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You Must Make the New Machines

Economist Ricardo Hausmann says the U.S. has a chance to invent the manufacturing technology of tomorrow.

The U.S. has lost millions of manufacturing jobs since 2000. Industries have moved offshore. America’s trade deficit in physical goods is $738 billion a year.

Product space: Harvard economist Ricardo Hausmann advises governments on what to manufacture.

So what’s the path forward?

Countries trying to understand what’s next for their export industries often call Ricardo Hausmann. The Harvard economist and onetime planning minister for Venezuela has developed a kind of economic aptitude test for nations. Using complexity theory and trade data, Hausmann looks at what a country is good at making and predicts what types of more valuable items it could produce next.

That sounds plain enough, but the results of Hausmann’s analyses are often surprising. A country with a competitive garment industry might want to move into electronics assembly—both need an industrial zone with quality electrical power and good logistics. A country that exports flowers may find it has the expertise in cold-storage logistics necessary to spark an export boom in fresh produce.

Hausmann, who is director of Harvard’s Center for International Development, spends much of his time helping nations that are just beginning to modernize their industries, such as Angola and Nigeria. MIT Technology Review asked him what his research methods predict about opportunities for manufacturing in the United States.

Why has the number of American manufacturing jobs been decreasing so quickly?

The fundamental reason is that productivity in manufacturing has been rising rapidly and demand for manufactured products has been growing more slowly. To supply the stuff that people want requires fewer jobs.

And then, manufacturing is becoming feasible in more parts of the world. There is more competition, including from countries with much lower wages. As they emulate American production, they take market share.

What’s the best manufacturing strategy for the U.S. in that situation?

It’s certainly not playing defense and trying to save jobs. The U.S. has very, very high wages compared to other countries. Yet it also has a comparative advantage, which is deep knowledge, high R&D intensity, and the best science and technology base in the world.

The step that makes the most sense for the U.S. is to become the producer of the machinery that will power the next global manufacturing revolution. That is where the most complex and sophisticated products are, and that is the work that can pay higher wages.

What kind of revolution are you talking about?

My guess is that developments around information technology, 3-D printing, and networks will allow for a redesign of manufacturing. The world will be massively investing in it. The U.S. is well positioned to be the source of those machines. It can only be rivaled by Germany and Japan.

You look at economies as “product space.” What do you mean by that?

The product space is the space of all possible products. The metaphor is of a forest. Each product is a tree, and companies are monkeys that are organizing and taking over the forest. Empirically, we’ve shown monkeys don’t fly. They move to nearby trees, or to industries for which they have many of the required productive capabilities.

So if you have the capability to make a regional jet, you may be able to make a long-haul aircraft. But if you are making only garments, figuring out how to make any kind of jet will be very hard. Countries that grow find a “stairway to heaven”—a sequence of short jumps that gets them far. 

How does that type of analysis help a country know what to do next?

Think about a developing country that exports raw commodities. The traditional way that people have thought about it is to add value: if you have trees, try to export paper or furniture rather than wood.

But the product space may actually argue against the idea that countries should add value to their raw materials. The way a country like Finland got transformed is that they moved from cutting wood to making machines that cut wood, to making machines that cut other things, to other types of machines, and eventually to Nokia. 

So what are the opportunities for the U.S. in product space?

The U.S. has the problem that it’s competing with countries that pay much lower wages. American monkeys are under stress from other countries’ monkeys in regards to less complex, easier-to-make products. So the U.S. should look to the taller trees. The tallest trees in product space are pharmaceuticals, chemicals, and machinery. It’s very hard to get into those. Very few countries are in that game.

That is why I say the really long-term play is for the U.S. to be the source of the machinery that will power the coming global manufacturing revolution. The U.S. can grow by using capabilities that few others have.

Is there a manufacturing technology you see as game-changing?

I think 3-D printing could change the dynamics. I use 3-D printing as shorthand for shorter production runs, more design, and much closer to the market. It’s a paradigmatic shift in what manufacturing is going to look like.

Historically you think of manufacturing as an assembly line with thousands of workers, the UAW [United Auto Workers union], and benefits. But here we are talking about very small batches, made close to consumers, and customized. It will still be manufacturing, but a different kind of job in a different kind of company whose organization we don’t yet know.

Will the U.S. create jobs in this way?

If anything, a manufacturing revolution is going to accelerate a trend toward more efficiency. So from that point of view, for the U.S. to base its employment strategy on manufacturing sounds unrealistic. Manufacturing is low-employment.   

What else is the U.S good at manufacturing?

If you look broadly at the U.S. product space, the country is super-competitive at agriculture and the industries that support it, like farm machinery, agrochemicals, and genetically modified seeds. It is strong in aerospace with Boeing, GE, Northrop Grumman, and Pratt & Whitney. It is a leader in pharmaceuticals and medical equipment, and it is the clear leader in information technology and the Internet. New industries often arise from the combination of capabilities, such as biotechnology that can move from medicine to seed development and pest control

How well is the U.S. doing in staying competitive?

For a while now, the U.S. has been much less focused on being competitive than most other places are. Americans have the feeling they are born to win, and if they don’t, someone else is cheating. The U.S. has many self-inflicted wounds. It has an infrastructure that’s increasingly lousy and a corporate tax rate higher than most countries’. But the most important [problem] is immigration policy. It’s been a real disaster by preventing the attraction and retention of the high-skilled people who come here to study and then don’t stay.

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