Wednesday, 29 December 2010

Manufacturing and China.

John Redwood, normally so interesting, is reduced to bleating "why don't we make things anymore?".

Of course making a "thing" you can drop on your foot is no different economically to providing a service except that the latter cannot be outsourced to secretive slave-labour camps like China which because of "communism" gets a bye from the leftist-inclined world media despite its savage political repression. Unlike the slave-labour camp Myanmar which has the misfortune to be a military Junta with a personable opposition leader, there is no significant world profile for opposition leaders in China. A billion people live in bondage in part because people want cheap "things" and in part because almost all journalists think communism is somehow better than fascism or military rule, when all involve the same repression. In fact, my guess is communism's worse. I doubt Aung San Suu Kyi would have survived had she had the misfortune to be Chinese. Can anyone think of anyone outside the identikit Grey men of the Politbureau who will be next leader. Clue: it's not Liu Xiaobo. Though the communist economic choke-hold has been released a bit and the Chinese economy grows at a decent clip. China's success in using her almost limitless labour supply to supply christmas lights to the west at £6 a time, is not a mark of success. It is the wages of half a century of failure of idiotic economic ideas and political savagery.

So poor countries like China with a highly centralised state CAN persue export-led growth by applying western developed technology and nailing them together using extremely cheap labour and currency manipulation. However, John Redwood would, presumably like her Majesty's subjects in the UK to remain free? To remain rich? And he's against currency manipulation. So how, exactly does he propose that we compete against the chinese? And who is going to buy our manufactured goods if we did persue this strategy? It's not the average Chinese worker - he couldn't becaue the Renminbi is kept artificially low and black market currency trading is punishable, as so much in China, by death.

If China's exports aren't a demonstration of the superiortity of Manufacturing, then what is? Manufacturing does not lead to stability - manufacturing goods is one of the most cyclical sectors. Nor does it generate many high-paid jobs, especially if you want high productivity too. Nor are manufactured goods any more "real" than services. How is cooking a steak in a resteraunt less "real" than making rubber dog shit? The real root of the wish for things to be made in the UK is ignorance of what a service economy actually is, xenophobia and nostalgia for an industrial working class, which has gone.

The idea that exporting manufactured goods is the most important economic measure is no less idiotic than the idea that Agricultural land is still the root of all wealth. Agriculture was indeed the root of wealth, until 1750 or so, then manufacturing took over until about 1965. Services - the businesses of ideas and information is the root of wealth now. It's about who controls the information and has the ideas. And that is still the lucky people breathing free air - Britain, her old Commonwealth, Western Europe and North America who are designing things to be put together by slaves in China who get the most economic benefit from the process.

So John Redwood is wrong. The only way British people could supply those Chrismas lights for £6 would be if we were extremely poor - too poor, in fact to buy them. Like the Chinese who make them.


Anonymous said...

Surely manufacturing things is the only way to actually generate wealth? A service which, say, moves capital to where it's needed certainly adds value, because the capital is more useful at its new location.

But - why is it more useful? I suggest it is only more useful because it is now in a position to *actually do something*. If a bank lends capital to a contractor, it adds value because the money is more useful right now to the contractor than the bank - but only because the contractor intends to use it to buy a digger.

Then again - there's no reason why the UK can't focus on putting capital in the most valuable places, I suppose, and let others do what they do best, be that driving the diggers or anything else.


Jackart said...

"Surely manufacturing things is the only way to actually generate wealth?"

No, NO and Thrice NO! Why is that the case? Is mending a car or fixing a television not increasing wealth by the application of knowledge? It increases the wealth of the recipient of the service (they don't have to go and buy a new car or TV and are better off by the difference between the cost of fixing and price of a new article) and the Mechanic or TV repair shop is better off by the cost of the repair.

Applying knowledge to the movement of capital (what the city does) is likewise creating value by ensuring that capital goes to the most efficient use (in the long term, this works better than state-planning whatever recent history suggests).

Is writing a book to be distributed on a kindle not creating wealth?

What about Entertainment? Is that not real wealth either?

What is special about making something?

Patrick, thanks for the comment, but I suggest that everything you think you know about economics is wrong.

Anonymous said...

Look at your examples:

1. Mending a car
2. Fixing a television
3. Writing something for kindle

Each one involves a thing - the car, the TV, and the Kindle. Now, I'm not saying that value hasn't been added by whatever financial institution provided the capital to achieve those things - but that added value surely only exists because it permits the achievement of an actual, concrete, real-world event?

Could you not say the guy who plans the route of the railway on his desk creates value, but only on the condition that that value is realised through the (reduced application of the) navvies' shovel?


Jackart said...

Look. A kindle's value is NOT in the loss-leading £109 price, but in the value of the IP in the manufacture, and in the IP of the content.

Making things is NO different to designing things or putting content on things.

An iPhone ap or software program is just as valuable, if not more so than the platform it runs on. Who makes the iPhone is irrelevant. Most of the value is captured by the company who DESIGNED it.

You'll be telling me "bricks 'n Mortar" makes a good investment next?

Jackart said...

And in the iPhone example, Cambridge's own ARM owns the IP on chips and captures most of the value there, a significant part of the £300 or so an iPhone costs. How much of that £300 do you suppose the unfortunate chinese workers capture?

British success? or would you rather British workers be paid $20 a day or whatever the going rate is at a chinese factory...

Anonymous said...

I don't argue that most of the value of the gadget du jour is captured by the designer, not the manufacturer.

However, the value captured by the designer could surely not exist if the thing was never to be made. There are very detailed designs for a space elevators, but what's the patent worth? I'll tell you - absolutely nothing. Because no-one is going to build it.

Put it this way - money surely only has value because you can use it to *do stuff*. Otherwise it would have no more value than points in a computer game.


Jackart said...

Manufactured goods are wondrous. Agreed! But it matters not who puts them together!

The wonder of mobile phones is not who makes them but that (for example) indian fishermen use them to get the best price for their catch, meaning consumers get lower average prices, fewer shortages and fresher fish.

You'll be telling me "jobs created" is a benefit of a scheme, as opposed to a cost next?

Anonymous said...

It matters not who puts them together - but it is vital that someone does.

Otherwise moving the capital around adds no value at all.


Sean said...

If the chinks wish to subsidise their goods with a artificial exchange rate and thus send a subsidy to us through cheap consumer goods then we should buy up all their stock in good faith.

but surly jack the problem with services is I have to pay a fiver for some British chavy bird with too much make up and smelling like a fag end to cut my hair, when a Chinese one would find it difficult to travel over here and do it for 10p.... and vice versa,

Jackart said...

Yes, but that's not all the British economy does. It also has a highly successful manufacturing industry employing 7% of the workforce making high-tech, high value things. This is more valuable than when 15% or even 50% of the workforce was making things.

At the moment, china puts things together. 100 years ago, we did, in 50 years it will be africans. Agriculture is what people do when they're poor, Manufacturing is what you do when you're getting richer, climbing the value chain. Services is what you do when you're a rich economy.

I'm not going to let you off the hook. Who puts things together is irrelevant.

Anonymous said...

I agree that who puts it together is irrelevant - but insist that someone has to.

Otherwise agriculture will start to look very attractive again!


Jackart said...

Actually, the western experience is that "Someone" does not have to do manufacturing. Machines do a better job than people at repetitive fine motor tasks.

Whatever it is you do, I hope economics is not part of your job description.

Anonymous said...

But someone has to put the machine together... that's my point! Unless *someone* actually does *something*, nobody has anything but nice ideas!

Those nice ideas only have value if they're actually put into practice.


Jackart said...

Look, I see where you're going, but you're wrong. No-one "has" to do anything. Your original assertion is that "Manufacturing things is the only way to generate wealth" is demonstrated to be utterly, hopelessly wrong. Machines have to be serviced (a skilled job in the most automated of factories). But they can be re-tooled to make machines that make things and so on.

Chicken and egg won't win you the argument. Sorry.

Anonymous said...

I cannot think of a sustainable system, that makes people materially better off, that doesn't involve the creation of an object of some kind.

A nice idea that doesn't leave the drawing board does not do that. Sure, you can think of the perfect app - but until a critical mass of people actually own a physical iphone, it's useless.

Suggest to me then a sustainable system in which people get better off - that does not at any point require an object. Do that, and I'll concede.

Also, the egg came first. The chicken has to come from an egg, but the egg can come from two chicken-like ancestors. Simples!


Anonymous said...

You must be a stockbroker. Clearly deluded and trying to justify your own valuable contribution to the world. It will be a sorry time for you when the whole edifice comes tumbling down. Creating things is important and will become more so again as the world rebalances. Agriculture is also real and life giving. Moving money around is not.

Charles said...

Patrick (& Jackart) - you are going round in circles here. A few propositions to help:

1. The manufacturing process adds value. As Patrick says, someone has to make something. Not that "making stuff" is the only way to add value, but it is a substantial part of the global economy.

2. You can split the value created in manufacturing down into its components: raw materials, labour, capital and design. The whole concept of a global economy is dependent on specialisation of labour. Australia will be a cheaper supplier of raw material than the UK in most cases. China will be a cheaper supplier of unskilled labour. Consequently, the UK needs to specialise where it has a competitive advantage.

3. The UK's areas of specialisation include:

- Goods and services that can't be geographically relocated or where it is inefficiently expensive to do so (e.g. hydro power, location dependent consumer services such as table waiting and hairdressing)

- Highly skilled labour (e.g. precision engineering)

- Application of intellectual property: design, development, etc.

- "British Invisibles" such as insurance, movement of capital, etc. Here we are using our competitive advantages of language, a stable and broadly fair legal system, time zone and clustered skills.

4. British Invisibles add value because the facilitate - and hence reduce the cost - of someone else carrying out an economically productive activity. We are essentially allowing them to make more of a profit out of their own resources and then taking a cut out of the middle.

In summary - Jackart is right on a macro level. Patrick is right on some of the specifics - but very narrow - specifics.

Can we agree that honor is served and we can all go home?

Mark said...

What is wealth? What is "capital" in this context if its measured by fiat currencies which have no intrinsic value?

Seriously, what exactly is it!

"Bricks n mortar" a good investment? Well the genius bankers seemed to think so when they were "lending" non existent "money" and trading "bonds" or whatever based on debt they knew couldn't possibly be repayed.

Jackart said...

Charles, you support my point that there's nothing special about manufacturing. That's as far as it goes. I'm not saying it's less valuable, nor am I saying it shouldn't or doesn't need to be done.

It's just that it doesn't matter who does it or where and that deliberate attempts by Government to skew the economy towards it will be counterproductive.

Mark, your point is (apart from tedious banker-bashing)? The crash was because people decided that houses, unlike every other investment would keep going up, and supported by bankers who were in turn cajoled and encouraged by governments, lent ever more to people who earned ever less to buy houses way above their intrinsic value. This has nothing to do with the special place some people think Manufacturing has in the economy...

Anonymous said...

Jackart - I think we have more or less reached agreement - it is essential to make things, but whoever does it is best left to the market, even if that means the work goes overseas.

I think it is essential because adding value to raw materials, be that turning carrot seeds into carrots or bauxite into drinks cans, is what creates wealth. You, in the financial sector, add value to capital by moving it to where it is needed, just as BP add value to petrol by moving it from a refinery to my car. But, just as BP would not have added value to the petrol if I didn't want to burn it, you would not add value to the capital if someone did not want to spend it. Or sell it on to someone who wants to spend it, on something akin to carrots and drinks cans.

I am not sure if you agree with that analysis or not. If you think capital can gain value just by being somewhere else, I would be genuinely interested to know how - because I don't see how it can. I cannot see value being added to it anymore than value is added in moving a litre of petrol from the refinery to the pumps in a country entirely populated by diesel cars. It would fetch exactly the same price in either location.

So, I don't think finance is a zero-sum game. It adds genuine value, by enabling the creation of wealth through placing capital in the right place at the right time. If that place is China, or anywhere else, then so be it.

Oh, you asked earlier on what I did. I'm surprised you don't know - I am an engineering researcher at a University. I'm not a member of the UCU, though.


Charles said...

Jackart (pace Mark)

It's actually an interesting point (and I will declare an interest - I'm sick of being bashed for doing nothing!)

The main baks that struggled:

- Northern Rock: Retail proprty (especially buy-to-let)

- Bradford & Bingley: Retail property (especially buy to let)

- HBOS (mainly BoS to be fair): commercial property

- RBS: corporate leverage, commercial property

- Irish banks: commercial property

In virtually every banking cycle you look at - whether the 1990s, the 1980s in LatAm or the 1970s in the UK it usually comes down to bad lending on real estate.

Bankers make the mistake that property feels like a secure asset and they end up believing the values without appreciating that there is an interlinkage between the levels of debt available and the price of real estate.

Shock wasn't the City's fault after all!

cuffleyburgers said...

Well you're all missing the point.

I always respect jackart's opinions because I nearly always agree with them and he expresses them very well.

Charles is basically correct in this case, as Jackart's bias against manufacturing is rather annoying from an otherwise reliable commenter.

The real point is not whether we need more manufacturing or not, but what obstacles are there that are fucking up the natural development on the economy, since by removing these obstacles such as excessive taxation in general, taxes on jobs in particular, mindless regualation, hidden and not hidden subsidies to favoured players, especially large corporates - these are some of them and there are surely others.

Remove these, and manufacturing (along with everything else) will expand or contract as required by the free economy.

A free economy is decided NOT what we have at present - how can we when government spending is over half of it and government borrowing is hoovering up savings to buy votes...

Jackart said...

Cuffleyburgers, I am NOT anti-manufacturing. I just don't think that it should have a special place in the economy. And low-value manufacuring (rubber dog-shit and the like) can certainly be done elsewhere without problem.

I agree with you about the free economy though.

claude said...

Two words:
trade deficit.

Charles said...


Trade deficit is meaningless in an economy with a significant service segment.

You need to look at the balance of payments, including invisible earnings and interest of overseas investments. We are still making a fortune from the canny investments of our Victorian ancestors.

(although in my case my Victorian ancestors were spendthrifts who managed to p*ss away all the investments that my Georgian ancesters built up...)

Jackart said...

Claude. Lefties and economics. It's cute that you try.

Trade deficits (big, important sounding words a lefty might hear in the news) in manufactured goods aren't important, so long as value: design, finance, capital, management, flows the other way.

The chinese factory making iPhones is benefiting from the US designers of the iPhone, (and British designers of the chips in iPhones) and the US capital investment in china.

So, whilst we do all the hard bits, we subcontract the easy bits (nailing the stuff together) to china. And they're bloody good at it. Sort of like having a secretary. And like a secretary, the chinese will get better and better until they can do our job, and then They'll subcontract low skill Manufacturing to the Africans.

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