In which I agree with Ritchie again

The first is that there is an in-built tendency for manufacturing to be weak and the City to be strong.

Quite true.

It\’s called the international division of labour.

There have been two great outbreaks of this international division of labour. In the 1880-1914 ish times and 1980 to today.

Both times we found that Germany specialised in heavy industry, especially the manufacture of capital goods. The UK specialised in international finance.

*Shrug*.

OK then, we\’re just seeing the playing out of the comparative advantages of the two economies.

What I don\’t understand is why he\’s complaining about it.

Perhaps he\’s like to go back to the sources? Perhaps he could tell us why Adam Smith was wrong about wealth coming from the division and specialisation of labour and the associated trade, why David Ricardo was wrong about how comparative advantage adds to this process?

20 thoughts on “In which I agree with Ritchie again”

  1. The difference is the employment profile of the two industries. Manufacturing provides low paid work for low skill employees. Finance does not.
    Finance finances our low skilled unemployed to sit at home.

  2. Manufacturing provides low paid work for low skill employees

    On a general basis, not what I hear about German manufacturing workers.

    Finance does not.

    Creating an excellent reason for some other sector of the economy to employ them, say highly-paid financers who would rather have a home-delivery laundry service or what not.

  3. Marksany – and also frees up lots of low skilled workers to shoot Germans when necessary?

    Can we still make the guns needed for this task? Or do we have to buy them from the Germans first?

  4. To be serious (briefly), I’m not sure that the basic assumptions here are even true.

    See pretty graphs from Cambridge University, here:
    http://www.ifm.eng.cam.ac.uk/cig/09stats/international.html#1

    8.1, manufacturing as % of GVA. Yes, manufacturing has fallen in importance in the UK, but it’s still about 13%. Yes, that’s a lot less than Germany, but still about the same as France and the USA, so not exactly “weak”.

    Interestingly the decline largely happened under the Labour government; in 1995 and even 1997 we were pretty close to Germany, with manufacturing still over 20%.

    Second, manufacturing isn’t a big employer, compared to the sector’s size. Compare graph 8.4 to 8.1, and manufacturing’s percentage of employment in the UK is consistently less than manufacturing’s percentage of the economy. Currently about 13% of the economy but only 10% of employment. That seems pretty consistent – in 1995 it was about 22% of the economy but only 16% of employment.

    Third, manufacturing in the UK is not a particularly low-pay sector; wages are higher here than Germany, France or Japan, and not much behind the US (graph 8.10).

  5. OK, it was the linky thing I was trying to do that didn’t work.

    According to OCED figures, and some pretty graphs from Cambridge University that I can’t link to, in the UK manufacturing did indeed decline as a percentage of the economy under the last government. It fell from over 20% (only just behind Germany) in 1997 to just 13% in 2007.

    But that’s still above France and the USA, so perhaps “weak” is over-egging it.

  6. Also I’m not sure about manufacturing being a source of mass low-value employment.

    Manufacturing employment as a percentage of total employment seems to be consistently lower than manufacturing as a percentage of the economy.

    That seems to hold for the UK, USA, Germany and Japan (although not France).

    I know that’s a crude comparison, but it certainly suggests that manufacturing employs fewer people than we would expect from its share of the overall economy.

  7. Manufacturing tends to have militant unions which finance left-wing ‘think tanks’ like, er, some organisation or other, whereas finance is hardly a hotbed of militancy.

  8. Manufacturing is a source of mass low value employment. In China.

    The manufacturing left in the UK tends to be higher end stuff or niche stuff; aerospace, pharma. Hence the high value for a good share of GDP, high salary, but low total numbers of employees.

    Anything low value and labour intensive is on it’s way out, like Cadburys.

    You need a lot of home delivery laundries to replace a car assembly plant of 20,000 workers.
    At nothing like the pay.

    I work for a manufacturing company. When I joined in the 80’s there were no operations in China. Now 90% of our plants in Western Europe have shut including all four UK plants. 80% of all our employees are Chinese in 20+ plants. UK staffing has gone from 4000 to 300. We who are left are technical people, among the highly paid.

    This structural change in our economy is leaving behind a generation without a chance to get a living wage through hard work. When I left school, any boy without O Levels could walk into a factory job or a brickfield job. Brighter ones got apprenticeships. Those jobs have largely gone, to China or to automation. Without replacements.

    Kids at school in the bottom stream know there are no jobs for them, so they don’t bother to learn. A lifetime of benefit culture and criminality lies ahead. They aren’t even needed as fathers, since the state provides a better standard of living for mum and babies than they can.

  9. When I left school, any boy without O Levels could walk into a factory job or a brickfield job.

    Any boy could walk into a cleaning, hotel, vegetable picking, or labouring job now, only the only ones who seem willing to actually put in the hard work are foreigners.

  10. But how long will the ‘comparative advantage’ of financial services survive (and indeed, what is the source of this advantage other than a time zone between the US and Far East?) as manufacturing offshores and the East grows?

    What happened to the great European banking centres of Florence and Antwerp when Britain and the US industrialised ?

  11. Tim Newman,

    Any boy could walk into a cleaning, hotel, vegetable picking, or labouring job now, only the only ones who seem willing to actually put in the hard work are foreigners.

    More accurately, they’re the ones that don’t get benefits. A lot of lads just can’t be bothered going to work for the difference between wage over benefits.

  12. Laban – who cares how long a particular comparative advantage lasts? Comparative advantage is a theory that states that if you have two people, A, and B, or two countries, A and B, even if A is more productive at making everything than B, then A and B can both still gain from trade, because A can specialise in what A is most productive at, and B can specialise in what B is comparatively productive at. See http://en.wikipedia.org/wiki/Comparative_advantage

    As for what happened to the great European banking centres of Florence and Antwerp – the important thing is what happened to the wealth of the people of Florence and Antwerp as Britain and the US industrialised. It went up (barring the interruptions of a few wars, things like being occupied by the Nazis, or having a bunch of Allies come up through Italy on their way to Germany is rather disruptive to prosperity). The Florentines and the Antwerpians found other things to trade with.

  13. But Tracy – surely the important thing to most humans is the relative, not absolute, level of wealth. The lowliest chav is wealthier, cleaner, better fed, housed, doctored and clothed than a king of 500 years ago, but does that make him feel like a king? The burghers of Florence went from being princes of the known world to inhabitants of a pretty, but unimportant heritage site.

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