Tuesday, 28 April 2020

COVID-19: The politics of economics and adjustment

Bring manufacturing back!

Andrew Timming

Andrew Timming invites us to reconsider the value that manufacturing brings to our economy and why the current COVID-19-induced economic instability is a good catalyst for its revival.

The economy, currently being ravaged by COVID-19, is screaming out, but no one seems to be listening. Listen closely:

‘It’s time to bring back manufacturing!’

Over the last 40 years, it’s no secret that Western economies have seen a major decline in manufacturing jobs, many of which have been relocated to China. As these lucrative, value-adding jobs have moved from West to East, service jobs have largely taken their place, especially those in finance and retail.

Just how lucrative are manufacturing jobs? The simultaneous economic rise of China over the last 40 years provides a deafening answer to this question. It is no accident that the mass relocation of factories to China has coincided with a huge increase in wealth in that country. This is because manufacturing – unlike, for example, financial transactions – adds comparatively more value to the economy.

Think about it in these terms. A financial transaction always involves a winner and a loser. A currency speculator, for example, can make billions of dollars buying and selling currency in the international capital markets. But this activity contributes virtually nothing directly to economic growth because any gain made in one place is directly offset by a loss elsewhere. For example, if you make a profit of $10,000,000 through such financial transactions, that means someone else made a loss of $10,000,000, resulting in no net growth overall. In other words, financial transactions, which make up a huge portion of Western economies, do not directly create new value; they just transfer already existing value from one person (or institution) to another. To the extent that they indirectly create wealth, this is through an efficient allocation of capital investment.

In contrast, manufacturing directly creates wealth where it previously did not exist. When an entrepreneur adds raw materials and labour (what economists traditionally have referred to as constant capital and variable capital), something magical happens. The final product is worth more than the sum of its parts! This is what causes economies to grow. If you don’t trust me, just ask China.

The time to act on this insight is now. COVID-19 has effectively paralysed the service sector, which is just another way of saying that it has paralysed most Western economies. An economic model that does not directly create wealth, but only transfers wealth, is not sustainable. If you stop what you’re doing right now and just listen to the economy, you’ll hear its cries.

‘It’s time to bring back manufacturing!’

In many ways, COVID-19 provides the perfect pretext for this to happen. There is not much of a service sector anymore. We can’t even leave our own houses! Now is the time for all of us to invest in manufacturing so that it can re-take its place on the economic throne where it belongs.

How can we bring manufacturing back? Coercion is not advisable unless national security depends on it. Instead, we need to create an atmosphere in which firms are incentivised by low corporate gains taxes and a highly skilled workforce. The old model of low-skill manufacturing is obsolete. What is needed now, more than ever, are highly trained, technologically savvy factory workers. For this reason, the government must continue to invest in higher education, making it free for anyone who qualifies. Another thing we must do urgently is to implement a universal basic income (UBI) to create a low-risk atmosphere that will encourage entrepreneurship and protect the vulnerable as our economy re-transitions to a manufacturing base.

When the factories close in China and relocate to a city near you, does this mean that you’ll have to pay a bit more for the products you buy? Sure it does, but at least you’ll have a value-adding manufacturing job to pay for them.

Associate Professor Andrew R Timming is an organisational, experimental and evolutionary psychologist (with sociological leanings) at the UWA Business School’s Management and Organisations department.


UWA Public Policy Institute