Seeing through Economic Fallacies:

Is America In Trouble for Lack of Manufacturing?

by Harry Browne

February 23, 1992      

One of today's most popular clichιs is that the growth in service industries and the decline in manufacturing has somehow made America weaker. No week goes by that I don't see at least one lament in the financial press that America has become a "service economy."

Today I came across references to America's fall from grace in two different investment newsletters:

I belong to an athletic club. . .filled with lots of lawyers, bushels of stockbrokers, scads of real estate salesmen and tons of insurance agents. Oh yes, there are also a few doctors and bankers, but precious little else. I've been going to this club for 10 years and I've yet to meet an engineer, a chemist or a geologist. Almost everyone I know is a salesman of some sort or another. I have a feeling that this is the way it is all across North America. The continent has become a Mecca for hamburger flippers and insurance agents — hardly a prescription for economic revival.

And:

A nation does not get rich selling services to itself.

Repetition can make an idea seem believable, but it doesn't make it logical. Economic and investment writers aren't any smarter or learned than you are — and may well have much less analytical talent. They repeat clichιs not because they know them to be true, but because they lack the ability to decide for themselves.

Seeing through Economic Fallacies

How do you distinguish an economic bugaboo from a matter of serious concern?

Technique #1 for recognizing a fallacy is to ask "Why?". Why does a given condition prevail and not the condition the writer apparently would prefer? (Why, for example, has America become a service economy? Because we're lazy? Because Ronald Reagan made us do it?) If you ask why, you often discover that the supposed terrible disaster isn't really a disaster at all. In fact, it may be precisely the opposite.

Does the economic condition arise because people chose to do what they're doing? If yes, then the condition is nothing to worry about. People are getting what they want, and no economic writer has proven himself wise enough to be believed when he claims that people want the wrong things.

Economic conditions arising from the voluntary actions of individuals can't devastate a nation, because economic limits will prevent the condition from going too far if it's truly harmful. It doesn't matter whether the condition is a trade deficit, a wave of corporate takeovers, greater personal or corporate debt, or a trend away from manufacturing.

But if the government is responsible for the situation, it can go on seemingly indefinitely — until it causes harm that might take years to repair. That's because the government can force people to continue doing something even after the consequences are obvious. Because force is the motive power, any program is bound to be artificial and a diversion from what people would prefer — even if it's a plan for safer products, greater savings, a stimulus to some ailing industry, or more medical school graduates.

Contrary to the sloganized versions of history, Rome didn't fall because the people cherished bread and circuses. Or because they forgot their values or lost their sense of direction. It died because the government squandered the wealth the people had accumulated when they had been relatively free and productive.

The 1980s' savings & loan scandal didn't occur because S&L managers suddenly became greedy and dishonest — or because the industry was "deregulated." If deregulation leads to fraud, why aren't there scandals in the computer industry or the supermarket business — which are far more "deregulated" than S&Ls? The S&Ls turned bad only because the market was disabled by the government — which allowed managers to make all-or-nothing bets with taxpayer money.

If the much-maligned trade deficit arose because the American people developed a taste for foreign products, they will eventually run out of the international credit necessary to pay for them — unless foreigners are buying a lot of American products as well.

Ask for the Solution

Technique #2 for seeing through an economic clichι is to ask what alternative the writer has in mind.

Would the writer who worries that all the members of his athletic club produce services (just as he does, incidentally) feel more comfortable if they were farmers, guild carpenters, or cigarette manufacturers?

So what solution does he have in mind? Is he suggesting that the government outlaw salesmen and stockbrokers — and force those people to take jobs in automobile factories? And, if so, who's going to arrange the sales of the autos produced, and who will take care of the people who want to provide capital to the auto companies?

Does the writer who says that "a nation does not get rich selling services to itself" believe that a nation gets rich selling itself Chryslers, corn, or soap? Does he want the government to prohibit the sales of services — and permit Americans to sell only hard goods to other Americans?

A nation's standard of living rises when its people are free to produce what's in demand, and to buy whatever they want from whomever they want — anywhere in the world. If they can afford services that make their lives more comfortable, why should they stop using them? If they can't afford them, they won't buy them. And they can't borrow the money to buy them unless someone's willing to lend it to them.

In communist Vietnam and Cambodia, people were supposed to become better citizens by being forced to leave their homes and their jobs as teachers, factory workers, shopkeepers, or students — and spend a couple of years working knee-deep in water in rice paddies. Would Americans be stronger and better people if the government forced us to stop working in service industries and shipped us to Detroit to toil on assembly lines?

By trying to determine what solution the writer has in mind, you often come to the conclusion that the cure would be worse than the alleged disease.

The Evolution of Economies

In truth, there is nothing uniquely virtuous about manufacturing.

Primitive societies (very primitive societies) subsisted by hunting. Every day required a new hunt just to get enough to eat. There was no way to preserve meat — and, aside from wild fruits and vegetables, there was no agriculture to provide any kind of food beyond the catch of the day.

Eventually, people learned how to grow food, and thus escaped the need to hunt every day of the year. And over the millennia agricultural production gradually became more sophisticated, so that more food was produced with fewer human resources. This allowed society to devote more of its resources to making things — to manufacturing.

As civilization progressed, manufacturing became more advanced — enabling people to build better homes, preserve food, perform chores with less physical effort, and move things and people from place to place more easily.

Eventually steam power arrived, leading to the industrial revolution and mass production. More and more goods were produced with less and less effort — eventually allowing factories to operate with fewer workers and freeing the rest to provide services.

Thanks to the industrial revolution, there are more restaurants, cleaners, researchers, entertainers, teachers, scientists, writers, gardeners, doctors, dentists, accountants, advisors, and others who help to make our lives more comfortable and enjoyable.

The move to a service economy is simply a further step upward — a sign that fewer resources are needed for hunting, agriculture, and manufacturing. Services are luxuries — the icing on the cake of civilization. They are evidence that a society is very wealthy.

I haven't heard anyone regretting that America is no longer an agricultural economy — as it was in the 17th and 18th century, and as the South continued to be in the 19th century. Fortunately, it requires only 2% or so of America's resources to produce enough food to feed us all — freeing the rest of the resources to produce other goods and services.

Only 20% of America's resources are devoted to manufacturing today — leaving roughly three quarters of our productive capacity available for getting products to consumers, improving communications, and delivering services that were unknown half a century ago.

Competing in the World

The service-phobes say, "Yes, that's all very well. But a nation can't export services as easily as it can products. To compete in the world, our base must be manufacturing. The Japanese are producing cars and computers while we cultivate lawyers and hamburger-flippers."

And that brings us to Technique #3, which is to ask, "So what?". Why must we be better than the Japanese at what the Japanese want to do? Why shouldn't Americans do what Americans want to do?

And why should America be "competitive"? To what end? Those who fret about America's place in the world want to sacrifice Americans' standard of living to a goal they never spell out. Who cares what America's place is in the world?

What happens to "America" is far less important than what happens to the people who live in America. It doesn't matter whether America is competitive, only that Americans live well. And "living well" is a subjective standard that each American must set individually for himself.

"Japan" supposedly is very competitive. But the average Japanese lives about half as well as the average American. He works much longer days, resides in housing we would consider substandard, spends hours getting to and from work, and has little time to relax and enjoy himself. Is that what the competitiveness buffs want for us?

The Japanese government directs the use of resources to make "Japan" an awe-inspiring export machine — but leaves consumers with less to enjoy. Is that what America needs?

Military Capability

But Burger King can't produce military equipment. So, supposedly, we have to keep our manufacturing base alive — artificially, if necessary — in case a war should come.

There always will be manufacturing in the U.S., however. The fact that manufacturing is a smaller share of our economy than a hundred years ago doesn't necessarily mean that manufacturing is disappearing, only that it is more productive than it used to be.

In addition, it's hard to see how America needs much manufacturing to defend itself. Most items of military equipment (tanks, battleships, landing craft, and bombers) are needed only for foreign wars fought in foreign countries — wars that history has demonstrated America should stay out of. As to military equipment to defend America, no foreign power has threatened to invade America since the War of 1812, and no foreign power threatens to do so today.

To defend itself, America needs only a shield against nuclear attack, a small standing army to defend its borders, and a small standing navy to defend the shores. You don't need General Motors for those things.

Progress

Economic fallacies gain currency often because so few people bother to challenge them. And sometimes, it requires only a question or two to see through the emptiness inside a seemingly sophisticated concept. Questions like: Why? What is it you want? So what?

As far as our manufacturing base is concerned, the share of the nation's productive capacity devoted to manufacturing, mining, construction, transportation, and agriculture has been declining for over a century. Meanwhile, the share devoted to trade, utilities, communications, finance, insurance, real estate, and other services has been rising. And we're better off for it.

The progress since World War II is shown in the table below.

If hand-wringing journalists and politicians don't like what they see there, I hope they'll put away their typewriters and campaign planks, and find jobs in a factory somewhere. 

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% OF GNP DEVOTED TO EACH SECTOR OF THE U.S. ECONOMY

Year

1950

1960

1970

1980

1985

1988

Manufacturing

29.4%

28.7%

25.8%

21.3%

19.7%

19.4%

Mining

3.2%

2.5%

1.7%

3.9%

2.8%

1.6%

Construction

4.5%

4.5%

4.8%

5.0%

4.6%

4.8%

Transportation

5.6%

4.5%

3.9%

3.9%

3.4%

3.3%

Agriculture, forestry, fisheries

4.3%

3.2%

2.8%

2.3%

2.0%

7.3%

Miscellaneous services

8.5%

9.9%

11.7%

13.7%

16.1%

17.9%

Finance, insurance, real estate

13.4%

14.1%

14.7%

15.9%

17.0%

10.8%

Communications

1.6%

2.1%

2.3%

2.4%

2.7%

2.6%

Utilities

1.9%

2.5%

2.3%

2.5%

3.2%

3.0%

Wholesale, retail trade

18.0%

16.7%

17.0%

16.1%

16.4%

16.0%

Government

8.3%

10.7%

13.2%

11.8%

11.9%

11.7%

Foreign

0.4%

0.5%

0.5%

1.7%

1.0%

0.7%

Sources: Historical Statistics of the United States, Colonial Times to 1970, Series F 130-143; Statistical Abstract of the United States, 1991, Table 699; both published by the U.S. Department of Commerce.

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Also see:
"The 'Exporting Jobs' Scam"