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OPINION

Yes, manufacturing matters

Yes, manufacturing matters
July 28, 2015
Yes, manufacturing matters

This continues a long trend. Since the mid-1960s, manufacturing output has fallen from one-third of UK GDP to under 10 per cent.

We should be worried by this. For one thing, manufacturing has been a big source of productivity gains and higher productivity means higher incomes for everyone. A smaller manufacturing sector thus means less scope for productivity gains in the whole economy.

This is because of the nature of the business. It takes four people to perform a Beethoven string quartet - the same number as in Beethoven’s day. But the number of people needed to manufacture recordings of that string quartet has fallen down the decades. This tells us that productivity grows faster in manufacturing than in services. And the facts corroborate this. Since 1978 (when current ONS data begins) output per worker in manufacturing has grown almost twice as fast as that in the whole economy – by 2.9 per cent a year against 1.5 per cent. This is not merely a statistical artefact caused by difficulties of measuring services output. It’s a real thing. If Socrates were to walk into an Oxford tutorial, he would immediately feel at home, but he’d be utterly disoriented by any modernish manufacturing plant.

This difference in productivity growth was not a big barrier to growth in the 1980s and 1990s when low-productivity manufacturing jobs were being replaced by high-wage services ones - when assembly-line jobs were destroyed whilst high-wage finance was expanding. But it is a problem now. Manufacturing jobs are high-quality ones: the average wage in the sector, at £567 per week, is 15 per cent higher than the national average. A shift from manufacturing to services might well therefore mean worse jobs and lower productivity - which is just what we have seen in recent years.

A second problem is that manufacturing is a source of exports. This isn’t a necessary fact: in theory, manufacturing could be replaced by tourism and selling financial services to foreigners. In practice, however, the decline of the manufacturing sector has been accompanied by a rising external deficit - by increased borrowing from overseas. This matters, because, historically, big current account deficits have eventually led to rising inflation and slower GDP growth.

There’s a third reason to worry - a cultural one. Manufacturing can encourage a culture of craftsmanship, a commitment to produce something excellent. However, as the sociologist Richard Sennett has shown, deindustrialization means this culture has been supplanted by what Alasdair MacIntyre called the goods of effectiveness - a mere desire to sell anything, regardless of quality: mis-selling scandals are common in the financial sector but rare in manufacturing (though not unheard of - remember Thalidomide). It might not be an accident that deindustrialization has coincided with a declining quality of popular music and indeed democratic debate.

We should therefore lament the loss of manufacturing. In saying this, I’m in an ecumenical church. David Cameron has said that “we have got to be more reliant on manufacturing” and Len McCluskey says he is “clear about the importance of manufacturing.”

However, there’s little hope of a turnaround. In the short-run, the strong pound might disproportionately hurt manufacturing. So - more fundamentally - will low profits. The ONS estimates that the net return on capital in manufacturing is just 6.8 per cent, compared to 18.9 per cent in services. I wouldn’t set much store on these precise numbers, but if they are remotely true they offer no incentive for a revitalisation of manufacturing.