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Source link: http://archive.mises.org/17964/u-s-manufacturing-output/

U.S. Manufacturing Output

August 4, 2011 by

Someone left a comment on one of the articles making the claim that the United States is no longer a manufacturing economy, having transitioned to a service sector oriented economy.  The statement is half right.  While the U.S.’ service sector has grown, and this is not a bad thing, so has the manufacturing sector.  Here is a graph showing an increase in manufacturing output.

De Rugy’s data shows an increase in manufacturing output since 1975 and a decrease in employment in the manufacturing sector.  What this suggests, off hand, is an increase in productivity per worker, which has released labor to the service sector and other industries.  This is a good thing, because it means that we are much wealthier than we were in 1975 (not only more manufacturing, but a greatly expanded market in other sectors, as well).

{ 31 comments }

Jake W. August 4, 2011 at 1:53 pm

To do a proper comparison, shouldn’t be be looking at manufacturing output in real dollars?

coturnix19 August 4, 2011 at 3:41 pm

It says on the left axis ‘Billions of 2005 $’. So at least it does take government-calculated inflation into account.

DD5 August 4, 2011 at 1:56 pm

The distinction between what is considered “manufacturing” and what is considered “service” are totally fallacious. They are determined on the basis of arbitrary and superficial criteria. There is no such distinction to be made on praxeological and economic grounds. They are both processes of production and the utility of the goods being produced is always derived from the value of the service it renders to remove uneasiness. In this respect, the economy is always a service economy.

It is more fruitful to explain this false dichotomy, rather then try to explain why such and such statistic based on very bad economics is good or bad. Any such explanation of “this means there is progress” or “this is bad news” cannot be scientifically established anyway.

coturnix19 August 4, 2011 at 3:42 pm

Perhaps, good can be re-sold, and service cannot.

Franklin August 4, 2011 at 4:22 pm

Every time a good is sold, another service opportunity is born, precisely DD5′s thoughtful implication.

Franklin August 4, 2011 at 3:43 pm

Very insightful comment, and appreciated.
Also provides ammunition against the hand-wringing talking heads who employ narrow data sets to forecast the end of a “nation’s” wealth because a car assembly line is on another continent.

BobBobberson August 5, 2011 at 6:50 am

Similar to the Piano industry. “How can a civilized nation not make Pianos?”

http://mises.org/daily/3253/The-End-of-the-US-Piano-Industry

K. Chris Caldwell August 4, 2011 at 11:17 pm

“In this respect, the economy is always a service economy.”

This is not correct.

There are two types of services, primary and auxiliary. Primary services are engaged in the production of real-wealth–things. Auxiliary services do not create wealth but provide services in trade for real-production–generally speaking.

So a worker on a production line and the trucker driving it to market and the salesclerk that sales it are engaged in primary services–they presumably get a share of the real-product produced and are part of a production chain.

Now a auxiliary service is like your barber who must wait around for a person with a share of real-product to trade for a shave and cut. Most financial services are of this variety as well.

I am not trying to disparage auxiliary workers or take away from their importance in an economy. These services are vital and valued my many of us.

Now to consume anything something has to be produced first so we can’t all be barbers and financial paper shufflers. Picture a ship full of barbers being stranded on a deserted island; they are not all going to be able to get by just cutting each others hair!

I don’t know who or how these statistics are gathered but visit any big-box store and have fun trying to find something made here. Then take in the trade deficit stats. After that go into most towns and cities and take a small census of the number of auxiliary businesses popping up. I live near a town that past a law limiting the number of new hair-care places.

An unfettered economy would have just the right mix of primary and auxiliary producers but this is not what the US is by a long shot. An economy using real money would not be able to get into the situation the US finds itself in now.

As the production/manufacturing structure continues to implode, production moves ever closer to the consumer and there is none closer than auxiliary services like your barber, dentist, doctor, etc.

chris August 4, 2011 at 2:04 pm

Jonathan, your right, but the trends in manufacturing output and jobs also reflect the market’s response to ever-increasing costs on labor, which has forced manufacturers to become more capital-intensive than they otherwise would have been. While capital efficiencies surely have enabled some manufacturers to shed labor (leading to structural changes and an increased aggregate output in the long run), interventionism in labor markets and the workplace in general has contributed to these trends as well.

W Baker August 4, 2011 at 2:26 pm

Does this take into account that a good deal of restaurant jobs are counted as manufacturing jobs?

Jonathan M.F. Catalán August 4, 2011 at 2:29 pm

It’s the FRED manufacturing output index.

Horst Muhlmann August 4, 2011 at 3:53 pm

Someone is cooking the books. Either inflation is being under-calculated or manufacturing is being redefined to boost its value. Most likely it is a combination of both.

We are most certainly NOT twice as wealthy as we were in 1975!

Greg August 4, 2011 at 3:59 pm

See my post below. I do not believe we can equate industrial output with wealth.

Jonathan M.F. Catalán August 4, 2011 at 4:05 pm

I don’t think anybody could say that we are “twice as wealthy”, since economic goods are not homogenous. But, there certainly are more economic goods being produced today than there were in 1975.

newson August 4, 2011 at 8:18 pm

“homogeneous”?

feudalredux August 6, 2011 at 10:50 am

homogonous?

Greg August 4, 2011 at 3:55 pm

“What this suggests, off hand, is an increase in productivity per worker, which has released labor to the service sector and other industries. This is a good thing, because it means that we are much wealthier than we were in 1975 (not only more manufacturing, but a greatly expanded market in other sectors, as well).”

While it does suggest that productivity per worker has increased, it does not necessary mean that we are wealthier. I do happen to think we are wealthier, but that’s not the point. The point is that there are other factors of production other than labor. Minimum wage laws artificially increase labor costs, which in turn encourage mechanization in places where it’s not more efficient.

For example, let’s say a fast food restaurant could cut down from 3 cooks to 2 by paying $40k per year for a mechanized fry cook. If they can keep someone hired to do that job for $30k, they will not go the mechanized route. If minimum wage is suddenly set at $50k per year, they will cut down the number of cooks to 2. Suddenly the restaurant sees a 50% increase in production based on the number of employees. But did they really gain anything from this?

And what about “society” as a whole? Does society gain now that this ex-cook can work in another job somewhere, thus increasing the overall production of the nation? Or is his potential productive output less than what it took to build the machine that now does his old job?

Jonathan M.F. Catalán August 4, 2011 at 4:04 pm

The red line is aggregate production of manufactured goods in terms of dollars. The productivity per worker was derived from a comparison between the red and blue lines. I can’t deny that minimum wage laws and other forms of wage floors have had an impact on slowing industrial productivity, and that this represents a loss in terms of opportunity cost, but manufacturing has nevertheless increased as a whole relative to 1975.

Greg August 4, 2011 at 4:14 pm

Manufacturing of what though? Widgets and Gidgets for other machines to be used in production? Or is this final consumer goods we’re talking about? Do we count all the software produced whose sole purpose is to aid in compliance with the ever expanding list of government regulations? Not all production is equal.

Jonathan M.F. Catalán August 4, 2011 at 4:20 pm

I never said “all production is equal”. I’m not sure what this has to do with your original argument.

Greg August 4, 2011 at 4:26 pm

My original argument is that an increase in productivity per worker does not necessarily mean we’re wealthier. Perhaps we should define what we mean by “wealthier” first. To me, being wealthier means having more consumer goods/services. The point of production is to have stuff. Producing a thousand widgets doesn’t make us any wealthier unless those widgets are then used at some point to produce things that we consume.

Jonathan M.F. Catalán August 4, 2011 at 4:32 pm

What’s the basis for your assumption that capital goods produced are not produced for the purpose of producing consumer goods at some point? Surely, there has been malinvestment, and to some extent this is represented in the productivity drops, but we are still generally more productive than we were in 1975.

Your original argument seems like it was saying that we have suffered a loss in productivity, which I agree with (represented by opportunity cost), but this doesn’t suggest anything of what you claim in this latest response.

Greg August 4, 2011 at 4:46 pm

I didn’t say that capital goods aren’t produced in order to produce consumer goods. I’m saying that if measuring wealth (as if that could even possibly be measured), the consumer goods are the only important measure. If I can build 1 million cars with 1 factory and 100 people and you can build 2 million cars with 50 factories and 50 people, who is generating more wealth? The question cannot be answered by simply looking the total output or the output per worker.

And I didn’t say we’ve suffered a loss in productivity. We’ve clearly gained in productivity. I’m saying that this doesn’t indicate we are wealthier. The government could order all companies to produce billions of giant styrofoam sheets to help reflect sunlight, and pay them a large amount of money to do so. Does this mean we’re wealthier?

Jonathan M.F. Catalán August 4, 2011 at 4:48 pm

Ok, but your argument supposes that only the capital goods industry has grown, not consumer good manufacturing. None of this follows from the data on the graph.

Greg August 4, 2011 at 5:01 pm

Which is why I asked “Manufacturing of what though?”

I am not an economist and so maybe the term “manufacturing” indicates only consumer goods. If so, then I’d agree that we are wealthier. I always thought manufacturing meant the production of any good from individual components, or something along those lines.

noah August 5, 2011 at 3:14 pm

“This is a good thing, because it means that we are much wealthier than we were in 1975…”

Who is “we?”

John James August 5, 2011 at 4:48 pm

My question is, what exactly is it we are manufacturing? if manufacturing output has grown so much, why is our trade deficit what it is and why are all the store shelves filled with foreign-made products?

noah August 5, 2011 at 9:34 pm

A lot of U.S. manufacturing is the assembly of foreign components. I’m wondering, do these numbers take that into account? Does “U.S. manufacturing” mean made in America with 50% foreign-made components, or even assembled in America with 100% foreign-made components? Is it possible these supposed gains are not what they seem because of that?

David C August 6, 2011 at 8:48 am

I was wondering the same thing. I was under the impression that much of that productivity gain was because US companies outsourced many stages of their production to China. Sure, they spend less and produce more final product, so it looks like a productivity gain, but internally there is no gain at all.

Anders August 7, 2011 at 9:21 am

I was thinking the same way. If the US is so productive, why is the country running trade deficits of tens of billions of dollars every single month? I mean, look at the “car capital of the world” – Detroit. It looks like a shanty town in Africa nowadays.

I think most of the production is actually just people putting stuff together, stuff that was manufactured abroad.

Mr. E August 10, 2011 at 10:58 am

Actually a lot of manufacturing in the US is assembly work where the components are imported from another country. Also services like making sandwiches have been reclassified as manufacturing. Additionally, we don’t know if the dollar value of manufactured goods have been properly deflated by the true rate of inflation.

It’s also important to note that if automation and not outsourcing was why there was a decline in manufacturing employment, then more goods should be saying made in the USA. The productivity agrument is actually nonsense because if productivity was really increasing then the accumulation of capital would be growing. Since the US outsources capital like factories and technology to pay for imported consumer goods, it can’t be increased productivity that is causing the decline in manufacturing but outsourcing.

So only capital accumulation can increase productivity which is what is being outsourced. The so called productivity statistics that show increased productivity per worker are derived by taking a GDP that gets inflated by money printing which doesn’t get properly deflated and then dividing it by less workers employed due to outsourcing. This means the productivity numbers are bogus.

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