Is it really curtains for globalisation?

Finbarr Livesey’s From Global to Local: The Making of Things and the End of Globalisation is a terrific read, although I’m not completely persuaded by the argument that the transformation of production by global supply chains will be reversed. In fact, the book gives a nuanced and highly informative account of why firms manufacture what they do where they do – making, too, the entirely valid point that the political context is highly uncertain and we could be seeing not only a retreat from hyper-globalisation but a full-blown canter toward nationalism and protectionism. The world has seen such unwindings before.

The first part of the book describes how the increasing specialisation of manufacturing, enabled by technology and declining transaction costs, led to the development of long cross-border supply chains. It then goes on to roll forward the evolution of both transport/transactions costs and automation, covering issues such as containerisation and shipping costs, the oil price, the move to regional trade deals, and agglomeration economies. These are some of my favourite subjects, and these chapters give a very nice synopsis of the economic issues.

However, one of my queries about the argument arises in the section on agglomeration. The suggestion here is that the economic forces of agglomeration apply to cities in developed economies but perhaps not so much in the emerging markets. “One of the open questions is whether the massive collection of companies making so many things in southern China has become a self-reinforcing cluster, a location with its own internal gravity binding manufacturers to it for a significant time into the future. …. [G]iven the rise of automation and the desire of leading firms to retain design and intellectual property control over their products, some of the clustering forces for places like Guangzhou and Shenzhen may not be as strong as thought at first glance.” My guess – no more than that – is that while automation will lead to some ‘reshoring’, as Livesey suggests, the Chinese manufacturing centres do in fact have some distinctive capabilities: the ability to manufacture to consistent standards on a large scale; unparalleled logistical expertise; and growing R&D/design capabilities in a number of products from clothes design to renewables.

Having said that, the book is very strong in describing the complexity of the production decisions facing manufacturers now, and there is loads of interesting detail. One chapter covers environmental issues, including the now widespread drive to reuse and recycle (IKEA is a nice example here). Another looks at trade policy and politics, and the importance of proximity (hello, Brexiteers!), leading some companies to switch their focus from exporting to markets to owning production assets in those markets: “Government regulations on foreign ownership will become the new trade barrier,” as otherwise companies may not be able to access certain markets at all. There is a chapter about automation and additive manufacturing, and the implications of smaller factories, with lower retooling costs, becoming economically viable. Labour costs will become steadily less decisive as a reason for locating production in an emerging economy (although I think that reason has been over-stated sometimes.)

All in all, Livesey predicts: “[I]t is likely we will see anything from a 20-30% fall in global merchandise trade (services are not affected the same way) over the coming decade.” This is quite a bold prediction, implying a big restructuring of production and diminution in importance of cross-border supply chains, given how much of merchandise trade now consists of components rather than finished products. I’m not sure about this, yet do agree with that the technological, political and economic conditions that shaped the world of global supply chains are changing substantially.

From Global to Local makes a great combination read with Richard Baldwin’s The Great Convergence published earlier this year. They offer two different sets of lenses on the organisation of the world of production. One could add Stephen King’s Grave New World, a pessimistic, big picture perspective on global political economy.

Reflecting on these three recent books, they need to be combined with looking at implications for employment and incomes. As David Autor pointed out in his IFS lecture last week, trade has contributed enormously to the biggest decline in poverty recorded in human history as China has grown – and the loss of jobs, income and status among some (not very numerous) groups of people in the west, a narrow but deep cost of technology & globalisation. We surely need to think much harder about the social and economic welfare implications of current trends, including whose welfare, given how badly prepared economists and politicans were for the implications of past developments. Globalisation and automation started to eat western livelihoods around 1980, and the failure to make sure those who lost out were properly compensated with appropriate policies goes quite a long way to explain today’s politics.

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On The Economy of Machinery

by Charles Babbage was published in 1832. I discovered it courtesy of Sydney Padua’s , not having known Babbage had written at all about political economy.

[amazon_image id=”1511434422″ link=”true” target=”_blank” size=”medium” ]On the Economy of Machinery and Manufactures[/amazon_image]

It’s a marvellous book. Babbage clearly had a joyous, expansive interest in everything. The first half describes and discusses all kinds of innovations in manufacturing – how machines work, what different industries have been introducing, and a long chapter on different types of copying, from copperplate printing to mass production techniques making copies of manufactured items.

The second half turns to questions of political economy and it is fascinating to see how Babbage links his observations about actual businesses that he visits – clearly, very many of them – and the price lists he sees, and the machines he has seen built – with analytical principles. He describes the importance of fixed costs and increasing returns to scale; the importance of asymmetric information in explaining many phenomena in business; the way large productivity gains depend on a reorganisation of production, but may be left untapped unless there is enough pressure from competitors because old techniques are still profitable; the phenomenon of geographic clustering for exactly the reasons Alfred Marshall more famously set out his 1890 ; and the sheer restless dynamism of the industrial economy. He even has thoughts about the relationship between automation and jobs.

All in all, it adds up to a very modern-seeming view of how the economy operates. Although of course it would have seemed very old-fashioned to 20th century economics, having no equations, no steady state equilibrium, no machinery of assumptions and axioms.

I love Babbage’s detailed empiricism. He is overjoyed by the potential of the division of labour, and takes Adam Smith’s example of pin manufacture. He visits pin makers of all kinds and describes the 10 stages of pin making in some detail. He tells us whether tasks are mainly done by men, women or children, and what their typical wages are. He describes the tools used and how they work. He also has a detailed account of pin making from half a century earlier. He can put a figure on the productivity gain from the division of labour!

It turns out Babbage wrote a fair bit of economics. I might move on to another of his works.

[amazon_image id=”1616407522″ link=”true” target=”_blank” size=”medium” ]Passages from the Life of a Philosopher[/amazon_image]  [amazon_image id=”110341688X” link=”true” target=”_blank” size=”medium” ]Reflections on the Decline of Science in England, and on Some of Its Causes[/amazon_image]  [amazon_image id=”B00X61XRDM” link=”true” target=”_blank” size=”medium” ]Thoughts on the principles of taxation, with reference to a property tax, and its exceptions[/amazon_image]

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Is the US a post-innovation economy?

 edited by Richard Locke and Rachel Wellhausen is a useful short summary of an interesting inter-disciplinary MIT research project, and is the companion to an earlier volume, . Although entirely US-centric, the research into what is needed for firms to be able to innovate then commercialize and grow is fascinating. All the more so in the light of the mild furore yesterday about Facebook’s purchase of Oculus, which some commentators saw as a signal of the inability of start-ups to grow organically.

[amazon_image id=”0262019922″ link=”true” target=”_blank” size=”medium” ]Production in the Innovation Economy[/amazon_image]

The work, based on existing data sources and a new survey of US manufacturing companies – including high-tech spinouts from MIT, explores a number of potential barriers to turning research into successful US manufacturing entities. The papers in the book cover skills, what it rather coyly calls ‘complementary assets’ but is actually finance to grow past the start-up stage, and a thick, geographically specific ‘ecosystem’ of suppliers. Taking these in turn:

– most manufacturers have no specific high skill needs and have little sustained trouble filling jobs, but a significant minority (15-20%) need people with higher mathematics and computer skills, and team working capability, and find it hard to recruit. Small, innovative start-ups do not have the capacity to train up their own people – they need to hunt for them in the labour market.

– surprisingly, finance to get to the point of being able to manufacture at scale, including a stage of iterative incremental innovation and prototyping, is a major barrier even in the US (and surely all the more so elsewhere). Part of the problem is that VCs have become specialists in specific stages and are usually looking for an out from their stage – in other words, venture capital has become very short term finance, shorter term than needed to grow a successful innovative manufacturing business. Many US businesses now turn to strategic overseas investors in Asia, either their customers or even state-funded entities.

– a third requirement is the presence locally – for the exchange of tacit knowledge – of a thick enough market for components. The geographic co-location of members of a supply chain is becoming a constant theme of the literature on innovation. In the economy of the 1960s and 70s, large vertically integrated companies with their own R&D arms did not have this challenge of finding partners in the supply chain; but all new innovative manufacturers have to source components from suppliers who are prepared to work on the new products.

The specific policy conclusions are written for the US, and do not carry over elsewhere in the same form. But the general principles are very obvious. They all point to the need for government to play a co-ordination role. Whether it is ensuring the system of education, training and apprenticeships serves the needs of new start-ups, co-ordinating finance or tax breaks on the funding gap at the transitional stage of growth, or liaising between firms and with local authorities and educational establishments to achieve the geographic clustering, there is a strategic role for government.

Asian governments are superb at this, including focusing support on some specific sectors (such as energy innovation in China), and I think some European governments do a decent job too. The book is pretty clear, though, that the US government has not adapted its industrial strategy for an economy consisting of smaller innovators, one where it can’t rely on big defence contracts and the likes of Bell Labs to look after the business of growing new ideas into large-scale commercial success. In the US and UK there is still the official delusion that industrial policy is equivalent to pouring a bath of taxpayers’ money in which lame ducks can splash around in unproductive luxury. This book provides a really solid evidence base concerning the barriers to growing small, innovative manufacturers, and is very persuasive about the need for policy action to lower those barriers – otherwise, it implies, the US economy can have superb universities and early stage research but will be nevertheless a post-innovation economy.

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How much do we really want a manufacturing revival?

There’s a well-known economics joke that goes:

“Q: How many economists does it take to change a light bulb?

A: None, because if it needs changing, market forces will take care of it.”

The psychiatrist equivalent seems to be:

“A: None, but the lightbulb has to really want to change.”

These old chestnuts came to mind as I was reading Vaclav Smil’s new book, . It’s exactly the kind of book I find very relaxing, with tons of information and empirical observation.

[amazon_image id=”0262019388″ link=”true” target=”_blank” size=”medium” ]Made in the USA: The Rise and Retreat of American Manufacturing[/amazon_image]

I’ll review it when it is officially published later this month. But, as a curtain raiser, the sections on how hard it has become to manufacture in the US (and by extension other advanced economies) are eye-opening. Low wages in Asia are not the main reason many manufacturers give for offshoring, but rather the complexity of the processes they have to go through to create a viable plant at home – training the workforce, lack of infrastructure, permits, legal obstacles or fear of legal challenge, planning permission – there’s no “can do” but rather an interlocking web of “no, sorry, can’t do”. Smil quotes one example of a planned investment that was pulled because the factory would be behind the local golf course in its priority of access to the water supply.

In another context, I was looking back at my notes on Joseph Tainter’s 1988 book, , a fascinating work. His argument was that sophisticated societies become too rigid in their complexity, impossible to simplify, resulting in the ultimate simplification of collapse.

Yesterday President Hollande announced a grand new industrial strategy aimed at increasing the share of manufacturing in the French economy – lower now than in the UK, never mind Germany. It isn’t clear that it addresses the kinds of obstacle Smil writes about in his book. How can we make it easier again for businesses to open major manufacturing plants, or build infrastructure, in our highly complex societies? As a start, we have to really want to do it.

[amazon_image id=”052138673X” link=”true” target=”_blank” size=”medium” ]The Collapse of Complex Societies (New Studies in Archaeology)[/amazon_image]

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Municipal grandeur and balanced growth

One of the inspiring things about Tristram Hunt’s book  is reading about the energy and optimism of leading citizens in the newly industrialising cities.

[amazon_image id=”075381983X” link=”true” target=”_blank” size=”medium” ]Building Jerusalem: The Rise and Fall of the Victorian City[/amazon_image]

It was an era when Britain’s cities other than London, for all the misery and squalor of the working classes, had a sense of control over their own destiny. I do agree with Hunt when he says in the Introduction: “[T]he policies of successive British governments have served to castrate civic autonomy. Unintelligible and ideas-free history [of urban growth] has gone hand in hand with rate-capping, surcharging and centralisation to render local government and civic pride a forlorn part of the historical landscape.”

He points out that Lord Palmerston defended the grand designs for a new Foreign Office building in Whitehall on the basis that it could not be less impressive than Leeds Town Hall. The unpleasant John Ruskin criticised the ugliness of the northern cities – as apparently Peter Hall did too – but it would surely require mental blinkers not to appreciate the glory of Manchester Town Hall or St George’s Hall in Liverpool, or the streets of handsome warehouses in any of the Victorian industrial centres. Hunt writes: “Britain was a land of great cities, each one playing a part in the political process and preventing the unstable accumulation of too much power in the capital.” Commentators at the time contrasted Britain’s stability favourably with the continuing upheaval in over-centralised France.

It is a weakness of the British economy now that it runs on only one engine, albeit a super-sized one, in London. Nobody sensible wants to see London weakened, but surely everybody sensible would like to see other cities have the capacity to grow faster than they have for the past 50 years or more. When people talk about the desirability of rebalancing the economy so that manufacturing and exports grow faster than financial and other services, that’s equivalent to hoping for faster growth in the industrial centres outside the south east, because that’s where most of the manufacturing is located. Economies are not abstractions, they consist of people in places.

I was involved in the Manchester Independent Economic Review, looking at how the city could regain some of that Victorian dynamism, which requires regaining a stronger voice over some of the influences on growth, such as transport and other infrastructure links, planning (an area where the issues in south and north are entirely different), and skills.

It’s a slow process achieving these things, though. Not only is the centre naturally unwilling to cede any decision-making territory, there is also the tyranny of the so-called ‘postcode lottery’. Still, the experience of the devolved nations suggest it is possible to come to terms with difference, so I think it is worthwhile looking for inspiration in the Victorian cities.

Victoriana

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