Use it or lose it – semiconductor version

I highly recommend Chris Miller’s Chip War: The Fight for the World’s Most Critical Technology. It starts with the history of the development of semiconductors, which might be familiar from other Silicon Valley histories (such as Margaret O’Mara’s also excellent The Code). But the book then goes on to less familiar and more recent territory, encompassing the technological changes needed to manufacture ever-more precise chips and the huge scale, complexity and sophistication of their fabrication. This introduces companies that have recently become familiar (AMSL in the Netherlands, making the machines that are needed to do the fabrication, and TSMC in Taiwan, which produces more than 90% of the most advanced chips) – and also others key to the process that are still not very well known in general.

The narrative arc is a steady shift from US leadership in both technology and manufacturing, to Asian leadership in manufacturing and rapid catch-up – especially in China thanks to large-scale subsidies and IP theft – in some slices of the technology. The result is an extraordinarily complex global supply chain with a number of very narrow 1 or 2 firm bottlenecks. The best to hope for seems to be a version of the Mutually Assured Destruction doctrine: no country can afford disruption. The worst? Massive disruption of all aspects of modern economic life.

That there would be some shift seems inevitable: as East Asian economies developed in the late 20th century they would always try to move up the value chain into more sophisticated sectors. However, the book is quietly but strongly critical of the pro-globalisation philosophy of the US (and rest of the west) that gave up on retaining core manufacturing and engineering competencies at home – their loss didn’t matter until it really did, with the re-emergence of geopolitical strife. As the book puts it, there was a “liberal internationalist ethos that guided officials of both political parties amid America’s unipolar moment.” Yet Andy Grove’s paranoia was valid, when he said in the early 2010s: “Abandoning today’s ‘commodity’ manufacturing can lock you out of tomorrow’s emerging industry.” (One of the best summary articles making eactly this point is Gregory Tassey in JEP in 2014.)

There is a lot of interesting detail. For example, I hadn’t realised how much Darpa focused on educational infrastructure – funding students and workshops, and university computer equipment, as well as futuristic tech research. There are lots of great examples of the difficulty of copying advanced chip technology because of the necessary tacit knowledge: for instance, every AMSL photolithography machine comes with a lifetime supply of AMSL technicians to tend to it. This is either hopeful – China will find it hard to catch up fully –  or not – the US or EU will not be able to catch up with TSMC because of the latter’s vast embedded know-how. Another example is the fact that defence dollars bought 72% of all integrated circuits produced in 1965, but Robert McNamara’s deffence budget cuts led Robert Noyce of Fairchild to bet on the consumer market and slash chip prices from $20 to $2. Annual US computer sales went from 1000 in 1957 to 18,700 a decade later.

All this and much more. The book has no easy policy solutions but is an essential contribution to current debates about industrial policy.

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Making economic miracles

I’ve always really liked Michael Best’s 2001 book The New Competitive Advantage, and his latest, How Growth Really Happens: The Making of economic miracles through production, governance, and skills is a worthy successor. Best, who has vast experience of visiting businesses and learning in detail how they produce their goods and services, centres his account on the idea of a ‘capability triad’. Growth requires success in three linked domains: skills, a production system and a business model. Note how largely intangible these capabilities are – this is not a matter of investing in capital equipment or even inventing molecules or gadgets. Policies should aim at ensuring businesses can access or develop these capabilities, broadly understood, rather than taxes and subsidies.

The book has a number of examples, historical and more recent, illustrating the concepts, ranging from the wartime transformation of the US economy to modern Greater Boston’s reinvention to the present loss of production capabilities and skills in the US; from the UK’s postwar relative decline to Japan and China’s more recent experience.

There is also a chapter looking at the tradition of thinking about production systems and capabilities in the history of economic thought. Smith is there but also some names too often overlooked in modern economics: Charles Babbage; work on increasing returns models by Thomas Schelling and Paul Krugman, following in the footsteps of Alfred Marshall and Allyn Young (author of a 1928 article ‘Increasing Returns and Economic Progress’; and above all Edith Penrose. I knew too little about her work until a fine biography by Angela Penrose, No Ordinary Woman, sent me to it earlier this year. Given the obvious prevalence of increasing returns in modern economies, it’s high time to revisit this tradition.

The book ends with some reflections about the links between the productivity slowdown of the past 10 years and diminishing capabilities in the affected economies it mainly looks at the US here. Like a growing number of others (see for instance this article by Gregory Tassey), Best argues that the worst long-term consequence of offshoring has been the loss of know-how embedded in production systems and skills. The way to address this? A policy framework aimed at strategic economic development, something that has been lost from the vocabulary of policy for a generation, although tacitly recognised perhaps in the UK’s debates about an industrial strategy.

There’s a mass of interesting detail in the book – perhaps too much compared to the more reflective sections, but then the ideas do pick up on Best’s earlier work where there is much more on the conceptual framework. How Growth Really Happens is well worth a read, along with the earlier book – so much so it’s on the Enlightened Economist Prize 2018 longlist.

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Hot grease and cotton dust

Joshua Freeman’s Behemoth: A History of the Factory and the Making of the Modern World starts – of course- with the cotton mills of northern England during the Industrial Revolution. The early chapters had a (reverse-)Proustian effect, reminding me of the distinctive assault on the senses of taking my dad his lunch in his spinning mill, where he was a mule operator, or going to see my aunties in their weaving shed: the rhythmic clatter of the machines, the smell of hot grease and cotton dust. But they were small factories. The book’s theme is the economic and cultural role of giant factoriesm behemoths.

It’s an engrossing read, progressing from Manchester in England – inspiration for Marx and Engels (the latter running a mill there) – to the New England textile industry and the American System; the late 19th century enthusiasm for factories and manufactures with the Crystal Palace Exhibition and other grand fairs; Ford and Fordism; Soviet Gigantism; the Cold War era of mass production; and ending with the giant plants in China and elsewhere in Asia today.

The book notes the magnetic appeal of big factories, even for their social critics. This started early. In the 19th century, campaigners’ indignation focused on conditions of work in the new factories, including their use of child labour. Quite right too. Yet, Freeman notes, “The novelty of the factory system drew attention to the exploitation of its workforce, while the long-standing exploitation of agricultural workers, domestic producers, servants (encompassing twice as many women as in the textile industry) and others went largely unnoted by politicians, journalists and writers, who had little interest in the lower classes.” (The same is true now of the commentariat’s focus on ‘gig’ work via digital platforms; there are lots of worse jobs around.)

For much of their history, factories have been seen as symbols of modernity – including in the arts, especially by photographers such as Margaret Bourke-White or Alexander Rodchenko. In the late 19th century again, the structures of industry represented the Sublime. The link of the huge factory complex with modernity was particularly striking in the newly industrialising Soviet Union – and one of the things I learned from the book was how much that had depended on American engineers, designers, foremen, trainers in the 1920s and 1930s. The Soviet sphere continued to manufacture on a giant scale until 1989. As a journalist in 1990, I visited the Ganz Elecrtic plant near Budapest, up for sale to western investors. Steel went in at one end, everything from buses and lightbulbs emerged at the other. Some giant plants even had steel mills, integrating the entire vertical chain.

Yet in the US the biggest companies moved away from their emphasis on huge plants like Ford’s River Rouge – a tourist destination and much photographed and celebrated – in part to reduce their vulnerability to organised labour and industrial action. The need for labour and the constant to and fro in power relations is one of the threads running through the book. Freeman argues that unionization and labour power get too little attention in the economic literature on industrial location, which I think is right. The communist countries were able to continue on the behemothic scale because unions were part of the social state.

The book ends with China’s giants, such as Foxconn City. Why are they still so big, Freeman asks? These are not long and complex production lines like those involved in building a modern car or an aircraft. And there are diseconomies of scale in terms of management and organisation – not to mention hiring and managing such a large workforce – which one might have expected to lead to production on a smaller scale. His answer is that scale today serves the retailers, not the manufacturers. The focus on marketing and branding by the likes of Apple or Nike means they want consistent, timely and huge runs of new products. Modern communications – virtual and physical – have made contract manufacturing possible on this immense scale. Many western manufacturers outsourced their manufacturing from the mid-1990s. So whereas 19th and 20th century giant factories were public marvels – criticised, yes, but also admired, visited, debated – 21st century factories in China are dull boxes surrounded by walls and rarely photographed.

Still less do they inspire poets like Walt Whitman, who wrote of the sublimeness of steam power. The poetry quoted here is by a young Foxconn worker who committed suicide: “They’ve trained me to become docile/Don’t know how to shout or rebel/How to complain or denounce/Only how to silently suffer exhaustion.”

Being a factory worker has always been exhausting, draining, deafening, dangerous – for all that there are worse alternatives. Although unions briefly won great gains for (male, long-term) factory workers in the mid-20th century, leading some people now to romanticise blue collar jobs and factory communities, I’m happy to see robots taking over ever-more of the work. And yet, and yet, factories are still fascinating.

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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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