American Manufacturing and Innovation

American Manufacturing and Innovation

An article by Louis Uchitelle in the February 13, 2011 New York Times posits that the decline of American manufacturing will likely lead to a decline in American innovation.  Alas, Mr. Uchitelle’s  premise, shared, I think, buy all too many of his readers, is dubious at best. 

Mr. Uchitelle bases his “American manufacturing is in decline” premise on two misused, or at least misunderstood, statistics.  First, he points out, correctly, that American manufacturing employment has been in a more or less steady decline since the 1950s.  Second, he points out, let’s assume correctly, that manufacturing, as a percentage of gross domestic product, has also declined since the 1950s.  Neither of these statistics addresses the real questions, to wit what has happened to the absolute value of American manufacturing output, or the relevant share of global manufacturing output, over the last decades?  The answers to these questions might surprise you: the value of US manufactured goods (in constant dollars) has skyrocketed since the 1950s; and the American share of global manufacturing output has held more or less steady at around 20% since 1980. 

What gives is simple: productivity.  And productivity gains are, at the end of they day, the engine that drives wealth creation in any economy – well, any economy not based predominately on exporting increasingly scarce raw materials (think Saudi Arabia ).

This is not to say that displaced manufacturing workers – Mr. Uchitelle’s story plays off the recent closure of the last flatware manufacturing plant in the United States – do not pay a price in what to them is the only “real” economy – their own and their families.  But it is to suggest that when considered at the scale of America as a whole, the “decline” of American manufacturing has been much overstated, and in fact has been accompanied by enormous increases in real manufacturing output and even bigger – and largely innovation-driven – increases in gross domestic product and income. 

One more point (Mr. Uchitelle must have been having a bad day when he wrote his article): our intrepid reporter reports that while innovations like Apple’s IPhone may be designed in America, they are made in Asia .  Sorry, they are assembled in Asia, but the large majority of components that make up an assembled IPhone are manufactured in places like the United States and Western Europe .  And the value/cost of those components vastly exceeds the value/costs of the labor to assemble them in China. 

The point of all this, I think, is simple, if perhaps a bit subtle.  It’s not the value of the inputs that determines a nation’s wealth, it’s the value of the outputs.  Doing more with less, whether we are talking about manufacturing or services, is a good thing, not a bad thing.  And it is something that Americans still do quite well, thank you.

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About Paul A. Jones

Serial venture capital backed entrepreneur, angel investor and venture capital investor; Co-chair of the VentureBest team at Michael Best & Friedrich, LLP.
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