Angus Kennedy, 29 October 2009
Conventional opinion puts the blame for the current recession on the shoulders of greedy bankers; on the increased financialisation of the British economy over the last twenty years. In some ways, however, this is unfair since there has been a much longer term decline in British manufacturing industry which hole, it could be argued, the growth in financial services and public spending has been attempting to plug. Although some commentators now call for a return to productive investment and a regeneration of manufacturing to set the balance right again, is this at all realistic? Is there something intrinsically wrong with an economy based on services and on consumption? Something better and sounder in an economy based on production? What should the balance be? In a capitalist economy - where production after all is organised for profit - there is little to be gained by a naive and moralistic reaction against services in the name of manufacturing, against consumption in the name of production. We need, instead, to take a closer look at what is really happening in the economy in terms of the creation of new value and the ability of British capitalists to turn a profit.
Britain has ‘an utter contempt for skill. If one talks to people who dig coal and drive trains, or to doctors, nurses, dentists or tool-makers, one discovers that no one in Britain is interested in them. The whole of the so-called entrepreneurial society is focused on the City news that we get in every bulletin’. So said Tony Benn in 1990 and that was merely a repeat of what he said in 1975 warning against the dangers of a contracting number of manufacturing workers. Will Hutton, writing in 2009, shares Benn’s distaste for the City as opposed to manufacturing: ‘The City, spreading a virus that for generations has obstructed a fair society and productive, high-investment economy, has at last been dislodged. Britain will be the better for it.’ He urges the state to control and reform the banks and argues that ‘companies have chased after too high returns for too long and undervalued innovation and production.’ Libby Purves, writing in The Times, agrees that finance and other services are not enough for the economy: ‘To feel good about your work, as an individual and a society, to be both emotionally satisfied and economically safe, you have to make stuff.’ Apparently we have been making bad, short-term, get-rich quick choices for over thirty years now and it is long overdue for us to wise up.
In the wake of the recession there are many voices raised demanding that we get back to productive growth and move away from a consumption based service economy. The financial service sector in particular is blamed for the recession and so is ruled out of being the basis of a future recovery. In its place are posited the old fashioned virtues of making things. While we do get some arguments for consuming more - spending our way out of recession - they are soon tarred with the same brush of irresponsible self-interested unsustainable greed that blackens the risk-taking financiers. Can we restore some balance to the economy through revitalising the manufacturing sector even though it has been - almost paradoxically - much more severely impacted by the recession than the services sector?
After all, it is not as if Germany and Japan have done well out of this recession - for them and for Britain the real shocks have been felt in manufacturing as businesses that have been surviving on credit now find their financial lifelines choked off. One could go so far as to argue that exposing ourselves any further to the manufacturing sector might be very unwise. It does appear that the manufacturing sector is more fragile and open to shocks than the service sector. Not only more fragile but also much weaker in terms of the economy as a whole, compared to services which make up 75% of the economy. It has been known since the 1970s that British industry was in a long-term decline - services have in fact played their role in offsetting this decline. To such a degree that in the heady days of the 1990s we were told that we need not fear the loss of industry since the dirty business of actually making things was being eclipsed forever by the information economy where knowledge was money. Are we now then really to go back to making ships and things? If manufacturing wasn’t working then, why would it hold the keys to our economic future now?
It is undeniable that manufacturing has been in a decline in the UK. Manufacturing today represents 13% of GDP and 10% of employment: in 1970 it was 34% of the economy. Great Britain is number six in the world rankings in terms of manufacturing output but the volume of goods produced has fallen by 25% since 1997. The UK has disposed of Westinghouse, Airbus, Vestas… One million manufacturing jobs have gone in the last 10 years. The city makes up 3.5-4% of GDP and one in five people are employed by the state - mainly in education, health and administration. Public debt stands at £1000bn and public spending equals half the economy. By way of comparison, after WW1 it was 20% and after WW2 30%.
Although Britain might be at number six in the world, it is also on the way down the list:
Manufacturing output, $bn, 2006
1. US 1663
2. Japan 954
3. China 751
4. Germany 584
5. Italy 299
6. UK 270
7. Canada 260
8. France 248
9 S Korea 220
10. Brazil 169
Looking at this table - and allowing for currency fluctuations - it remains true that the G7 produce most of the world’s manufactures but equally we can see that the emerging economies are catching up. Why then would the UK try and compete in this sector? To understand its chances we need to take a more serious look at the types of manufacturing that the economy engages in and at the contribution services make in generating prosperity.
So, what does Britain make? The picture is not one of decline right across the board. In the wake of the recession, Rolls-Royce, supported by state investment, is to open four new plants and create or guarantee 800 jobs. The plants will produce advanced aerospace technology and parts for new nuclear power stations. ‘This practical package of measures will help equip British manufacturers of all sizes and sectors to take advantage of the advanced technologies and new market opportunities now shaping our low-carbon industrial future’ said Lord Mandelson of the £150m to be invested by the government in support of ‘more real engineering and less financial engineering’. Britain does compete in a number of high-tech industries: robotics; renewable energy; stem cell research; cybernetics; nanotech; biotech; nutraceuticals; and computer gaming. Aerospace factories in Bristol are involved in advanced manufactures like carbon-fibre materials. Industrial sectors like this or the production of specialist chemical products such as automotive catalysts are able to resist low wage pressure from elsewhere due to the high levels of engineering skill involved.
Despite the shortage of venture capital available to this sector from private investors, crippled by contemporary risk aversion, and despite the paltry £150m promised by the state, Gordon Brown still says: ‘our future lies in low-carbon, high-technology manufacturing and services’ albeit that all that depends on ‘a reformed and more responsible banking system’. The state is still investing in ‘science, green jobs, skills and the digital backbone’. These are not necessarily empty promises. UK manufacturing output is 2.5 higher in real terms than it was in 1950. As the examples above show, Britain can still compete in aerospace, biotech, big pharma and even automobiles. A more optimistic look at the economy might perceive, rather than a decline in manufacturing, an even faster growth in the service sector and in disposable income.
After all, some economists have always argued that the norm for developed countries is for manufacturing to grow to a certain point and then for services to become more and more important. After all we have to spend the money on something and every manufacturing job typically generates at least 2-3 times as many supporting jobs in the service sector. Britain with 13% of the economy in manufacturing is actually doing better than France and the US where it is only 12%. As Philip Whyte has argued in The Times, one could rightly say that ‘declining employment reflects the strength of efficiency gains in manufacturing’. So, just looking at the number of people employed in manufacturing is maybe no reliable indicator of its strength: rising productivity is the result of more automation and fewer hands to the pump after all. Why then are we so concerned about the disproportionate impact on the manufacturing sector, here, in Japan and in Germany? If it is hard to raise productivity in these already highly efficient industries - should our challenge not to be raise productivity in the service sector instead? Why not concentrate on financial services, the professions, even tourism, restaurants and the media?
If it is not a simple truism that Britain does not make stuff anymore - that in certain sectors it is actually extremely productive - it is equally not even the case that we have been consuming too much. Britain is in debt: that is true. Credit card debt is the highest of any nation in Europe and household debt as a percentage of disposable income has risen from 100% in 1990 to nearly 170% now. The US by comparison stands at only 130%. But whereas household consumption as a percentage of GDP rose by nearly 3 points in the ‘80s, in the ‘00s it has fallen by nearly 1.5 points. Instead of individual consumption, it is the state that has been spending. Spending - and largely wasting - tax revenues from the financial sector. We are so much in debt now, not because of a spending spree, but because of a doubling of house prices. Lest Britain be said to be an exception to the rule that the West is consuming too much and producing too little, it is worth noting that it is not even true that the Chinese are not consuming enough. Chinese consumption is increasing - some 10% in 2008 (electronics, clothing and above all cars are the main drivers). Consumer spending in emerging Asia has grown 6.5% annually on average over the last 5 years. Investment and exports of course have grown even faster.
So, if Britain is still productive and is not necessarily consuming too much, why all this talk about things being out of balance between production and consumption? Both at home and globally? It is striking that one recent report from a London investment advisory firm estimated that Asia spends some 25% of GDP on net capital investment and the West only 5% (Re-thinking Emerging Markets, May 2009, CrossBorder Capital). Profitable businesses tend to invest which drives employment and consumption: unprofitable ones try to reduce costs and downsize. Low investment speaks - as do historically low interest rates - to the fact that ‘the current crisis owes far more to the falling rate of profit in the West, than to fragile finance or poor regulation.’
The real problem lies with profitability, with the ability of investors to find areas in the British economy in which to make healthy returns. Profitability in manufacturing is low precisely due to its high levels of productivity - meaning that the cost of the machinery and automation required to remain competitive and take it to the next level is prohibitive. The financial services sector can take a share of profits through speculation and rents and title ownership but it is hard to raise productivity in the service sector due to the importance of intangibles like quality or knowledge: let alone the tiny amounts of R&D committed to services. The British legal sector, for example, is strong due to the depth of case precedent and the benefit of the English language and of Engllsh law being internationally respected. It can’t be automated though. Against the background of declining profitability in the manufacturing sector and decreasing international competitiveness, it is hard to argue that deindustrialisation is a benign process. Productivity growth may be average at best but output growth has been sluggish which has resulted in labour shedding and outsourcing. What remains is productive sure but less and less profitable.
Counterposing manufacturing and services is not a very useful way of understanding the economy: if for no other reason that most of the economy now is services. Nor is counterposing production and consumption. Neither really make the economy tick. Capitalism is a system based on producing for a profit - a way of organising society that is far from ideal; that is, in truth, not very social at all, not based on meeting our needs and not under our control, not a rational system. That said, in the absence of any real alternatives - rather than just palliatives - and in the absence of social movements calling for radical change, if we want to ensure any kind of increase in productivity for the benefit of society as a whole, we have to recognise that profitability is the crucial factor.
What matters is making profits and we adjudge labour to be productive or unproductive in terms of the way in which it relates to the production of profit or surplus value. The NHS for example, state funded, is largely unproductive. In the US on the other hand heath care is privately owned and directly contributes to the production of profits. We need to have something to exchange. Manufacturing creates new value which is easier to exchange: hence the reason that manufacturing items tend to be traded more heavily internationally. Services generally speaking do not create new value and so must be exchanged with some other country that is producing value.
We actually need a debate about which capital intensive industries should be taken on by the state - free of the dictates of profitability - and which unproductive areas of state expenditure might be better handled by the private sector. It is not enough to look at the superficial structural aspects of the economy. Instead we need to examine the underlying national capability, what is happening at the level of capital accumulation. If we look at the economy in terms of which sectors are profitable and productive and which are not a different perspective on the problem open up. The economy is increasingly dependent on the state more so than it is on services and even the service economy is dependent on the state (eg, building Docklands for the finance sector). What is more important is the attitudes of society to the production of wealth - where we see it as being generated from and where we pin our hopes for the future. And risk-aversion is critically important here in that it holds us back from productive investments where they do exist. Arguably it also holds us back from making a break with the past. Just as there is an imperative to invest to create the new, so there is a need to destroy the old, to clear the decks and shake out the cobwebs. We must find ways to fund initiatives that break the cycle of low profitability, low investment, low productivity, low profitability and we must realise that this will necessarily involve the destruction of unprofitable sections of the economy.
In that sense the future might look more than a little bleak in that our main hopes appear to be attached to the low carbon economy. In particular, to those areas that can generate a lot of jobs - irrespective of productivity - and are clean in terms of energy usage. While it may be a good thing (albeit a qualified good) for someone to get a job in a windfarm - in terms of their narrow self-interest - it may not be in terms of the economy and society as a whole in terms of maximising the production of profits. Equally, the low carbon economy can also be the low productivity economy: either because of the nature or limited scale of the technology. That said, areas of green technology that do offer profitable investment opportunities should be taken up. What we should not do is look for areas in which we can employ the most people at making stuff. Sheer numbers of jobs created is obviously not enough: if it was then we should argue for low productivity industries and low wages…
In addition, the attachment to the green economy is a way of avoiding the increasingly uncomfortable fact that manufacturing creates products for us to consume. When we see consumption as a matter of personal greed rather than a matter of fulfilling our needs and wants, then we start to realise that the arguments in favour of making more stuff are more than a little ‘nuanced’ - it is about making the right kind of stuff: clean green stuff. It is actually about making less - because the industries are less productive - and about consuming less: the only value attached to the economy is in terms of how little carbon it can produce. Making a buck doesn’t count any more: we are in danger of forgetting that in a capitalist economy nothing is worth producing if not for a profit. There is a sense in which the economy based on making profit is seen overall as simply too dangerous, too exuberant, too out of control and it appears better to keep it restrained and moderated by basing the economy around doing less. That means less for us all, however, not just for the City bankers. It means an economy that almost literally makes no sense since the meaning of the economy lies in us creating new value. If the economy is now to be based on producing less it is fair to ask just who might benefit from that? Nature maybe but not us.
If we were instead to repose the debate in terms of what is profitable economic activity and what is not, we might sharpen the debate in society between those who want to limit progress in the name of cost-cutting austerity and those who really want to advance growth and living standards to the benefit of all. This means arguing for productive investment in the economy and breaking up the existing barriers of low profitability and low investment. That means re-politicising the economy and arguing for the growth and dynamism needed to move society forward.
Angus is a Battle of Ideas committee member, has written for spiked, and reviewed for Culture Wars.
• Building Britain’s Future, chapter 3
• Management Today, De-industrialisation: Made in Britain
• Rob Killick, Should we be making more things? Part I & Should we be making more things? Part II and
• Peter Howell, Once more on productive and unproductive labour
• Daniel Ben-Ami, Getting to the root of the economic crisis
• Gordon Brown, We will put people first, not bankers
• Graeme Wearden, Rolls-Royce announces £300m UK factory plan
• Peter Marsh, Complexity is key to overcoming recession
• Carl Mortished, The West can’t spend, China won’t spend
• Libby Purves, Save the nation: log off and invent a machine
• Philip Whyte, It’s a fabrication that Britain doesn’t make things anymore
• Will Hutton, Yes it’s bad, but at long last the government is getting it right
• Dave Hill, We must sell Britain to avoid recession
• FT, UK economy’s misconception of consumption
• Finance markets, Rise in UK’s service sector is good news for the economy
• FT, Data show sharp fall in output
What is China Thinking? - Adrian Hornsby
"There was an astonishing range of opinions expressed while I was there, some of them pure nonsense, others profound, all of them provocative."
Daniel Moylan, Deputy chairman, Transport for London