Dan Wang on how technology grows

It is a short essay, here are a few scattered bits:

The real output of the US manufacturing sector is at a lower level than before the 2008 recession; that means that there has not been real growth in US manufacturing for an entire decade. (In fact, this measure may be too rosy—the ITIF has put forward an argument that manufacturing output measures are skewed by excessive quality adjustments in computer speeds. Take away computers, which fewer and fewer people are buying these days, and US real output in manufacturing would be meaningfully lower.) Manufacturing employment peaked in 1979 at nearly 20 million workers; it fell to 17 million in 2000, 14 million in 2008, and stands at 12 million today. The US population has grown by 40% since 1979, while the number of manufacturing workers has nearly halved.

And:

I think we should try to hold on to process knowledge.

Japan’s Ise Grand Shrine is an extraordinary example in that genre. Every 20 years, caretakers completely tear down the shrine and build it anew. The wooden shrine has been rebuilt again and again for 1,200 years. Locals want to make sure that they don’t ever forget the production knowledge that goes into constructing the shrine. There’s a very clear sense that the older generation wants to teach the building techniques to the younger generation: “I will leave these duties to you next time.”

And:

There’s an entertaining line in the Brad Setser piece I linked to earlier. He tells us that one of the reasons that the US has such a high surplus in the services trade is that Americans have a low propensity to travel abroad. I don’t view that as a great way to earn a trade surplus.

There is much more at the link.

Comments

Are the comments working?

Well, so much for the Bloomberg connection.

On the other hand, the idea of a time delay as a way to increase the quality of comments is at least an original idea - one that is extremely unlikely to bring any real benefit in terms of people employing any form of automation (that 'Notify me of new posts by e-mail' feature might be useful in that regard, for example).

That might explain why those with apparently no experience with programming might think it could work as a trick.

Hard to tell if this was meant as commentary by Prof. Cowen or was part of the quote - 'I think we should try to hold on to process knowledge.' There is no question that the U.S. has lost the ability to build belt armored battleships (and was not able to successfully operate them after decades of disuse), but considering that Prof. Cowen feels that defense spending in advance of a major war is good for economic growth (https://www.nytimes.com/2014/06/14/upshot/the-lack-of-major-wars-may-be-hurting-economic-growth.html, maybe someone can convince the Trump administration to make American battleships (built in America using American steel and American coal) great again. Wouldn't want to lose such process knowledge after the greatest generation dies out completely, right?

So, after enjoying lunch and reading much of the essay, I was going to make a typically snarky comment about how Wang must have been talking to Germans recently, because everything he wrote was just commonplace for German manufacturing. Such as the practice of Kurzarbeit to ensure that 'process knowledge' is not lost, a more than century old German industrial employment practice.

Turns out, no need to be snarky - 'I visited Germany earlier this year to talk to people in industry. One point Germans kept bringing up was that the US has de-industrialized itself and scattered its production networks. Whereas Germany responded to globalization by moving up the value chain, the US manufacturing base mostly responded by abandoning production.'

And just imagine I wrote this - 'In order for other countries to import more from the US, first it should have better goods to sell' to write the standard MR comment to dismiss that observation.

German manufacturing output has declined, too. FRED stopping tracking, but even the non-inflation-adjusted shows a fall-off. DEUOTPT Eyeballing it (and mentally subtracting for inflation) it looks about the same as the US.

Okay, he later cites DEUPROMANMISMEI and calls it real output and says it has grown, but it sure looks like nominal output to me. It's seasonally-adjusted, not inflation-adjusted. Can people more familiar with FRED confirm or deny my reading?

I've thought the US should strategically maintain minimum facilities in every industry: there should always be at least one semiconductor fab, at least one yarn factory, at least one shoe factory, all of that. I don't know how this works with WTO agreements, though. I suspect the other DanW would agree in principle but say I don't go far enough.

and yet Chinese peasants could industrialize quite quickly. Process knowledge eventually can be built up.

But the Chinese peasants sucked the brains of the gullible Westerners and build a second (infringing) factory in parallel to the authorized one, if you believe that meme. Truth is probably somewhere inbetween. By analogy, I code as hobby and sometimes I get inspiration from somebody's example online but then I modify it, improve it, make it my own.

Honest question: Do Chinese factories churn out high quality products (or do more advanced manufacturing like machine tools)? I suspect, but I am by means certain, that quality control in manufacturing and good design are the really hard parts of manufacturing that are difficult to transfer from one culture to another, and that is where Japan and Germany still excel, and where China might be deficient. If you want something cheap, China seems to be the place to go. If you want something dependable and well crafted, I think Germany and Japan (and maybe Switzerland) still are the places you want to look. I also suspect that those countries have a commitment to quality that is cultural and seeped into their economy and commerce, and not the other way around.

Quality control is an issue. I’ve been trying to source some parts from China for my business. They are certainly capable of making high quality parts, and the management level people I’ve dealt with have been great, but when the container arrives you find random layers on a pallet packed wrong and ruined.

The shift from a manufacturing economy to a service economy contributes to hegemonic decline according to Robert Gilpin in a book he wrote in 1981. Why? Among other things, productivity gains are much harder to achieve. About six to eight years ago GE decided to remake itself as a tech company, or more accurately in the combination of tech and manufacturing. I was excited about the prospects of combining America's lead in tech ideas with manufacturing (as opposed to advertising if I wanted to be snarky). Alas, the experiment failed and GE has all but given up the project. Why? Some observers claim that tech is too focused on short-term profits; thus, the focus on low hanging fruit. By comparison, the big push in China is for China to become the world leader in tech, in particular the application of tech to manufacturing. To their credit, officials in the Trump administration appreciate the significance of ceding leadership in the combination of tech and manufacturing to China, but their answer, a demand for a veto power over China's fiscal policy, seems more like a concession (i.e., America isn't up to the task) than a strategy for America to regain its leadership in manufacturing. Cowen's recent essay in Bloomberg on America's decline struck me as entirely inconsistent with Cowen's general disposition as an optimist. What will it take to get America back on track? Perhaps a Marshall Plan for the age.

The low hanging fruit in tech won't last. Then tech will devote much more resources to . . . . manufacturing. While I might prefer a Marshall Plan to get there sooner, I'm well aware that markets will get us there more efficiently. Even if it takes longer. In the meantime, there's the risk to order and stability. I assume Cowen would choose that risk over the Marshall Plan, but I wouldn't know.

Facebook going from an ad model to a friend? model is a manufacturing move. America traded with China in the opium and fur trade. So why not teach friendship? Instagram will save facebook as advertising moves from a direct response to a branding model. Meanwhile, the rate of online dating will go up, the marriage rate down, breaking the bonds of friendship in America.

Russ Roberts offered this point in an Econtalk. It demonstrates why tech is after the low-hanging fruit. But then Silicon Valley forces older workers out.

"There’s this meme that tech culture is solving one problem: “What is my mother no longer doing for me?” Or, as George Packer put it in 2013, “It suddenly occurred to me that the hottest tech start-ups are solving all the problems of being twenty years old, with cash on hand, because that’s who thinks them up.”"

Peak libertarianism. eh.

The "closed comments" policy was preferable. Make real progress. Shut down MR.

The principle of comparative advantage is what it is, so it's not clear why we should be sentimental about manufacturing and foreign travel. Assembly lines and sweatshops were decried during their heyday, after all. And certainly, if Americans were to make a significant behavioral shift toward foreign travel, this would be portrayed as cause for concern: "Americans reject domestic destinations; is Trump to blame?"

More politics than economics. Also note that a large % of trade between developed countries is symmetrical, which is not what we should expect. Krugman pre-pundit showed us this in the 90s.

Btw high productivity manufacturing is not an assembly line or sweatshop. Think industrial machines, locomotive engines, CNC screw machines, CNC rotary transfer etc. The US has about a zero % market share. Believe GE is selling their last plant.

Part of this has to be political - union sits on the board in Germany. Says hell no we’re not moving the factory to ..Poland? Macedonia ?

How much of the German rents is due to internal frictions that prevent the free flow of capital and jobs to higher return countries within the EU ?

Free trade this ain’t.

'union sits on the board in Germany'

No, it is the Betriebsrat (that the translation is "works council" might give a clue how foreign that concept is to Americans) that has a place on the board. And members of the Betriebsrat are elected by the workers of the company, and do not to be members of a union at all.

so many claims about Germany. Go to a Lidl or whatever. Show me the German made products. Right.

CNC screw machines are amazing, but guess what? They use those screws to assemble an iPhone, so the machines should be closer to the assembly plants. So, even as you see high tech, automated production, it still moves to China.

Now, toothbrushes...no assembly needed. Made in USA. or Germany.

Maybe I wasn’t clear.

They’re manufacturing the CNC machines themselves. Which yes, do get exported to China, as well as Mexico, the US, Vietnam, Taiwan....

Although Germany does have a machining industry.

Comparative advantage means that someone is better than you, you lost in the competitive market. You can't compete on price, quality, delivery. Someone else is better than you.

You lost, someone else won.

The Chinese, Japanese, Koreans, Germans, French, everyone else gets this and recognises the import. They would rather win.

The vaunted computer Revolution has turned into an advertising engine.

That might be the man on the street definition, but it is definitely not the economics definition of comparative advantage.

Still doesn’t explain why such a large % of trade is between developed countries in the same goods! Theory of variety or whatever it was called is a better explanation.

A lot of people can't be lawyers or programmers or architects, but they can man an assembly line. The decline in employment for them is going to be a social and political problem.

When I was younger I thought everyone should just study more to get the better jobs, like I did. I didn't realize this was probably not possible.

This is the inherent problem with the "jobs training" approach that is often pushed as a solution to industries that are moving out of the US. A lot of the employees can't be up skilled to a very great extent.

A more serious issue is that jobs are being automated out of existence. If it was just jobs being sent out of the country we could deal with that. But it isn't. Even if all the manufacturing we had in, say, the 80s came back here tomorrow it would still not employ that as many people, and the people who would be employed would be the more skilled capable workers not so much the "general labor" types.

The speed of change also matters.

Its like cooking, which sometimes requires a slow stirring in of an ingredient, not just dumping it all at one time.

Could we have gradually opened to China.

or we could create "labor sponges" paid for by a low flat rate tariff. Say, re-doing all of our gas pipes, water pipes, or burying power lines. It would absorb a lot of labor, but China would still be very cost-effective for trade. A 5-8% tariff would not move too many products back to the USA, honestly. Make it flat so its not rent-seeking.

China might even agree to it, because they'd be selling the pipes, etc.

Have the tariff phase out when the global labor arbitrage is over.

That’s because overall production gains in services are asymmetrically generated by hedge fund managers....

In the US intelligent people are expected, by society a a whole and themselves, to achieve high incomes without becoming soiled. Financial titans are at the top of this totem pole. There's an overlap with the legal profession, the secular state priesthood, and upper level corporate management but real accomplishment is measured in dollars and cents and those are found in finance.

"He tells us that one of the reasons that the US has such a high surplus in the services trade is that Americans have a low propensity to travel abroad. I don’t view that as a great way to earn a trade surplus."

For Europeans, 'travel abroad' is a short-hop flight or a few hours drive at most. How different would the figures look if travel within the US was treated the same as within the EU?

"Take away computers, which fewer and fewer people are buying these days,"

I question this. I suspect people are buying far more computers today than they were 10 years ago. The computers just aren't PC's sitting on a desktop.

Here's a graph: PC sales have declined, but other computer sales have sky rocketed.
https://www.extremetech.com/wp-content/uploads/2016/01/computer-shipments-2015.png

I was going to make that point. My security system at home is one integrated computer, and so are our phones, TVs, watches, fridges, cars, etc. All of those need software by the way, which it's still an American only enterprise for the most part.

I wonder what the right measure is here. Total dollars spent on CPUs?

Software will eat the world.

Yes, but that measure ignores intrinsic improvements to the process. Hedonistic adjustments would be the official answer, neh?

It is a short essay,

Nice joke, 7500 words. I admit I fell for it then laughed.

Process knowledge is the kind of knowledge that’s hard to write down as an instruction. You can give someone a well-equipped kitchen and an extraordinarily detailed recipe, but unless he already has some cooking experience, we shouldn’t expect him to prepare a great dish.

There's a funny Netflix show called "Nailed It!" which is this exact concept. Amateur bakers given access to the best tools and recipe books, and we watch the results. Most of them screw up by deciding they don't need to follow the instructions, but even the hard-working and conscientious struggle.

Comments ON, clap, clap. Vaclav Smil the economist has made the same points in his book "Made in the USA: The Rise and Retreat of American Manufacturing", among others (his books are somewhat overlapping in theme) that manufacturing is about preserving (trade secret) process as it is in simply trading corn for TVs via free trade. He makes a good point. A sort of "military necessity" argument, which is often overused but here I think it's apt.

Bonus trivia: you can get a patent for process inventions, but in practice, they are often not really patented as much as kept trade secret. Then again the employees keeping the trade secrets can walk out your door and into the employment of competitors, but companies try tactics like NDA and non-compete litigation, theft of trade secret causes of action, and, sometimes, if you believe some people, sabotaging the departing employee (the new Mofo partner who had to quit due to alleged sexual misconduct from an anonymous accuser as reported in the WSJ the other day comes to mind; also some alleged trade secret thieves make the same point, that they are not really thieves, just being maliciously prosecuted).

We have become a nation of thinkers rather than a nation of tinkerers, the tinkerers being the manufacturers. I'm reminded of the political science class I took in college many years ago, the professor looking at the large number of those in the class and observing that it was a reflection of the wealthy country in which we lived. And so it was. And so is Ray's many observations at this blog. He and I differ on the reason for one's presence in the Philippines, my grandfather's being because he was an army surgeon in the Spanish America War and the Philippine America War, and Ray's being because . . . . well, I don't know. Our differences about the Philippines also reflects our differences with regard to manufacturing. My ancestors prospered because of manufacturing, in Pittsburgh where my ancestors, who were tinkerers, resided. Their descendants were thinkers, because they could afford to be thinkers, attending the country's best schools and being thinkers. From tinkerers to thinkers. It's good for a couple of generations. And then it isn't.

"From tinkerers to thinkers. It's good for a couple of generations. And then it isn't."

When isn't it? Can you give any historical examples?

The second phase of mitosis is the metaphase. Dynamic instability became a foundation of cell physiology; upon it we have built our explanations for how dividing cells segregate their chromosomes, how fibro-blasts migrate into wounds during healing, and how neurons extend their axon and dendrites.

The Fed recalculates the weights in Industrial Production every year by the nominal value of each industries output. Often, the prices of high tech goods decline more that the index of production. Consequently, the weight of the fastest growing economic sectors actually falls. One would expect it to rise. I've long wondered if this causes the growth of industrial production to be understated.

US manufacturing peaked in 1979? Eleven years after the development of the Programmable Logic Controller (PLC) which is ubiquitous in almost every factory on Earth. The PLC reduced retooling time by replacing relay rewiring with programming. It also facilitated more automation as it could be reprogrammed by upload.

Just so happens the PLC is 50 yrs old this year.

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