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When is 60 a Good Grade?

Feb 2, 2011 • Developing Economies, Economic Thinkers, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically • 159 Views    1 Comment

At 60.8 percent, the Institute for Supply Management’s (ISM) measure of manufacturing activity was way up, far more than anyone expected. Reflecting expansion, any number above 50 is good.

So robust a number takes us to a question. If production is healthy and the U.S is  the world’s biggest manufacturer, then why do so many people say we just don’t make things anymore?

Actually we do. It’s just not what we used to make. A Planet Money podcast said it perfectly when they went to a failing button factory and a thriving electronics connector company. The former was replaced by plants in China while the latter, requiring innovation and technology, is perfect for the U.S.

Similarly, according to “Made in the U.S.A. Still Means Something,” we no longer make inexpensive dress shirts and microwave ovens. However, we do produce health care technology, chemicals, aircraft and space-related equipment. 

You see where this is going. We do not produce what low cost labor can do better. Instead, we use technology to make more technology. The result is fewer people making more goods. These graphs perfectly show the inverse relationship between jobs and productivity.

The Economic Lesson

Both David Ricardo (1772-1823) and Joseph Schumpeter (1883-1950) would be saying, “I told you so.” Referring to comparative advantage, Ricardo would say trade, trade, trade, because each nation then can do what it does best and the whole world benefits through greater efficiency. Meanwhile Schumpeter would remind us that progress necessitates creative destruction through which outdated industries are replaced by new firms.

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