Economy class

In 1980, one in four British workers was employed in the manufacturing sector. Today, fewer than one in 12 is. The number of manufacturing workers has fallen from 6.5m to 2.5m over this period. Britain, it seems, no longer produces anywhere near enough things. Last year Peter Mandelson, then business secretary, said we needed less financial engineering and more real engineering. The present government appears to agree.

But the argument is fallacious, and the policy implications are wrong. Britain produces more manufactured goods than at any time in its history—because although there are fewer workers in the sector, each is now much more productive. A typical manufacturing worker produces almost four-and-a-half times as much as their equivalent did in 1980. That rise in output per person outweighs the fall in the number of workers, so overall manufacturing output is around 70 per cent higher than it was in 1980.

Some people will argue this figure should be still higher—that if we had achieved our rise in productivity growth while maintaining the number of employees, then we would now produce almost four-and-a-half times as many manufactured goods. But this is not a sensible proposition. I own a toaster, dishwasher, washing machine, and so on. But I don’t need more than one of those products. We reach satiation point for many manufactured goods relatively easily. That is why new products—flat-screen televisions, iPads—are important. Unless there is something new to buy, a lot of consumers replace items only when they wear out.

In contrast, we are nowhere near satiation levels for many services. As people get richer, they eat out and go on holiday more often, or pay for healthcare. This preference to spend more on services, combined with the productivity increase, means that the number of manufacturing workers is bound to decline as a country gets wealthier, even without competition from low-wage economies such as China. That is why Britain, the US, France, Germany and Japan have all seen declines in their manufacturing workforce in recent years. Just as agriculture falls as a share of the economy when nations progress from being undeveloped to developed, so manufacturing’s share of the economy falls as a nation moves from being developed to being affluent.

Britain is the sixth biggest producer of manufactured goods in the world—which is about what you would expect, given our population and wealth. As a proportion of the economy, it is almost exactly the same as in France and the US. There are countries that have a bigger manufacturing sector—Germany and Japan, for example, which export many of their goods. Accidents of history, as much as anything, mean that we are more successful at financial services and media, and they are more successful at manufacturing. Some people might wish it were otherwise, but there are three reasons to think that we have the better deal.

First, emerging economies such as China are very good at manufacturing and are moving up the value chain rapidly. After starting with textiles, Chinese manufacturers moved to medium-value manufacturing such as white goods, and are entering the higher value-added sector, such as high-speed trains. Chinese wages are very low, and countries such as Germany and Japan will have a serious competitor soon. I would not want to be in their shoes.

Second, manufacturing is a competitive business. Short-run profits are soon lost as rivals catch up. In Britain, despite the increase in the number of goods we manufacture, the revenue we receive for them is pretty much the same, in real terms, as it was in 1980. The extra value that we have created has gone to consumers—some British, some foreign—in the form of lower prices.

Finally, having a manufacturing-rich economy does nothing to protect you from a downturn. Within Britain, manufacturing output has shrunk more than service output in the recent recession, despite that recession originating in financial services. Nor has Germany ridden out the recession protected by its reliance on manufacturing; its performance has been very similar to ours.

The last five years saw the number of people employed in British manufacturing fall by around 20 per cent. This trend is likely to continue, meaning that we will lose 500,000 more manufacturing jobs over the lifetime of this parliament. The government can throw money around in an attempt to pick winners—manufacturing wind turbines is flavour of the month—but it is no more likely to be successful than Tony Benn was when he tried the same thing as minister for industry in the 1970s. Standing against well-established trends that are rooted in how economies develop is rarely sensible policy.

Instead, the government should be providing conditions that help all businesses—namely, effective infrastructure, a skilled workforce and better planning. We should make no attempt to pick winners—whether individual companies, specific sectors, or manufacturing as a whole.

Read Tim Leunig's assessment of the government spending review: "does it really make sense to take this much out of the economy?"