Of course manufacturing declines as we get richer
An interesting and useful economic point made in The Observer (of all places):
According to official figures, factory output accounts for 8.2% of national income, or gross domestic product (GDP), down from about 30% in 1970, indicating the diminishing role manufacturing plays in the UK economy.
Except, a recent report by Oxford Economics and Lloyds Bank argued that with all the add-ons and service contracts associated with the sector included, its impact is far greater than the official measure, concluding it was worth £518bn in 2022, or nearly a quarter (23%) of UK GDP.
Manufacturing’s decline is in part just due to changes in composition of the sector. The design department used to be in the Satanic Mill and counted as manufacturing. The design department is now likely in some swish office and a different company and is counted as a service, not manufacturing. Despite exactly the same thing being done.
But there is another point we’ve all got to grasp.
Manufacturing as a percentage of the world economy is falling. This is because we’re all getting richer.
No, no, think on it. Baumol’s Cost Disease says that services will become more expensive relative to manufactures as we become richer. This is because it is easier to increase labour productivity in manufacturing than it is in services. But average wages are determined by average productivity across the society. So, wages rise as productivity does. But we reduce the labour embedded in manufactures more (this is what increasing labour productivity more means) than the labour embedded in services. Thus services rise - that cost of that embedded labour - in price relative to manufactures.
GDP is the measure of value add. It is also, by design, equal to all incomes. Manufactures become cheaper relative to services as we get richer - therefore manufacturing becomes a smaller portion of GDP as we get richer.
By all means mutter that this might have gone too far, that perhaps something must be done even. But do grasp that manufacturing is, in the long term, going to go the way agriculture did - that place where it’s even easier to increase labour productivity than in manufacturing. From the vast majority of the economy to some 2 or 3% of it even as output itself continues to increase. It’s just an inevitable effect of us all getting richer.
Tim Worstall