The Myth of Post-Industrialism
Harvard sociologist Daniel Bell told America that manufacturing didn’t matter. He was wrong.
In the wake of the Japanese attack on Pearl Harbor in 1941, the U.S. Navy doubled its fleet within a year and quadrupled it before the end of the war. It was a similar story in the merchant marine. By 1943, U.S. shipyards were turning out three merchant ships a day. They ended up building a total of nearly 3,300 ships before the end of the war. Given that shipbuilding was then one of the world’s most advanced industries, there could hardly have been a more impressive demonstration of America’s global economic leadership.
Fast forward to today, and we discover that America’s hollowed-out manufacturing sector is having a hard time arming Ukraine and can do so only with the help of copious imports of advanced electronic components from various trade partners, not least China.
Why has the U.S. manufacturing base become so hollowed out? One key yet little understood aspect of the story: the pernicious role played by so-called post-industrialism.
The term comes from The Coming of Post-Industrial Society, a book by the Harvard sociologist Daniel Bell. Writing in 1973, Bell predicted a growing trend for the United States of retreat from manufacturing and a switch instead to new “post-industrial” services, of which computer software seemed to be his favorite. Jobs in post-industrial businesses would be not only cleaner and more advanced but better paid. Best of all, the United States seemed to enjoy some special (if never exactly spelled out) aptitude for post-industrial activities and would therefore benefit disproportionately.
As we will see, this analysis was badly misguided, but that did not stop it playing a decisive role in the decline of American manufacturing.
The idea of post-industrialism greatly weakened efforts in Washington and elsewhere to forge a national consensus in fighting foreign protectionism. If American manufacturers were not long for this world anyway, why should Washington expend vital diplomatic capital on their behalf? After all, nations like Japan, Germany, and Korea were so intransigently committed to mercantilism that Washington risked touching off a full-scale trade war if it pressed fully seriously for a fair deal for American manufacturers abroad.
From this point onwards, American manufacturing was visibly on the skids. The longer America’s trade diplomats dithered, the larger and more formidable the East Asian and European manufacturing challenge became. For the challengers, size brought large economies of scale and fast-expanding research and development departments. It also meant the ability to fund ever more sophisticated lobbying initiatives abroad, not least in the United States. Japanese and European corporate lobbyists fanned out across Washington and were soon pressing home their advantage.
One tactic was to blame the victim. It was alleged that American manufacturers were underinvesting. Few observers seemed to notice that this got the causality reversed. Because world markets were heavily rigged against them, American manufacturers suffered chronically poor returns on investment. They therefore lacked the large retained profits needed to invest in the most efficient new manufacturing technologies.
The embrace of post-industrialism was all the more surprising to anyone who glanced at Bell’s book, which was remarkably light on details. About the only thing it contributed was one item of news: manufacturing’s share of total U.S. economic output was declining, and the share accounted for by services was rising. Bell was right on both counts, but this hardly meant manufacturing was finished as a principal source of First World wealth and economic leadership. The trends Bell noticed were relative. Looking at the world as a whole, there was no evidence that manufacturing was losing its position as a driver of prosperity.
Nor did Bell offer any fundamental reason for believing that, going forward, post-industrial services would prove more effective in increasing wealth than traditional manufacturing. As we can now see clearly in retrospect, post-industrialism has proven no panacea. Of course, some post-industrial businesses have been spectacularly successful—companies like Google and Amazon come to mind—but even with Silicon Valley’s massive growth of the last half century, post-industrialism has fallen far short of creating enough new American jobs to make up for the loss of manufacturing.
This is where we get right to the point. Jobs are one of three vital economic criteria to which manufacturing’s contribution is strongly positive. The other two are wages and exports.
The jobs point hardly needs elaboration. Factory work generally creates plenty of productive jobs for ordinary workers. By contrast, jobs in many of the most successful post-industrial businesses are reserved disproportionately for workers of above average ability. There are some exceptions, such as Uber and DoorDash, which create plenty of “gig economy” work for individuals of average ability. The problem is that such work compares quite unfavorably with the sort of jobs manufacturing used to create in better times. For the most part, gig economy work pays little more than minimum wage and falls down also in terms of job security and benefits.
The second criterion is wages. Why do some employers pay more than others? This question is central, yet Bell never attempts to address it. In reality, many factors go into determining wage levels. One is whether a business is capital-intensive or labor-intensive. Generally, all else being equal, capital-intensive employers pay better, in many cases a lot better.
Bell never explicitly considered the distinction. He seems to have assumed—without really realizing he was making an assumption—that factory work in the United States was either already labor-intensive or was headed that way. Thus American factory jobs were destined soon to fall victim to competition from cheap-labor foreign locations.
The truth was then, and still is today, that factory work is a mixed bag. Some factory work is labor-intensive, giving low-wage nations a clear competitive advantage, but leading-edge manufacturers are generally capital-intensive. This means that wage costs account for a relatively small proportion of their total costs, giving low-wage nations little edge.
Another consideration is trade secrets. These are often critically important in capital-intensive businesses. The battle to thwart industrial espionage is constant, and in general such secrets are easier to protect if they are kept at home.
The third criterion is trade. Manufactured products tend to be fundamentally more exportable. This reflects in part the fact that they tend to be less culture-specific. A car made in Japan or Germany can be sold around the world with remarkably few adjustments for different markets.
So-called producers’ goods are particularly free from cultural ties. Such goods are rarely mentioned in the press, yet they are vital to the world economy. The category includes super-miniaturized electronic components, highly refined materials, and ultra-precise machine tools. Often, for any given item, only one or two manufacturers exist worldwide. The processes involved in making such goods are generally highly capital-intensive, thus they provide plenty of headroom to pay above-average wages.
Take precision lenses. Known to the consumer mainly for their use in cameras, lenses are critical components in countless medical, dental, scientific, and defense applications. The United States long ago dropped out of contention in lenses and these days depends mainly on Japan and Germany for state-of-the-art supplies.
As a general rule, manufacturers who dominate a significant sector in producers’ goods can expect strong export sales and export pricing. By contrast, post-industrial businesses are generally poor exporters. At best they sell little abroad and their pricing power is generally weak. Even for the strongest and most advanced of them, the ability to expand abroad is generally constrained by linguistic and cultural impediments. Google, for instance, has had to build a serious bricks-and-mortar presence in countless foreign markets in order to be competitive. So elaborate are Google’s overseas operations that Google buildings are local landmarks in places as far afield as Tokyo, Wroclaw, Amsterdam, Tel Aviv, Haifa, and Kuala Lumpur.
Even an internet retailer as tech-savvy as Amazon performs quite disappointingly in key overseas markets such as China and Japan. At last count, Amazon’s sales in the United States and Canada accounted for nearly two-thirds of its total.
For all these reasons, the shift to post-industrialism has greatly compounded America’s pre-existing trade problems. The result is that the United States has consistently been running huge trade deficits since the 1970s. In recent years, these have settled down to average 3 to 4 percent of gross domestic product, a performance that implies that the U.S. dollar is greatly overvalued against the currencies of several big exporting nations, most notably China, Japan, and Germany.
As a matter of basic arithmetic, trade deficits have to be financed. This means that successive generations at the U.S. Treasury have needed to resort to foreign creditors, most notably the banks and institutional investors of Japan, China, and South Korea. These institutions have evidently decided to continue to play their allotted role in a drama directed by the U.S. Treasury for now. For a few years longer, they will continue to finance American over-consumption. Little understood in Washington, however, is that the Asians probably don’t plan to be taken for granted forever. America’s foreign borrowing will have to be repaid and in the process Americans will have to accept more and more back-seating from foreign creditors.
How do we sum up Bell and his influence? He was not only an exceptionally poor thinker but a poor writer, and the book he produced was almost unreadably bad. He was a sociologist innocent of even the most basic and illuminating economic concepts. He rarely cited any facts—at least not relevant facts—but larded his text instead with references to people like Leonardo Da Vinci and Einstein. The only purpose of such asides was to advertise his general knowledge.
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How do we sum up Bell and his influence? He was not only an exceptionally poor thinker but a poor writer, and the book he produced was almost unreadably bad.
The counterargument to Bell never lacked for serious thinkers and serious books. One of the earliest and most persuasive was Manufacturing Matters: The Myth of the Post-Industrial Economy by Stephen S. Cohen and John Zysman. This was first published in good time to catch the policy debate in the mid-1980s. Other authors who have done serious work in and around the field have included Louis Uchitelle, Pat Choate, James Fallows, Alan Tonelson, Peter Navarro, and Clyde Prestowicz.
There is a mystery here. How did a book as bad as Bell’s, which today might most charitably be described as a historical curiosity, achieve such influence? The answer seems to be that his message suited various powerful vested interests. Had Bell not already existed, the trade lobby would have had to invent him.