Creative Destruction and the Myth of “Lost” Manufacturing Jobs

By Dave Smith, Senior Contributor, USDR.

“The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.” – Joseph Schumpeter

There’s a story about Milton Friedman – perhaps apocryphal, but illustrative regardless – visiting a construction site in China. Remarking about the number of workers using shovels instead of bulldozers or backhoes, he was told by his Chinese guide that using shovels was preferable because it created more jobs. Friedman’s reply: then why not have them use spoons?

Technological innovation exerts the “creative destruction” that Schumpeter coined as a term: the invention of the steam engine rendered John Henry obsolete; the rise of the automobile ruined employment opportunities for wagon wheel cartwrights, while the advent of tractors spelled the end for scythe-wielding reapers. In more recent years, tens of thousands of telephone operator jobs have vanished due to software, cell phones, and VOIP; ATMs are nearly ubiquitous.

Rarely does anyone bemoan the “loss” of these jobs, and rightfully so: we recognize that technology has made food more plentiful, transportation more safe and accessible, communication more cost-effective, and banking more convenient. Rather, most people barely, if at all, remember not having avocadoes year-round, flying being considered a vestige of the rich (hence the term “jet setter”), waiting until the weekend to make a long-distance call, or being unable to get cash until the bank opens.

The same concept applies to manufacturing: as technology and automation have become more common, productivity gains have pushed manufacturing output: according to the Federal Reserve, “real output” in the U.S. manufacturing sector has increased by 74.2% over the past three decades, and the Industrial Production Index has increased by 173.5% in the past half-century. Unfortunately, this fact is not well known – a Pew Research poll showed that just 35% of respondents knew this, while 47% thought that output had actually decreased.

What people do seem to know is that manufacturing employment has decreased since reaching its peak in the United States in 1979. Politicians on the left and the right have consistently hammered home this point, blaming “outsourcing” or “bad trade deals” for “shipping jobs overseas” while conveniently avoiding the other side of the equation: that, as mentioned above, manufacturing output – the goal of manufacturing – has increased. As with agriculture, fewer workers are required to produce more product.

Yet the claim remains, repeated often, that not only are the “loss” of US manufacturing jobs a negative, but that other nations are benefitting – that they are somehow benefitting from jobs that would otherwise have belonged to American workers. In 2016, Donald Trump won the election due at least in part to the 49% margin he enjoyed among blue-collar workers and his promise to “bring back” factory jobs. Elizabeth Warren and Bernie Sanders have proposed alternative economic nationalist plans to promote jobs and stop “outsourcing” or “offshoring”.

But do the facts match the rhetoric? Have American jobs been “shipped overseas” and has “outsourcing” produced a malaise among the American manufacturing sector? Or have innovation and massive productivity gains simply made it possible to make more “things” with fewer people?

To answer that question, it’s instructive to look at the top manufacturing economies in the world, and then trend their manufacturing employment. According to the Brookings Institute, top 10 nations in terms of manufacturing output are China, United States, Japan, Germany, South Korea, India, France, Italy, United Kingdom, and Taiwan. The World Bank collects data on all of these except Taiwan; additionally, the World Bank maintains aggregated statistics for groupings, such as the European Union, the Organization for Economic Cooperation and Development, regional groupings, etc.

Of the top 9 manufacturing countries, only two have increased their manufacturing employment in the past two decades: India, and China. Every other country has decreased manufacturing employment, despite increasing manufacturing output. Moreover, the EU and OECD overall show decreasing manufacturing employment.

Tightening the time window provides even further information: since 2014, manufacturing employment in has decreased even in China; of the top 10 manufacturers, only India has added workers in this sector. Manufacturing employment in the entire world has decreased steadily since 2014 by approximately 1.5% points.

Over the last 30 years, the industrial workspace has undergone enormous change. The development and application of such tools as computer-aided design (CAD), data regression, Six Sigma, networking, distributed control systems (DCS) have made production more efficient and workers more productive. Artificial Intelligence (AI) and other technology promise to do similarly in the coming years: driverless cars and drones will upend delivery workers, AI will perhaps supplant many design and engineering functions, nanotechnology may displace workers in even more ways that haven’t yet been imagined.

Schumpeter’s Creative Destruction will continue, with the beneficiaries being less visibly apparent than the “victims”. The response should not be to smash the mechanized looms, but rather to embrace the recognition that the purpose of production is consumption, and working less productively does not “create jobs”.

Dave-Smith-Said-That

Born in the same county as Davy Crockett in East Tennessee, Dave found his way to Texas where he works in the petrochemical industry. He’s written and spoken about politics on various media outlets including Fox, ABC, and Townhall. He is a graduate of Tennessee Tech with a degree in chemical engineering. Make sure to check out Dave’s popular series, “Profiles in Liberty” at USA Daily Chronicles. Follow Dave on Twitter: @semperlibertas.

All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.