The Fall of the Machines

Readers of the Economist recently will have seen the image of a deteriorating factory gate adorning the front cover, a gate that has closed forever, an image symbolic of the failing state of British industry. Since the shocking drop in consumer confidence last year, media attention has gradually moved its focus from one aspect of the economy to another as each, in turn, experiences its own turbulence.

{{ quote It would not be unfounded to question if there was ever a point in the British post-war economy when private manufacturing could have survived. }}

In the beginning it was the banks, with the rush on Northern Rock and the subsequent bail out plans. Next, the public eye shifted to what was happening in the high streets with the undoing of several iconic businesses there. And, now, attention is being focused on the badly hit manufacturing industries.

Earlier this month, manufacturing industries world-wide have begun extensive cost-cutting exercises. The international steel manufacturer, Corus, for example, has already begun drafting in cheaper labor, which has already sparked uproar among the displaced workers, causing several days of strikes and protests during the snowfall. The rising relative cost of manufacturing has already spilled over into secondary industries. Car manufactures have particularly suffered. Among the worst hit, include Renault, who have reported a 75% fall in profits this quarter. This has already led to thousands of redundancies and exacerbates a labor market in which, according to the BBC, there are now around 25 applicants for every manual labor job vacancy.

The sheer scale of such unemployment has obviously put a huge onus on the government. Business leaders have suggested that the government should offer manufacturing similar fiscal bolstering to that which it gave to the banks. The advantages of retaining the manufacturing sector seem at first to be clear: keeping low earners employed is vital in regenerating the economy because of their propensity to spend, which would combat the deflation more effectively than a VAT reduction. The question some have raised though is whether or not the government could save manufacturing if it tried.

In truth, British manufacturing looked unstable well before the crash. The car industry is a prime example where the increasing availability of loans and the rise of debt culture had led to a consistent growth in demand, while improving technology and growing mass production resulted in a massive expansion in supply. This continued to the point of overproduction so that, when consumer confidence disappeared, we are left with the situation we have now; thousands of cars sitting unsold on forecourts and in storage.

Years ago we could have blamed this lack of demand for British cars on the high value of the pound but even a large relative fall there was not enough to make people buy British. But just like the pound, it is arguable that British manufacturing had it too good and that the credit crunch is only exacerbating an anticipated fall in demand.

However, it would not be unfounded to question if there was ever a point in the British post-war economy when private manufacturing could have survived. Once upon a time Britain was able to sustain its population on its raw material exports whether that be wool or coal or anything else. But imperialism, necessitated by a growing population, caused the end of that as Britain sought foreign territories to produce the wealth to sustain its population, subsequently accelerating population and economic growth.

The ultimate effect of this is the centralisation of wealth into Britain, creating a web of less developed countries that support its primary and secondary manufacturing needs, while British industry moves into the tertiary and quaternary sectors of industry as the world economy dictates. Thus, in the modern day, as classical Ricardian economics states, primary and secondary industry in Britain cannot compete with companies that can produce those same commodities abroad.

Britain is a country relatively poor in natural resources, for example, the sheer amount of land in America makes large scale agriculture there much more effective than over here. Similarly, metals of most varieties are less abundant in the UK than they are elsewhere and so economic theory suggests that production will relocate to the site of the natural resources to minimize costs. Obviously these rules aren’t universal and certainly don’t address all individual cases but the point is the same; British manufacturing is fundamentally redundant, a romanticised piece of the past.

And unlike with the banks which are responsive to fiscal stimulus, manufacturing supply without demand is simply not viable. The government has clearly made its decision to deny the pleas of industry, to the disapproval of many, and has chosen instead to protect the finances of prospering manufacturers; those who have prudently spread their risk. For the others, and their many unfortunate employees, the hope of salvation is thin in the face of such a cold economy.