Learning by Doing by James Bessen

Author:James Bessen
Language: eng
Format: epub
Publisher: Yale University Press
Published: 2015-04-22T04:00:00+00:00

Manufacturing Policy

Some people advocate very different policies in response to the supposed shift to a knowledge economy. They see this shift destroying well-paid manufacturing jobs and want to preserve these jobs with subsidies or trade protections.

But manufacturing jobs are not well paid because they are in manufacturing; they are well paid because workers in manufacturing today possess valuable technical knowledge. This is not always true. The manufacturing workers of the early Industrial Revolution were certainly not well paid, and their wages increased only after their skills and labor markets developed over many decades. Also, valuable manufacturing knowledge, once acquired, can become obsolete as new technologies emerge; we saw evidence that this is happening today as experience premiums decline in manufacturing. Then workers must acquire new knowledge in order to maintain high pay. Trade protection tends to benefit politically influential established interests and preserve jobs with obsolete knowledge. It would be better to facilitate the retraining of workers and the transition of firms to new technologies.

The case of the steel industry illustrates how trade protection—ostensibly to protect workers—hurt consumers, delayed the transition to new technology, and delayed the development of a workforce with new skills that could sustainably earn good wages. Perhaps no American industry has been better at winning trade protection in recent decades than steel. Import quotas were first put into place in 1969, with variations of protectionist measures made by the Carter, Reagan, and George W. Bush administrations, until commitments to the World Trade Organization forced Bush to lift steel tariffs in 2003.

The industry first ran into trouble during the 1950s and 1960s when it failed to keep up with new technologies—the basic oxygen furnace and continuous casting—that were being widely adopted in Japan and Europe. American steel at the time was dominated by a few large, integrated producers.30 Because of their complacency, the United States became a net importer of steel in 1959, and imports increased during the 1960s. This motivated the steel producers to lobby repeatedly for various forms of trade protection that served to keep prices high so that their outmoded mills could stay in operation. The larger, older, and less competitive firms tended to lobby the most aggressively.31

Some of the newer, smaller firms that were pursuing a new, more efficient technology actually opposed trade protection. It turned out that the real threat to the large steel producers came not from foreign competition but from American “minimills” that used electric arc furnaces to melt recycled steel. The older integrated steel makers began production by smelting iron ore into pig iron and then converting that into steel. Minimills could operate at a much smaller scale, they could be located closer to consumers, and they required substantially less labor and energy per ton of steel.32 They accounted for only 7 percent of U.S. steel shipments in 1979; today they account for 70 percent.33 With the growth of the minimills, and the subsequent shakeout of outdated mills, the amount of labor needed to produce a ton of steel fell from ten hours in 1980 to around two hours today.

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