Productive Vs. Unproductive: Manufacturing Vs. Financialization   (June 6, 2011)

The Status Quo heavily rewards financialized profiteering and resource extraction while penalizing productive capital investments in manufacturing.

There is so much ideological, quasi-religious fanaticism around "free trade" (there is no such thing as "free trade," there are only various permutations of managed trade) and "industrial policy" (every nation has one, explicit or implicit) that it is difficult to make any sense of the many intertwined issues.

Ideological purity is not a substitute for knowledge, any more than a superficial admiration of machines equals actually knowing how to assemble, maintain and repair them.

As a background context, we might start by noting that Marx outlined how finance capital comes to dominate industrial capital, as industry comes to depend on the credit extended by the banks/finance capital.

The key takeaway: if you don't control the banks, then they will end up dominating industrial capital. In the U.S., we have the worst of both worlds: a dominant financial Elite and various cartels (military-industrial, sickcare, agribusiness, etc.) that have captured what little of the Central State that isn't already beholden to financial capital.

Moving production around the world to exploit cheap labor--also knowns as "wage arbitrage"-- is not free trade: it is merely the consequence of free capital flows, and an extension of capital's dominance of labor. If capital can reap higher returns by flowing elsewhere and abandoning domestic labor, then it will do so, and "lowering the cost to consumers" is the marketing propaganda issued to placate the captive home markets.

Consumers, after all, are not free to travel the globe seeking "higher returns," i.e. lower prices--that privilege is reserved for capital.

When China sold silk to the Roman Empire in 100 C.E., the cost of capital to produce the silk and the cost of labor was set in China. Traders took the risks of transport and reaped the gigantic profits. The same was true when China sold porcelain made for export to America in the 1800s.

That is "free trade." Moving capital to China to exploit cheap labor there, then closing the factory and moving production to Vietnam, and so on, is simply free-flowing capital exploiting labor on a global scale.

As further context, we should note the dominance of short-term profiteering as the motivator of management in Corporate America. "Beating quarterly estimates" is basically the only metric of "success" in America, because a corporate management that fails to "beat estimates" won't last long enough to pursue any long-term capital investments.

The financialization of compensation is also a critical factor: if compensation is mostly stock options, then that creates a huge incentive to boost the stock price and then exercise the options--"pump and dump" on a vast, systemic scale.

This obsessive addiction to boosting short-term profits also leads management to view labor as the "enemy" which is sucking off profits, rather than the partner in the company's long-term success. Thus relentless cost-cutting and downsizing is heavily incentivized as the one sure way to boost short-term profits, even as the company is being hollowed out.

Management isn't being rewarded to think about the long-term, any more than a member of the House of Representatives is rewarded for thinking ahead more than two years. Some problems cannot be solved, or even addressed, in short-term thinking. This is one reason why the nation is heading to heck in a handbasket--nothing can be discussed that can't be "resolved" in 18 months (the election cycle starts six months before every congressional election). Management might only last 18 months, so there is every reason to stripmine the company of assets and know-how, boost the stock price, cash in the millions of dollars in options and hightail it on to the next "opportunity."

An emphasis on housing as a bedrock of wealth and lending has completely distorted the U.S. economy. The incentives in real estate are massive, and massively perverse: the unlimited mortgage deduction for interest incentivizes borrowing vast sums and "moving up" to ever-larger, ever more wasteful homes, to name just two, and policies aimed at expanding suburbs effectively gutted central cities while heaping subsidies on sprawl and distant exurbs.

The U.S. has a distinct industrial policy: benign neglect, ignorance, favoritism towards real estate development and financialization, and a fanatic devotion to short-term profits and cost-cutting.

What makes any discussion of "free trade" so impossible is the vast ignorance of free trade proponents about our industrial competitors and the history of trade. If you know essentially nothing about industry and industrial policy in China, Japan and Germany, and nothing about the long history of trade in a capitalist framework, then exactly what are you bringing to the discussion other than religious fanaticism to a concept that begs for deep knowledge of other nations and nuanced understanding?

I have studied Japan and China for almost 40 years, both formally in university studies and via visits, research and discussions with my many Japanese and Chinese friends. I have toured many Chinese factories and discussed trade with entrepreneurs and marketing reps, and received inside information from local government sources.

Japan, Germany and China have trade policies which support and encourage specific industrial and export models. For context, please read these two related articles: Outsourcing manufacturing hurts U.S. and a factory that costs $11 million in California costs $5 million in Germany, after tax credits.

If you watched any Japanese television (NHK) after the tsunami and earthquake, and you are a careful observer, you had a rare chance to see industrial Japan from the inside. Japan, Inc, is not just a Toyota factory filled with industrial robots: it's thousands of small factories producing parts for the global corporations.

For example, one factory affected by the tsunami manufactured special components for satellites. The workers were shown hand-polishing the complex castings by hand.

Let me repeat that, for those who mistakenly think everything can be made by robots or in some Chinese factory by low-skilled workers: by hand, by highly skilled workers.

Industrial robots are costly to buy and maintain; they make no sense on small production runs, or highly skilled, complex tasks. No robot could duplicate the delicate hand-eye coordination required to hand-polish these complex parts.

This is not some outlier, this is standard in Japan, Inc., and also in Germany, Inc. There is a critical need within any broad-based industrial supply chain for skilled labor.

As for automation: yes, it works in producing mass-produced goods, but skilled labor is required to reprogram the robots, maintain them, assemble them, etc. Though the factory floor may have few people present, there is a long supply chain behind the automation that supports multiple levels of value-added labor and manufacturing.

It's not just moving the assembly offshore, it's moving the entire value-added chain that feeds it.

As my friend G.F.B. recently noted, the initial invention that is the obsession of America and supposedly its great advantage in the global marketplace leaves off the real value-added proposition, which is the development of the later models and iterations.

Place the production elsewhere and keep the design staff in the home nation is an excellent way to lose the design of the actual parts and workflow--the real value added. Apple has been able to keep ahead of competitors by integrating software that is difficult to copy into hardware, but it not the typical case, it is the outlier, hence its outsized value.

As I repeatedly point out, Apple, Google, Facebook and Twitter together have relatively few domestic employees. As production is overseas, then that's where the design jobs go, too, eventually.

You have to understand the entire value chain, not just the assembly costs.

The U.S. culture denigrates skilled labor and glorifies the C.E.O. and innovator as god-like heroes. Other nations, notably Germany, maintain a value and education system which recognizes and nurtures technical skills. In the U.S., we fawn over social media companies that generate billions in new wealth for Wall Street and a handful of founders and venture capitalists, and drill into every student's head the value not of tradecraft skills but of a four-year business degree.

For those not suited for an MBA--sorry, there are few other choices of learning.

In America, we are addicted to the drama of startling, big "innovations," and we are enamoured with the romance of "instant wealth" from the "hot investment" of the moment.

Extraction is not the same as value-added production. There is temporary value in the equipment set up, but once the resource has been depleted, the wealth is gone and the "gold rush town" dries up and blows away.

The problem with financialization is that it is the gold rush dynamic on steroids. To reap the big gains from financializing, you need ever-greater amounts of credit, leverage, risk and churn--all the elements we saw in the housing bubble and in every stock bubble.

Once the financialization bubble bursts, there is nothing left to extract or leverage. Since productive investments were disincentivized at every turn, then the implosion of the unproductive investments leaves a hollowed-out shell of an economy with a very wealthy layer of managers and financial "winners" and the 90% below them with few prospects in what amounts to a corporate-colonial economy ruled by financial oligarchies and their minions in the Central State.

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