23 Things About Capitalism – Things 9 to 11

Capitalism

Today’s post is our fourth look at 23 Things They Don’t Tell You About Capitalism. We are up to things 9 through 11.

Thing 9 – We do not live in a post-industrial age

The mainstream picture is that manufacturing has been replaced with services as countries have become richer.

  • “High-productivity knowledge-based services” like banking and consulting exacerbate this trend.

Britain is perhaps the best example, having been responsible for 46% of world trade in 1870.

  • For comparison, China currently accounts for only 17% of world trade.
  • Even in the 1970s, 35% of the British workforce was employed in manufacturing.
  • It’s now 10%, and manufacturing’s share of GDP is down to 13%.
  • Worse that that, Britain has a negative manufacturing trade balance of 35% of GDP (which is partially offset by a positive trade surplus in services).

Ha-Joon argues that although most people now work in shops and offices rather than in factories, the shrinkage in manufacturing’s share of GDP is due to the falling prices of manufactured goods, rather than a reduction in the quantity produced.

  • Computers get cheaper every year, but haircuts get more expensive, as wages rise faster than inflation.

In Britain, the share of manufacturing in total output fell by more than 40% from 1955 to 1990 (down from 37% to 21%).

  • But measured in constant prices, it fell by only 10% (from 27% to 24%).

Ha-Joon also states that some things now provided as services (catering, cleaning etc.) used to be provided in-house as part of manufacturing.

  • The trend to outsourcing exaggerates the move from manufacturing to services.
  • A similar effect occurs when a hybrid firm’s services output begins to exceed its manufacturing output, and the entire firms activities are re-classified from manufacturing to services.
Thing 9b – De-industrialisation is bad

Ha-Joon argues that de-industrialisation is bad for productivity and the balance of payments, since services are harder to export and harder to achieve productivity increases in.

  • You can’t improve the productivity of a string quartet by asking them to play faster.
  • A teacher with double the number of pupils in her class is not really twice as productive, since the quality of her teaching will suffer.

Ha-Joon also notes that work in offices is more individual than in factories, and that this shapes people’s outlook on life.

  • So society is post-industrial in a social sense, if not in an economic one.

Ha-Joon states that the weight of manufacturing within a country is less important than the relative speed of productivity growth in both manufacturing and services relative to other countries.

  • This is what will determine the competitiveness of the country, and hence its balance of payments and eventually, its living standards.

As usual, Ha-Joon worries particularly about the potential impact of a de-industrialisation policy on emerging economies, but we can skip that angle here.

See also:  23 Things About Capitalism - Things 6 to 8
Thing 9c – Conclusions

There’s not much to disagree with here.

  • The move to services is exaggerated by classification and price effects, and more services means productivity and balance of payments issues.

I would have liked Ha-Joon to examine the potential impact of software automation and robots on service economies, but I guess that all looked a lot further away back in 2010.

[hr]

I’m giving Ha-Joon the full point on this one, taking his score to 4.5 out of 9, or 50%.

Thing 10 – The US does not have the highest living standard in the world

Altough several European countries have a higher a higher per capita income than the US at market exchange rates, a dollar will buy more goods and services in the US, and so many people argue that it is the country with the highest standard of living.

Market exchange rates are largely determined by supply and demand in internationally traded goods and services, whereas how far money will stretch in a country depends on the prices of all goods and services.

  • The prices of labour intensive services in particular, vary widely between countries.

Using PPP (purchasing power parity) to “equalise” exchange rates makes US incomes relatively higher (in practice, they shrink less than those of other rich countries).

[hr]

Some people then further argue that the US has the highest living standards because it is the country which comes closest to the free-market ideal.

Thing 10b – Inequality, working conditions and hours

Ha-Joon’s critique of this claim revolves around the high level of inequality in the US.

  • This both undermines the significance of the “highest per capita average” statistic, and explains the US’s poor showing on softer measures of living standards, such as left expectancy, health and crime.
  • For example, the US is only 30th in life expectancy.

His second point is that services are cheaper in the US than in other countries because of poor employment conditions, underpinned by immigration.

A third point is that Americans work more hours than Europeans in order to earn their higher incomes.

  • Per hour worked, they earn fewer goods and services than many European countries – one study found that the US came 8th in per hour PPP income.

It is certainly debatable whether more material goods with less leisure time is better or worse.

Thing 10c – Conclusions

Which country has the highest standard of living is not particularly important, though why it has could be of interest.

I can’t accept Ha-Joon’s first point, that high inequality in the US invalidates the per capita average.

  • It might be better to use a median income rather than a mean, though I’m not sure whether such statistics are available.

Neither is it a problem that the higher purchasing power of US dollars is driven by lower wages in service industries than in other rich countries.

But he does have a point that many people would prefer less money and more spare time – I know because I’m one of them.

  • This in turn means that “highest average income” is not a title worth chasing.

It’s part of the general principle of diminishing returns – when your standard of living is low, it’s a priority to increase it.

  • But when you already earn $30K a year, another $1K won’t make that much difference.
See also:  23 Things About Capitalism - Things 1 and 2

It’s also reminiscent of the problems with GDP – many of the best things in life don’t count towards it.

  • Gun crime alone would be enough to stop me moving to the US.

[hr]

I’m going to give Ha-Joon half a point here, taking his total to 5 out of 10 and keeping his percentage score at 50%.

Thing 11 – Africa is not destined for underdevelopment

Many people think that Africa will never catch up with the West.

  • It has a bad climate and lots of diseases, many of its countries are landlocked and / or small (leading to a lack of export opportunities), and it has a lot of natural resources, which tend to produce laziness, corruption and conflict.
  • It also has deep ethnic divisions, and lacks the infrastructure and institutions of western capitalism (perhaps because of the legacy of colonialism).

Certainly, Africa is poor – the average per capita income of Sub-Saharan (“black”) Africa was $952 in 2007, higher than the $880 of South Asia but lower than that of any other region – and has stagnated over the last 30 years (with average annual growth of 0.2%).

Thing 11b – Common problems

Ha-Joon argues that all of these structural handicaps “have been present in most of today’s rich countries”.

  • He thinks that “the real cause of African stagnation in the last three decades is free-market policies that the continent has been compelled to implement”.
  • He also points out that annual growth in per capital income during the 1960s and 70s was 1.6% – not high, but reasonable.
Thing 11c – Conclusions

The future of Africa is not an issue that concerns me greatly, and Ha-Joon hasn’t done much to get me interested.

  • In many ways this is a re-run of Thing 7 – free-market policies don’t make poor countries rich.
  • As I said then, developing countries can adopt whatever policies they like, but it’s far from clear that protectionism is the path to prosperity.

Global free-trade probably will help to keep existing winners on top – China could be the last country to catch up – but for Africa to compete, it will have to produce something – other than natural resources and food – that other countries want.

  • It’s hard to see what that might be at the moment, and I won’t be holding my breath to find out.

[hr]

I’m going to give Ha-Joon zero on this one as I don’t think we’ve learned anything new.

  • His score is now 5 out of 11, or 45%.

[hr]

It’s been a disappointing set of Things today, with two that I don’t care much about, and only one of real interest.

We’ll be back in a couple of weeks with another three Things – let’s hope that they are more compelling.

Until next time.

Mike Rawson

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 35 years, with some success.

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23 Things About Capitalism – Things 9 to 11

by Mike Rawson time to read: 5 min
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