Wednesday, January 05, 2005

Lou Dobbs Part 1a - Manufacturing and the Do Do

I was very pleased to see David’s article on outsourcing. This is perhaps the most clear and concise argument that I’ve seen. I would like to use his thoughts today as the jumping for my own. David explains about how the economics of the individual also apply to nations. I think that there is much truth in this, and want us to look for a moment at another out-sourced example: manufacturing.

I live in what used to be called the “rust belt.” Stretching from Philadelphia to Cleveland to Cincinnati, our stretch of the Western Pennsylvania and the Ohio River Valley were long known for manufacturing: especially steel, but also chemicals and byproducts. Today, only a small handful of mills of any sort are left, and those that have survived either have modified what they produce to meet current demands (chemical companies like Dow and PPG) or they manufacture infrastructure of some kind (tool and die shops). But the Bethlehem Steels of the world are all but out of business.

Some of this is simply failure to modernize. Unions over the last century jacked the cost of labor so high that plants could not afford for refit and modernize over the years (a significant, but all too common opportunity cost). Which means that there are in fact, even today, still a few steel mills that pour steel using the same high-technology as they did in 1910. In fact, it is the exact same equipment. Is it any wonder then that they fell prey to the modernized Japanese or Argentine steel operations, who wee producing steel much less expensively through lower labor costs and modern technology. Since their costs are lower, they get it done for less. However, it does say a lot for American know-how and work ethic that they survived as long as they did.

The sing around town has for the past few years been “stand up for steel.” What that really means is stand up for union labor and protectionist tariffs. Bush implemented them in his first term only to see the Court acknowledge that they were illegal by violating our trade agreements with, well, just about everyone. Nonetheless, steel workers here still cling to the hope that these tariffs will be reinstated and that their inflated 60K job will be sustained. The general public around here buys into this rhetoric because they fail to grasp the significance of David’s last post.

America is becoming a specialist nation. We are specializing in service and management. By the time my grandchildren are old enough to enter the workforce, ceteris paribus, they will all be entering some level of middle-management in a multi-national corporation. Labor will be the purview of the third world, supply and logistics the occupation of the second, and management (and the services thereto) of the first. Manufacturing in this country has gone the way of the do do. Obviously, as the second and third worlds emerge into first-world nations, that paradigm will change again hence. But during my lifetime, I think that this scenario will hold. I know that sounds elitist, but I think the antidotal evidence supports that, as MBA enrollment figures continue to skyrocket.

In this world, the one I’m describing, things are very interconnected. Wars will become very hard to have. I can only suspicion that much of the resistance to a global world hinges on interests vested in this long-established enterprise, the great Broken Window. Imagine the possibilities of a world at work. It’s staggering.


David said...

Thanks Ron. You're too kind.

I'm really curious how the world will change (assume governments let it) once your first/second/third world paradigm is firmly established. It is the most likely scenario in the next twenty or forty years but what happens after that? Trade (outsourcing included) makes both countries involve richer so the third world won't manufacture forever.

I imagine that greater technological development in the first world will spawn an increase in manufacturing in the US and Europe as a) abroad manufacturing becomes more expensive and b) technological sophistication of manufacuting requires higher education levels. This would crowd out management positions in the US, lending possibly second and even third world countries providing management advice. As communication technology connects us in ways we never thought possible, I forsee a manager living in India using the latest in holographic and VR technology to attend business meetings in New York (both of these technologies exist in their infant stages today). In sixty years, politicians might talk about a great sucking sound...of management.

Chris said...

David, hopefully in sixty years politicians won't be around nagging about a gigantic management drain, but rather making it easier for management to move to where it's most needed.

Furthermore, my guess as to where the future is headed if Ron's model is correct (and that isn't great in the fast and dynamic world we live in) is that once the third and second world becomes more like the first world of today that we might see the first world shift to an economy where most people make their living through e-entrepeneurism