The United States was able to build a tremendous economy by building up those systems while continuing to benefit from its older manufacturing base for decades.
The United States economy is far from perfect, but it hasn’t traded away a long-term asset for only short-term ones as you’re suggesting.
I think there's little doubt that our change in allocation of resources has been advantageous versus staying an economy focused on primary metals and relatively simple manufacturing. Do you really feel otherwise?
Of course, economic assessments and the behavior of markets generally assumes free choice by participants. So there's always:
1. Geopolitical risks: state leverage can turn a local absolute advantage in e.g. producing war materiel into other advantages.
2. Sure, we could back ourselves into a corner, ultimately, by not being able to provide a key part of the value chain by following that gradient. (Geopolitics can be related, too, in that states can gather together lots of small advantages and use them in coordinated ways against other states).
So our state, of course, needs to focus on countering those actions of other parties. And maintaining some diversity beyond what is economically optimal can add resilience.
(One point I make in class: our textbook pretty much says that price controls are always dumb... but that there are plenty of reasons that a country might desire to have a surplus of food or to not be dependent upon another country).
The track record of those who would seek to centrally plan and optimize for some future outcome instead of following that profit gradient has been very poor. Not to say that it's never worked: but generally following the profit gradient has yielded better outcomes.
> because of (unlike what any econ 101 textbook teaches), marginal costs decline with production quantity in the manufacturing sector.
Unlike what any econ 101 teaches? Talking about LRATC, returns to scale, etc, is a big part of my unit 3. If you're not referring to that and instead e.g. Wright's law, that too is mentioned.
The behavior of markets assumes free choices by participants that rewards the participants who make those choices. I do not dispute that the CEOs who were responsible for shipping supply chains to China were following their incentives, and it worked out well for them. I would argue that there are alterations to regulations on corporate governance which would increase long-term profitability of those corporations overall, but that the key people in the corporations aren't properly incentivized to pass them, nor are shareholders sufficiently informed or coordinated.
> Talking about LRATC, returns to scale, etc, is a big part of my unit 3
In your unit 3, do you draw LRATC curve as a parabola? Because that's the wrong shape for manufactured goods. Not only do average costs decrease, so do marginal costs, and this is monotonic over all but the shortest timescales. Wright's law is about half of the reason, yes.
A whole lot of the decline that we're talking about has been in those sectors. Microchips and aerospace grew; simple consumer goods and steel manufacturing fell threw the floor.
> The behavior of markets assumes free choices by participants t...
Incentives can be, and often are misaligned. However, the context of our discussion is talking about large overall economic growth that has outpaced manufacturing growth, even though it is still positive. This isn't evidence of misaligned incentives.
> In your unit 3, do you draw LRATC curve as a parabola? Because that's the wrong shape for manufactured goods.
It's absolutely a bathtub.
It's steep-downward sloping, mostly flat for a loooooonnnggg time, and then upward sloping. Indeed, this understanding of the shape of LRATC comes from study of manufactured goods. At some point coordination gets hard and further increases in quantity require using resources that are not well suited for the task.
Of course, the quantity at which costs slope upwards may be at an impractically large quantity for any industry-- in which case that industry is likely to be a natural monopoly.
I endeavour to convince you that you are teaching your students a falsehood. Natural resource industries have bathtub-shaped average costs. Average costs fall strictly monotonically for manufacturing, and marginal costs either fall or remain constant. Constant marginal costs are what you get if you don't even bother to solve coordination problems, and just copy-and-paste your whole assembly line instead (except even then you can't help but gain economies of scale, if only from your tooling suppliers). The misconception that it's a bathtub does not come from the study of manufactured goods, it comes from thought experiments about manufactured goods done by people who never managed quote requests at a real factory. Empirical studies done on actual firms almost never show rising marginal costs at any quantity.
That this error has permeated introductory economics is a very, very big problem.
You still have coordination problems on the supply and distribution side.
> Average costs fall strictly monotonically for manufacturing
This is an extraordinary claim that is easy to refute with simple thought experiments. e.g. You think that if I want 103% of the units that a set of equipment from ASML can deliver, that average costs will be lower than producing 100%? Or do you mean "strictly monotonically" in some other sense?
Being able to vary your capital in the long run doesn't mean that you can have 10.3 sets of photolithography apparatus.
> and just copy-and-paste your whole assembly line instead
If you copy and paste and have everything truly independent, without the need for any coordination of resources, what you effectively have is multiple firms. In practice, firms still need to allocate scarce resources among lines.
> The misconception that it's a bathtub does not come from the study of manufactured goods , it comes from thought experiments about manufactured goods
This is a falsehood. Bain conducted reams of real-world research on manufacturing, plant size, firm size, and returns to scale, and this informs today's idea of LRAC. Of course, this research is 70 years old, and recent data is more ambiguous. As I've said, some believe that information technology has changed everything.
Apparently this was known as the “American School” of economics — and it dominated from the mid-late 1800s for over a century.
Not true. If your factory can make N widgets per year, and you want to make N+1 widgets, the marginal cost of the N+1th widget is vastly greater than the Nth widget.
For most goods, the factory doesn't run anywhere near N, and the fixed costs are 6 or more orders of magnitude higher than the marginal widget costs, so your business is well served just by finding any method to use that plant more effectivly. As an example, I was quoted $60,000 for a mold which would have produced parts at $0.005. (Very small plastic widgets.) At that ratio, any amount of scale will increase my profit, since the marginal costs, even if they increase by a factor of 10 or 100, are negligible to the cost of the tooling. (And the global market for this widget is measured in hundreds of units.) Any amount of reusing the mold is going to save me money. Sure we have problems if we need N+1 widgets in less than 1/N more time, but if we expected to need 2N widgets, we could reuse the tooling design at a second factory, and marginal costs actually do keep dropping.
There is never any guarantee that profits are long term or short term, or that your manufacturing specialization is going to remain useful, instead of being a dead end. Retaining specialization on, say, cathod tubes wasn't exactly profitable. See all the camera manufacturers that zigged when they should have zagged, and used their manufacturing strength to unprofitability. All of this is hidden by talking about 'manufacturing' in very large terms, but the real world doesn't work like that. Specifically, semiconductors were a very nice place to keep expertise in, and paid off. Internal combustion engines, and filaments for incandescent lighbulbs probably not.
Even in cases where we are looking at the same kind of manufacturing in multiple places, competitive advantages are lost. There are parts of Europe taht still have metallurgy and never attempted to divest, but lost comparative advantages because better technology came in at the wrong time in the capital depreciation curve: They invested heavily at the slightly wrong time, still had expensive labor, so they became far less competitive, at least for a while. Did they not pray enough to the manufacturing god? Did the Netherlands get lucky, or was sufficient dedication to manufacturing that led them to have ASML in their borders? Is the fact that Novo Nordisk found the most important pharmaceutical in the world a matter of Danish superior industrial policy, or did they just get lucky compared to the many other places with large investments in pharma that didn't get anywhere near that lucky?
The path dependence is not so predictable, and the path that makes you better today can lead you down a cliff. It's all gambles, and whoever claims they can predict what is the right one in the long run is being overconfident
A lot of the GLP-1 success is based on progress made in the diabetes space (incidentally so), the refinement of molecules and better understanding of how obesity could be treated.
Van den Brink gave a great interview some time ago, I'll see if I can translate it and post it here.
Looking at how Apple said it would be impossible to get US chips, so much this. It needed a lot of investment to onshore chip production again. And we should onshore more high value manufacturing to keep the supply chain working in one place.
The EU has been better at keeping manufacturing competence, but I see a lot of these short term comparative advantage econ 101 ideas taking over in the EU as well.
Like I said in my previous comment, though, this doesn't mean the capability to build has left the US (or Europe). Just that the decision to continue investing in manufacturing things that aren't competitively profitable has been made and the capacity has been allocated to higher margin manufacturing (regulated industries, complex products, and products where customers are less price sensitive).
It's not just geopolitics. China required partnering with local companies and sharing IP. Even if they were geopolitically friendly, Western countries set up to build their own Chinese competition from scratch in exchange for lower labour costs, believing that either they could out-innovate China at design (even when Americans no longer understand how their own products get made), or that they'd be retired by the time it did matter.
Manufacturing is the core example of path-dependent advantages, because (unlike what any econ 101 textbook teaches), marginal costs decline with increasing production quantity in the manufacturing sector. This means the more you make, the better you are at making more things!