The Need for a New Understanding of Manufacturing and Industrial Policy in Leading Economies

Ongoing debates about economic growth in the United States and the United Kingdom following the 2008 financial crisis have given a new primacy to manufacturing within the two countries’ respective economies. President Obama’s 2012 State of the Union address focused on manufacturing as the bedrock of future growth. The contrast to the financial sector was writ large when he said, “We will not go back to an economy weakened by outsourcing, bad debt, and phony financial profits” and called for “an economy built on American manufacturing.”¹ In a similar vein, the UK coalition government has focused on the theme of rebalancing the economy, which is characterized as increasing the role of manufacturing. David Cameron’s first economic speech after becoming prime minister set the trend, when he stated, “Our economy has become more and more unbalanced, with our fortunes hitched to a few industries in one corner of the country, while we let other sectors like manufacturing slide.”²

It is as yet unclear whether these reactions to the crisis caused by the near collapse of the global financial system represent a well-formed approach to achieving long-term growth. The rules of the global economic game continue to change, and the current narratives on the economy, manufacturing, and growth are sadly out of date. Trapped within a framework that has become less and less representative of the economy, laden with ideological baggage, and lacking new thinking on how manufacturing has evolved in terms of production technologies, company organization, and impact on the economy, it should not be a surprise that our current responses to the call for rebalancing and growth might be off the mark.

This article investigates attempts by the UK and the U.S. to focus on and provide support for manufacturing in the wake of the financial crisis. We focus on these two countries due to the significant attention being paid there to this debate, and because their actions highlight the general weaknesses in how policymakers are considering the future evolution of manufacturing.

Falling Out of Love with Manufacturing and Industrial Policy

In the 40 years since 1970, one trend has stood out for the developed economies of the G7: manufacturing as a share of national economies has fallen dramatically.³ Across the G7, the greatest decline has been in the UK, where manufacturing has fallen by 20 percentage points as a share of gross domestic product (GDP), contracting in this sense to one-third of its original size. The United States has seen a similar contraction of manufacturing during this time, from 24 percent to 12 percent of GDP. Some observers believe that these statistics actually underplay the depth of the decline in manufacturing in the developed economies. According to this argument, the loss of manufacturing jobs is not due to rising productivity but is “a function of slow growth in output . . . caused by a steep increase in the manufactured goods trade deficit.”⁴

These changes, loosely termed “deindustrialization,” were seen by many to be almost a natural part of the evolution of leading economies from agriculture through industry and on to services. Daniel Bell’s influential 1973 book, The Coming of the Post-Industrial Society, in many ways created a context in which this interpretation flourished. This book capped a long-running narrative of progress in which the leading economies move from the land to industry, then from industry on to services, all the while retaining the high-value elements of research, design, and service delivery.

A strong ideological position appeared in parallel to this characterization of the economy on the role of government in the economy. This was a reaction in particular to the strong state intervention that had taken place in many countries, loosely under the banner of industrial policy. A dominant ideology emerged that supported government creating an environment for innovation or establishing enabling conditions, but it did not support sectoral or targeted interventions. For many at the time, “industrial policy . . . turned out to be an idea with a brief career.”⁵

By the turn of the 21^st...