The Calico Cat
A weblog about business, economics, law, politics, and current events - nothing about cats
From Information Economy To Marketing Economy
The decline of the manufacturing economy and the rise of the information economy
The traditional explanation of our nation’s economic development is that we have moved from an agricultural economy to a manufacturing economy, and then from a manufacturing economy to an information economy.
It was technology that moved us from an agricultural economy to a manufacturing economy. Technology automated and improved farming so that a much smaller number of workers could grow a much greater of food. So jobs moved from farms to factories.
One should point out that most of the factory jobs weren’t all that great. The term “sweatshop” arose from the harsh working conditions in factories. At most of these factory jobs, the workers were mere automatons, instructed to do a repetitive task over and over again. These were not jobs that gave meaning to people’s lives, they just put money in their bank account. For these reasons, many have trumpeted the arrival of the information economy as a good thing, an improvement to the lives of most working Americans.
With respect to the decline of the manufacturing economy in the United States, the numbers speak for themselves. In 1950, 34% of non-farm workers were in the manufacturing sector, and that has declined to only 13% in 2002 (see USA Today, 12/12/2002: U.S. manufacturing jobs fading away fast).
Unlike the switch from the agricultural economy to the manufacturing economy, in the switch from the manufacturing economy do the information economy, it hasn’t simply been a matter of the manufacturing jobs being replaced by technology. Some of that has happened, but the bigger story is that most of the manufacturing has moved overseas. And the reason it has moved overseas is because there are people in other countries willing to work for only a small fraction of what American workers gets paid.
Some argue that this is a good thing. From the article cited above:
It's good for us to displace low-wage, manual kinds of labor with higher-skill, higher-tech, higher-education-content labor," says Federal Reserve Bank of St. Louis President William Poole, who compares what's happening with the decline in agricultural employment of the early 20th century.
The economic boom we experienced during the 1990s was driven by the information economy. The computer chips and software that the rest of the world uses were designed here in the United States.
But now we see a new trend in the move to overseas sourcing. It’s not just manufacturing that’s moving overseas, the information jobs are moving there also! Thanks to the internet and inexpensive long distance phone service, the barriers to doing business with someone on the other side of the world have mostly been eliminated. Already we see call centers moving all over the world. When you call up customer service or technical support, you may very well be connected to someone in the Philippines or in India. And the biggest new trend in software development is using computer programmers in India who work for one third the salary of American programmers.
There is no reason to think that this trend will not continue. Any type of job that could be done overseas will be done there. There are 1.3 billion people in China and one billion in India, and they are willing to work for a fraction of what Americans get paid. They may not speak English in China, but that is not a barrier. With more information jobs being exported from the United States, the people in other countries will discover that if they learn English they will enjoy a huge salary increase. Money talks. People will learn English if it means that they can double their salary.
The new marketing economy
What happens when all the information jobs move overseas? What we will have left is what I call the marketing economy. Nearly all jobs that involve creating actual value, such as manufacturing, computer programming, engineering, or just answering the phone at a call center, will be moved overseas. The only jobs left in the United States will be marketing jobs.
Instead of creating real value, marketing merely creates the perception of value. But perception is a very powerful thing. The weekend before Christmas in Manhattan, I spotted a vendor on the street selling sweaters for only $5 each. But a Polo by Ralph Lauren sweater at a mid level department store like Macy’s sells for $99. What’s the difference between the two sweaters? Even if the Polo sweater costs more the manufacture, I guarantee you that it doesn’t cost twenty times as much to manufacture. It’s doubtful that it even cost twice as much to manufacture. Nope, that $99 sweater is actually only a $5 sweater that has a higher perception of value. The manufacture of the sweater takes place in Macao and costs only $5. Then $85 is spent marketing the sweater in the United States, with $10 of profit for Macy’s and Polo.
The marketing economy, like the information economy, has many tiers of jobs. There are low paid workers manning the cash registers at Macy’s, and high paid models who pose in the ads for the sweaters. There are advertising people who think up the ads and salesmen who attempt to get stores like Macy’s to sell the sweaters. All of these people are working in the marketing economy, magically turning a $5 sweater into something that someone is willing to pay $99 for.
Another good example of a marketing industry is the investment banking industry. What most people know about investment bankers is that they make a lot of money. Few know what they actually do. To find out about what investment bankers really do, the best source of information is the book Monkey Business which gives out the inside scoop on investment banking. What the investment bankers actually do to earn their huge salaries is to pitch deals to companies. Investment bankers are nothing but salesmen who understand accounting and the lingo of Wall Street, that’s all. One shouldn’t be surprised to discover that they are making huge amounts of money from doing sales, because mostly all of the very high paying jobs in our economy are sales jobs.
Once the company agrees to the deal, the actual work is done by a much lower paid workforce, including lawyers. Lawyers are among the highest paid of people doing real work, primarily because their jobs are protected by law. It’s illegal to do legal work unless you are a member of the bar. It’s too bad for computer programmers that they don’t have similar legal protection; then their jobs wouldn’t all be moving to India. It should be noted too that the very highest paid of lawyers, the partners at the big law firms, are mostly doing rainmaking activities (marketing in other words), while the real work is done by associates who get paid a much lower salary.
The sustainability of the marketing economy
I recently explained my theories of the marketing economy to a friend, and his response was that it’s impossible for our country to sustain itself if we don’t actually create anything that has real value. But he’s wrong, the economy can sustain itself, because at the top of the economy we have capitalists, people who own assets. The assets are now in other countries, but the capitalists still get rich, and the money from the capitalists trickles down to people working in the marketing economy.
How it works is that the capitalist invests his money in a business where the real work is done overseas. He makes a return on his investment that can be quite substantial. The capitalist doesn’t have to personally work in order to make money. His money makes money for him.
I might even go so far to say that we are moving towards a new mercantilism. What exactly is mercantilism? It’s ill defined, but prior to the 1800s, nations believed that their wealth was based on how much gold they had in their treasuries. Adam Smith, who wrote the book The Wealth of Nations , helped to change that viewpoint, and afterwards it was understood that a nation’s wealth was based on it’s ability to produce valuable goods. But this leads to a conundrum, because how can the United States be the world’s richest country if nothing is actually produced here at all? The answer is that we own all of the assets, and now that the U.S. dollar has replaced gold as the worldwide medium of exchange, we can create dollars a lot more easily than the Spanish could plunder gold from the new world. So our wealth is now based on the supposedly discredited system of mercantilism.
It is still worthwhile to ask how long can the United States be the world’s richest nation if we no longer contribute anything of real value to the rest of the world? I think it can be quite a long time. Decades, not years. But eventually our failure to contribute anything of real value to the rest of the world will catch up with us. The next world superpower will probably be China with its 1.3 billion people.
posted January 23, 2004
A reader from Chandler Arizona sent the following letter:
January 23, 2004
You made several interesting and valid points, but you seem to have left out one important factor. What is going to happen to all the unemployed people that loose their programming, call center, and manufacturing jobs to outsourcing? There is no way that this many people can be absorbed into a Marketing economy (marketing is about a few people telling the masses what to do with their money not the other way around). What happens to a marketing economy when the masses are no longer employed? What sort of drag will they place on the economy if they are no longer able to contribute because they are not part of a Marketing revolution?
A free society simply can't exist in such an environment. Outsourcing will eventually give rise to Socialism. Face it, we are already seeing this in our healthcare system.
The purpose of my essay wasn’t to say whether the coming marketing economy is good or bad, but merely to point out that it is happening. And it’s not something that’s going to happen in the far distant future, it’s what’s happening right now. Since we are already underway in the shift from the information economy to the marketing economy, and the sky hasn’t fallen, this gives credence to the idea that the United States can still get along quite well with a strictly marketing based economy.
Proponents of free trade say that each nation has a comparative advantage in certain goods and services, so both the world economy and the United States economy benefit from free trade because all nations gain the benefit of goods and services that are produced more efficiently elsewhere.
With the shift from a manufacturing economy to an information economy, free trade proponents pointed out, perhaps correctly, that our comparative advantage was in information and not in the production of manufactured goods. Intel, Microsoft, and all the other big corporations that define the information economy, are based in the United States.
However, one needs to honestly assess where the United States still has a comparative advantage in information. Looking at all the evidence, the answer is no. Anything that’s done in the United States can be done for less money in a foreign nation. There are a lot of bright computer programmers and semiconductor engineers in foreign countries. In fact, if you walk into the engineering department at most United States universities, you will see that the majority of the students are foreigners. It’s possible that even were the wages the same in China as they are in the United States, the Chinese might actually have a comparative advantage in engineering and computer science.
What has kept both information and manufacturing activities in the United States is capital that cannot be relocated. This is easy to understand when considering a factory. It may be that there are factory workers in Mexico willing to work for a few cents an hour, but if the billion dollar factory is already located in the United States, then there really isn’t any way to take advantage of the cheap Mexican workforce (although W’s immigration proposal is a step in that direction). So factories located in the United States continue to manufacture things, but when new factories are built, they are built in foreign countries and not in the United States. Thus our manufacturing output slowly declines as old factories are closed down, but our manufacturing output does not disappear overnight.
In addition to physical capital such as factories, the United States also possesses human capital in the form of trained information workers such as engineers and computer programmers. This human capital can be as hard to move as a factory. Suppose that Intel has a department of several hundred engineers with intimate knowledge of the Pentium microprocessor. This is an area of expertise that exists nowhere else in the world; the Pentium engineering department can’t just be recreated overnight in China or India.
But what is different today as compared to ten years ago is that the ability to transfer information and collaborate around the globe has increased dramatically. Modern day telecommunications, such as the internet, allow the instantaneous and practically free transfer of information around the globe. A group of highly paid engineers in Silicon Valley can now collaborate with a group of much lower paid engineers in Asia. Thanks to the internet, the human capital that exists in the United States can now slowly be transferred to countries where salaries are significantly lower. Thus we will see the inevitable decline of our information economy, just as the manufacturing economy declined.
Our advantage lies in marketing. Only Americans know how to sell things to other Americans. And we are even good at selling things in foreign nations! Around the globe people watch American movies and drink American soft drinks. No nation can compete with the United States when it comes to marketing.
Once again, whether this is good or bad remains to be seen. If information jobs with high pay are replaced by marketing jobs with high pay, then there is no harm to our workforce. On the other hand, it is possible, maybe even probable, that the transition to a marketing economy is contributing to the phenomena of the “shrinking middle-class” and the “jobless recovery.”
posted January 24, 2004