Donald Trump, the 45th President of these United States, has spoken emphatically about the factories that are running away from the United States and into the arms of Mexico and China. He said “I have visited cities and towns across this country where one-third or even half of manufacturing jobs have been wiped out in the last 20 years.” He believes that the politicians we have elected are responsible for allowing this “disaster” to happen. Factories shut down, leaving cities is a state of disrepair, and utterly destroying the middle class.
While there may be some merit to his claims, there is a different aspect to this story; one the President has slyly left off his angry speeches to the masses.
Sir Arthur Lewis, a development economist, would say that politicians are not the sole reason that factories are closing shop in the United States. Rather, that the factories are no longer necessary as the country is experiencing a turning point.
Sir Arthur Lewis and Theodore Shultz won the Nobel Prize in Economics in 1979. They won the award for their “pioneering research into economic development research with particular consideration of the problems of developing countries.”
Sir Arthur Lewis put his name on the map when he published an article in 1954 entitled, Economic Development with Unlimited Supplies of Labor. It was from this article that he developed what came to be known as the Lewis model. In this model, Lewis combines an analysis of developed countries with the core principles of economics to produce a picture of how countries develop and flourish.
In his theory there are two sectors; The first sector, the “capitalist” sector, is developed by using up labor from the second sector, the “subsistence” sector. According to Lewis, this second sector is governed by informal institutions and social norms, where producers are not maximizing their profits and workers aren’t being paid their appropriate wages. He develops the model, explaining that in the early stages of development, the “unlimited” supply of labor from the subsistence sector allows the capitalist sector to expand for some time without having to raise wages. Think of how plantation owners made their killings off the backs of slaves.
As a result, the capitalist sector experiences higher returns to capital, which they are then able to reinvest in order to make even more money. With the extra stacks of cheddar that they have accumulated, or the capital stock, the capitalists are able to hire more workers from the subsistence sector. As long as the profits are reinvested and the build up of money does not replace workers, the country modernizes and grows! When the labor from the subsistence sector gets fully absorbed into the modern sector, with increased wages and all, this is known as the…wait for it, the Lewisian turning point.
Has This Happened Before?
Have we seen cases where countries experienced these turning points? Definitely! We need not look any further than the good ole US of A to see this happening. Think back to both of the Industrial Revolutions that took place in our country. In both cases, we saw people moving from agrarian type jobs to manufacturing jobs, which resulted in higher wages for the people that moved into the city to take those industrial based jobs. The graph below shows the time period before and after the industrial revolution. The industrial revolution also occurred in Europe, and it shows in both cases where the people of those countries experienced increased levels of wealth after these Lewisian turning points.
The most recent case has to be China (Trump’s favorite country). China has experienced an incredible rate of growth over the past 35 years.
A lot of this growth has to do with the country going through one of these Lewisian turning points, where the country has experienced a shift from an agrarian society to a more industrial one. The result has been increased GDP per capita, or standard of living, for the people of China.
The New American Lewisian Turning Point?
While Lewis’ model was meant to look at the development of poor countries, we can also use it to look at advanced countries as well, because they also continue to develop even when they are at a state of prosperity. So when we look at Trump’s statements about manufacturing jobs, it is only partially true. For over 30 years, manufacturing jobs have, indeed, disappeared from the United States.
The data provided by FRED shows that the percent of US jobs in manufacturing have taken a nose dive, going from almost 22.5 percent to just over 10 percent. If this was all there was to the story, perhaps there would be more merit to the president’s words.
However, I would argue that the United States is in another Lewisian turning point. Here is why: The United States has the service industry — including finance, insurance, and healthcare — which is more lucrative than manufacturing. The criss-cross is a clear and telling depiction of this transition.
The data above shows how the services sector has taken an increasing share of representation of the US economy. While manufacturing represents a smaller portion of our economy, 12 percent of the GDP in 2016 is still a multi-trillion dollar industry. It’s foolish for President Trump to assume that the path we’re on will end with no factories or manufacturing jobs. We will always have more manufacturing jobs than none due to the fact that we have a comparative advantage in producing some goods over other countries. In other words, it’s still cheaper to produce some goods here than overseas.
Another way of looking at the disappearing jobs is by looking at how productive our workers have become.
Similar to how service sector jobs replaced many of the manufacturing gigs, the disappearing workers have been replaced by highly productive manufacturing workers. If one worker can now produce the same amount 400 workers produced 15 years ago, it makes no sense to keep the same amount of workers. You’d get rid of some, right?
The End Result
We’ve largely transitioned from an economy based on farmers to one that was based on manufacturing. From there, the service sector has overtaken manufacturing. Now, we are in the midst of transitioning into a “knowledge economy” with the slew of technological advances and global connectivity. Trump’s dismal view of the manufacturing sector and his attempt to “save” it ignores the idea that we may be transitioning into something better. He’s ignoring the Lewis model and the turning points that come with it.
This is exciting! But, no one said these Lewisian turning points don’t have some aspects that hurt. These are just growing pains of a transitioning economy, championed and brought to light by Sir Arthur Lewis.