‘Production Economy’ vs ‘Consumption Economy’

In a recent post, I said that the U.S. should be a production economy, not a consumption economy. Matt Yglesias notes that “I have really no idea what that’s supposed to mean, since presumably the idea is to produce goods and services that people want to consume.”

Let me explain: I believe that the U.S. has come to a fork in the road. The direction we’ve been going leads to the  the consumption economy, putting more resources into consumption and distribution rather than production. It hasn’t been working for us.

The U.S. needs to change course to a production economy:  put more emphasis on investment in physical, human, and knowledge capital, and less on consumption as the yardstick of success.  We need to take up our fair share of the global productive burden.   

To see one indicator of the consumption economy  take a look at this chart.

It tracks the buildings used for manufacturing (production) versus buildings used for retail, wholesale, and warehouses (distribution). Around 2001 the lines crossed, a sign that distribution was becoming more important than production in the U.S. economy.

The goal of a consumption economy is to provide consumers with low prices and wide variety, with less concern about jobs and wages.

In a consumption economy, successful corporations are the ones who can best manage their global networks of suppliers to obtain the lowest costs. Offshoring is a mark of pride,  showing that companies can meet the desire of their customers for lower prices.

In theory, a consumption economy can be a great thing.  Low prices can presumably bring higher living standards for households, as real wages rise.  In theory, production is not an essential component for economic prosperity if you can create the product and organize the production and distribution process.

The great success story for the consumption economy is Apple. Apple is a spectacularly profitable creator of innovative  products and ecosystems, and a successful retailer to boot.  However, the company does not manufacture the  iPads, iPhones, iPods, and so forth that  it creates and sells.  Creation and distribution, but no production. [Edited for clarity. See below*]

However, Apple is Apple. For the rest of us, the consumption economy isn’t working  so well.

I promised myself I would stop writing excessively  long posts, so I’m going to stop here for now.

*Added:  The exact language from Apple’s  annual report

Substantially all of the Company’s Macs, iPhones, iPads, iPods, logic boards and other assembled products are manufactured by outsourcing partners, primarily in various parts of Asia

Obviously this does not include software.

Comments

  1. You’re phrasing it like it’s a zero sum game.

  2. Is the point that creation and distribution don’t create jobs, but production does?

    The US is absolutely far and away the world’s biggest producer if you’re measuring output. (Manufacturing, value added constant 2000 US$ http://data.worldbank.org/indicator/NV.IND.MANF.KD?cid=DEC_SS_WBGDataEmail_EXT)

    I’m not really arguing, I just don’t see how the value added figures fit your case as I understand it.

    • Mike Mandel says:

      The value added data undercounts imports and overcounts value-added. I’ve written many times about this.

  3. Good point, but I think it is possible to go deeper with the Apple example: the production process is composed of assembly (putting everything on a board / case) and hi-tec manufacturing (making the chips / lcd). I believe that what you want to bring to the US is the hi-tec parts; the assembly can be taken care 100m south of the US border.

  4. I’m not sure why you want to divide up creation and production and if that really makes sense. Apple doesn’t manufacture their devices but they write, ie “produce,” all their own software and employ around 50 thousand people in total, many producing software. That’s because software is where all the profits are. Admittedly highly successful software companies like Apple, Google, and Microsoft may not employ as many people as a services giant like IBM, but I’ve written before that I think we’re on the verge of a great boom in other information jobs. This guy now pulls in seven figures off of his podcast and associated revenue, like live shows and merchandise. A recession happens when we figure out how to make the stuff we already use really efficiently, such as computer hardware or cars, but we still haven’t figured out what the next thing we’re going to do is nor completely how to make it work yet, ie all the information jobs over the horizon. But we have some smart people working on it and we just need time to figure it out. It will happen, just like it always has, :) but going back to antiquated manufacturing jobs accomplishes nothing.

    btw, the great thing about the blog format is you can devote as much space as you want for any topic. I think the main issue is not padding out a post just to fill space, like many articles and books currently do, not restricting yourself when you really have something to say.

  5. Does productivity increase more rapidly in manufacturing or distribution?

    If manufacturing then you would expect this pattern even in the absence of the shift you describe.

    Your data are insufficient.

    • Mike Mandel says:

      You wouldn’t expect the share of distribution to increase relative to the whole economy.

      • I have to agree with the comment above, Mike. The chart seems to imply our economy consists solely of manufacturing and consumption of manufactured goods, ignoring industries that have no physical product to be manufactured and stored, or retail outlet to sell it in.

        If we cite Google as an example, they’ve provided thousands of well paying jobs for Americans and bringing more money from overseas back to the US. The same can be said for Facebook, which is generating revenue from businesses worldwide.

        The issue isn’t whether the US can create more manufacturing jobs, but whether the US can train its workforce for the jobs where it is most competitive. Industries that require high capital investment, an educated workforce, and strong protection of intellectual capital are where the US has a competitive advantage.

        The issue isn’t to get more people assembling TVs and lawn chairs in the US, but to get more people trained in the fields our strongest industries demand.

      • Dan: Just what are those strongest industries whose demand is not met? A lot of tech companies are offshoring work “because they can”, and there is little evidence of an actual talent shortage. Note, I mean demand for skill sets, not demand for favorable (i.e. low) pay expectations. Much of the hand-wringing over all those positions that cannot be filled is because candidates have “outsized” pay or perks expectations. Some tech employers will admit as much. Sometimes this is couched in terms of “we cannot find the skills” (subtext: at our price point). Meanwhile experienced tech staff or ex-staff over 40 (or whatever the actual magic “too old” marker) as well as most US candidates without “hit the ground running” niche experience are not considered, or are second/third preference at best.

        What many employers, perhaps with the exception of Google and similar companies in limited growth fields, want is not graduates in the respective field, but graduates with some work experience who are past the “greenhorn” stage. This experience is supposed to come from “somewhere”. I know about some place where people with 3-5 years of applicable postgraduate industry experience are sought, but the larger industry has not been hiring a lot locally over the past decade, and instead “invested” a lot in offshore workforce training (global talent pool and all that). So where are the local 3+ years candidates supposed to come from? There will be some but they will not be interested in pay cuts. What will probably happen is that those jobs are staffed offshore too, or a trained offshore person is brought in on visa.

  6. I’m not too sure I understand what we’re talking about… is the suggestion that the US should increase investment/savings instead of consumption, swinging the current accounts balance to the positive? Is the idea that the US should go back to an export driven growth model? It’s my understanding that the US plays a big international role in allowing the current account surpluses of others eg. China, is there room in the world economy for an export-driven US? My understanding is that there’s less of a “global production burden” as a “global consumption burden.” Sorry if I’m misunderstanding the point

  7. Michael,

    Remember that the culture and hence government have decided to make the US female-centric.

    Feminists lobbied hard for TARP money to go towards jobs that women do, even if overinvested in already (Healthcare, education), and away from jobs women don’t usually do, even if needed (construction, manufacturing, engineering).

    Do not overlook this core theme of why the US is a consumption, rather than production, economy. Men have been marginalized in a society-wide campaign to over-privilege women.

  8. Michael,

    Are you predicting a new recession starting in the next few months? Your words of ‘greatest convulsions in 75 years’ sound ominous, indicating that it is not even just a recession, but worse.

  9. Doc at the Radar Station says:

    Michael, I’m glad that I found your blog. It is always a breath of fresh air to read people who are talking about production and consumption imbalances. The gist of what you seem to be saying is similar in many ways to me what Michael Pettis writes about.

    http://mpettis.com/2011/06/how-to-become-virtuous-and-save-more/

    “Abnormally high or low savings rates are almost always caused by trade, industrial or tax policies at home and abroad that distort the relationship between consumption and production.”

  10. If you look at this at a more fundamental level, the question is: What are the problems that we want to solve?

    Is it enough to pursue a consumption economy aimed, as Michael says, “to provide consumers with low prices and wide variety, with less concern about jobs and wages?”

    Or do we want to solve weightier (and much more lucrative) problems? To do that, we need a production economy. But I think that the concept of a production economy too quickly takes peoples’ thinking to the industrial economy. In the industrial revolution, every aspect of our economy was industrialized.

    The opportunity today is to create a post-industrial production economy. The design constraints of this economy include minimizing energy use, minimizing/eliminating waste, maximizing health and wellness and maximizing knowledge. In many cases, local development and jobs will also be a priority (not the development of far-off foreign communities but those outside our own doors).

    We know that we are already shifting to a global knowledge economy. What we haven’t come to terms with is what this shift means to the production economy. It won’t look like the U.S. of the past or even the China of the present. It will look completely different and it will be built by those applying knowledge to the problems and constraints of the coming decades.

  11. Mike,

    Do you know of any studies that was done on the impact of manufacturing vs. distribution on an economy? For example – number of people will be emplyed if say toilet paper is completely manufactured in a city/town as opposed to having a distribution warehouse in the town? That would strongly support your theory.

    Binu

Trackbacks

  1. […] The consumption economy works for Apple ($ AAPL).  The question is whether it works for everyone else?  (Michael Mandel) […]

  2. […] Look at this graph from an earlier post: […]

  3. […] when I write about the shift from the consumer economy to the production economy, people assume that […]

  4. […] the need for the U.S. to shift from a consumer economy to a production economy. (See for example here, here and […]

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