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Jean-Baptiste Say on Manufacturing Nostalgia and Industrial Policy

There is a reason the classics never go out of style. For example, on page 62 of Charles Robert Prinsep’s translation of Jean-Baptiste Say’s 1803 A Treatise on Political Economy, Say writes:

Production is the creation, not of matter, but of utility.

That one sentence captures one of today’s major debates: the decline of manufacturing. Which matters more: output for its own sake, or the value people get from that output? Most economists agree with Say that utility matters more. It doesn’t matter how much steel a factory can crank out if people don’t get value from it. On the opposite side are economic populists such as Oren Cass on the right and Sen. Sherrod Brown on the left.

Many politicians are convinced that manufacturing is in decline, and are advocating far-reaching industrial policies from Washington to save it. Unlike Say, they seem to believe that there is something intrinsically better about creating physical goods, rather than services, ideas, or technologies. To them, matter is what matters most. This is not a reductio ad absurdum. Cass, in his book The Once and Future Worker, advocates subsidizing industries and even entire towns engaged in manufacturing, even if their products create so little value that few people want to buy them. Rather than doing more with less, Cass argues for the opposite.

This view is mistaken in two ways. First, according to the data, U.S. manufacturing is in good health. Second, the size of this or that sector doesn’t matter anyway. What does matter is that people are able to create as much value for each other as they can. Sometimes that involves manufacturing, and sometimes it doesn’t. Policy makers in Washington will never be in a place to correctly decide that ever-changing mix.

Pre-COVID manufacturing output in the U.S. was at near-record levels, though dented a bit by President Trump’s trade policies. It is still too early to tell what COVID’s impact will be, but it almost certainly will not be good. Fortunately, economic fundamentals remain strong. While recovery will likely take a few years, manufacturing will likely resume its long-term steady climb.

Even when populists do acknowledge the data, they worry that manufacturing output growth is slower than in other sectors of the economy. This is why manufacturing’s share of GDP is smaller than it used to be. This is just a more nuanced version of the same mistake. The percentage of GDP taken up by this or that industry does not matter. What matters is that consumers are free to spend on what gives them value.

The ongoing shift from manufacturing to services is hardly at the same level as the earlier shift from farming to manufacturing. But the impulse to oppose the change is the same. Even Adam Smith, who was no Luddite, distinguished between “productive” labor, which was agricultural, and “unproductive” labor, which was most non-agricultural. Today, Cass and other industrial policy advocates draw a similar distinction between productive manufacturing and less productive non-manufacturing jobs.

The data have a problem with this argument, too. Even back in the 1940s and 1950s, the service sector had roughly triple manufacturing’s GDP share. The populists’ fixation on ratios, rather than how much wealth people are creating, is a similar mistake to the one in the inequality debate Iain Murray and I pointed to in our paper “People, not Ratios.”

Say’s Treatise was published in 1803, about a generation after Adam Smith and right at the point in history when industrialization was becoming noticeable in Say’s native France. This was the beginning of the Great Enrichment that has raised incomes in the richer countries by 30-fold or so, and is still operating today.

This brings up the second flaw in today’s economic populism. Not only do populists often get the data wrong, they make a fundamental error about what people value.

Say’s insight is that if people value something, it doesn’t matter if it was made this way or that way, or on a farm or a factory, or even whether it is a physical product that a person can hold, or sit on, or drive. This is true regardless of an industry’s NAICS code, which is an artificial distinction anyway.

The whole point of labor is to create value for people, not to create it only in ways that Peter Navarro or Elizabeth Warren approve of. As Say says, what matters isn’t matter; it’s utility.