Ed note: Long-time Markets and Money readers will recall Dan Denning, previous publisher at Port Phillip Publishing. After he handed over the reigns to Kris Sayce a year ago and took some time to travel and relax, Dan’s now writing for our British affiliate through his new newsletter, Capital and Conflict. Today Dan returns as a guest writer with an edited excerpt from that publication. Enjoy.
The third quarter UK GPD numbers are out and they don’t support the narrative. The narrative over here in Britain is that we are undergoing a post-industrial manufacturing revival. Smaller, nimbler firms are supposed to be using high-tech manufacturing and labour saving devices to create Britain’s next boom. That’s the idea.
Maybe it’s true. Or will be true. In fact, after his stint on the show last week, Charlie Morris said he was headed up to Birmingham in November for a conference on manufacturing and innovation. He’ll report back with pictures and stories.
In the meantime, there are numbers. UK GDP was up 0.5% in the third quarter. That was down from 0.7% in the second quarter. Services expanded nicely at 0.7%. That’s the great thing about having a world class financial services sector. Boom times.
But manufacturing contracted by 0.3%. It makes up 10% of British GDP, according to the Office of National Statistics. The sector is in a technical recession. Construction also contracted by 2.2%. It’s only 6.4% of GDP. But between the two—building and making—it was enough to tap the brakes on the growth of Britain’s economy.
Rather than parsing the data, let me ask you a question I’ve been asking all my friends lately. Send your answers to email@example.com. I’ll publish the feedback this week. Here’s the question, or really, a series of related questions:
Is representative democracy only possible when you have a large middle class? Is a large middle class historically anomalous? In the 20th century was the middle class only possible because the industrial and energy revolutions lifted aggregate wages for unskilled and unskilled labour in ways that the technological revolution of the 21st century never can?
Put another way, as a claim, the wage gains from the labour saving devices in information technology are not as widely distributed as the wage gains from manufacturing. A smaller group benefits to a greater extent from the automation and innovation from information technology. Everybody else not directly employed in the innovative industries gets stuck on lower wages in service industries.
You can’t have a stable political system when people can’t find meaningful work that pays enough to create ownership and capitalise the middle class.
What do you reckon? A bit much for a Tuesday? It’s worth thinking about. Having recently re-read portions of Adam Smith’s 1776 classic The Wealth of Nations, the key to civilisation (according to Smith) is the division of labour and increases in productivity brought about by labour saving devices. For Smith, civilisation IS the division of labour.
Voluntary trade promotes cooperation and wealth. That produces civilisation. Keep that in mind next time someone quotes US Supreme Court Justice Oliver Wendell Holmes, who said ‘Taxes are the price we pay for civilised society.’ Holmes had it all wrong.
Free markets and free people create civilised society. The Rule of Law preserves it. Taxation comes later, when other people decide they’re entitled to your money. If someone didn’t create wealth to begin with, there’d be nothing to tax. But I digress.
The more people trade and specialise and make, the richer the variety of goods and services we all have to choose from. And remember, our production (not consumption) is the source of our wealth. Because we make, we earn. And what we earn, we can trade for things we don’t make.
That formula has worked well for the last three hundred years or so. Look at the average living standards of people in the Western World and claim otherwise. Go on. Make a claim. But what happens when technology changes the structure of the labour market?
It always does that, of course. That’s why there’s an element of faith to the division of labour. You have to believe that the jobs lost in a specific sector due to innovation or competition (let’s say the steel industry, for example) will be replaced with other jobs that don’t yet exist. Because they don’t exist — they are ‘unseen’ in Frederic Bastiat’s terms — you can’t count them.
You have to believe that somehow, someway, they will ‘emerge.’ The spontaneous emergence of new industries and new jobs is what the free market has done very well for a long time now. Joseph Schumpeter famously referred to the ‘gales of creative destruction’ that force businesses to innovate and do better or perish from the earth.
There’s no reason to believe the ‘rise of the robots’ won’t lead to entirely new (and massively profitable) areas of productive human endeavour. Let’s hope so! The future is coming whether we like it or not.
Doing meaningful work with your life — not being ‘alienated’ from your labour as Karl Marx would have said — is a big element of human happiness. If you don’t think the work you do is good, meaningful, and beneficial, it certainly affects your quality of life, as well as your sense of self-worth.
Technology is changing our relationship with work at ever faster rates. This creates structural dislocations in the labour market which show up in GDP numbers. As investors, our challenge is to understand this change, try and forecast it if we can, and then profit from it with some tactical risk taking.
Contributor, Markets and Money