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There Is No Proof that Economic Health Depends on Manufacturing

Author: Jagdish N. Bhagwati, Senior Fellow for International Economics
August 30, 2010
The Guardian

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Economists long ago put to rest the error that Adam Smith made when he argued that manufacturing should be given primacy in a country's economy. In the second volume of The Wealth of Nations, Smith condemned as unproductive the labours of "churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera-dancers, etc." We may agree with Smith (and Shakespeare) about the uselessness of lawyers, perhaps, but surely not about Olivier, Falstaff, and Pavarotti. But the manufacturing fetish recurs repeatedly, the latest manifestation being in the United States in the wake of the recent crisis.

In mid-1960s Britain, Nicholas Kaldor, the world-class Cambridge economist and an influential adviser to the Labour Party, raised the alarm over "deindustrialisation". His argument was that an ongoing shift of value added from manufacturing to services was harmful, because manufactures were technologically progressive, whereas services were not. He even got a Labour chancellor, James Callaghan, to introduce in 1966 a selective employment tax, which taxed employment in services more heavily than employment in manufactures--a measure that was reversed in 1973, once it was realised that it would hit the tourist industry, which generated badly needed foreign exchange.

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