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On Monday, the Deep End was all about Britain’s remarkable economic recovery. Today, we dig a little deeper – noting what may be the most important thing said by anyone about the Autumn Statement. It can be found in paragraph 1.1 of the OBR’s Economic and fiscal outlook – December 2013:

“We judge the positive growth surprise to have been cyclical, reducing the amount of spare capacity in the economy, rather than indicating stronger underlying growth potential.” 

This doesn’t lessen George Osborne’s victory over his pro-stimulus opponents, because the big battle over economic policy has been about cyclical, not structural, recovery.

Since 2008, a series of debt crises have smashed into the global economy – driving consumers, lenders and investors into headlong financial retreat. Osborne’s judgement was that a conventional debt-driven government response would be the wrong way of dealing with an unprecedented debt-driven shock to economic confidence. Instead, he emphasised solvency over stimulus.

Experience has proven him right. Five years of pent-up demand (and spare capacity) is now being released back into the economy. However, this energy, while considerable, is not infinite. Like an uncoiled spring it will play itself out – after which a fresh and longer-lasting source of momentum will be required.

Where will this come from? The debate has barely begun, but as good a place to start as any is Clive Thompson’s interview with Vaclav Smil for Wired. You may not have heard of Smil, but he is one of those rare academics who dares to look at the bigger picture:

“‘There is no author whose books I look forward to more than Vaclav Smil,’ Bill Gates wrote this summer. That’s quite an endorsement—and it gave a jolt of fame to Smil, a professor emeritus of environment and geography at the University of Manitoba…

“His nearly three dozen books have analyzed the world’s biggest challenges—the future of energy, food production, and manufacturing—with nuance and detail. They’re among the most data-heavy books you’ll find, with a remarkable way of framing basic facts. (Sample nugget: Humans will consume 17 percent of what the biosphere produces this year.)”

One of his key conclusions is that ‘knowledge economies’ which dispense with manufacturing doom themselves to ignorance:

“Most innovation is not done by research institutes and national laboratories. It comes from manufacturing—from companies that want to extend their product reach, improve their costs, increase their returns. What’s very important is in-house research. Innovation usually arises from somebody taking a product already in production and making it better: better glass, better aluminum, a better chip. Innovation always starts with a product.

“Look at LCD screens. Most of the advances are coming from big industrial conglomerates in Korea like Samsung or LG. The only good thing in the US is Gorilla Glass, because it’s Corning, and Corning spends $700 million a year on research.”

Without manufacturing, economies don’t just come apart economically, but socially too:

“In every society, manufacturing builds the lower middle class. If you give up manufacturing, you end up with haves and have-nots and you get social polarization. The whole lower middle class sinks.”

So, how do we get manufacturing back again? Not through protectionism, but by being the best – and that starts with world-class vocational training:

“Only two countries have done this well: Germany and Switzerland. They’ve both maintained strong manufacturing sectors and they share a key thing: Kids go into apprentice programs at age 14 or 15. You spend a few years, depending on the skill, and you can make BMWs. And because you started young and learned from the older people, your products can’t be matched in quality.”

George Osborne has won the battle of the last five years, but it’s time to talk about the next fifty.

25 comments for: Heresy of the week: Britain is doomed without manufacturing

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