Sunday, 9 September 2012

Made In Britain: Book Review (Part 1)

evan davis, made in britain, economics book, economics reading list, economics for teens, economics for teenagersby Viva Avasthi

Before I read this book I wasn't sure how the British economy plans to sustain itself, considering the fact that we are only just coming out of a double-dip recession and there are always complaints about how little we manufacture compared to China and Germany. Although it is quite clear that Britain had the clear economic advantage over other countries during the times of the British Empire, what Britain has exported after that had been fairly unclear to me, especially since the media portray the image that Britain does not export very much at all.

I found very well-explained answers in Made In Britain, by Evan Davis, which has provided me with an excellent overview of how Britain's economy is structured as well as how it has developed into what it is and what the outlook for Britain's future is.

The book is made of four main sections, and I will be stating my opinions on what the most interesting and relevant ideas in each section were. Please note that I will only be giving summaries and so I highly recommend that you read the book for yourself for a more detailed explanation of the ideas I mention. This review has been split into three parts and the first part stops at the end of half of the book. The second part of the book review covers Part 3: Intellectual Property and the third part of the review covers Part 4: Services.

Part 1: Where we stand

Chapter. 1: How Great is Britain's Economy?

Near the start of this book, we are presented with a table of what we produce in Britain. It is certainly very reassuring: the very same manufacturing that many claim we do not do enough of accounts for 10.3% of total output!

What we produce
Percentage of total output
Agriculture, hunting, forestry and fishing
Mining and quarrying
Electricity, gas and water supply
Wholesale and retail trade (including motor trade)
Hotels and restaurants
Transport, storage and communication
Financial intermediation
Real estate, renting and business activities
Public administration and defence
Health and social work
Other services

All industries

Source: Office for National Statistics Blue Book 2011. GVA weights 2008

One of the key ideas in this section is that trade deficits are not as important as we think. The actuality is that it is our decisions on borrowing and saving that drive everything, not our national ability to sell things. This means that although there hasn't really been a change in logic, but there has been one in emphasis. Davis argues that:
 "it should not be the objective of economic policy to make the nation run up surpluses, any more than it should be an objective of cleaners to save as much as they possibly can...We should not judge our ability to make things in Britain by the trade gap...[However,] since the financial, crisis, two things have become obvious. We have been borrowing too much and saving too little, and balance needs to be restored."
 I think that although the trade deficit is not emphasised in the news as much as it used to be in the eighties, for example, one important thing in an economy is faith, which is reflected in the level of national saving. It is through the savings that we make as a nation that companies and industries can develop. This has been made clear through the example of Japan, where people are unusual in the sense that while most other citizens lose faith during difficult economic times, the Japanese have always been consistent with their savings because of the high levels of national pride they have. Therefore, I think that if more people were to accept the idea that a huge level of exports is not necessarily key in a healthy economy, then they would have more faith in Britain's economy, which would present itself as higher levels of saving.

Chapter. 2: How We Got Here

Another key idea is that we are not entirely in control of how our economy develops. Davies mentions the displeasure with which people speak of the fact that Britain massively de-industrialised and how they complain that this is what has caused the economic problems that this country faces today.

However, Davis claims that the way our economy has developed has been because it has followed the three rules that successful economies have to follow if they want to continue to be successful. After all, some British companies had tried to keep their manufacturing within the British isles, but they were not able to do so. A well-known example of this is Marks and Spencer's, which vowed to only sell products made in Britain, but could not carry on doing this when it was not able to continue making profits.

The three rules that Davies mentions in his book are:

  1. "Thriving nations build their economies around the resources they have at their disposal"
  2. "Properly functioning nations tend to deploy their resources in the highest value activity they can find."
  3. "As things change, nations adapt."

The three rules seem to be quite logical: it would be silly for a country with large supply of bananas, for example, to try and specialise in oil if it didn't have a large supply of the resource. However, the second rule outlines the concept that if the country also had a large supply of aeronautical engineers, they would be better of making aeroplanes than selling bananas because engineering is the higher value activity in this case. The third rule suggests that a country should have a constant cycle of developments and innovations so that if another country is able to become better at the niche the niche the first country had created for itself, it should be able to create a new niche.

So far, Davies argues, Britain has been fairly successful at following these rules which means that the chances it will continue to be are fairly high.

Chapter. 3: An Open Economy

The last idea that Davis puts forward in this section is that, unlike many other countries, Britain is a consumer society more than a producer society. One example of proof that Davies provides is a reference to a poll carried out by the German Marshall Fund of the United States which, in its international public opinion poll, asked the question, 'There are many different views about the rise of China.In economic terms, some people see China as more of an opportunity for new markets and investment, while others see it as a threat to our jobs and economic security. Which is closer to your own?'

Most countries are "distinctly negative about the rise of China...[but] the two countries most favourably disposed to it are Britain and the Netherlands. This positive outlook has been shown in both 2007 and 2010, when the polls were conducted. In 2010, over 50% of respondents in each country saw China as an opportunity. The least well disposed was France, where 63% saw it as a threat, and only 24% saw it as an opportunity.

He uses this information as well as other case studies to argue that the protectionist campaigns of the past didn't work and were, in fact, destined to fail because, "buying British is not a virtue if British isn't what you want to buy." He says that protectionism of some British industries, such as the car industry, for example, was serving the interest of British producers at the expense of the consumers. This idea is explored further later in the book, when he looks at British manufacturing, but one thing he does mention is that Britain's economy is unique in the sense that it is very open. By this he means that rather than having our own car industry, for example, we produce cars for Nissan and Land Rover and generate income that way because we are huge advocates of free trade. In fact, data from 2007 shows that we have a car industry only marginally smaller than France and significantly larger than Italy, despite the fact that France owns Renault and Italy owns Fiat, whereas British car companies, from the Rolls Royce to the Mini, are foreign owned.

Part 2: Manufacturing 

Chapter. 4: The Psychology of Manufacturing

In this chapter, the development of Britain's manufacturing industry is looked at and the question of why people value manufacturing so highly is answered. An interesting point that he makes is that of linking human evolution to economic development. He argues that just as a craving for sugar helped the early man to survive, but present day over indulgence has negative impacts on our health, we might now be clinging to manufacturing when our economy should be evolving beyond that.

"Maybe our yearning for manufacturing is simply a failure to appreciate the value of non-physical labour."
He then goes on to compare manufacturing with retail and draws the conclusion that although retailing seems to be more of a 'soft' service, it is something that customers clearly value, and actually generates more income than manufacturing even though it is just a product being dressed up. However, a good argument to support this idea is that we do not live in a subsistence economy, which means that when we are offered the choice of a product or a product with a nice retail experience, there is nothing wrong with us choosing the latter.

Another interesting idea is that the nature of our manufacturing is such that as it improves its performance year upon year, costs tend to fall and the prices of manufactured goods follow. This means that as fewer people are required to produce the same amount each year, jobs are lost, and it appears that the manufacturing sector is in decline, when it has made more goods than ever before!

"The crucial feature of manufacturing is that we tend to improve our ability to produce things in that sector more quickly than we do in other parts of the economy, for example in personal services or the arts."

(Directly after this statement, he refers to the American William Baumol's 1965 paper, co-authored with William Bowen, called 'On the Performing Arts: The anatomy of their economic problems', and then Baumol's own 'Macroeconomics of Unbalanced Growth: The anatomy of urban crisis' in 1967.)

The idea condensed is that it takes the same number to play a quintet as it did in Mozart's day, whereas it doesn't take as many people to manufacture a car as it did ten years ago.

Chapter. 5: What We've Lost and What We've Gained

We've lost employment to China and other places where manufacturing is cheaper, but our companies (he uses the example of Berwin & Berwin, who supplies suits to Ted Baker etc.) have more profit, so even if the British end up getting jobs with half the pay, we are still better off overall. Although this sounds harsh, the British customers do enjoy the benefits of cheaper goods. This means that lower income households' spending power has increased because of the lowered prices of goods. Aside from this, China will not stay as cheap to manufacture in forever (just as Japan developed into a high cost economy) which means that aside from production moving over to places like Vietnam, it could also come back to Britain. 

Another idea that Davis mentions is that although we lost the manufacturing of 'easy-to-make' goods to China and other places, we kept the most challenging manufacturing here. Davis then gives the history of how various important and technical industries came into existence in Britain. Most notably, he mentions the aerospace industry with BAE Systems and the manufacturing of the unique Brompton folding bicycle (which produces 25,000 bikes every year at £600to £1500 retail price and has huge demand across the world, with only 30% of customers being British). Another company he mentions is McLaren, and the fact that Formula One is a big business, and one that is primarily located in Britain. McLaren is also building the MP4-12C supercar. Aside from these companies, there is GKN (a British multinational automotive and aerospace components company) and other companies that are less well-known, but each generates a turnover of over a billion pounds a year.

Chapter. 6: Room for Improvement

According to Davis, we need to produce more of the products we currently produce, and to extend our manufacturing base. He states that the problem is that our levels of savings have been low in recent times and so the banks have had less to lend in the form of investment. This means that the economy has become orientated towards industries where a low level of capital is required.

He also wrote that the British obsession with housing is not a positive one because it leads to volatile economic conditions and has a negative effect on investment. This happens because people waste money on bad ideas in boom times and so are refused credit during difficult times. 

Personally, I think that the biggest problem for us has been the obsession over the credit card system and that because those companies gain profits from our not being able to pay them back on time, they encourage us to spend beyond our means.

He also mentioned that he believes more investigation needs to be done into how we can develop our 'knowledge economy'. I think that this is a very useful idea and something that the government should seriously consider. However, since this would be a long-term consideration, more needs to be done within the education system to encourage the youth to develop more of an interest in science and technology. Although it is evident that the government is trying to emphasise the importance of science and maths through the use of advertisements and the hosting of national science and technology fairs, it is unclear how successful this has been and the government should consider asking the leaders in British technological developments to talk to children by visiting schools.

Part 3: Intellectual Property and Part 4: Services will be explored in the second and third parts of this review. You can visit the second part by clicking here once the review has been written.


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