I remember the moment as if it was yesterday. A coworker forwarded me an email and then, before it even hit my inbox, he was in my office standing at my desk shouting, “Do you believe this! How could he say that?”
“What on earth are you talking about?” I asked.
“Look at your email!” he insisted. I opened the message and I couldn’t believe what I was seeing. It was a copy of a letter from our governor stating that, as far as he was concerned, manufacturing was obsolete, a relic of the past, and that Ohio’s future was going to be built on a new hi-tech service economy (my paraphrase). As a career manufacturer, I couldn’t have been more disappointed.
Well, that was almost 15 years ago and, my, how things have changed! It’s apparent now that the reports of manufacturing’s death and unimportance were greatly exaggerated. Our current governor travels the state celebrating our industry’s growth, and other state officials are singing our song too. Last year Treasurer Josh Mandel launched a new effort, called Ohio Strong, to “help recognize men and women in manufacturing and the skilled trades, and raise public awareness to encourage more people to pursue careers in these fields.” As a career manufacturer, I couldn’t be more thrilled.
So, what gives? What is it that these guys see that the others didn’t? Why are states across the nation, from Nebraska to Georgia, tripping over themselves to make their state a great place for manufacturers to do business? Why are they fervently working to develop programs to train up a skilled workforce that can fill the jobs in this industry?
Simple Economics
It’s true, I’m not an economist (I don’t even play one on TV), but the task of connecting manufacturing to the building of real wealth is so elementary, even a former tool-and-die maker (like me) can do it. Actually, even a Guatemalan coffee grower can get it (I’ll explain this below). Trust me, this won’t be hard to understand.
Let me first clarify, that when I speak of manufacturing building wealth, I’m not talking about it making someone personally wealthy (although that can happen too), I’m talking about it growing wealth for our communities, cities, states and for our great nation.
Ok, so to understand the important economic impact of manufacturing, we have to understand what the difference is between manufacturing and other industries. That’s where the coffee grower comes in. Franklin Voorhes is an American engineer who founded a non-profit (As Green As It Gets) to help Guatemalan coffee growers realize the full economic benefit of their craft. Of all the explanations of basic economics I’ve read, none are as clear as how Franklin presents it in his article titled, “Creating Wealth”. You can read his full write-up here. Using language most can understand, he breaks the economy down into four simple steps, or economy types. I’ll attempt to summarize them here:
1. Raw Materials (production or extraction): This includes Mining, Agriculture, Forestry and Fishing. Work is involved here, but mostly it is a process of cultivating and collecting from the earth what God has already produced and provided for our use. Of course, some value is added to these materials as they are harvested and presented to the market.
2. Manufacturing & Processing: This step is taking those raw materials and adding value with subsequent steps or processes to transform them into something very different. It might be crafting wood and straw into a broom or burning coal to produce electricity or turning iron ore into a car body. In each case the end product has significantly higher value in its new state than it did as a raw material. And the more transformational steps that are required, the more value that is added. And that substantial value increase is what we call wealth.
3. Retail, Distribution & Service: There’s not doubt that these activities positively impact our society. They make the goods more accessible and easier to purchase but the base product did not really change. Little to no value has been added to the actual product. In this step Franklin (and others) say that money (or wealth) is just “moved around” and not “created”.
4. Research & Development: This is where ideas for improving and creating things happen. But, the value of an idea is not fully realized until it is incorporated into a marketable product (think manufacturing). Interestingly, the manufacturing industry is responsible for about two-thirds of all R&D.
As you might suspect, each step listed above is essential for a well functioning economy and my goal is not to diminish any of them. But, when it comes to adding/producing wealth, not all steps are equal. Governments, Services, Education and Entertainment are all important, but they all feed off of the wealth that is produced in the first two steps. They are actually just circulating the money that is already created.
Wealth building here at home
Fortunately for us here in Ohio, we have a robust (and somewhat complete) economy. We are blessed with an abundance of natural resources (Step 1), we have a thriving and growing manufacturing industry (Step 2), we have a solid infrastructure and distribution system (Step 3) and we have some great Universities and organizations that are committed to developing the innovations of tomorrow (Step 4).
My hope is that as time goes on we will not lapse back into the skewed thinking that somehow we can have a strong state economy without a strong manufacturing industry. I think we’ve proved that that model doesn’t really work. No, today in Ohio, we have the opportunity to do more than just move existing wealth around, we have the resources, skills and people to manufacture it!
What are your thoughts on what is needed to produce real wealth?
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