The Third Wave Rolls On

( "The Third Wave" )

Here is a bit of what noted economist and NYTimes columnist Paul Krugman had to say back in '94, before he went insane:

...We still are not a country that is used to having a lot of international trade for a long time, such as Britain. Britain has three times as much international trade, relative to their economy, as we do, and they actually talk about it less than we do. They are used to the idea that, sure, a lot of output gets exported, and a lot of consumption gets imported, and they very rarely obsess about their competitive position.

What is true now is that, despite the increase in international trade, we are more than 70 percent a service economy. Very few services can be sold internationally because they are not transportable. Even quite a few of the goods we produce are not easily transportable. For example, at this point, while the great bulk of the TVs that are sold in the United States are from foreign-owned firms, nearly all of the picture tubes are made in the United States.

Picture tubes turn out to be something that are hard to ship internationally because they break, so there is a manufactured good that is not very tradable. And so, overall, in [1993] imports were about 11 percent of U.S. gross domestic product. A hundred years ago, they were about 8 percent.

The reason that we have the impression that it has increased by leaps and bounds is partly that there was a great collapse in international trade because of the two world wars and the depression. If you go back to when John F. Kennedy was president, we still only had about 4 percent imports, so we have sprung back, but in fact, we are not all that globalized, even now. [...]

Q: Will the U.S. be more dependent on trade in the future?

A: Over the last century, there have been two offsetting forces operating on international trade. On the one hand, transportation and communication costs have continued to fall so that the ability to ship goods around the world is much greater than it was. On the other hand, we've increasingly become a service economy and services remain, by and large, non-tradable.

Q: Why have we become more of a service economy?

A: Manufacturing has become less important for the same reason that agriculture earlier became less important. [Emph. add.] [...]
Productivity has grown in manufacturing, which means we need fewer and fewer workers and the prices get lower so we spend more and more of our income on the things we can't automate, which tend to be in the service sector.

The actual ratio of the output of manufacturing - the constant dollar output of manufacturing's share of the economy - has been almost exactly constant for the past four years ['90 - '93]. But the share of the value of the economy that originates from manufacturing is steadily declining, and that's all because of the higher productivity growth. That's true around the world.

If you look at any particular manufacturing industry, you discover that the international trade in that industry has grown, that the industry has been more finely divided into little slices of value added in different parts of the world, and you say, "Wow, globalization has increased by leaps and bounds." But then you look at the overall numbers and discover that the share of trade in the economy has not increased very much. The reason is that more and more, the economy is concerned with producing things that can't be traded.

In the long run, everything will be tradable. In the millennium, you will be able to get all of your services by slipping on your virtual reality helmet and have them delivered over whatever the future Internet is, right?

- Paul Krugman