Heavy Industry is Hard Industry

Today, I’m focusing on the UK and I want to start off with two observations. 

My first observation is on the changing composition of the UK economy over time: the UK long ago ceased to be an industrial powerhouse, as it long ago got rid of the economic heritage of the Industrial Revolution, the engineering might of Isambard Kingdom Brunel and the building aptitude of the Victorians. 

As a UK House of Commons Library report says “Since 1990 the share of the economy attributed to services has grown from 70% to 80%, while the share attributed to manufacturing has decreased by a similar amount, from 17% to 9%.” It’s been a one for one change, whilst other industry groups - construction, agriculture, mining and utilities - have remained stable.

Data from the Office of National Statistics shows how services have come to dominate (light green), whilst manufacturing and heavy industry (dark green) are now less prominent.

The change is even more stark when we look at jobs by industry: vastly more people are employed in service roles than in other industries. Of course, looking at job share provides only a limited perspective. For example, agriculture, forestry, and fishing account for only 1.1% of total jobs. Still, we produce and consume more food than ever before because technology has made agriculture more productive - per person and square meter - than ever before. Increased productivity is good! If you can get the same output with fewer inputs, that is progress. Whereas you once needed a small army to harvest, you now need only a few people. Farming is highly optimised, automated and increasingly roboticised. In comparison, health and social care isn’t. It still requires a small army to provide healthcare, which is why NHS is the biggest employer in the UK, with about 1.5 million employees.

Observation number two is the wildly economic output and strength of different regions in the UK. Geographically, the UK is a highly economically unequal place. It’s dangerously unequal and is a significant drag on the economy when all your eggs are in one basket: London. 

The US has the technological superpower of Silicon Valley on the West Coast. It’s got the oil heartlands of Texas, the financial powerhouse of New York, the government centre in Washington DC and farmland across the mid west. China, likewise, has multiple economic powerhouses: Shanghai has financial services, Beijing has the government sector, Shenzhen has technology, and Guangzhou has manufacturing. 

The UK has London. The answer is always London. You see this mostly clearly in wages across the UK. I don’t care how great a world city London is (and it is), the answer cannot always be London.

Neither of these observations is new, but in the 24 years of the third millennium so far, no one has been able to reverse the trend. Many economists believed that as long as overall economic output continued to grow at an acceptable rate, then the financial services dominance of the UK, centred on London, was a viable economic path. I was one of those. 

But it isn’t acceptable. Being too reliant on any one industry or city leaves the UK exposed to exogenous shocks and disruption and, over time, slows innovation, as innovation doesn’t happen at the same pace across all industries at the same time. It’s also severely limiting to the labour force and reduces our presence on the global stage.

There are many reasons for the UK having a poor manufacturing and industrial base. As is becoming increasingly apparent, the industrial price of energy is far too high in the UK - the high cost of energy is a significant barrier to any sort of manufacturing. 

It is simply way more expensive to produce anything in the UK - which could have all been solved if we built nuclear power plants, but ….

… yeah, about that.

It can never be overstated: technology has had, for over fifty years, a way to produce very cheap, abundant electricity with vastly reduced carbon emissions - it is a (wrong) policy choice not to do so. 

Other things that hurt the UK’s manufacturing capability are that it is too expensive to build, planning applications take forever, the rail network is awful, labour unions are unhelpful, and housing is too expensive. As a recent report by UK Foundations stated: “the most important economic fact about modern Britain: that it is difficult to build almost anything, anywhere.”

I want to linger on the fact that housing is too expensive. Everyone kind of knows that entrepreneurship and new company formation are critical to future economic growth. It is why entrepreneurship is the fourth factor of production. There are common calls to take more risk, and I’m absolutely aligned with those. But here is a pertinent fact: if you are a graduate out of university, even with a good job, you can’t save for a house deposit until you are 35. Or you have rich parents. So the economic incentives are clear: get a good job in technology, banking or consultancy (actually, don’t do consultancy) to have a chance of buying a house. It disincentivises risk taking.

Expensive housing is a drag on everything. And why is housing so expensive? Because the economy is so highly concentrated in London, and that’s where the jobs are. And the vicious cycle goes round and round and round.

For the UK to not enter complete economic decline, it will need to develop a manufacturing and industrial base, and that’s gonna be hard for anyone to do. Now, the US technology sector has realised the importance of manufacturing and industry, and thanks to cheap shale gas and fracking and lots of space, the USA can still build things.

But in the UK, we can’t, which is why, even though the UK gets a high volume of venture capital investment, it mainly goes to Fintech, software and life sciences.

Don’t get me wrong, software and artificial intelligence will be critical in heavy industry, manufacturing, global supply chains and freight, rail, plane and car transport. As I’ve said before, everything is interconnected. However, the UK doesn’t really need yet another Fintech or SaaS company, and it for sure doesn’t need more hedge funds. The UK does need manufacturing and industry. Let’s build something in the real world. Let’s build with atoms. It needs more talent willing to go into heavy industry, but for that to happen, we need better economic incentives. Energy and housing costs need to be reduced. It has to get easier to build. The transport network needs to improve.

An economist looks at these facts and despairs. And if you are not despairing, you need to pay more attention. An entrepreneurial technologist looks at these facts, despairs … and then sets about changing them. Now, a little helping hand from the government with some rare good economic policy would be helpful, but don’t hold your breath: entrepreneurs, you’ll have to do it yourselves. 

An ardent industrialist can do these things and solve the UK’s economic malaise - but heavy industry is hard industry. There are so many problems to solve, but take solace from industrialists like Titus Salt. When he built Salt’s Mill, a textile Mill near Bradford, England, he wanted his workers to be closer and live in better conditions than those in Bradford at the time. So, he built an entirely new village for them - Saltaire.