Comment by mlyle

Fun fact: You should sell your seed corn, because the best hybrid seeds, crossed from especially made inbreds that you'd never want to use for yield, are so much better than the second generation crossing that you'll always lose money replanting.

There is never any guarantee that profits are long term or short term, or that your manufacturing specialization is going to remain useful, instead of being a dead end. Retaining specialization on, say, cathod tubes wasn't exactly profitable. See all the camera manufacturers that zigged when they should have zagged, and used their manufacturing strength to unprofitability. All of this is hidden by talking about 'manufacturing' in very large terms, but the real world doesn't work like that. Specifically, semiconductors were a very nice place to keep expertise in, and paid off. Internal combustion engines, and filaments for incandescent lighbulbs probably not.

Even in cases where we are looking at the same kind of manufacturing in multiple places, competitive advantages are lost. There are parts of Europe taht still have metallurgy and never attempted to divest, but lost comparative advantages because better technology came in at the wrong time in the capital depreciation curve: They invested heavily at the slightly wrong time, still had expensive labor, so they became far less competitive, at least for a while. Did they not pray enough to the manufacturing god? Did the Netherlands get lucky, or was sufficient dedication to manufacturing that led them to have ASML in their borders? Is the fact that Novo Nordisk found the most important pharmaceutical in the world a matter of Danish superior industrial policy, or did they just get lucky compared to the many other places with large investments in pharma that didn't get anywhere near that lucky?

The path dependence is not so predictable, and the path that makes you better today can lead you down a cliff. It's all gambles, and whoever claims they can predict what is the right one in the long run is being overconfident

>Manufacturing is the core example of path-dependent advantages, because (unlike what any econ 101 textbook teaches), marginal costs decline with increasing production quantity in the manufacturing sector. This means the more you make, the better you are at making more things!

Looking at how Apple said it would be impossible to get US chips, so much this. It needed a lot of investment to onshore chip production again. And we should onshore more high value manufacturing to keep the supply chain working in one place.

The EU has been better at keeping manufacturing competence, but I see a lot of these short term comparative advantage econ 101 ideas taking over in the EU as well.

The thing is there are also network effects, expertise building and marginal cost improvements to be built up in high value items and services.

The United States was able to build a tremendous economy by building up those systems while continuing to benefit from its older manufacturing base for decades.

The United States economy is far from perfect, but it hasn’t traded away a long-term asset for only short-term ones as you’re suggesting.

That last statement is absolutely true, but if you have a constrained domestic supply chain, high employee cost, and/or constrained margins on finished products, you're still going to have come out behind if you persist with domestic manufacturing rather than offshore. This is the calculus OEMs faced in the 1990s-2000s. The big bet that they all made is to assume relatively stable geopolitics, and that there wouldn't ultimately be a squeeze on the potential manufacturing constraints (labor, supply chain, capacity). Ultimately, it's proven to have been by far the smartest decision for high-vol / low-mix stuff: electronic components and consumer electronics (not to mention apparel and many industrial products).

Like I said in my previous comment, though, this doesn't mean the capability to build has left the US (or Europe). Just that the decision to continue investing in manufacturing things that aren't competitively profitable has been made and the capacity has been allocated to higher margin manufacturing (regulated industries, complex products, and products where customers are less price sensitive).

> . Unlike what Econ 101 asserts about maximizing comparative advantage being the most profitable strategy, there is absolutely no guarantee that following a locally-optimal comparative-advantage strategy is globally optimal over a long-term window,

I think there's little doubt that our change in allocation of resources has been advantageous versus staying an economy focused on primary metals and relatively simple manufacturing. Do you really feel otherwise?

Of course, economic assessments and the behavior of markets generally assumes free choice by participants. So there's always:

1. Geopolitical risks: state leverage can turn a local absolute advantage in e.g. producing war materiel into other advantages.

2. Sure, we could back ourselves into a corner, ultimately, by not being able to provide a key part of the value chain by following that gradient. (Geopolitics can be related, too, in that states can gather together lots of small advantages and use them in coordinated ways against other states).

So our state, of course, needs to focus on countering those actions of other parties. And maintaining some diversity beyond what is economically optimal can add resilience.

(One point I make in class: our textbook pretty much says that price controls are always dumb... but that there are plenty of reasons that a country might desire to have a surplus of food or to not be dependent upon another country).

The track record of those who would seek to centrally plan and optimize for some future outcome instead of following that profit gradient has been very poor. Not to say that it's never worked: but generally following the profit gradient has yielded better outcomes.

> because of (unlike what any econ 101 textbook teaches), marginal costs decline with production quantity in the manufacturing sector.

Unlike what any econ 101 teaches? Talking about LRATC, returns to scale, etc, is a big part of my unit 3. If you're not referring to that and instead e.g. Wright's law, that too is mentioned.

See IBM