In 1980, one in four British workers was employed in the manufacturing sector. Today, fewer than one in 12 is. The number of manufacturing workers has fallen from 6.5m to 2.5m over this period. Britain, it seems, no longer produces anywhere near enough things. Last year Peter Mandelson, then business secretary, said we needed less financial engineering and more real engineering. The present government appears to agree.

But the argument is fallacious, and the policy implications are wrong. Britain produces more manufactured goods than at any time in its history—because although there are fewer workers in the sector, each is now much more productive. A typical manufacturing worker produces almost four-and-a-half times as much as their equivalent did in 1980. That rise in output per person outweighs the fall in the number of workers, so overall manufacturing output is around 70 per cent higher than it was in 1980.

Some people will argue this figure should be still higher—that if we had achieved our rise in productivity growth while maintaining the number of employees, then we would now produce almost four-and-a-half times as many manufactured goods. But this is not a sensible proposition. I own a toaster, dishwasher, washing machine, and so on. But I don’t need more than one of those products. We reach satiation point for many manufactured goods relatively easily. That is why new products—flat-screen televisions, iPads—are important. Unless there is something new to buy, a lot of consumers replace items only when they wear out.

In contrast, we are nowhere near satiation levels for many services. As people get richer, they eat out and go on holiday more often, or pay for healthcare. This preference to spend more on services, combined with the productivity increase, means that the number of manufacturing workers is bound to decline as a country gets wealthier, even without competition from low-wage economies such as China. That is why Britain, the US,…

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