“One scene of arts, of arms, of rising trade . . .”

–    James Thomson


Kevin P. Phillips: Staying on Top: The Business Case for a National Industrial Strategy; Random House; New York.



Fiore and Charles F. Sabel: The Second Industrial Divide: Possibilities for Prosperity; Basic Books; New York.


David F. Noble: Forces of Production: A Social History of Industrial Automation; Alfred A. Knopf; New York.


”Phillips hasn’t just missed the boat. He seems oblivious to the fact tha.t it has sunk.”

                National Review


The period running roughly from 1965 to 1980 was one in which America was in decline both at home and abroad. The loss of military super­ iority and the war in Vietnam; eco­ nomic stagnation and record inflation; tears in the social fabric from crime, drugs, and abortion; and the political destabilization engendered by Water­ gate, the New Left, and congressional government. These developments all drew policy responses by conservatives to counteract their effects. The right gained national power on the promise not only to conserve but to restore America’s greatness.

There is, however, one major problem which the right has failed to confront. The problem of America’s loss of industrial leadership. Although total industrial production in the U.S. continued to grow during the period, progress was slow. In some key sectors, such as steel, autos, machine tools, and petrochemicals, there were actual declines. American manufacturing productivity increased at a rate only one-sixth that of Japan. Imports penetrated the U.S. market at an increasing rate (from 4. 3 percent in 1965 to 13. 9 percent in 1980) while America’s share of world exports fell. In 1984, the U.S. posted a record trade deficit of over $120 billion. Nearly three million jobs in industry were lost. For an economy which still cannot reduce unemployment below 7 percent, this is not a trivial matter.

The industrial policy debate has raged for a decade. It began with the defense industry. After the massive resupply effort mounted during the 1973 Yom Kippur War, it was discovered that the U.S. industrial base did not have the capacity to replace the equipment shipped to Israel rapidly. From here, concern spread to the rest of the industrial sector. The worsening trade situation in the 1970’s brought more attention to the problem as factories closed and unemployment in­ creased. Yet, despite the speeches, books, and articles, little had been done. Defense Secretary Caspar Weinberger in his 1983 report noted:

The serious decline in our economic base and in our leadership of the industrialized world …   problems which remain in the defense industry are, in fact, a sub-set of our overall economic industrial problems.

The debate has accomplished so little because the two schools which have dominated the debate have little to offer. The neoliberal advocates of an industrial policy have had a not-so­ hidden agenda behind their surface concern for productivity, capital formation, and technology. That agenda includes increasing the direct management role of the Federal government in business and in saving the power of organized labor. Their aim is to have the Welfare State absorb the corporate sector. Their tracts usually attack business management and give pride of place to redistribution over re­ industrialization.

Against these plans, the libertarians have been successful in arguing that it is better to do nothing than to bring back the New Deal. However, the libertarian position is based on the classical theory of free trade, a theory which has never been an accurate description of reality. The inability of so many libertarians to take account of the part played by nationalism and power politics in international economics makes their input largely irrelevant.

Kevin Phillips offers a third option which should appeal to conservatives as much as it does to businessmen. He uses the term industrial “strategy” rather than “policy” to emphasize that his role for government is to create an environment within which American business can successfully operate, rather than have government play a direct role in making business decisions. He places this strategy in the center because it calls for a government more active than libertarians can accept but a policy committed to pro­ business objectives which are anathema to the left. Since his book is primarily directed to the right, he makes a point of attacking the libertarians who have had their most paralyzing effect on conservative opinion.

Free trade no longer exists, if it ever did. The advanced nations which have built large industrial complexes cannot allow them to collapse without jeopardizing their long-term economic strength. Developing nations realize the importance of heavy industry and technology-the multiplier effect of high value-added production and employment-and seek to build a strong manufacturing core. At stake is control of the world’s most strategic wealth-producing units. The key to success is the expansion of markets both at home and abroad. The stakes are too high to trust the outcome to uncontrollable events in other nations or to a global “invisible hand.” Competition produces winners and losers. Those who do not play to win will lose.

Phillips provides a solid overview of the “neomercantilist” policies pursued by the expanding Asian economies led by Japan and by the Europeans. Foreign nations commonly subsidize their industry either directly or through low interest loans and public investment in research. The fact that capital costs to U.S. firms are twice as high as for foreign competitors is of prime importance. Foreign nations take import restrictions, export incentives, business tax breaks, cartels, state preferences in buying, and government coordinated marketing arrangements as common­ place. The economic success of the capitalist nations, especially of those in the Third World, have been pointed to with pride by conservatives as proof of the superiority of private enterprise over socialism. Yet, this success has not been built on the capitalist theories of Smith and Ricardo as much as on the capitalist theories of Mun and List. This should not disturb conservatives. As Phillips argues:


The managers of Japan, Inc., have used the leverage of government planning and power to promote a generally conservative economic system and set of cultural values… Progressive academicians prefer to skirt such recognition, that the values of MIT! are not those of the Harvard Faculty Club …that ‘industrial policy’-a neomercantilist business-government partnership-has enjoyed its most substantial successes under conservative or right-wing regimes like those found in Japan, Gaullist France, Brazil and Taiwan. That’s probably because such governments have meant business in both senses of the word.


Conservatives long ago discovered that on the issues of national security and social order there was more to their beliefs than the sparse contents of classical liberalism. It is time that that same discovery w s made in regard to economics. It would actually be a rediscovery. It was not too long ago that most conservatives shared the views of Alexander Hamilton’s “Re­ port on Manufactures,” Henry Clay’s “American System,” and the Republican protectionism of the Gilded Age, policies which supported America’s rise to Great Power status.

Phillips lists 15 needed reforms. The most important is a new cabinet Department of International Trade and Industry (DITI) combining the Commerce Department with the Office of the U.S. Trade Representative. The aim would be to create a unified policy to replace the ad hoc measures which result from the tangle of existing agencies, all of which have their own special interests. The U.S. would not be the first to copy Japan’s MITI; most nations have an equivalent body. The Thatcher government acted to combine its trade and industry ministries in 1983.

Phillips’s other major points include tax reform to spur capital formation by shifting from income taxes to consumption taxes; increased export credits; the removal of antitrust barriers to joint research and export Ventures; increased support for R&D and for the education of students in the sciences; and a restructuring of labor­ management relations to involve the worker more closely with the firm. Worker support for increased productivity would be purchased with improved job security and retraining when needed.

An outright return to protectionism can only be avoided if foreign nations can be -persuaded to open their markets to more U.S. exports and to curb some of their own “unfair” export activities. Phillips favors such negotiations. However, if reciprocity cannot be negotiated, the U.S. may have to take more direct steps to safeguard its domestic market in lieu of expanding into foreign markets. The U.S. ac­ counts for more than one-quarter of the entire world economy. Unlike many other nations, our internal market is sufficient to maintain our industrial base, providing American firms are free to dominate it

Phillips’s proposals are the result of two years of interviews with leading corporate managers and his usual de­ tailed reading of public opinion. Business feels that the government should be an ally in the global competition for markets and jobs. The Reagan Administration has moved the state from hostility to neutrality, but that still leaves U.S. firms outgunned by business-government partnerships in other lands. Supply-side economics has helped, but has not gone far enough.

In the past, industrial policies have been favored only by specific regions, mainly the Northeast, but now Phillips finds support nationwide. The movement of business from the Frost­ belt to the Sunbelt has served to involve all parts of the country in the global economic war. Imports threaten both low-tech and high-tech firms. There are steel mills in Alabama as well as in Pennsylvania. Polling shows clear majorities behind proposals far stronger than those made by Phillips. If conservatives do not act, an opportunity may be opened for the liberals to return to power on the economic issue. However, since the underlying theme of an industrial strategy is nationalism, the right is the logical place from which a credible policy should emerge and gain support.

Examples of the liberal approach to industry which might gain ground if conservatives fail to address the issue adequately are provided by Michael Piore, Charles Sabel, and David Noble. Piore and Sabel are labor economists primarily interested in worker control of business and other “humane alternatives” to the existing system of corporate capitalism. Their book sports endorsements from professional egalitarians Lester Thurow and Michael Harrington.

What Piore and Sabel label as the first “industrial divide” is generally called the Industrial Revolution: the shift from small-scale production by skilled artisans to mass production by semi-skilled factory workers. They are unhappy that this   shift   occurred because it led to Big Business and the subordination of the working class to the dictates of corporate planning and economies of scale. It is their contention that the current crisis in manufacturing can provide the opportunity to move back to a system of small-scale production that can be decentralized and thus subject to more democratic decision-making.

The rationale is that computer­ based production techniques allow greater variety and flexibility. Goods no longer need to be standardized to fit the assembly line. There is room for smaller firms doing “customized” production. This may be true, but it hardly leads to a rejection of mass production. Computer-directed machinery, robots, are still subject to economies of scale and will become even more so as the capability/cost ratio for computers increases. Robots will actually allow large firms to service smaller submarkets with efficiency.

Social historian David Noble takes a look at the evolution of business, but with the same bias. His thesis is that mass production techniques were adopted so as to shift power from the skilled workers to the new management class by centralizing authority. He sees the appeal to economic efficiency merely as a tactic for disarming critics of inequality.

Critics of Big Business have always understated the power of mass production, yet that power continues to grow. It is why the global battle for market share is so intense. Studies by the Boston Consulting Group and the Strategic Planning Institute indicate that doubling output can cut per unit costs by 20 to 30 percent. Scale economies are not necessarily exhausted even when a firm’s share of the world market exceeds one-third. The Japanese and West Germans were the first to put this principle to work in their drive for ever-larger export markets. Americans were slow to recognize that their shrinking market share, both at home and abroad, made their position steadily weaker.

Ironically, the “friends of labor” attack the very system which has elevated industrial workers into the middle class. Fiore, Sabel, and Noble are heading in the wrong direction for the wrong reasons. That is why they must argue against allowing economics or technology to determine industrial structure. They favor decisions made by political and social forces. In the early 1800’s there were attempts to establish communes and utopian fac­ tory systems as alternatives to mass production, but they folded because they could not compete against the new, more efficient capitalist methods. None of the three authors care for this kind of competition, but it is inevitable. Their pessimism about the ability of “progressive” forces to move the country in their direction in the face of “corporate privilege” is the only bright spot in their presentations.