“He that fails in his endeavors after wealth and power will
not long retain either honesty or courage.”

Not all change is progress. This simple statement is one of the dividing lines between right and left. An element of common sense to the conservative, it is denounced as timidity or a lame defense of vested interests by liberals and radicals. F.A. Hayek in his essay “Why I Am Not a Conservative” stated that “the liberal position is based on courage and confidence, on a preparedness to let change run its course even if we cannot predict where it will lead.” Hayek is a moderate liberal whose optimism about change is made bearable only by an apparent assumption that people adhere to basically conservative modes of behavior. More radical thinkers—Rousseau, Godwin, Marx, Marcuse—have urged change with different expectations about where it would lead. Certainly the changes over the last 30 years provide plenty of examples of decay and disaster. History only reinforces the conservative position that a commitment to “change” without thought of consequences is irrational.

In the social, political, or military spheres, those on the right easily agree that many recent changes have been for Samuel Johnson the worse. The aim of conservative public policy is to control events in the best interest of the United States, i.e., to foster changes that are beneficial while working to retard or reverse changes that are harmful. Only in the economic sphere do conservatives abandon common sense in favor of an unfounded liberal optimism: economics, alone among the activities of mankind, has an “invisible hand” that guarantees progress. Indeed, to listen to some exponents it would be easy to think that market outcomes were the result of divine intervention rather than the strategies of businessmen and governments pursuing gain.

Yet, as anyone in business knows, competition produces both winners and losers. The failure of individual firms can be devastating to those directly involved, as well as entire communities. But within a closed society this may only be a ripple, with the expansion of the victors making up for the collapse of the losers. However, on a global scale, things are different. Nations, not just firms, compete for wealth and power. The stakes are much higher. Summing costs and benefits across national boundaries is not valid. There are still fundamental differences between the loss of market share by GM to Ford or the shift of jobs from Ohio to Georgia, and the loss of market share to Nissan or a shift of jobs to Brazil. There is no consolation in being told that the decline in your own country has made the “world” a better place. There is no such entity as the “world”—only other nation-states that have gained at your expense.

Manufacturing Matters is an attempt by two Berkeley University of California economists to shake America out of the complacency of the “invisible hand” approach to international trade. Manufacturing is the central front in the global trade war and technology is:

revolutionizing production . . . creating a fundamental economic transition that puts the position of every nation in the international hierarchy of wealth and power, including the United States, up for grabs.

By value-added, manufacturing directly generates 24 percent of GNP. Cohen and Zysman, citing the 1983 Report of the President on the Trade Agreements Program, then add 25 percent of GNP for services “tightly linked” to manufacturing. Thus, manufacturing represents about half (49 percent) of GNP. It is this linkage that forms the core of the authors’ argument. “Industrial chains” link a number of manufacturing and service sectors. Telecommunications is one example among the many cited.

Will American companies dominate international trade in communications if they are not leaders in computers, semiconductors, telephone switching equipment, launchers, satellites and fiber optics?

No, and our rivals understand this. Foreign industrial policies target key links in the chain, hoping to capture a few strategic pieces so the rest of the industrial chain can be pulled under their control.

It is often argued that the shift from an industrial economy to a service economy is a natural evolution and thereby a sign of progress. Cohen and Zysman note that while all advanced nations are making this shift, it is important to distinguish between types of services. Engineering, software design, social work, and fast-food are all services, but they are not of equal value to an economy, nor do they produce the same income to those employed in them. “Lose manufacturing and you will lose—not develop—high-wage service jobs.”

High-wage service jobs are tied to manufacturing by high technology. “Most high-tech products are producer goods, not consumer goods.” Lasers, robots, computers, bioengineering, and machine tools are all linked to improved methods of production. “America must control the production of those hightech products it invents” for two reasons. First, “production is where the lion’s share of value-added is realized. It is where the ‘rent on innovation’ is captured.” The profits come from using the technology, not in developing it. Without an industrial base, R&D becomes too expensive to sustain. Also,

unless R&D is tightly tied to the manufacturing of the product—and to the permanent process of innovation in production now required for competitiveness in manufacturing—R&D will fall behind the cutting edge of incremental innovation.

In short, “you cannot control what you cannot produce.” Manufacturing, the best service jobs, and technological progress are an integral whole. The aim of policy should be “not a transition from an industrial economy to a service economy, but from one kind of industrial economy to another.” If postindustrial means nonindustrial, then a postindustrial America will be an “impoverished” America.

Cohen and Zysman neatly demolish the notion of separate economic stages. Those who argue that the transition from industry to services is like that of the earlier shift from agriculture to industry make a fundamental error if they conclude that industry can be abandoned. America did not abandon agriculture when it became an industrial power. Instead, agricultural production continued to expand at a rapid pace. The sectors reinforced each other, as mechanization increased farm productivity. The strength of the American economy has been its ability to build on success without giving up strategic sectors that would make it vulnerable in the future.

More than just money and jobs are at stake. Military power depends on industrial capacity and technological innovation. “An erosion of our competitive position in a critical set of industrial chains would constitute a massive reduction in our strategic independence and diplomatic options.”

Diverse, robust and leading-edge U.S. producers in [semiconductors, computers, telecommunications, robotics, machine tools] and other industrial chains are more critical to U.S. national security at the current time than to most other nations . . . whatever the ups and downs of military spending, our basic security posture is built on the assumption that America will maintain, round after hurried round, a permanent lead in a rather broad range of advanced industrial technologies.

The economies of scale in manufacturing and the high cost of R&D make a large commercial industrial sector a necessity. It lowers the cost of producing military equipment because much of the fixed cost of production and research are underwritten by the commercial side of the enterprise. Private American firms must be able to maintain, under normal peacetime conditions, the productive capacity and R&D programs needed in an emergency. Otherwise, the government will have to structure its own reserve capacity at enormous public expense, or the nation will become dependent on uncertain foreign supplies. Both are high-risk, high-cost alternatives to the protection of a large and ongoing commercial industrial base.

American productivity has lagged behind Japan’s, West Germany’s, and other rivals’. Cohen and Zysman urge greater investment in R&D and reindustrialization. Industry must “automate not immigrate.” This will require greater capital formation because advanced industrial systems are capital-intensive. The authors make the usual plea for a tax system that encourages savings and discourages consumer debt. The raiding of the capital pool to fund government deficit spending must also end. Instead, the government must contribute more to R&D and be prepared to subsidize private industry in key areas.

This represents a turnabout from current policies which have raised the cost of capital to business, increased taxes on industry, and promoted labor-intensive growth with stagnant productivity. It is ironic that American competitiveness has declined under a supposedly pro-business administration. Yet, the “supply-side” failure to live up to its billing stemmed from too narrow a focus on individual tax rates, a factor with weak and indirect links to savings and business investment.

The unprecedented string of large trade deficits that has plagued the U.S. economy since 1982 must end. These deficits have slowed economic growth and converted the U.S. into the world’s largest debtor. Neither cheap labor nor cheap dollars will end the deficits. Trade policy must be part of industrial policy as it is among our rivals, who “accept that industrial promotion and the direct support of private interests is a legitimate function of government.” While the U.S. talks of “free” or “fair” trade rules, leaving the market to determine results, foreign governments “are increasingly negotiating directly about trade outcomes,” seeking control of production and markets. The U.S. must realize what is at stake and develop strategies to protect its national economic interests.

The U.S. must become what Cohen and Zysman call a “developmental state” aiming at “the upgrading of the nation’s position in the international economic hierarchy.” Policies “to shape the national production structure and the pattern of comparative advantage to assist the evolution of wages and production” are well-known and have been used successfully for centuries. Japan did not invent mercantilism, only applied it, while we slept in a liberal dream world. Cohen and Zysman do not go into the details of specific policies. Each strategic sector will require its own policy mix. Their purpose is not to urge a particular strategy but to prod economic policymakers into starting to think in strategic terms. It’s a message that deserves wide attention.

The authors do not deal much with the issue of “protectionism.” But they do repeatedly cite the advantages Japanese and European industries have gained by having secure domestic markets that serve as a base for achieving economies of scale and reducing the risk of new investment. And it is hard to imagine a way to end the trade deficits without curtailing imports.

Historically, such a policy approach has been favored by conservative/ nationalist regimes, including American administrations until quite recently. No nation can remain a Great Power if its economic core is controlled by foreigners or if its powers of production lag behind its rivals. The loss of America’s economic independence and industrial supremacy is a change for the worse.

 

[Manufacturing Matters: The Myth of the Post-Industrial Economy, by Stephen S. Cohen and John Zysman (New York: Basic Books) $19.95]