You can hardly pick up a newspaper these days without reading yet another glowing account of the golden prospects supposedly in store for the United States in the so-called postindustrial era. If media comment is any guide, almost everyone these days is convinced that new information-based businesses and other postindustrial activities have superceded manufacturing as the font of prosperity.

There is, it seems, a natural progression here. Just as in the early nineteenth century the United Kingdom exploited the bountiful possibilities of the manufacturing age to become the world�s leading economy, a far-sighted United States is now poised to lead the world in a leap to a still more sophisticated level of economic endeavor in the postindustrial age.

Hitherto this euphoric cast on the United States�s so-called New Economy has been subjected to remarkably little reality checking. But the truth is that the United States�s steady retreat from manufacturing cries out for close scrutiny. For there are major holes in the case for postindustrialism. Not only do those who advocate postindustrialism--let�s call them postindustrialists--overestimate the prospects for postindustrial services, but they greatly underestimate the prospects for manufacturing. A major part of their problem is that they do not understand how sophisticated modern manufacturing truly is.

Before looking at the reality of modern manufacturing, however, let�s first be clear about postindustrialism. The term covers a bewildering variety of businesses whose only obvious shared characteristic is what they are not : they are not manufacturing. Broadly defined therefore virtually all service industries might be considered part of the postindustrial economy. For the purposes of this book, however, we will bend over backwards to be fair to the postindustrialists and judge their case on those areas of the service economy whose prospects they regard as particularly promising. We will therefore be focusing mainly on the information industry, which as defined for statistical purposes recently by the United States government consists of publishing, movies, broadcasting, telecommunications, and computer software. We will also include within our definition of postindustrial services such other advanced areas of the service economy as financial services, data-base management, the Internet, consulting, accounting, advertising, and the law.

One confusing point that ought to cleared up right away is that some statisticians have recently started classifying computer software as a manufacturing industry. This is obviously a perverse use of words and one that is explicable only as an effort by embarrassed government officials to cover up the extent to which real manufacturing has declined in certain key Western nations. Throughout this book, therefore, we will treat software for what it obviously is--a postindustrial service.

Our task is to weigh the economic merits of postindustrial activities against those of what might be called hard industries. This term is intended to denote capital-intensive, technically sophisticated forms of manufacturing. Thus it excludes most types of final assembly of consumer products, which is a generally labor-intensive and unsophisticated activity. This distinction needs to be emphasized because postindustrialists implicitly define manufacturing to mean merely labor-intensive work of the assembly type. In so doing they set up a straw man--for there is no question that, in an increasingly integrated world economy, many kinds of consumer products can no longer be assembled economically in high-wage nations. Overlooked by the postindustrialists, however, assembly is only the final, and generally by far the least sophisticated step in the making of modern consumer goods. Earlier steps such as the making of components and materials are typically highly sophisticated. And even before the making of such components and materials, there is a still more sophisticated level--the manufacture of the production machines that make the world�s components and materials.

These higher levels of manufacturing used to be the backbone of American prosperity in the days of undisputed American leadership of the world economy in the 1950s. Unfortunately for the United States, they have now migrated elsewhere--and in particular to nations that have adopted carefully honed national strategies to boost their manufacturing prowess.

One nation that has been outstandingly successful in expanding its share of advanced manufacturing in recent decades is Japan. The history of the Japanese electronics industry in particular is an object lesson in how a nation can climb the ladder of manufacturing sophistication. Having started out in the 1950s as a lowly assembler of imported components, the Japanese electronics industry long ago phased out most of its assembly operations to make way for more sophisticated activities--albeit activities that are almost entirely overlooked by consumers and even by business reporters and economic commenators. Among the most notable of such activities is making high-tech electronic components. The Japanese electronics industry has also moved heavily into making the advanced materials and production machinery used throughout the world electronics industry. Among other nations that have been similarly successful in advancing to ever more sophisticated levels of manufacturing are Germany, Switzerland, and Singapore--and, as we will see, in common with Japan, these nations have generally outpaced the United States economically over the years.

That said, we should make clear that this book does not seek to disparage all postindustrial activities, let alone all service industries. Nor does it hold up all manufacturing activities as inherently superior. In fact, advanced nations clearly need a judicious balance of manufacturing, postindustrial services as well as, of course, traditional service industries. Apart from anything else, many postindustrial services are necessary to support and enhance a nation�s manufacturing base. The point, however, is that postindustrialism should not be embraced blindly just because it is fashionable. Nor should nations lightly allow their manufacturing prowess to drain away.

For, as we will see, postindustrialism entails many hidden drawbacks. Of these the most important are:

* An unbalanced mix of jobs.
* Slow income growth.
* Poor export prospects.

In essence, these drawbacks constitute--in baseball terms--three strikes against the New Economy.

Strike 1 against the New Economy: a bad job mix

The most obvious problem with the New Economy is that it creates an unbalanced mix of jobs. Whether we are talking about financial engineering, legal services, computer software, movie-making, healthcare, broadcasting, database management, consulting, scientific research, or telecommunications, most postindustrial jobs are for people of considerably higher than average intelligence--typically people who rank in the top 20 percent in I.Q. tests, if not in the top 5 percent or even 1 percent. In this regard, postindustrialism contrasts sharply with manufacturing, which, of course, generally creates a well balanced range of jobs.

For workers who lack the rarefied talents needed to succeed in postindustrial services, therefore, the United States�s shift to the New Economy is little short of a disaster. In fact their job prospects are so discouraging that even the postindustrialists don�t bother to sugarcoat the pill. As estimated by the postindustrial economic commentator Michael Rothschild, up to 20 percent of the American work force will be marginalized by the move to an information-based economy in the years ahead. That amounts to a shocking 25 million people--or roughly four times the total number of jobless workers in the United States as of 1999!

Yet Rothschild and his cohorts see the sacrificing of such a large proportion of the work force as not only inevitable but even acceptable--because the collateral advantages of postindustrialism for the rest of the economy are supposedly so large. The postindustrialists imagine in particular that postindustrialism is a formula for generally fast growth in incomes. Would that it were so. It is time to consider the second strike against the New Economy.

Strike 2 against the New Economy: slow income growth

That the United States�s drift into postindustrialism results in weak income growth is one of the most serious, albeit one of the least recognized, drawbacks of the New Economy.

Yet the evidence is undeniable. Nearly two decades after the United States began its fateful drift into fullscale postindustrialism, international economic comparisons consistently show that Americans have consistently lagged in income growth in the interim. The ultimate authority on this is OECD in Figures, a yearbook published by the Paris-based Organization for Economic Co-operation and Development (OECD). For those who believe in the superiority of the United States�s postindustrial strategy, the 1998 edition of this yearbook made distinctly chastening reading. It showed that, with a per-capita income at last count of just $27,821 a year, the United States trailed no less than eight other nations. These included Japan, Denmark, Sweden, Germany, and Austria, all of which devote a larger share of their labor force to manufacturing than the United States. Most telling of all was the performance of Switzerland, a manufacturing-oriented economy whose per-capita income of $41,411 was the highest of any OECD nation. Although in the popular mind Swiss manufacturing industry is more or less synonymous with cuckoo clocks, Switzerland�s real strength lies elsewhere. Switzerland is in fact a world leader in machine tools and in sophisticated equipment for the textile, chemical, and electricity generating industries. As such, it is the very model of an advanced manufacturing economy.

That said, not all the world�s high income nations are noted for their large manufacturing sectors. In fact the same OECD yearbook showed that the United States was surpassed in incomes by two countries with quite small manufacturing sectors, Norway and Luxembourg. But even here, was little to encourage the postindustrialists. Take Luxembourg. With 17.0 percent of its labor force in manufacturing versus the United States�s 17.3 percent, it is in fact hardly more deindustrialized than the United States. Moreover it owes its income edge to a unique factor that the United States clearly cannot hope to emulate: it is a major international tax haven whose receipts of foreign financial flows--many from questionable sources--are vast in relation to its tiny population of 418,000. Norway�s non-manufacturing prosperity too is an equally special case. Why? Because with a population of just 4.4 million, Norway ranks as the world�s second largest oil exporter after Saudi Arabia!

In any case, the absolute levels of incomes we have been discussing so far are less important than the pace of income growth. And here the facts are even more clearly against the postindustrialists.

A particularly appropriate starting point for any analysis of income growth is 1980. This was the year when the merits of postindustrialism were first widely debated in the United States. The debate began after the social philosopher Amitai Etzioni published a gloomy analysis of the United States�s deindustrialization. His concern about the United States� then incipient drift out of manufacturing was widely challenged by many feel-good commentators, who proceeded to enunciate the now widely accepted doctrine that a shift to postindustrialism boosts the United States�s income growth.

Yet with almost no exceptions, manufacturing-oriented economies have outpaced the United States in income growth in the interim. Take the sixteen-year period to 1996, the last year for which full OECD figures are available as this book goes to press. In that time, the United States
boosted its per-capita income at current prices--that is before adjustment for inflation--by a total of 134 percent. Although at first sight this seems impressive, it was bested by no less than twelve other OECD nations. In order of income growth, these were South Korea, Japan, Portugal, Ireland, Luxembourg, Austria, Italy, Spain, Denmark, New Zealand, Germany, and Switzerland. And with the single exception of Luxembourg, all these nations boasted a greater commitment to manufacturing employment than the United States. In fact many of them are renowned for their outsized manufacturing sectors--most notably Germany, Japan, and South Korea. Less well known, but perhaps even more significant, Spain and Ireland have pursued determined national policies to build their manufacturing sectors in the last three decades and they too have been rewarded with notably superior income growth.

If these manufacturing-oriented nations had outperformed merely the United States alone, the evidence would be convincing enough. But in fact they have also outperformed several other nations that have been almost as enthusiastic as the United States in embracing postindustrialism. Perhaps the most notable case in point is the United Kingdom, whose cumulative income growth as measured in current dollars in the sixteen-year period came to just 106 percent. This put it twenty-first in a field of twenty-six OECD nations. Meanwhile Canada, another rapidly deindustrializing nation, mustered income growth of just 81 percent, placing it second to last (ahead only of perennially ill-starred Mexico).

Given the strength of the statistical evidence to the contrary, how come the postindustrialists ever considered the information economy a superior formula for income growth in the first place? In essence they have been blindsided by a subtle fallacy in economic reasoning. This fallacy is clearly apparent in the views of, for instance, John Naisbitt, who as the author of Megatrends was one of the earliest cheerleaders for postindustrialism. Noting correctly that the wages of United States�s postindustrial workers are generally much higher than the American average, Naisbitt goes on to jump to the completely fallacious conclusion that a general shift by the United States into postindustrialism will result in a general boost to wages. The fallacy here is Naisbitt�s implicit assumption that postindustrial wages are high by dint of the innately superior economic virtues of postindustrial services. In reality, of course, the high wages paid in typical postindustrial activities such as software merely reflect the fact that such businesses generally recruit exceptionally intelligent and capable workers--in essence workers who could expect to earn superior wages in almost any field they chose to enter. And in particular such workers could earn at least equally high wages in a manufacturing-based economy. Meanwhile Naisbitt utterly overlooks the plight of the rest of the work force, and in particular millions of ordinary workers who are left out in the cold by the shift to the New Economy. And it is their plight, of course, that is behind the United States�s persistent underperformance in international comparisons of income growth.

That said, many postindustrialists continue to cling doggedly to their faith in the New Economy�s superior income performance. So how do they explain away the contrary evidence? Basically they raise various objections to the methodology underlying the OECD comparisons. They seize, for instance, on the fact that the period under consideration does not include 1997 and 1998, which happened to be years when such manufacturing-oriented economies as South Korea and Japan suffered well-publicized economic problems. But actually this makes little difference to the outcome. For a start even if we exclude South Korea and Japan from the discussion, we are still left with many other manufacturing-oriented economies that have clearly been beating the United States in income growth and/or absolute income levels.

In any case two bad years are not remotely enough to eliminate South Korea and Japan from the reckoning. Take South Korea. In the sixteen years to 1996, its cumulative income growth came to a stunning 546 percent. By comparison with this performance, the subsequent strains South Korea has suffered have been no more than a speed bump. In fact the likelihood is that when we have all the figures available to us, we will find that South Korea still remained far and away the league leader in income growth for the entire period from 1980 to 1998.

Equally in the case of Japan, the strains suffered in 1997 and 1998 were nowhere near so serious as to wipe out the superiority of its record in the previous sixteen years. We will have more to say about Japan later but for now let�s be clear about one thing: the impression that Japan has been underperforming the United States in the 1990s is a myth. Of course not everything in the Japanese economy has been going well: in particular, as the media have continually emphasized, Japan�s stock market has been in the doldrums for years after crashing in the first years of the decade. Meanwhile the Japanese banking system has been laid low by major troubles in the Tokyo real estate industry. But, as we will see, media assessments have generally overlooked more important issues that matter more in overall international economic comparisons.

A second objection the postindustrialists raise to the OECD comparisons concerns the exchange rates used for converting foreign nations� incomes into dollars. Although the OECD�s figures are converted at market exchange rates (and it is hard to think of a more objective methodology than that), the postindustrialists believe this is unfair to the United States. They maintain that the internal purchasing power of the dollar within the United States is greater than what one dollar can buy abroad if converted into local currency at market exchange rates. They therefore embrace a system of comparison in which �purchasing power parity� exchange rates are used to assign a lower-than-market valuation to wages earned by workers in Japan, Germany, Switizerland, Singapore, and other key foreign currencies.

At first sight, this methodology seems to make sense. After all, if an American family is posted to, say, Singapore, it will soon discover that replicating an American lifestyle there is much more expensive than in Peoria. To the postindustrialists, therefore, the fact that wages are typically somewhat higher than those of his or her counterpart in the United States hardly proves that Singaporeans are better off than Americans. But the postindustrialists forget that by the same token, citizens of Singapore who try to replicate their home-country standard of living in Peoria also face sticker shock. They may, for instance, need to maintain two or three cars just to get through the day--whereas in Singapore the super-modern public transport system is so comfortable and safe that even many well-off citizens see little need to own a car. The Singaporeans will also face sticker shock when it comes to educating their children. How much will they have to pay for private education to make sure their children get as good a start in life as they would in just an ordinary Singaporean state school? And, for that matter, is there any private school in Peoria, however expensive, which is as safe from the drug culture as an ordinary Singaporean school?

The postindustrialists� purchasing power parity method tends to throw up particularly anomalous results in the case of the United States�s principal economic competitor, Japan. On a purchasing power parity basis, the Japanese come out looking distinctly less affluent than Americans. And this impression seems to be confirmed by the high prices the Japanese must pay for some obvious things such as housing, beef, and entertainment. But are the Japanese really so poor? Hardly. In fact on many of the most important objective measures, the Japanese are clearly richer than Americans. Take the most important measure of them all, life expectancy. This is a highly objective measure and, if the past is any guide, it is closely correlated with living standards. Remember that in the early years after World War II, the world�s highest life expectancies were found in Sweden and Norway, nations that by common consent at that time led the world in affluence. These days, however, the Japanese are the world�s longest lived people. In the space of just sixty years their life expectancy has gone from fifteen years shorter than that of Americans to four years longer. The key factor driving this trend has clearly been rising living standards. In the circumstances, therefore, it is obvious that there is something wrong with a purchasing power parity methodology that portrays the Japanese today as significantly less affluent than Americans.

Essentially there are many hidden flaws in the purchasing power parity method. Thus although it may accurately capture how the price of a McDonald�s hamburger varies around the world, it is far from reliable in assessing less easily measured items--items such as infant care and preventive medicine, where superior Japanese standards do much to explain Japan�s world-beating longevity experience.

Much more could be said about the major blindspots in the purchasing power parity method. But all we need to note here is that purchasing power parity is an ethnocentric yardstick that should have no place in a scientific debate. What matters is the undeniable fact that, measured at market exchange rates, employers in many foreign countries pay wages that are considerably higher than American levels. Thus it is a myth that manufacturing-oriented economies are ipso facto low-wage economies. As for the postindustrialists� suggestion that manufacturing economies are destined to suffer slower income growth than postindustrial ones, this is clearly even more misguided.

The result in the end is not only poorer income prospects for individual American workers but a general decline in the United States�s economic strength. And this latter effect is greatly compounded by the New Economy�s tendency to weaken the nation�s trade position. To that subject we now turn.

Strike 3 against the New Economy: a dearth of exports

The third big drawback of postindustrialism is that it weakens a nation�s prowess in overseas trade. It is a problem that has hitherto received remarkably little attention from the postindustrialists. In fact such leading advocates of postindustrialism as Daniel Bell, John Naisbitt, and Kevin Kelly make virtually no reference to exports in their writings. But there is no getting away from the fact that the export problem is not only obvious but extremely serious.

For a start, virtually all postindustrial activities are handicapped in export markets by fundamental cultural differences. Take the much hyped new American information businesses that have mushroomed with the rise of the Internet. Virtually all their revenues come from within the United States. This reflects the fact that in overseas markets, their sales are hindered by several cultural and regulatory factors of which the most obvious is language. English may be a universal language but most non-native speakers are hardly more likely to be comfortable reading English-language websites than, say, English-language magazines.

Differing national tastes also limit the export potential for Internet-based information businesses: an American database of baseball scores, for instance, has little appeal in Britain, let alone in Germany or France.

In any case, many kinds of information are inherently local in appeal and therefore generate minimal exports. Information on traffic conditions in Vermont, for instance, is likely to be of little value in Virginia, let alone in Vietnam. Similarly, a database on Nebraskan car insurance rates has limited value in North Carolina, let alone in the Netherlands or Nepal. The problems in exporting information are in fact endless. It is not surprising, therefore, that, as noted by Internet consultant Alfred Glossbrenner, American information providers� export sales are �negligible.�

As we will see in Chapter 3, similar cultural problems are also much in evidence in curtailing the American computer software industry�s export prospects. These problems are perhaps most obvious in the case of personal computer programs, which must, of course, be comprehensively altered for other nations� writing systems and customs. The costs involved cut deeply into the United States�s export revenues. In particular, the so-called WEBUSER interface--the array of commands and menus by which the WEBUSER operates the computer--must be tailored to the WEBUSER�s culture. This means much more than merely writing the commands and menus in the WEBUSER�s national language. In the case of many application programs such as accounting and factory-management systems, the WEBUSER interface may require a total makeover to fit the customs and procedures of other nations. In some cases, the WEBUSER interface may even have to be tailormade to suit the needs of individual companies within a single country. Thus, for all the hype about the United States�s world-beating lead in software, most American software businesses generate little if any revenue abroad and therefore do remarkably little for the United States�s chronically troubled balance of payments.

Culture is also a barrier to exports in many other highly-paid information-based professions. The United Kingdom�s famously strong advertising agencies provide a good example. Among the biggest and most globalized in the world, they shape the worldwide advertising activities of such globally active corporations as Ford, IBM, Philip Morris, Procter & Gamble, and Toyota. Nonetheless their contribution to Britain�s balance of payments is quite puny. The reason is obvious: most of the jobs involved in serving their global clients are not British jobs. To create advertising for the American market, for instance, British advertising agencies rely heavily on thousands of American advertising professionals in New York and elsewhere in the United States. And, of course, a fortiore in non-English-speaking markets such as Japan or Germany, British advertising firms must rely almost entirely on locally recruited professionals to serve clients in those countries. Thus most of their foreign revenues are eaten up by costs incurred abroad. At the end of the day, all the British economy receives is a trickle of dividends on the capital invested overseas.

The story is much the same in other information-based businesses. Take the American legal profession. It accounts for fully 2 percent of the United States�s gross domestic product, yet it contributes virtually nothing to America�s balance of payments. In truth, with the exception of some special clients such as foreign corporations operating within the United States�s borders, foreigners have no need for American legal advice.

So much for cultural barriers to postindustrial exports. But these are far from the only impediments limiting the United States�s overseas sales of postindustrial services. Another key impediment to trade in postindustrial services is regulation in foreign markets, which is generally a much bigger problem for exporters of services than for exporters of manufactured goods. Regulation is a particularly serious problem in financial services, an industry that ranks second only to computer software in the hopes pinned on it by the postindustrialists. If you believe the postindustrialists, nations like the United States and the United Kingdom can look forward to rich pickings as other nations open their financial markets to overseas competition in the years ahead. Unfortunately this prospect is largely fantasy. For a start, it ignores the fact that regulators in many overseas financial markets are not as �global� in their outlook as those of the United States, let alone those of that ultimate postindustrial pioneer, the United Kingdom. As we will see in Chapter 3, regulators in many key nations believe it is crucial to maintain their grip on their nations� financial systems, even if they rarely acknowledge this publicly.

Another major problem for many would-be postindustrial exporters is inadequate protection of their intellectual property rights. Essentially piracy in foreign markets severely depletes the flow of foreign revenues to many important postindustrial businesses, most notably computer software, movies, and music. Perhaps the most worrying aspect of the problem is that illegal copying of copyrighted work is getting ever easier thanks to technological advances. One reason why pirating is so rife in the CD industry, for instance, is that the investment needed to set up a CD replication operation is, in real terms, only a fraction of the cost of a record-pressing plant in the era of gramophone records. And just in the last few years, of course, the rise of the Internet has made it even easier to profit from other people�s work.

It is important to remember that piracy is a double whammy for American postindustrial exporters. First, of course, it deprives them of sales volume. But the second effect, while less obvious, is perhaps even more serious: it puts them into head-to-head competition with cut-price versions of their own products--with devastating implications for their pricing strategy.

As if the United States�s poor prospects for exports were not bad enough, there is another problem with the trade side of postindustrialism--rising imports. At first sight, the idea of the United States importing postindustrial services on a largescale seems hard to reconcile with our observation observation that cross-border trade in postindustrial services is heavily curtailed by cultural and other barriers. But actually there is no contradiction here because the barriers to trade in postindustrial services are in many cases not totally insurmountable. Rather they are expensive to surmount. Typically, the only real problem in exporting postindustrial services is that postindustrial products have to be adapted considerably for foreign markets. Although this adds to costs and thus is a major drawback for high-wage countries, it is hardly fatal for low-wage countries.

The full seriousness of the import threat is apparent only when you realize that postindustrial services are highly labor-intensive--typically more so even than such labor-intensive manufacturing activities as the final assembly of televisions and radios. By definition in a labor-intensive industry, the cost of labor is a decisive factor in competitiveness. Thus, as global competition intensifies, the first world�s postindustrial businesses can be expected to outsource more and more of their services from low-wage nations in the second and third worlds.

Even such a sophisticated business as the American computer software industry is far from invulnerable to the threat of third world competition. Of course, at first sight this seems hard to credit. After all computer software is the ultimate �knowledge industry.� As such, it is generally regarded as requiring a great deal of sophisticated know-how, not to mention a special streak of creativity that only a few countries are supposed to have. How can third world countries possibly aspire to go toe to toe with the United States in such an industry? Actually very easily.

Let�s address the creativity argument first. All conventional wisdom to the contrary, there is little evidence that simply by dint of their nationality, Americans are more creative than other people--and certainly there is no reason to hope, as the postindustrialists do, that a purported edge in
creativity will render the United States more or less invulnerable to foreign competition in the postindustrial era. In fact the evidence the postindustrialists adduce for their belief in superior American creativity is remarkably flimsy. They make much, for instance, of the fact that Americans are disproportionately successful in winning Nobel Prizes for science and technology. But is this a reliable measure of creativity. Actually no. Why? Because Nobel Prizes for science are awarded mainly for breakthroughs in only one narrow field, fundamental science. And the success of a nation�s scientists in fundamental science is a function far less of their inherent creativity than of how much government money is available for such science. As the United States government is by far the world�s biggest spender on fundamental science, American scientists not surprisingly win more than their share of the prizes. We will have more to say about the creativity question later. But for now let�s agree that creativity is a human attribute that is manifested in different forms in different cultures and is not notably absent among appropriately trained workers in even the poorest nations.

In any case, as we will see in Chapter 3, the role that creativity plays in the software industry has been greatly exaggerated. And certainly the incontrovertible facts of the industry give the lie to the idea that Americans have a special lock on software-writing skills. Many other nations, not least some of the world�s poorest, have demonstrated that they have what it takes to compete in the industry. Moreover, the know-how to enter the software business is amazingly easy for the developing world to acquire. And that opens up the possibility that American software workers will increasingly be undercut by low-wage workers abroad. In fact, as the authors William Wolman and Anne Colamosca have pointed out in their book The Judas Economy, the threat of third world imports is potentially far greater in software than in hardware. The point is that thanks to breakthroughs in satellite communications, third world software companies can now deliver their products instantaneously and cheaply to customers anywhere in the world. By contrast, the third world is heavily handicapped in trying to export manufactured goods to the West because of abysmal local transportation systems, not to mention the high cost of shipping bulky goods to far-off overseas markets.

The conclusion therefore is that, from the point of view of the American balance of payments, the shift to postindustrialism is double trouble. First, it weakens the United States�s export strength. Secondly, it opens the United States to the prospect of rapidly increasing imports. That said, in the eyes of many Americans, the fact that postindustrial businesses do not do much for the balance of payments is an easy point to overlook. After all, the United States�s huge current account deficits do not directly affect the quality of life within the nation--at least not in the short run. But in the long run trade matters--and matters fundamentally. The point is that a nation that allows its trade position to deteriorate too far for too long cannot expect to remain the world�s leading economy forever.

In truth almost anywhere you test the postindustrialists� case, it turns out to be more sizzle than steak. Having understood the New Economy�s weaknesses, let�s now review the case for manufacturing.

In praise of hard industries

As we have already noted, the most obvious advantage of manufacturing is that it creates jobs for a wide range of people. In fact, even in the most sophisticated areas of manufacturing, opportunities abound for the sort of blue-collar workers who are being increasingly marginalized in postindustrial economies. Take the most advanced areas of the steel industry. Many steel industry jobs have become simpler and easier to carry out as steel makers have moved to ever higher levels of automation over the years. In essence, in many manufacturing industries these days, so much knowledge can be built into the production machines that even a worker of less than average intelligence can operate them effectively.

As Bennett Harrison of New York�s New School has pointed out, all conventional wisdom to the contrary, unskilled workers �barely off the farm� can readily be trained to operate computer-controlled presses and similarly sophisticated production machinery. In Harrison�s terms, today�s high-tech production machinery is not �skill-demanding� but �skill-enabling.� Quoting a study by the economist David Howell, Harrison rebuts the widespread belief that a move to more advanced production techniques necessarily must result in the marginalization of workers of average intelligence. Referring to the trend for low-paid workers to suffer declining real wages in the United States in recent years, he comments: �If wages of poorly educated workers are falling, we need to look for explanations other than technology. After all, the same technologies have penetrated factories and offices in Europe and Asia, yet nowhere outside of the United States have low-end wages fallen so far and so fast.�

Of course, high-tech manufacturing is necessarily very capital-intensive. To the postindustrialists, this seems like a major disadvantage. But they could hardly be more wrong. Remember that in general the more capital is invested in a factory, the higher its labor productivity rates are likely to be. And superior productivity is, of course, the royal road to high wages. Moreover, the fact that an industry is capital-intensive almost automatically elevates it beyond the reach of competitors in low-wage nations. And the truth is that many manufacturing industries are becoming ever more capital-intensive all the time, thereby raising ever higher the barriers to entry for poorer nations.

Even quite mature manufacturing industries can be notably capital-intensive--and particularly, of course, the more advanced sectors of such industries. Take the textile industry. Although the production of textiles is generally regarded as labor-intensive, many of the textile industry�s sub-sectors are highly capital-intensive and therefore tend to be dominated by rich nations. Spinning is a good example. As recounted in the Wall Street Journal, the capital required in a state-of-the-art spinning mill these days can amount to as much as $300,000 per job. It is hardly surprising therefore that the world�s most productive spinning mills are located in affluent northern Italy, not in dirt-poor India or Pakistan.

Perhaps the ultimate example of high capital intensity is the components side of the electronics industry. As we will see, the investment per job in some Japanese component factories can reach well over $1 million--or more than one hundred times the rate of capital intensity in some parts of the world software industry.

It goes without saying that in capital-intensive businesses, wages are likely to represent only a small proportion of total costs. They are dwarfed by depreciation, financing charges, royalties for intellectual property, research and development expenses, and other high overheads. Just how small the wage component of costs can be was startlingly illustrated in the case of a new cellular phone factory built by Motorola a few years ago. After looking at many alternative sites around the world, Motorola decided to locate the factory in ultra-high wage Germany. German�s high wage costs mattered little because wages accounted for only 3 percent of the company�s total expected costs. In truth, from the point of view of an advanced manufacturing company, the need to pay superhigh wages is only a small price to pay for the many advantages of a German location. Whereas higher German wages add only slightly to total costs, Germany offers a world-beating manufacturing infrastructure complete with superb superb utilities, reliable delivery services, honest regulators, and a pleasant residential environment for expatriate executives. And, of course, there is also the advantage of Germany�s well-educated and disciplined work force. As Norbert Quinkert, chairman of Motorola�s German operations, pointed out, the advantage to the company of choosing a lower-wage location such as Britain was actually negligible in the larger scheme of things.

If capital intensity were the only advantage manufacturing had over postindustrial services, the case for manufacturing would be strong enough. But manufacturing boasts another key advantage: it enables incumbents in an industry to build up a huge endowment of proprietary know-how that gives them a wide productivity edge over would-be new entrants.

Some such know-how is explicitly protected by patents; but in many cases the most valuable know-how is unpatented proprietary production technology. Typically such know-how can only be acquired by dint of many years of learning by doing.

Just how formidable an advantage superior manufacturing know-how can be is best seen from the point of view of a would-be new entrant to an industry. Lacking the benefit of the incumbents� know-how, a new entrant is condemned to achieve notably poor labor productivity rates. Thus even if he operates from a developing nation and therefore enjoys a big advantage in lower wages, his unit costs will start out considerably higher than those of the incumbents and he will probably have to continue to absorb losses for many years as he struggles to catch up in know-how. In practice, the struggle is an unequal one--and unless he enjoys the full support of an extremely far-sighted, nationally organized effort such as that mounted by the Japanese government over the last one hundred years, he will undoubtedly think twice about entering the field in the first place.

It is difficult to exaggerate what a big advantage incumbents typically enjoy in many areas of advanced manufacturing these days. Take a product like liquid crystal displays. Most familiar as the flat screens used in so-called notebook personal computers, these seem at first sight to pose no great manufacturing challenge. And in one sense this is correct. They are basically an adaptation of semiconductor technology and are made using similar manufacturing equipment. Thus in theory at least many companies around the world could enter this extremely fast growing business. But in practice few have done so, with the result that the world market is utterly dominated by a handful of Japanese manufacturers. In fact Tokyo-based Sharp Corporation alone enjoys a world market share of close to 50 percent. Why such market concentration? The key to the mystery is something called �yield�--the percentage of flaw-free products in a given production batch. A liquid crystal display is flaw-free only if each of the countless �dots� that constitute its screen are fully functional. If even a single dot misbehaves, this will not only be noticeable to the human eye but will constitute an intolerable distraction. As each dot is controlled by a separate tiny transistor, the upshot is that every single one of hundreds of thousands of transistors must function as advertised. Given that, among other things, the tiniest contamination such as a microscopic speck of dust can render such transistors dysfunctional, the quality-control challenge involved in producing these devices is enormous. Thus in practice a new entrant to the industry would be lucky to get a yield of good screens of as much as 10 percent. By contrast, the leading incumbents in the industry are believed routinely to achieve yields of 90 percent or more. Thus differences in yield alone can give incumbents a nine-to-one productivity advantage over new entrants.

Of course, one obvious step a company can take to improve yield is to filter the factory air extremely carefully. But this is easier said than done and even when a company takes all obvious precautions of this sort, it can still end up with a notably poor yield. In truth many of the secrets of improving a factory�s yield are highly elusive and can be discovered only by a careful, laborious process of trial and error.

Admittedly, not all manufacturing involves entry barriers as formidable as this. But even the manufacture of relatively simple materials often requires a great deal of valuable proprietary know-how that is difficult for would-be entrants to an industry to acquire. Take something as simple as adhesives. As an expert at the Shell/Royal Dutch oil group has pointed out, the exact chemical structure of an adhesive is often almost impossible for competitors to determine. In practice, a manufacturing company may literally need to have unrestricted access to its competitors� factories if it is to understand their production processes. In the nature of things, such access is generally denied; thus in seeking to close the technology gap with more advanced competitors, manufacturing companies often resort to amazing--and often highly controversial--tactics. Take, for instance, some Japanese aerospace executives who wanted to acquire American aerospace know-how. As recounted by Larry Kahaner in Competitive Intelligence, these executives wore shoes with specially soft soles when touring American aerospace factories. Their objective was to pick up microscopic metal shavings from the factory floor, which were later analyzed for clues to the Americans� manufacturing secrets.

Of course, with reasonable luck, a security-conscious manufacturing company can undoubtedly keep most of its production know-how secret for years or even decades to come. Thus even in mature manufacturing industries, proprietary know-how often provides incumbents with enduring protection against new competition. The photographic film industry provides a striking example. Because it is based on nineteenth-century breakthroughs in silver chemistry, it might seem like an easy industry for, for instance, the East Asian tiger economies to target. But in reality it has remained all but impregnable to them. Even the Koreans, for instance, are no more than a negligible force in the industry: although they make some film at home, they re highly dependent on inputs imported from Japan and the United States and do little exporting. A key problem for the Koreans, as for other would-be entrants, is that they cannot match the enormous endowment of know-how that the incumbents have built up over several decades of learning by doing.

The most recent major entrants to the business, Fuji Photo Film of Japan and Polaroid of the United States, got their start as long ago as the mid-1930s--and their story only serves to underline how high the entry barriers truly are. Fuji Photo, for instance, would probably never have got off the ground but for the fact that Japan�s then military government deemed photographic film an essential war mat�riel; thus they spared no expense in establishing an indigenous source of supply ahead of Pearl Harbor. Meanwhile Polaroid�s rise was propelled by forces that were similarly unique: in this case, the enormous creativity of Edwin Land, one of the most brilliant inventors of the twentieth century. Yet even with the benefit of Land�s technological innovations, Polaroid has remained no more than a niche player which continues to depend on competitors for certain key inputs.

Thus the fact remains that, at the end of the twentieth century, the global photographic film market remains dominated by just three companies, Eastman Kodak, Fuji Photo Film, and Agfa-Gevaert. Based respectively in the United States, Japan, and the European Union, these are all quintessential first world manufacturing employers. Admittedly Eastman Kodak has been losing market share in recent years--but crucially it is being challenged not by a low-wage competitor but rather by Fuji Photo, a Tokyo-based company whose labor costs are about 30 and 50 percent higher than American levels. In truth making photographic film is a great first world manufacturing business.

The same pattern of large entry barriers is apparent right across the board in advanced manufacturing. In the circumstances, therefore, it is obvious that nations with a heavy orientation towards advanced manufacturing will enjoy a fundamental edge in world economic competition. Hence, for instance, the pattern we have already noted whereby manufacturing-oriented economies have shown remarkably strong income growth in recent years. And the result is that both Japan and Germany have now decisively passed the United States in wage rates. As recorded in the 1998 edition of Japan: An International Comparison, a publication of the Japan Institute for Social and Economic Affairs, the average hourly wage was $21.01 in Japan and $14.79 in Germany. By comparison the figure for the United States was just $12.37.

Moreover, Japan, in common with such other advanced manufacturing economies as Austria, Switzerland, and Singapore, has consistently enjoyed lower unemployment than the United States in the 1990s. Admittedly, one notable manufacturing-oriented economy has been doing less well in this regard. That country is Germany, whose unemployment rate was running at 11 percent as of 1998. Germany�s problems, however, stem not from its manufacturing orientation per se but rather from the fact that its economy has been suffering continuing dislocation following German reunification (in 1998, nearly a decade after reunification, unemployment in the territories of the former East Germany was still running more than double that of the rest of the country). An additional problem has been the increasing burden that Germany�s leadership role in the European Union places on the German economy (in particular Germany suffers disproportionately from the fact that EU nations have been exporting unemployment to one another for decades). Germany apart, unemployment rates in most other high-wage manufacturing economies have remained notably low in the 1990s. Japan�s rate, for instance, has averaged less than 3 percent in the 1990s and in the midst of the economic problems of 1998 it never rose above 4.5 percent. American press commentators sometimes suggest that Japanese unemployment figures are understated but, as research by both the U.S. Department of Labor and the OECD has shown, this is a dogma-driven assertion that is unsupported by the facts. That there is no large hidden army of unemployed people in Japan is also confirmed by the experience of foreign employers, who consistently complain of shortages of many types of labor.

If manufacturing merely delivered high wages and low unemployment, its contribution would be impressive enough. But it also delivers another crucial economic blessing: a powerful trade performance. This reflects the fact that manufactured goods are generally much more universal in appeal than services--a fact that is abundantly apparent in the consistently large current account surpluses that most of the successful manufacturing-based economies have achieved in recent years. It is a notable fact, for instance, that of the eleven manufacturing-oriented member nations of the OECD that have surpassed the United States in income growth in recent years, all but three were running current account surpluses at last count. Meanwhile the two great postindustrial economies, the United States and the United Kingdom, have consistently been running large current account deficits for many years.

To sum up, whether judged by jobs, wages, or trade, manufacturing scores
over postindustrial services.

The future of manufacturing: a historic challenge

We have seen that manufacturing industries are clearly highly effective in boosting the prosperity of many major economies today. But can manufacturing continue to deliver a superior economic performance in the decades ahead? The postindustrialists, of course, think not. Insisting that the world economy is already suffering from an acute excess of manufacturing capacity, they predict that this excess will get ever worse in the decades ahead. It is a frightening picture--but one that is based on a wholly mistaken reading of how the world economy works.

In reality, the long-term outlook for manufacturing demand is for expansion almost right across the industrial waterfront. Perhaps the easiest way to see how bright manufacturing�s future truly is is to remember that about 90 percent of the world�s population is poor. As the world�s developing nations bootstrap themselves out of poverty, how will they spend their money? Do they ache to acquire such postindustrial products as personal home page software, databases of American newspaper clippings, or Wall Street�s latest portfolio hedging services? Probably not. More than anything, what developing economies want is, of course, material goods. And they are not alone in this preference. Even in the most developed parts of the world, there are plenty of material wants waiting to be satisfied. In fact almost no one anywhere feels as affluent as he or she would like to be--and, asked to compile a wish-list of wants they would like to satisfy, most people would place more emphasis on material goods than postindustrial services.

Essentially therefore manufacturers face an enormous and highly exciting challenge. In the future, as in the past, they must aim to create even more goods--and in the process somehow use less of the earth�s scarce resources. They must create ever greater abundance by developing more inexpensive materials and more efficient production technologies. The extent of the challenge can be summed up in just one sentence: if the rest of the world is ever to enjoy an American-style standard of living, the world�s output of material goods will have to increase at least five-fold. It is a formidable challenge in itself--and is made more so by the fact that manufacturing will have to become much more environmentally friendly in future than it has been in the past.

Of course, to many the idea that poor nations can ever hope to enjoy an American-style standard of living seems utopian at best. But is it? Certainly, there is no question that even with the best luck in the world, many nations will remain poor as far ahead as anyone can see. On the optimistic side, however, there is nothing utopian about assuming manufacturers will continue to improve the efficiency of their production processes and thereby spread prosperity ever further around the world. This is exactly what manufacturers have been doing since the beginning of the Industrial Revolution and it is a process that is clearly continuing apace in our own time.

One notable way in which manufacturers have been improving their efficiency--and boosting their output--in recent years has been in cutting down their use of expensive, rare materials and instead making ever more use of inexpensive, abundant ones. Whereas in former times, many manufacturing industries consumed large amounts of expensive and scarce materials such as copper, zinc, and tin, they now use mainly abundant materials such as silicon and carbon. Take the telecommunications industry. In the old days it needed vast amounts of scarce copper to make telephone cables. These days by contrast it achieves far better results with an almost laughably cheap material--glass. Just seventy pounds of glass in the form of optical fibers can transmit as much telephone traffic as one ton of copper. Moreover optical fibers require only one-twentieth as much energy as copper to produce. This is a classic example of how leading manufacturers are making more with less. The result is that the price of material products keeps falling in real terms and Western-style affluence is spreading ever further into the developing world.

Another conspicuous example of how new technologies can spread prosperity is the development of the compact disk. Standard five-inch compact disks are only about one-eighth the weight of the old ten-inch gramophone records they replaced. Thus since both the vinyl in gramophone records and the polycarbonate in compact disks are derived from petroleum, there has been a reduction of roughly 90 percent in the call on the earth�s resources. In essence the CD revolution has enabled the world�s music lovers to get ten times more music out of a barrel of oil.

The low manufacturing cost of CDs--they can be stamped out for as little as 30 cents each--has helped spread abundance in formerly poor parts of the world. According to Peter Newcomb of Forbes, more than 11 billion CD disks had been sold as of 1998--equal to about ten disks for every household on the planet. Not surprisingly, therefore, CDs are a ubiquitous consumer item
in many nations where twenty years ago gramophone records were a luxury beyond the reach of all but the richest citizens. Notable examples of such nations include South Korea, Malaysia, Thailand, Indonesia, and China.

At the same time, there has been a parallel miniaturization of CD players (many of which are less than one-thirtieth the weight of the trunk-sized record-players of the 1950s). This has yielded major savings not only in scarce materials such as copper and wood but in the machines� power consumption. Again the message is clear: manufacturers are making more with less and in so doing they are helping spread prosperity ever further into formerly poor parts of the world.

For our purposes here, the key point is that the CD revolution has created a host of opportunities for some of the world�s top manufacturers--most notably Sony Corporation, which, as we will see, dominates the world market in the key laser technology that has made the CD possible.

For as long as scientists and engineers continue to make new technological discoveries, the process of creating more with less is clearly set to continue; and it can be counted on to create similarly exciting opportunities for a host of other advanced manufacturers as the developing world increases its share of consumption of countless products the first world has long taken for granted--most notably consumer durables such as motorcycles, cars, refrigerators, air-conditioners, washing machines, television sets, cookers, heaters, telephones, and personal computers. Of course, many of the final assembly plants to produce these goods will be located in the developing world; but they will typically be owned by first world manufacturers and will certainly source most of their key materials and components from the first world�s most advanced manufacturing nations.

More generally, as technological progress spreads prosperity into the developing world, first world manufacturers will enjoy major new markets for pollution control equipment, power-generation plant, telephone-switching gear, communications satellites, railroad locomotives, airplanes, medical equipment, scientific instruments, oil rigs, pipelines, bulldozers, excavators, and many other kinds of sophisticated capital equipment.

The expansion of world manufacturing opportunities will be accelerated by the high savings rates that characterize many parts of the developing world. A high savings rate enables a nation to invest heavily not only in private industry but also in public infrastructure. Either way the result should be a boost to total output, and particularly to exports. All this in turn enables a nation to increase its imports of foreign products. High savings rates look likely to prove particularly enduring in East Asia, where one nation after another has launched notably effective policies to buttress the savings habit in the last fifty years. In Singapore, for instance, workers and employers are required by law to invest an effective 34 percent of wages in the government�s Central Provident Fund. Other East Asian governments have similar if less direct ways of promoting savings (typically with measures that directly suppress consumption).

All given high savings rates and the various other positive factors at work in the global economy today, the proportion of the world�s population that will enjoy a full first world-style standard of living is likely to jump from about one-tenth today to nearly one-third by the mid-twenty-first century. At the end of the day, the success of the first world�s most advanced nations in performing more-for-less alchemy in manufacturing industries will be the single most important force driving the world�s increasing prosperity.

Thus, beyond the economic case for manufacturing, there is a crucial political one that has hitherto been overlooked by the postindustrialists: leading manufacturing nations enjoy enormous scope to project economic power beyond its borders. This power derives from control of production know-how--know-how which when transferred abroad can greatly improve other nations� productivity and by extension their income levels. Such know-how is so coveted that a great manufacturing nation can pick and choose which nations to bestow it upon and can insist on extensive favors from them in return.

Just how significant this sort of power can be was already apparent several decades ago when in the aftermath of World War II, the leading nations of both Western Europe and East Asia assiduously courted the United States for transfers of American production know-how. In return they were prepared to sign off on most of the United States�s foreign policy agenda--including even such controversial geopolitical gambits as the Vietnam war.

Of course, these days the United States�s ability to project economic power abroad has greatly diminished as it has withdrawn from one advanced field of manufacturing after another. But this means merely that other nations now hold the high cards. While the United States is, of course, still courted for transfers of production know-how, increasingly nations like Japan and Germany are the focus of even more ardent wooing. And the reason is clear: these nations now possess a huge fund of valuable technologies that can be shared with other nations to considerable mutual advantage. Such sharing has clearly bolstered Japan�s sway around the world, particularly in East Asia. Equally Germany�s sway in both Western and now Eastern Europe has been similarly bolstered as other nations vie with one another for direct investment by German manufacturing companies.

In the long run, therefore, the huge economic patronage that the great manufacturing nations of the future will enjoy will serve as a powerful counterweight to the United States�s vaunted position as the world�s �sole remaining military superpower.�

Trusting the market: the tyranny of a treacherous ideology

We have seen that the postindustrialists� case for the New Economy is a tangle of misinformation and chop logic. But why do so many otherwise intelligent and well-informed people fail to recognize the obvious holes in their theories? Their basic problem is that they place a child-like faith in the efficacy of free markets. They assume that as postindustrialism has emerged first in the United States�s avowedly free-market economy, it is is self-evidently good thing. Essentially they have been led astray by advocates of extreme laissez faire, who, echoing Alexander Pope�s admiration for the work of the Creator, believe that in a free-market economy �whatever is, is right.�

Admittedly, at first sight the idea that the rise of postindustrialism in the United States reflects the superior efficacy of the American free-market system seems sound enough. But to anyone who knows how far the economies of the United States�s main competitors deviate from the norms of free market dogma, an entirely different explanation of the United States�s shift into postindustrialism suggests. This is that, by dint of far-sighted economic policies, such competitors have been consistently preempting the world�s most exciting new manufacturing opportunities. Thus the fact that so many American entrepreneurs have been lavishing their talents on postindustrialism is merely a passive adjustment to other nations� behavior. In essence therefore the United States�s postindustrial drift is driven by foreign nations� industrial policies--policies that in many cases represent the very antithesis of laissez faire. And, as we will see, these policies are highly effective thanks to the existence of complexities in the real economy that are utterly overlooked in the postindustrialists� simplistic laissez faire model.

The basic error in the laissez faire model is that it greatly overemphasizes the interests of capital over those of labor. This bias has always been there, of course, but in modern �globalist� conditions countervailing forces that in former times tended to curb it have now been largely eliminated. Hence the characteristic pattern of postindustrial society--large profits for a tiny elite and low wages for the broad mass of the work force. The postindustrialists, of course, argue that profits are a good thing. And up to a point, this is certainly 1. But you can have too much of a good thing. And in the case of profits, this point is notably apparent in many parts of the third world. After all, if a disproportionately heavy bias towards profits were really a formula for
superior economic performance, we would expect nations like Mexico and the Philippines to economic titans. By the same token if low profits were a recipe for economic dysfunction, nations like Germany, Switzerland, and Japan would be paupers.

The most obvious way that the United States�s competitors systematically preempt manufacturing opportunities is via subsidies. These are most apparent these days in �strategic� industries. Aerospace is a notable case in point. The spectacular growth of Europe�s Airbus consortium, for instance, has been driven in large measure by subsidies. So successful has government support been that, after less than three decades in business, the consortium had drawn abreast of Boeing in market share in large commercial jets as of 1998. Of course, subsidies are supposed to be banned under international trade rules these days--but, as the rules are largely unenforceable, subsidies are likely long to remain a factor in world economic competition (and certainly they are becoming an increasingly significant factor these days in such promising fields as renewable energy and fast rail systems). One thing is for sure: Europe is unrepentant about using subsidies to build its aerospace industry: the reason, of course, is that, in its own eyes, Europe has merely been emulating the United States, which in an earlier era established a large lead in aerospace with an unabashed program of direct and indirect government supports.

Beyond subsidies, many nations use a plethora of less obvious devices to promote the growth of promising new manufacturing industries. Many nations, for instance, protect their home markets and thereby provide their manufacturers with a profitable sanctuary from which to attack foreign
markets. Of course, in the view of laissez faire advocates, trade protection is counterproductive because it featherbeds weak companies and bad managers. But while this is indeed sometimes 1, there is another side to the story: where protection is structured intelligently with an eye to boosting the national interest as opposed to the sectional interests of individual businesses, it can serve powerfully to envigorate a nation�s industries. The point is that so long as some appropriate system of rewards and penalties is in place to induce corporations to plough back their large domestic profits into improving their production technologies, worker productivity levels are bound to increase accordingly.

In any case in many advanced economies these days, manufacturing companies enjoy much greater access to outside capital than their American counterparts. This reflects a fundamental macroeconomic fact: most advanced manufacturing nations now boast considerably higher savings rates than the United States. Of course, for believers in the simplistic logic of laissez faire, the United States�s perennially weak savings rate should no longer be a handicap for American manufacturers. After all, capital markets around the world have supposedly become �globalized� in recent years, thus in theory savings now flow freely from nations with a surfeit of capital to nations with a capital shortage. In the real world, however, things are different: even in these days when billions of dollars of capital can be moved across an ocean at the click of a mouse, most of the world�s savings flows tend to be invested close to where they are generated. All this comes as a surprise to the postindustrialists. Blinded by their laissez faire models, they forget that, in the real world, bankers are people, not mathematical agorithms. And people have families and friends--factors that tend to encourage them to stay close to home. Even David Ricardo, that ultimate nineteenth century advocate of laissez faire, considered it only natural that people should prefer to invest at home than abroad. As he pointed out, at bottom, investors like to keep a close eye on their money. They fear the unknown and are therefore naturally reluctant to invest in foreign lands where the rules and customs are not fully familiar.

Admittedly the world has shrunk since Ricardo�s day but human psychology has not changed much in the meantime. After all, contrary to their globe-trotting image, modern bankers are no more likely than anyone else to enjoy living out of a suitcase. In any case they like to deal with borrowers with whom they share strong cultural, if possible, personal ties. And, of course, the closer these ties are, the smoother and more productive the banking relationship is likely to be. This is particularly the case in the high-saving nations of East Asia where networks of personal relationships, typically based on long-standing friendships formed at elite universities, hold borrowers to a standard of personal accountability that no mere legally binding contract can hope to equal. (That personal ties can be more effective in ensuring accountability than legal contracts is often disputed in the West, but few familiar with East Asia doubt it. The efficacy of personall ties is particularly apparent in the way that trade with one another without benefit of contracts yet suppliers consistently meet exceptionally high standards not only in the quality of their products but their punctuality in meeing delivery dates.)

It has to be added that the tendency for high-saving nations to invest close to home is generally bolstered by local financial regulation. Indeed, much financial regulation around the world is specifically aimed at achieving precisely this result. For one thing, financial regulators tend to ensure that the lion�s share of the local banking market is reserved for local banks. In Japan, for instance, Japanese banks enjoy a market share of fully 99 percent of the local savings deposits. Moreover even where American banks have access to significant savings flows in foreign financial markets, they are under considerable regulatory pressure to lend the money locally rather than make it available to manufacturers in the United States.

A further factor that has tended to result in the relative decline of manufacturing in the United States is imbalances in the flow of trade secrets and other proprietary know-how. Here again this is a factor that is utterly overlooked in the postindustrialists� laissez faire models. If the postindustrialists think about these matters at all, they imagine that know-how flows freely in both directions. In reality, however, governments around the world try to ensure that the flow is almost entirely one way. On the one hand, they pry as much advanced know-how as possible out of the United States as possible. On the other, they make sure that few if any of their own corporations� leading-edge technologies leak abroad. (Of course, as we have already noted, nations like Germany and Japan are increasingly transferring considerable amounts of know-how abroad--but such transfers almost invariably involve mid-level technologies that have already been superceded at home.)

All the evidence is that a well organized nation can be highly persuasive in inducing American corporations to transfer their most advanced production technologies to factories within its borders. Its trump card typically is access to its markets. An American company will be presented with a choice. If it tries to export into these markets from its factory in the United States, it will probably face significant trade barriers. By contrast, if it chooses instead to manufacture within the nation concerned, it will not only enjoy privileged access to the local market but it will probably also be offered many other important benefits such as investment grants and tax concessions.

The really troubling aspect of this pattern for the American national interest is that in time the production technologies concerned may be entirely lost to the American economy. This is because once American corporations transfer their production technology to a foreign subsidiary, they may find it makes sense to concentrate all future production in this subsidiary. Such a decision typically is made when the corporation faces heavy investment costs in jumping to the next stage of the technology concerned. In such cases it rarely makes sense to continue to maintain two production facilities turning out the same product. Thus the obvious choice is to close the original American factory--obvious that is because American workers are much easier to fire than their foreign counterparts (who, thanks to tough labor regulation, usually enjoy considerable protection against lay-offs). Thereafter all the crucial learning-by-doing know-how that is the essence of advanced manufacturing will accumulate in the overseas subsidiary to the benefit of the productivity of its workers.

Why don�t American executives fight harder against the pressure to transfer their production technologies abroad? Because they see little reason to do so. After all, they can assure themselves that they do not lose a technology merely because it migrates to one of their foreign subsidiaries. This is, of course, the spirit of globalism and almost everyone in corporate America�s boardrooms these days is a 1 globalist.

Of course, from the point of view of American workers, things look very different. Not to put too fine a point on it, it is hard for American workers to achieve world-beating productivity rates if their employers do not equip them with world-beating production technologies.

The whole trend of wages over the last fifty years bears this out. In the 1950s, when the most advanced production technologies were typically deployed only within the United States, American workers were the world�s highest paid--and they earned about six to eight times as much as their counterparts even in Japan and Germany. By the 1980s, however, Japan and Germany had caught up in production technologies. Wages in these nations duly passed American levels and have stayed ahead ever since.

In essence as American labor is not represented in American boardrooms, the real losers from technological globalism have no say in the matter. Moreover workers� interests count for so little these days that American corporate executives openly proclaim their commitment to utopian globalism without the slightest fear of embarrassment. The pattern was memorably exemplified a few years ago by an executive of Colgate-Palmolive, who told the New York Times: �The United States does not have an automatic call on our resources. There is no mindset that puts this country first.� A similarly outspoken disregard for the interests of American labor was apparent in a remark by NCR president Gilbert Williamson some years ago, when he said: �I was asked the other day about the United States�s competitiveness and I replied that I don�t think about it at all. We at NCR think of ourselves as a globally competitive company that happens to be incorporated in the United States.�

Many other examples could be cited of how far the real world diverges from the narrow world of the postindustrialists� laissez faire models. Suffice it to say that the world is far from a level playing field in trade, let alone in finance or flows of technological information. And many of the distortions tend to promote manufacturing outside the United States, while the American economy, constantly propelled by the pursuit of short-term profits, drifts ever deeper into postindustrialism.

The worst part of it is that free market dogma has tended to obscure from Americans how far the United States has been falling behind its principal competitors in recent years--most notably Japan. All press reporting to the contrary, Japan�s highly distinctive economy, which defies laissez faire dogma in almost every detail of its workings, did not collapse after its famous financial bubble of the late 1980s burst in the early 1990s. Far from it. As we have already seen, Japan�s unemployment rate in the 1990s remained consistently below that of the United States and ran only about half that of France. Meanwhile Japan�s overall economic growth rate in the first eight years of the 1980s averaged a respectable 2.1 percent. That was considerably better than the United Kingdom�s average of 1.5 percent and was actually exactly the same as that of the supposedly booming United States. Japan�s growth performance was all the more impressive given that the yen appreciated considerably against the dollar in the period: as of the end of 1998, for instance, the yen was showing a gain of 24 ck percent compared to the end of 1989, the last year of the Tokyo stock market bubble.

Then there was Japan�s perenially strong trade performance, which was even stronger in the 1990s than almost anyone noticed. The result was that in the first eight years of the 1990s, Japan�s current account surpluses totaled $750 billion. That was more than two and a half times the total of $279 billion recorded in the first eight years of the 1980s.

When you remember that (a) Japan runs a large surplus in almost every tradable manufactured product, (b) Japanese manufacturers pay some of the highest wages in the world, (c) there have been virtually no American-style layoffs anywhere in Japanese manufacturing industry in recent years, and (d) nations with lower wage costs like the United States are rapidly increasing their trade deficits with Japan in high-tech goods, it is surely obvious that the Japanese economy is one of the strongest in the world--and is particularly strong judged by the yardsticks that matter to Japanese policy-makers.

Essentially the point is Japan�s very different economy should be judged by Japanese objectives, not Western ones. And here we get to the crucial point: whereas the American economy is generally run to boost the short-term welfare of the American consumer, the Japanese economy is run to boost Japan�s ability to project economic power abroad in the long run.

Measured by this latter criterion the 1990s have been years of spectacular progress for the Japanese economy. Remember that every dollar of current account surplus a nation receives adds an extra dollar to its foreign assets. The truth therefore is that Japan in the 1990s has been growing its net foreign assets faster than any nation since the United States� golden years of expansionism in the 1950s. In the long run, this will be just about the only thing that historians will remember about Japan�s progress in the 1990s--and it was the one thing American observers utterly overlooked at the time.

Before looking in detail at postindustrialism in following chapters, let�s sum up the story so far. The argument of In Praise of Hard Industries revolves around many points, but one is paramount: all conventional wisdom to the contrary, modern manufacturing industries are difficult to enter--thus those nations that achieve early leadership in them are remarkably well insulated against future challenges from lower-wage foreign competition. In truth, modern manufacturing industries require large amounts of both capital and proprietary production know-how--resources that are generally difficult for low-wage countries to acquire.

By contrast, postindustrial services are relatively easy to enter. For a start they typically do not require large amounts of capital. Nor, all conventional wisdom to the contrary, do they require much proprietary know-how. Rather most of the necessary know-how can be acquired from public or semi-public sources.

In sum, this book turns upside down the standard presentation of postindustrialism as a more advanced and economically desirable activity than manufacturing.