The wealth of our nation has always been based on manufacturing. A country that has no manufacturing is not post-industrial, it is pre-industrial, that is, poor. The people of the United States are perfectly capable of rebuilding the manufacturing sector by concentrating on high-skill sectors such as industrial machinery and digital technology, among others. For most of our history, these statements would have been been greeted with a shrug, as if the speaker was stating the obvious.

Today, however, the assumption seems to be that there is nothing we can do about the loss of manufacturing, and that it doesn’t really matter because manufacturing can be replaced with services. But these are myths, as I hope to show. Perhaps worse than the the widespread dissemination of these myths is the effect that a lack of understanding of the importance of manufacturing has had on our national economic policy debates, and in particular, on the quality of any progressive response to the economic stagnation of the past several decades. Because of the lack of attention paid to manufacturing, there is an intellectual hole at the center of progressive politics, and that empty space is the lack of a clear and compelling explanation for the miserable state of the economy. The Right has an explanation: the government is interfering too much in the economy, and as mainstream (neoclassical) economics shows, if only the government would get out of the way (including but not limited to minimal to no taxes, no rights for workers, and no regulation), then everything would be fine.

From the center to left, however, there is no such cogent explanation. Much of what passes for progressive economic policy is a kindler and gentler version of the Right: if we can just tweak the market in the right way, then things will get better, hopefully, although how much better is hardly ever ventured. On the left end of the progressive spectrum, we have an emerging consensus that there is a gross inequality in the economy that is hurting the 99%. A rise in the minimum wage, and greater taxation on the rich would help, although again there is little or no attempt to explain how or if the 99% can recover the prosperity of a couple of decades ago.

So complete is the domination of neoclassical economics that none seem to venture to challenge the accepted canon with a more realistic view, one that would point toward solutions that could appeal to the great majority of Americans. A realistic view must include a central place for the support of manufacturing.

The dominant, neoclassical view is that the foundation of the economy is exchange, not production, and that the manifestation of exchange, the market, is the most important system. If all is well in the market, it is presumed, then everything else will follow — for instance, production of the goods and services that make possible the exchange, income and decision-making that economists generally take for granted. This focus on exchange instead of production is ideological, at the heart of the Right’s agenda, and leads to policy proposals, such as a weaker labor movement, loss of manufacturing, and a disappearing middle class, that is becoming catastrophic for the economy.

This economic conventional wisdom was once reversed. At the founding of the American republic, Alexander Hamilton and many others where concerned with "Manufactures", that is, how to produce goods in the United States. A United States that did not produce most of its manufactured goods would effectively become a colony to Britain again, as Britain could use its monopoly of the production of goods to suck most of the wealth out of the United States. Indeed, a large part of the motivation for the Revolution had been to avoid the economic oppression instituted by the British in their attempt to make America supplicant, both politically and economically.

The United States has not been the only country to notice that societies that produce much of their own wealth are the ones that are richer and more powerful on the international stage than those countries that let "the market" have its way with the national economy. The market, if left on its own, will give advantages to those who already have power, in a self-reinforcing cycle of capital accumulation and further accumulation of economic power, as Marx and others observed in the 19th century and now Thomas Piketty has documented in the 21st.

People like Alexander Hamilton who control countries would generally like to control a more powerful country than one that is being controlled, economically or politically, by others. So it is that the Chinese Communist Party set out to make China the "workshop of the world", because they knew manufacturing preeminence would lead to great national wealth and power. While their strategy might be called "capitalist", they hardly let the market do whatever it wants; they emphasized and encouraged, and continue to emphasize and encourage, the expansion of manufacturing. To a significant extent the Soviet Union was their model, since the U.S.S.R. rose to great power only because it built up its manufacturing power (with the help of people like the Koch brothers' father, who built up the Soviet oil industry, so that his sons might extol the virtues of "the market").

Currently the Germans are the economic stars of Europe, given to pre-Keynesian lectures to other European countries on how they should behave economically, but Germany is anything but a model of neoclassical laissez-faire. Through state-directed institutions, some in existence for centuries, the Germans have built themselves into a manufacturing powerhouse, particularly in the most central of manufacturing sectors, the industrial machinery industries, whose machinery output is used to create all the manufactured goods that consumers (and militaries) use.

The Japanese, followed by South Korea and Taiwan, have also paid almost no attention to neoclassical prescriptions, and now perform quite well with manufacturing sectors which in terms of percentage are two or three times as large as in the United States. They too dominate in various kinds of machinery production.

For much of the 20th century, the United States produced almost half of all industrial machinery; now that share is down to about 15%. The accumulated wealth of the United States, because of its domination of world manufacturing for much of the 20th century, led to the capability to create a huge military, challenged by the scraped-together military of the Soviets, who had to immiserate their citizens in order to pour the output of the manufacturing sector almost exclusively into military goods. Now the U.S., which has also ignored its manufacturing, focuses on the military and experiences a similar decline in power and output. The irony is that the Republicans used to be the party of “economic nationalism”, that is, the desire to create a national economy better than others, while they now seem to be completely uninterested in national economic power.

The dean of American economists, Paul Samuelson, fretted that people would not understand the beauty of neoclassical economics because of its complexity and counterintuitive conclusions. I want to argue that people will reject neoclassical economics because it is wrong, not because it is complex. The neoclassical emphasis on exchange can be contradicted by pointing out the easily observable co-existence of manufacturing with economic wealth, both in the world today and throughout history. When people can see with their own eyes the evidence for a different way of thinking about the economy, they should be able to understand that a new set of economic policies is needed.

As we have seen, the most successful countries are the ones which pursue manufacturing strength. If we look around the world at the poorest areas, we see that they have never industrialized, or very incompletely. Africa in particular, as scholars of the region have repeatedly shown, has been "disarticulated", that is, Africa has been forced to provide raw materials and agricultural products to the industrialized world, while it has not developed its own industrial base. At the bottom of the problems in the Middle East is its fall from manufacturing preeminence 1000 years ago to their current reliance on raw materials such as oil. The countries of the former Soviet Union, including Russia, have seen their economies implode because their manufacturing network collapsed, partly from long-term neglect and partly from the disarticulation of their manufacturing system as the result of no longer being part of the same manufacturing system.

Regions that constitute the "middle class" of the world, such as Latin America and to some extent south and Southeast Asia, have become richer as they have industrialized. The United States is still a significant producer of manufacturing goods but it has had a huge trade deficit in goods for decades now, and the economy is kept afloat only because the dollar is accepted as a medium of exchange, most importantly as the only currency used to buy oil. Without this crutch, inflation of foreign-purchased goods would explode and the standard of living of most Americans would plummet.

The United States stands on this economic precipice because global trade is overwhelmingly conducted in goods, not services. Since Ricardo propounded his theory of comparative advantage, economists have extolled the virtues of trade, and today make trade a centerpiece of both theory and policy initiatives, such as the odious Trans-Pacific Partnership. But these same economists haven't seemed to notice that 80% of trade between regions is in the form of goods, and only 20% in services. This ratio of 4 to 1 is true for the United States as well. The reason is simple: for the most part, services are the act of using manufactured goods. It's very difficult to trade the act of using something.

When David Ricardo advised and predicted, at the end of his discussion of comparative advantage, that England should continue to make manufactured goods and the United States and Poland should continue to concentrate on growing grain, he not only made one of the most spectacularly bad predictions in intellectual history, he was also arguing for the continuing dominant wealth of England at everybody else's expense. During the same period in the early 1800s that Ricardo was writing, Alexander de Tocqueville was predicting that the United States and Russia would eventually become the two most powerful nations on Earth. How did de Tocqueville get it so right and Ricardo get it so wrong? Because de Tocqueville could see that the Americans excelled in "the industrial arts” as he travelled around the country, while Ricardo was busy lobbying for the banking industry in the English Parliament.

In the same way, people understand that when all the goods they see in stores come from China, and then when they go to Europe or Asia and they see that the public infrastructure is superior to the American versions, they gain an intuitive understanding that something is wrong. But there is no intellectual framework for them to grab onto to explain what they see. All they hear is that the market is perfect.

Part of the problem is that it seemed so obvious to observers until recently that manufacturing is important that they didn't bother to make it clear why this is so. Even Keynes uses the example of factory production in his theoretical discussions in his most important book, "The General Theory". Since “better late than never”, let me try to make clear how the economy works from the perspective of production, not exchange:

Goods are produced in factories, and services are performed using these manufactured goods. Factories, in turn, use a set of goods called industrial machinery to produce the goods that consumers use -- let's call them "production machinery". In turn, production machinery is produced by machinery that can make many different things including more of themselves. For instance, a machine tool makes metal parts for all kinds of machinery (and other things), including metal parts to make more machine tools. Let's call these kinds of equipment "reproduction machinery". So what we have, in a modern economy, is reproduction machinery making more reproduction machinery and also making production machinery, production machinery making goods, and goods being used to provide services.

Technological change in the machinery industries, particularly the reproduction machinery industries, creates the conditions not only for most technological advances in society, industrial machinery is responsible for most of the economic growth per person that we experience. Steve Jobs and Apple are responsible for developing the iPhone and iPad, but they could not have done it without spectacular advances in an obscure set of machinery called semiconductor-making equipment, which is used to make the more and more powerful computer chips that make more and more powerful iPhones, iPads, and other devices.

Just as populations of plants and animals can grow rapidly because of reproduction, so can sets of machinery, such as machine tools and semiconductor-making equipment, create the kind of economic growth that we have been experiencing over the past 200 years or so. In fact, the Industrial Revolution was made possible by the creation of various kinds of reproduction machinery, such as steam engines and iron and then steel-making equipment. Steel-making equipment makes the steel that can be used to make more steel-making equipment, and they also make the steel used to make machine tools, and to make the turbines and now wind farms that produce the electricity that powers the steel-making equipment and everything else. These cycles of mutually beneficial technologies power the growth and innovation of the entire global civilization.

The most powerful countries are those that produce the bulk of industrial machinery, because this capability gives nations the power to create the wealth and military they need to dominate the countries that don't produce machinery. During the 20th century, according to my research, about four or five "Great Powers" controlled about 80% of global machinery production. We see once again that it is easy to observe that economies with manufacturing and machinery production thrive and become powerful; openness to trade or the perfection of markets within a country has no such clear capability to explain the differences in the fortunes among countries.

Manufacturing is not only the main cause of growth, wealth, and technological advance, it is the foundation of a middle class. The percentage of the workforce that is unionized has tracked the percentage of the workforce that is engaged in manufacturing. Both fell from about 25% in the mid1960s to about 10% now. The late Professor Seymour Melman argued that the main motivation to outsource manufacturing to other countries was the motivation to destroy the power of the unions. He could find no instance of a factory being closed down and moved overseas in which the factory was actually losing money. Companies choose to close down factories not just to boost profits, but to boost the power of management, which is constrained by unions. The decline of manufacturing is a political process, not just an economic one, involving the desire of managers to to expand their power "without limit", as Melman put it.

If factories that were shut down were making a profit, then had those factories been employee-owned-and-controlled, we would still have about 20 to 25% of the workforce and GNP in manufacturing. Nobody would vote to eliminate their jobs. There would still be a large, expanding middle class.

The manufacturing sector is the foundation of the middle class because about the same share of the economy that is produced by manufacturing also goes to the people who are working in the manufacturing sector. That is, in the 1960s when 25% of the working population was in manufacturing, that working population received 25% of the national income. So the average employee in manufacturing earned the average salary of the country. Of course there was variation within manufacturing, with executives receiving greater compensation than shopfloor workers (although the differences were much smaller in the 1960s than now), but the vast bulk of manufacturing population benefitted from this equality of input to output.

Not so with two other main parts of the economy, the low-wage service sector, and the high-wage finance, insurance, and real estate sector (FIRE for short). The health, retail/wholesale, and hotel and restaurant sectors of the economy, taken together, have always had a greater share of employees than they have had of national income. So the average employee in these industries has a less-than-average income, notwithstanding some occupations such as doctors. In 1968, these sectors together employed 19% of the working population, and received only 13% of the nation’s income. Worse, in 2009 the low-paying service sectors employed 30%, and had an income of 16% — so the average salary of employees actually declined, from about 2/3rds of the national average to barely above one half.

On the other hand, FIRE jumped from about 14% to 21% of income from 1968 to 2009, but the percentage of employment went from 4% to 6%. Thus the average income for FIRE stayed at about 3 1/2 times the national average.

Most of the lost employment in the manufacturing sector has gone into the lower-salary service sectors (11% of the 15%), while about half of the lost income has gone to the higher-salary FIRE sectors (7% of the 14% income loss) . There has been a growth in one “middle class” sector of the economy, which can be referred to as the “professional services” sector, which contains 6% of the workforce and receives almost 8% of the income. But this sector has taken the slack of only about one quarter of the loss of manufacturing employment, because professional services as a percentage of employment has only increased from about 2% to 6%. The alleged transformation of the economy from blue-collar to “knowledge” sector never took place.

So what we have is another clearly observable phenomenon: when manufacturing was strong, so was the middle class, and as manufacturing has withered, so has the middle class. More and more people are thrown into low-wage service sectors, while more and more of the nation's wealth flows to FIRE. Thomas Piketty, in "Capitalism in the 21st century" has laid out the data that shows the increasing inequality of our society, and points to the inevitable accumulation of wealth that results from the top 1% owning most of a society’s capital; but there is another factor involved in worsening inequality, and that is the decline of manufacturing.

We see that in those countries that have held onto their manufacturing, such as Germany, the middle classes are strong and the wages of manufacturing workers is actually higher than in the United States, counter to the neoclassical argument that wages in the United States are too high. Melman pointed out that wages in the United States were the highest in the world during the entire time that the U.S. was the world's dominant manufacturing power; it is only since manufacturing's decline that wages have fallen behind other countries.

Seen from the perspective of a production-centered economics, there is a certain logic to the accelerated decline of manufacturing and wages in the U.S. Again counter to what neoclassical economics teaches us, manufacturing economies thrive best when they encompass a complete suite of manufacturing industries within their borders. This is because an economy and a manufacturing system are ecosystems — that is, they require the co-existence of multiple sectors, each of which carries out certain critical functions within the regional manufacturing ecosystem. The automobile industry cannot survive intact on its own; it needs myriad other industries, such as machine tools, or else it will be dependent on foreign manufacturers who will not be familiar with the needs of the American industry, will not be able to meet face-to-face, and will have a tendency to favor foreign buyers.

Ricardo’s argument, which forms the basis for neoclassical trade policy, is that every country should concentrate on what it does best, and let the other sectors drop by the wayside. This is actually exactly the wrong advice. It is as if you had a forest, and the trees were in one area, the insects in another, the plant-eaters in one more, and the carnivores in yet another. The forest would obviously collapse. Like a forest or any other ecosystem, countries, or regions of countries (such as the E.U.), should work to encourage all of the various production "niches" within their economies, not just the one or few that happen to be their specialty at a particular moment in time. Humans and countries are perfectly capable of learning new skills and becoming experts even when they were complete beginners at one point - as we, and all countries, once were.

When industries drop out, so does the competitiveness of the remaining industries, and then the general wage level of the remaining manufacturing workers suffers, as do their communities. Thus it is that the car companies, notwithstanding various managerial incompetencies, continue to be at a serious disadvantage because of the long-term decline of their various co-evolved industries. Apple can’t make iPhones here, not just because they crave lower wages, but because all of the industries needed to create an iPhone don’t exist at a large enough scale in the United States to make production competitive.

So the wealth of our nation, and other nations, has always been based on manufacturing for a number of easily observable reasons: manufacturing provides the foundation for the other sectors of the economy, including the act of using machinery, services, and most trade takes place with goods, not services; powerful countries have used the wealth generated by manufacturing to conquer other countries and/or prevent other countries from conquering them or otherwise dominating them; most of the technological change in an economy has its roots in the machinery sectors of the manufacturing system; and a strong middle class has been based on manufacturing.

Many observers, from the Right through the Left, seem to repeat the tired old phrase, “we can’t bring manufacturing back”. Anyone who says this should complete the sentence with the phrase “so the United State will eventually become a poor and virtually powerless country”. Of course we could “bring manufacturing back”, but not in exactly the same form that it was during its heyday in the United States, if for no other reason than technology is constantly changing. Gone are the days when millions of people worked in mind-numbing, repetitious, boring assembly jobs. The main bulk of manufacturing jobs will be in the machinery sectors, using high-skilled workers putting together complex, digitally-based equipment that takes the place of most of those assembly workers. No just economic system should seek to increase unhealthy jobs, if it can possibly avoid it. Germany and the more advanced industrial economies have concentrated on creating high-skilled, high-paying jobs, while China and other countries have allowed their workers to become ill and injured in low-paying, low skill, and unsafe occupations. The Right pushes policies that follow the path of China; the Left should push to follow the path of Germany, as many on the Left are currently doing, such as Manufacturing Renaissance in Chicago and the Center on Wisconsin Strategy.

The “market” will not fix the problem. The “market”, or rather, the top corporations, have created the crisis in the first place by moving factories overseas. These corporations are part of the “big power complexes” that we discuss in “Citizens’ Campaign 2016”; while a rise in wages in China might lead to a certain number of factories being opened in the United States, such market forces will not create a wholesale change of heart for Big Power. Compounding the problem, the loss in particular of machinery factories has led to what Seymour Melman described as a “point of no return”, that is, the economy is no longer able on its own to recreate a world-class manufacturing system.

It is up to governments at all levels, national, state, and local, to recreate a vibrant manufacturing sector. While there are many policies that can and have been used, both in the United States and abroad, to encourage manufacturing, one method stands out through history; government providing the “market” for domestic firms to sell their products, which gives new and old firms the breathing room they need — along with fair trade policies — to develop world-class skills and employees. Right now, we happen to need an entirely new infrastructure in order to avert myriad environmental catastrophes such as global warming, so now is the perfect time to solve two problems at once with a large-scale government infrastructure rebuilding program — a program which will be explored in the second article in this series, focused on the infrastructure (to be available soon).