Main Edition
US
FR
'The US is only now stumbling toward a proper industrial policy' (Photo by Bob Riha, Jr./Getty Images)
America’s ability to build is now a matter of survival and recovery. It is a question of building not only factories in the Midwest or whole cities out of the wilderness, but also basic infrastructure in the aftermath of Hurricane Milton. The problem is construction remains an arduously slow task — and even in the least regulated states, suggesting the deeper technological causes of this paralysis. It seems that the pace and scale of American innovation have simply ground to a halt.
Joseph Schumpeter, who famously recognised that capitalism and innovation are intimately linked, wrote in 1942 that capitalism “never can be stationary”. It has to take risks and fund the most radical ideas because “creative destruction” is the driver of economic change. At the time of Schumpeter’s writing, America’s mid-century golden age, technologies were both the cause and consequence of the country’s massive industrial expansion. Everything from automobiles to consumer appliances to commercial air travel became part of everyday life. Through a technological feedback loop, prosperity was sustained for years.
But, with the exception of the brief computer and internet-fuelled boom at the turn of the millennium, US productivity has been in decline since the Seventies. This downward trend has occurred in spite of consistent increases in spending on research and development, the numbers of patents and PhDs conferred, and scientific articles published. For some economists, such as Robert Gordon, this is because our current technological developments are just inherently less conducive to growth and innovation than those that powered the last once-in-history boom of the second industrial revolution. The implications of Gordon’s analysis are that the days of Schumpeterian “creative destruction” are over: the technology of the future will be just more diversionary apps on marginally improved iPhones.
The potentially revolutionary technological breakthroughs, though, the stuff of the next great boom, are here for anyone who cares to look. Quite apart from the hype around Artificial General Intelligence, existing breakthroughs in modular construction, energy extraction, and nanotechnology could help realise the visions of futurist thinkers and presidential candidates alike. Even the clichéd trope of flying cars, invoked by Peter Thiel to lament the flailing state of American innovation, has found expression in prototypes of eVTOLs or “electrical vertical take-off and landing vehicles” that could bring us closer to Jetsons-like skylines. Many of the “nice things” of the future are already here. The problem is that they are not reaching Americans at an everyday level.
What explains this gap? Well, novelty and innovation are not the same thing. Unlike the former, the latter doesn’t simply happen once an invention is unveiled. As Schumpeter observed, it requires diffusion of breakthroughs across the economy, which is in turn reshaped by it. Research, development, and commercialisation phases were closely integrated in mid-century America. It was the heyday of the fabled corporate research lab, such as Bell Labs, RCA Laboratories and General Electric Research (GE), which helped to convert innovations for consumer markets. Corporations were willing to devote considerable resources to creating improved products which would bring greater profits, even if it meant waiting longer.
But the wave of financialisation that swept American business starting in the Seventies and Eighties scrambled this system. Capital responded to heightened international competition, not by doubling down on technical investments to out-compete ascendant rivals in East Asia and Europe, but by selling off the very material and scientific infrastructure that formed the basis of an industrial economy. The new economic model prioritised financial returns over pioneering innovations: thus America was transformed into a “capital-light” entity of the neoliberal era. Corporate labs were closed and vertically integrated firms like GE were hollowed out. And though America still generated scientific research, particularly at universities, producing and harnessing innovations domestically became increasingly difficult.
Join the discussion
Join like minded readers that support our journalism by becoming a paid subscriber
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.
SubscribeA quality article and analysis, but the title is too “click-bait” for its contents. My compliments to the author!
Regarding the topic under discussion, I concur, and definitely suggest that retaining key industries, such as steel and machinery manufacturing, chip production, medicine and chemistry, etc., are essential to national security and as such should NEVER be subcontracted out to a third-party country, and especially an unfriendly country, such as China. “Cheap stuff” doesn’t compensate when your country lacks essential equipment, and can’t get it, either because of supply chain disruption, international tension, or war.
Our financial system unfortunately is based on a 30-90 minute phone call every three months; the quarterly earnings call tells analysts what they should “predict” for the next quarter, and for the bond market to adjust accordingly. THAT, coupled with many top-tier universities scrapping much of their engineering and STEM capabilities over the last 45 years in favor of finance, economics and “quant” subjects, has moved the U.S. into a weakened state. Making money in the short term was the poison apple that allowed us to snatch defeat from the jaws of post-WWII victory.
I had a similar reaction: I was expecting an entirely different kind of article. This is rather good.
The domestic equivalent of multilateral development banks (MDBs) sounds like a very bad idea as a solution to a problem that government may have contributed to, if not created. Obviously governments aren’t really capable of coming up with a plan for the country then implementing it. It may be the system itself that’s at fault, but whatever, the idea of a government financial institution, like the writer suggests, looks like the government going into business against the private sector, with huge resources and very little accountability. That looks like the perfect tool to destroy capitalism, if not with intent then through sheer stupidity.
Seems to me this pretty much already happened but in an even worse way. Quantitative Easing after 2008 and 2020 produced a huge amount of liquidity for banks and non-bank financial institutions. Because the speculative financial industry has direct access to this wealth they will do what they do best: producing financial bubbles and sit on it. This creates a situation where wealth becomes extremely concentrated leaving behind the real economy where things only deteriorate further and further. So in a way it is precisely the government outcompeting a large part of the market by supporting the financialized part, which was made dominant after the late 70s because they believed in supply-side- and trickle down economics back then.
The problem for America is that , comparatively, it is in the best position of any country in the world. That is, it can always get by, if only sub optimally.
At the moment it’s rather like a battered but unsinkable ship.
England’s administrative genius was what made the difference for its colonies, as compared to the colonies of Holland, France, and Spain. The Judeo-Christian heritage combined with Anglo-Saxon sense made a perfect combination of a just and morally upright people, well-managed.
Sure, tell that to the Tasmanian aborigines (if you can find any surviving).
Innovation and adoption on a wider scale can only happen in societies with high levels of trust and confidence. This can only happen in homogeneous societies where you can implicitly trust your neighbours and institutions. Once that is lost there is invariably a circling of the wagons (or the gated communities) and the instinct is to hoard what you can. This why China will win in the end. Japan had the chance but lacked the resolution to follow through.
What Japan lacked was the political independence required to break free from the suffocating grip of the USA. China has it, and that is why China is the target of America, the Tonya Harding of the world economy.
Good article. One would think that the reality of “too big to fail” after 2008 and the QE rounds after 2008 and 2020 should have incentivized innovation. However, instead, it seems we only amplified all the pathologies of financialization and cronyism. It seems that big capital is more interested in low hanging fruit or even things that only look innovative on the surface but are essentially mostly PR. Big tech is more vulnerable to this. We see a lot of unprofitable ‘Uber clones’ and even things that appeared to be scams, but still raised millions like Theranos. And it makes some sense. The ‘neoliberal’ system, introduced in the late 70s, is aimed at accumulating capital. So it will look for the path of least resistance to do so. Especially since the economy was flooded with liquidity after 2008 we get a situation where rent seeking and speculation is a better method to protect relative wealth than risky investment into complex technology or bringing back actual production. If one can raise billions with just PR then this is what people will do. Meanwhile the ultra-wealthy and big capital put their wealth into private equity who offer big returns, not rarely by stripping corporations from what makes them productive. Another strategy is simply putting money where others put their money, the result is endless financial bubbles. We get into this persistent situation where the asset economy booms while the real economy stagnates. Real estate is another example, it appreciates beyond the moon but is also completely dysfunction. A problem is that those who profit from this stagnant situation will defend it. We can also understand that symptoms like “labor shortages” are misdiagnoses of the actual problem: a dysfunctional economy.
So in the end it seems vital that we understand the role of the state in stimulating innovation but also in hampering innovation. However, as we can see, it is not as simple as regulation vs. deregulation. Perhaps in an ideal free market under “perfect liberty” – as Adam Smith called it – innovation would be maximized. But this has never been a reality, nor did neoliberalism bring us any closer. In fact, despite its rhetoric, almost the opposite. The truth is that if you open your phone and trace all the components from the semiconductors to GPS; much of it started in public sector, often military (DARPA) funded. Even Bell Labs, as a subsidiary of AT&T, essentially had something of a government guaranteed monopoly, so not precisely the market in action, but of course also not the suffocating control as we saw in the Soviet Union. It was, however, also the competition with that Soviet Union during the arms- and space race that incentivized government to invest in science and – also very important – high quality affordable education. In any case, we really need a serious paradigm shift.
It’s the politicians that have their hands on the controls. If they discourage innovation, intelligent and informed risk taking, and tax rewards, it’s not surprising how it’s turned out.
In addition, they announce the results of R&D before it’s been started, go full ahead with ‘state of the art’ projects without prototyping, controlled staging, or even a credible plan or experienced person in charge. And DEI is more important than making the company’s products.
If it wasn’t so damaging, it would be funny.
Heck, it’s funny, anyway! 🙂
There are companies working in the blood testing sector, steadily improving their machines. Such companies, with their experienced scientific staff, are well placed to take advantage of advances in biotechnology. However they will not get the investment. It is simply far more profitable to invest in fraudsters such as Theranos. These pump and dump schemes are enabled by a scientifically illiterate media in thrall to the charlatans.
The author laments the fact that ” policymakers still have not rediscovered how to do it.” while referring to innovation. His illusion is that policymakers EVER did discover innovation. The opposite is true: they are the people actively opposing innovation though the morass of ever expanding laws.
The elephant in the room is the idea that we should live lives deemed “safe” by someone else, and unthreatened by things new. Under the prevailing risk averse mindset, no innovation is safe, and nothing is ever fully proven to be safe. And the bureaucrats and policymakers are quite happy to “protect’ us from ourselves and our ideas that might change anything.
This cancer of the human spirit tells us that the safest thing we can do is just cower in the illusion that we are safe in our current situation and hope things don’t get worse. But of course this is a losing strategy, and not much fun either.
Life is fundamentally all about change. Death is the absence of change, and the death of civilizations can be predicted by the degree of their own self-enforced resistance to change.
The antidote to today’s despicable “safe” mindset is coming, as it came for the ancient Romans when the barbarians sacked Rome. They discovered that truly being “safe” was was not quite what they thought it was.
Just look who’s been in power for 12 of the last 16 years…Enough said!
Responding to the title rather than the article (which is more thoughtful) – capitalism is always flawed. It is a feature, not a failing. Capitalism promotes the ‘winners’ but that means there are also corresponding ‘losers’.
Much political debate and action has been aimed at minimising the ‘losers’ and it is that which undermines the uncaring dynamic of capitalism.
You can always choose state control of course (socialism or fascism), but that seems historically to be even less effective than flawed capitalism.
What contradiction exists in American capitalism or any other nation’s use of this means of organizing an economy lies in the level of govt intervention that is involved. Bureaucracy and regulation made it financially advantageous for companies to outsource/offshore what was previously done domestically. The consumer didn’t care as the result was a wide range of affordable goods.
It also didn’t help that people who did make things were told in derisive fashion to “learn to code.” Now AI is doing quite a bit of coding, so not great advice from Chocolate Jesus and his minions.
Capitalism is not perfect but it does work better than the other economic isms. Pity we no longer practice it, preferring instead a version of corporatism where business and govt are often in bed together, colluding against the ordinary person. The elected class, which has never made a product or a payroll, has far too much sway over those who make both.
A big part of the white collar rush started back in the 80’s/early 90’s in response to the tech boom. Computers were a HUGE deal at that time, as I’m sure you recall, and with many tech jobs, they do actually require some sort of secondary education (most likely college). Of course, computers still are a big deal, and there is lots of money out there for folks who want jobs in science/tech. Many of these are real jobs, and many of these scientists/engineers/programmers are absolutely necessary for future discovery/manufacturing.
The trouble is, we sort of forgot about the other side of the coin. I picked up CNC machining long ago, because I come from a blue collar family, and I’m good with numbers. It also helped that I could get started on a semester’s worth of courses at the local community college, which cost about 500 dollars at the time. Now I make pretty good money, and I love my career. I won’t ever get rich doing this, but it earns a solid honest living.
The good news is, there has been a recent huge movement to re-emphasize skilled manufacturing careers over the last few years. Hopefully, this syncs up well with a new manufacturing boom here in the states. We already have a bunch of boomers retiring, so we are at a shortage as it is.
I believe it’s simplistic and naive to assume the concept of a free market still applies today. When Adam Smith spoke of “laissez-faire,” he couldn’t have anticipated the rise of technology and its profound impact. In fact, David Bowie seemed closer to predicting how wildly technology would reshape the world. Referring to historical ideas often requires a pragmatic and realistic approach. With today’s advanced technology and other countries being equally capable, it’s unrealistic to think the market can truly remain free. Nothing influenced by humans is ever entirely free—if it were, no one would trust medicine or food! Common sense is still common sense.
That said, the real issue in the U.S. is the lack of a domestic policy to ensure the country has a long-term strategy. If private equity and capital organizations contributed even just 1% of their profits toward national development, we’d be in a much better position. At the most basic level, people need shelter, food, and interaction before they can innovate. Putting large groups of people in survival mode stifles innovation and ultimately leads to a country’s decline.
In the end, it’s Americans being exploited by their own system, and it’s hard for outsiders to fully grasp the severity of the situation.
The authors recommended answer to the problem of more government intervention into the capital market when it has arguably been government intervention and hyper-regulation that is a big part of the problem we are currently experiencing.
There is only one time that the fridge freezer can be invented
Good article, but I am not convinced. Capital will flow where there is a good risk-adjusted rate of return. The problem is that most sectors of the economy now are subject to government intervention or regulation. Western governments have shown, with the financial crisis of 2008, with net-zero, and with Covid, there is almost no limit to their potential intervention. When, today, financial institutions say they are willing to invest in infrastructure, they don’t mean capitalistic investment. They mean corporatist cooperation in government intervention. Elon Musk is a glorious exception.
“Special report: The American economy has left other rich countries in the dust…..Expect that to continue” “American productivity still leads the world.” These are the headlines of two feature articles this week in The Economist….normally seen as pre-eminently having the pulse of economic issues. Has the author of this essay read them I wonder?
If you call a growth rate of 2 percent versus zero “leaving other rich countries in the dust”, well, ok. I note that according to World Bank figures, the contribution of the US economy to global GDP has just fallen below 15 percent for the first time in over a century. The rag you quote is little more than a mouthpiece for neoliberal orthodoxy.