When in the course of human events things get really messed up,
well, then, it’s time to rethink some basic concepts...Neoclassical
economics cannot explain how a national economic system, much less a
global one, will operate in the long-term, across industries, in the
presence of technological innovation, and in conjunction with the
ecosystems on which all economies depend.
When in the course of human events things get really messed up,
well, then, it’s time to rethink some basic concepts. In last
month’s column, I proposed that a new kind of global political and
economic architecture needs to be envisioned, or else the reigning
neoimperial philosophy and its beneficiaries, the global elites, are
going to run the global economy and biosphere into the ground.
The first principle of such a global makeover is that the natural
boundaries of an economy are the physical boundaries that the
movements of tectonic plates have bequeathed to us, the continents
and subcontinents such as India and China. This concept is in direct
conflict with the reigning sales pitch of economics, that
globalization leads to the best of all possible worlds because
production and the market are global processes, not continental
ones. In reality, extreme globalization would produce much less
global growth, with much worse distribution of wealth, than a
continentally-based global economy.
In the view of neoclassical
economics, the market is either perfect (conservative economists) or
almost perfect but the losers need a safety net (liberal
economists). The market is the object around
which the rest of the universe of economics revolves. Since exchange
is the central activity in a market, then trade among nations is the
central activity in the international economy; therefore, we should
have global free trade; in other words, we should accede to the
ultimate triumph of globalization.
Liberals, in the American meaning of the term, are burdened
with the contradiction of accepting the centrality of the market
while trying to ameliorate the conditions of the great majority of
people who do not profit from market-centered policies. Further to
the left, the distrust of the market runs deep, but no real
alternative is presented that people can use to help them better
understand or change the world.
In the service of manufacturing
The second principle of an alternative global architecture is
that production of goods and services, and in particular, the
production of manufactured goods, is at the center of the economic
universe. Policy should be production-centered, not market-centered.
The rest of the economy depends on manufacturing in general and in
particular on the machinery industries.
order to make the manufactured goods that consumers buy, machinery
must be built that will produce the goods that consumers buy. This
production machinery powers the factory and the work site. Advances
in production machinery propel the manufacturing sector forward,
which in turn enables growth in services.
Trade and services follow
manufacturing, not the other way around. According to the World
Trade Organization, 80% of the trade among global regions consists
of the exporting or importing of goods, while only 20% of global
trade is in services. This is because, to a
great extent, services consist of the economic activity of using
goods in the location in which the goods are present. Goods, and in
particular manufactured goods, are the main material which the rest
of the economic system uses in order to fulfill the various economic
functions in society. Once a good has been created, it can be
bought, sold, retailed, advertised, shipped, consumed, taxed,
marketed, invested in, insured, speculated on, traded, amortized,
augmented, repaired, cleaned, or otherwise used in any number of
service industries. Services are those activities that take place
within an economy as people use the goods that have been produced,
either domestically or abroad. While goods can be produced outside
an economy, most services cannot.
Looking under the hood
The U.S. economy, that bold pioneer of the post-industrial
future, is just as dependent on manufactured goods as any other
society. The following table shows the percentage of the economy
that each subsector of the service economy provides in the U.S., as
well as the trade surplus or deficit of each:
Table of Services in U.S. economy, 2003, Value-added 
Notice the sheer diversity of services, which constitutes fully
two-thirds of American economic activity. Also notice that the trade
surplus of $61 billion is tiny compared to the trade deficit of
manufacturing of the U.S., hurtling toward $1 trillion per year.
Let us take a quick stroll through the service economy, and see
how most of it is completely dependent on manufactured goods:
- Retailing and wholesaling exist for the function of selling
- transportation services use large pieces of transportation
equipment such as planes;
- telecommunications use sophisticated telecomm equipment;
- advertisers mostly advertise goods;
- the health care industry is completely dependent on medical
equipment and drugs;
- hotels and restaurants provide services based on the use of
buildings and the preparation of food;
- repair services repair manufactured goods;
- computer-related services are performed using computers;
- real estate is the business of buying,
- selling, and leasing buildings;
- even janitors use physical objects to clean other physical
Engineering services shouldn’t be considered a service because
engineers are at the center of the manufacturing process. Scientific
R&D requires some of the most sophisticated equipment on the
planet. Engineering and scientific education requires great amounts
of equipment in order to create people who can make even better
equipment, which in turn is used to produce most of the progress in
the service economy – think of the impact of the internet, which was
made possible by advances in semiconductor-making equipment.
Nevermind all that, just make me a star!
But what about that part of the economy that looms so large in
the imagination of the masses, the sector that includes all media
such as TV, radio, and print, and entertainment such as movies,
music, theater, sports, arts, and gambling? What percentage of the
economy do these comprise? When I asked classrooms of advanced
seniors in high school this question, the answers ranged from a low
of 10% to a high of 50%. The answer is -- 3%. These industries
dominate the society’s culture and are used for political
indoctrination – and even, occasionally, to enlighten -- but they
are fairly insignificant economically. At least in the United
States, I would bet that more young people dream of succeeding in
these industries than all the other economic sectors combined. But
such ambitions do not help the economy in the long run, because an
economy needs people who want to make the machinery that makes
goods, a geeky occupation if ever there was one.
sectors to touch on are finance, insurance, and management-related
services, comprising about 10% of yearly economic activity in the
United States. Finance and insurance recycle the surplus created by
the other 78% of the private economy, that is, non-government
related manufacturing, agriculture, construction, mining, and
services. So finance is indirectly dependent on manufacturing.
Government, comprising about 12% of the economy, is dependent on
revenues drawn from the rest of the economy, and therefore,
indirectly, from manufacturing.
What’s trade got to do with it?
Production is not spontaneously generated by the market.
According to one writer, “From the time of the ancient Romans,
through the Middle Ages, and until the late nineteenth century, it
was generally accepted that some life forms arose spontaneously from
non-living matter”. The lack of interest in
production in neoclassical economics gives rise to a similar logic
vis-à-vis production and the market; all one needs to do, allegedly,
is set up the conditions of a perfect market and, voila!, new
technology and better production techniques will come pouring into
History is not kind to such preconceptions. If the Romans had had
a perfect market system, their economy would not have been
significantly larger. If they had had our production technology and
their market, their economy would have experienced explosive growth,
albeit with certain inefficiencies caused by a primitive market. In
his classic study of the Trobriander Islanders, the anthropologist
Malinowski described a “primitive” people with a very sophisticated,
albeit Stone Age, system of exchange; a modern industrial system was
not therefore spontaneously generated. The Soviets, with a very
flawed system of exchange, still became a superpower because of
their technologies of production. No technology, no wealth. Bad
market, less wealth.
If economies are based on continents and on manufacturing, then
what function does trade serve? Free trade is critical
within a continental manufacturing economy because the
various stages of production need unfinished, intermediate goods to
be moved from one part of the economy to the other. But trade
among continental economies is not very important, as long as
each economy has done the right thing and constructed its own
complete suite of industries.
When a manufacturing system is
essentially self-reliant, that is, needs very little inputs from
outside, then technological progress and the quality of output will
increase because of the advantages that the different parts of the
system receive by being in close proximity to each other. There are two main ways
in which inter-regional trade can still be useful.
there are certain raw materials that are critical to an economy, and
those raw materials are very unequally distributed among nations,
then trade becomes important in order to redistribute the raw
materials. Exhibit A is petroleum: critical to the global economy in
its headlong rush to global warming, those with liquid gold are at a
Not only does a relatively scarce material make trade necessary,
but scarcity leads to geopolitical jockeying and eventually to wars.
The conventional wisdom since before WWI was that trade would lead
to greater peace because trade produces gains for all parties. Perhaps this is true when
a cessation of trade would not be catastrophic, but when the traded
commodity is absolutely critical then control of trade actually
becomes a cause of war , not of peace. The Bush neoimperial
campaign for control of the global oil trade is the premier example.
Solar energy generation, by contrast, is most dependent on silicon,
which is the second most plentiful mineral on the planet. A global
reliance on solar energy as opposed to oil would remove a major
cause of war. When something has to be traded, somebody
thereby gains power, and great harm is usually the result.
Let 100 technologies bloom
While trade can be important because of the unequal distribution
of raw materials, interregional trade can actually be helpful to
humanity by spreading innovations from continent to continent, as it
has for millennia. That is, if there were nine
fully functioning, thriving industrial centers in the world, then
there would be nine sources of first-rate technological innovation.
Certainly this would be better than having two or three, as
presently. Unlike the theory of comparative advantage, which
absurdly advances the idea that it would be better for humanity if
each industry specialized within one nation, the history of
technology shows that having many centers of innovation encourages
more and better innovations.
Darwin’s theory of evolution rests on the concept of multiple
centers of innovation. In the case of evolution, each reproducing
organism is a center of innovation, because each reproduced organism
may constitute a “variation”, to use Darwin’s term, from the
original from which it was born. It is the set of variations which
gives rise to the ability of life to adapt to changing environments,
because some variations do better than others in a particular
environment. If life had followed the law of comparative advantage,
we would probably all be sea slime, because all of life’s eggs would
have been confined to one basket. As Mao said, let one hundred
flowers bloom – only don’t do as Mao actually did, which was to
eliminate those he didn’t like.
Mao invented a great metaphor, but the irony is that this concept
is part of the core of mainstream economic thinking. After all, one
of the main benefits of a competitive economy is supposed to be the
capability of the each firm to outcompete the other by developing a
better way to make something. The theory of comparative advantage
contradicts this idea by advancing the notion that monopolistic
specialization will lead to a better global economy.
A world based on globalization would be less technologically
active than one based on production-centered, continental economies,
because regional economies would create more innovations than one in
which each specialty was monopolized by one region. Every region,
even the U.S., needs to have a manufacturing system in order to be
What, me worry?
Currently, American economists are facing an ideological dilemma.
The United States is running up huge trade deficits in manufactured
goods, because the manufacturing base of the country is failing.
Even the pied pipers of the Federal Reserve Bank acknowledge that
such trade deficits are “unsustainable”.
Since manufactured goods constitute most of world trade, and the
U.S. economy is becoming more and more based on services, the U.S.
is more and more unable to exchange goods for goods. The implication
of this situation is clear: in order to be wealthy, the U.S. must
rebuild its manufacturing sector. But to admit that one sector,
manufacturing, is necessary and irreplaceable, would be to throw the
profession of economics into chaos.
All of the tools of the economist’s trade are based on the ideas
of substitutability, sets of linear equations, equivalency to
mechanical systems such as gases and liquids, with all of the
attendant virtuoso mathematical manipulation. To admit that there
needs to be a permanent sphere of manufacturing and machinery at the
center of the economic system, surrounded by other, irreplaceable
sectors, all with specific relationships to each other, would imply
that an entirely new way of looking at the economy was in order. So
economists tend to stick their collective heads in the sand in
ignore the looming economic crisis.
The principle that manufacturing is a necessary and central part
of the economy logically leads to the conclusion that if
manufacturing is in decline, then it is necessary to reverse that
decline. In the case of the U.S. the decline of the manufacturing
base has been caused by the relatively unregulated operation of the
market and the construction of a huge military-industrial complex.
Therefore, the only possible way to rectify the situation is to have
the government intervene in the economy by redirecting resources
from the military to the manufacturing sector.
Enter government, stage left
As inconvenient as the truth of the centrality of manufacturing
may be, an extreme makeover of the global economy would have to
include a reorienting of the public’s focus from markets to
production. And much to the consternation of those who are profiting
from the decline of American manufacturing, the third principle of a
global economic architecture should be the following: government
must manage the economy in order to support manufacturing, because
the market cannot do the job.
Neoclassical micro economic theory is actually a theory of
how an industry, made up of a homogenous and fairly numerous set of
firms, will behave in the short term. The theory does not explain
how industries interact with each other to form a system, how firms
take over whole industries, or how technological innovation changes
the dynamics of the economy over the long-run. Neoclassical
macro economic theory, at best, is a theory of how an economy
will operate, in the aggregate, over the medium term.
Neoclassical economics cannot explain how a national economic
system, much less a global one, will operate in the long
-term, across industries, in the presence of technological
innovation, and in conjunction with the ecosystems on which all
The long-term, global processes of the economy are inherently
chaotic. That is, small causes may have large effects, random
elements may change stable trends, there may be “tipping points”
that shift a system from one fairly stable mode to another, and
technological change is unpredictable. In an unpredictable world,
only the government has the capability of managing an economic
system as a whole. This doesn’t mean that the government should
centrally plan the economy, Soviet-style – quite the contrary, it is
because of the chaotic nature of economic and ecological systems
that central planning cannot work.
What is needed may be more accurately described as
stewardship – watching the system carefully, and making
appropriate adjustments when necessary, but otherwise letting the
system operate on its own, in as a regulated “free market”.
Government has been pursuing this stewardship model with regard
to ecosystems for sometime, particularly within national parks like
Yellowstone. If deer are getting out of control and eating all the
grasses, reintroduce wolves. If a species is in danger of being
eliminated, protect it. If there hasn’t been a fire for a long time,
prevent an “unnaturally” destructive fire by burning the
In a similar way, governments have been managing economies since
civilization began. The main method governments use to manage the
economy is by controlling the infrastructure -- the transportation,
energy, communications, and water systems of an economy. Governments
have also encouraged production throughout history, in the
industrial age by creating a manufacturing sector if necessary, or
by protecting “infant industries” from larger, more advanced ones,
as advocated by Alexander Hamilton. Governments have also been
intimately involved with the education and training of the
population, and except for the U.S., insuring the health of all of
Because governments were presumed to be so important in the
management of the economy, economics was originally labeled
“political economy”. If manufacturing is central and necessary, then
government stewardship is also necessary, and we can put the word
“political” back into “economy”. But if governments need to manage
the economy, who will manage the managers?
Political power is best seen as beset by positive feedback loops.
The more power one has, the more power can be usurped. Such
snowballing of power eventually leads to a weakened economy, because
the unchained beast of government sucks all of the resources out of
the economy, lavishing riches on government elites, their friends,
or in an attempt to extend power beyond national borders, on a
voracious military. The best solution to this threat so far devised
is to implement democracy. But what kind of democracy? And is
democracy at the national level good enough? Is there a way to
extend democracy to the economic system? What about at the global
level where so many problems must be solved?
How can we solve the problems of global warming and global
economic financial meltdowns?How will it all turn out? In what
political and economic directions are the continents moving now, and
what hope is there for…the future? Find out in the heart pounding,
season ending episode of…Extreme Makeover, global edition!
You can contact Jon Rynn directly on his jonrynn.blogspot.com .
You can also find old blog entries and longer articles at
economicreconstruction.com. Please feel free to reach him at
This email address is being protected from spam bots, you need
Makeover, Global Edition, Episode 1 ”.
The best of
the liberal mainstream economists in this regard in Dani Rodrik at
These ideas are
elaborated in “Why
manufacturing and infrastructure are central to the economy
WTO publication, .
Trade Statistics , 2004, World Trade in 2003, Overview ,
page 23, Table 1.9.
 Percentages are from
Survey of Current Business, January 2005, .Annual Industry
Accounts.,Table 1, and trade figures are from Survey of Current
Business, October 2004, .U.S. InternationalServices., Table 1. In
order to calculate the value-added percentages for several small
servicesubsectors, I used the data on revenue to calculate the
percentage that a certain sub-subsector was of a subsector, and
applied that percentage to the subsector.s value-added.
 See the
followoing link .
 This idea is further
elaborated in “Extreme
Makeover, Global Edition, Episode 1 ”.
 The Princeton political
scientist Michael W. Doyle has written extensively about this idea.
 The economist Amartya
Sen has written on this topic as a challenge to Samuel Huntington’s
theory that civilizations clash.
instance, the Captain of pied pipers, Federal Reserve Chairman Ben
Bernanke, in a speech
given in 2005.