Basically, Melman's argument is that, first, a huge military-industrial complex, and then, a huge financial system, warped the production competence of American management.  Most of his books deal with the first problem, of military production.  In a nutshell, the cost plus nature of military work -- the overly complex machinery, the lack of attention to cost -- in fact, the effort to inflate cost -- the exotic and purely military nature of the technologies that engineers and managements in military firms concentrate on, leads to an engineering and management that finds it very difficult to transfer their skills to civilian work, in fact, their civilian work is not cost-competitive.

Another way of looking at this is, what made the Soviet system inefficient?  Because basically the Soviet system was an enormous military-industrial complex, a Pentagon writ large.

The financial system has warped the manufacturing system by insisting on short-term profits, which has translated into the goals of low-cost wages, instead of the long-term strategy of the Europeans and Japanese, that is, concentrating on improving your machinery and production methods.  When financial people take over manufacturing companies, the result is usually big trouble, because the easy path is simply to cut costs.

In addition, Melman argued, unions actually help improve the competence of the industrial sector.  When wages go up, which they did during American dominance, competent managements compensate by introducing more machinery and better production methods (as you can imagine, this line of argument did not please the economics profession).

A "strong" dollar also did not help, because it devastated the export sector, by making goods artificially high.  This is the down-side of having a global currency, as the British found out a century ago.

The result, which the economics profession refuses to acknowledge, is that the trade deficit, among other things, occurs because American managements don't know how to make manufactured products as well as Europeans and Japanese, and don't know enough about production processes to produce low-cost goods to compete with the Chinese by automating.

I hope this is helpful.

The post-war buildout of American industry was entirely under the supervision and at the behest of the military.  Yet we enjoyed 20-30 years of success subsequently.  So I'm having trouble with the idea that the military's involvement was the prime contributing factor.

The financial incentives you cite seem substantially more legitimate reasons, with the obsessive focus on quarterly results being the the most obvious key problem.  That comes directly from the stock market, and the laws that forbid a CEO from seeking any good other than shareholder value.  And yet, are European and Asian markets and laws really so different?  I'm asking because I honestly don't know, but I figured there had to be a certain degree of parity between our systems and theirs, if only to facilitate multinational business.  My assumption, in that context, is that the short-term-profits obsession and visible-numbers-only management style that has so damaged American business was a matter of culture and expectations more than of financial or legal constructions.

Thoughts?

Incidentally, it seems to me that the entire thesis of your argument hinges on whether or not one believes in the "loss of competence".  Which is a very large assertion to make with very little text (in the original post).  Not that I necessarily disagree, but I'm just saying...

1. The Europeans and Japanese are much more dependent on banks and their own internal funds (in the case of Japan, within a corporate group), which allows them to have a much longer view.  The Germans also have codetermination, that is, all employees vote for a shareholders board of directors, which cuts down on the outsourcing.  In Japan, there was a social contract of sorts that accomplishes much the same thing, so a comparison of the various political/economic systems is important.

2. They also don't have a huge military and empire, which the US has (and USSR had, yes, there were certainly other problems there as well).  There's a lot of ruin in a country, as Adam Smith said, which makes it more difficult to trace the direct causes of decline, but in the US case Melman tried to document as well as he could the causation from military to civilian, starting in 1963 with a book called "the depleted economy"

3. Showing lack of competence is another huge issue -- the most obvious pieces of evidence are the imports, and the percentage of imports that are consumed here.  This has been a huge shift, some of which one would expect as other countries "catch up", in the social science lexicon, but no well-developed advanced country should have our level of import penetration, which covers all sectors.  If anything, our initial advantages should have helped us.

In addition, there's the 3 million jobs lost in manufacturing, some of which can be "credited" to automation, but that's been going on for a century.  So again, one would have to look at the particular sectors.  Usually, the loss of jobs via automation gets made up with new jobs because the management adds more factories, that is, expands output, and the workers in the automating machinery factories get more jobs, but that hasn't happened, or at least not to the same extent, as before.

Finally, there's economyincrisis.org, which keeps a list of companies and sectors that are now in foreign hands -- one would assume that the foreign managements are more competent.

So there are a whole suite of factors, although a real good accounting would take another post (or book), obviously.

What I think is essential to understanding the loss of competence, as Melman and any rational observer sees it, is that job skills are perishable, not only between generations, but within a generation as well.  Manufacturing jobs that require a degree of complex skills are even more perishable such that, once industries leave a particular country, there is no longer any way to domestically retain that set of skills.  Melman offers several anecdotal stories of foreign engineers coming into US factories and being asked by the workers if they are there to study US manufacturing methods, only to be told that they were there to teach the Americans methods they had long since lost.  

We are not talking about no longer being able to produce dime store widgets.  When the NYC Metropolitan Transportation Authority wanted to upgrade its subway system with new subway cars, it had to order them from abroad because there is no longer any domestic production of subway or train cars.  We are not just talking about the production means, but the production know-how. That is the loss of manufacturing competence that is replicated across vital areas of our economy.  

Economics 101 tells us that value in a society is created only when something is produced that in turn creates more value.  These are referred to as capital goods and they form the core of a vibrant economy.  Manufacturing machines that in turn help create new things, whether they be buildings, ships, etc., grow an economy.  Our manufacturing sector is measured in hundreds of thousands of jobs, rather than the millions it once numbered, and grows smaller virtually by the day.  This means that growth in our economy comes only in pirating the growth of other economies and infusing the value they create into our own economy.  

This helps explain trade deficits.  In a service-based economy, value is shuffled around without any real value being created and profits come not from growth in capital goods, but in the extraction of profits as this imported value changes hands.

As to the US-USSR comparison, you really have to read Melman for the complete answer.  To summarize, he makes the point that as in Soviet Russia, the defense sector does not act in collusion with the military in some kind of co-equal combine (though the original phrase Eisenhower wanted to use was the military-industrial-congressional complex), but as a production arm firmly under its control and direction.  The military rigorously controls production at defense companies far exceeding what one thinks of as a simply contractual relationship and will shape contracts for the maintenance (and enrichment) of certain companies, spreading the massive share of public largess that comes its way to ensure that its several client companies are well rewarded for their service and adequately taken care of, seconding concerns of a purely defensive or military nature to the imperatives of corporate welfare.  

This is almost an exact replica of the Soviet model of several client companies that formed the core of the military sector under rigorous, centralized state management.  The expansion of so-called "homeland defense" spending has this kind of centralized, state-managed planning writ large.  As Melman often pointed out well before it was fashionable, resources devoted to such enterprises deprive other areas of our economy from necessary resources, leading to further decay.

As an economy and as a society, over the past 50 years we have been sold out by politicians who lack vision to capitalists who lack morals for a society that lacks fundamental security and stability.

So, Dad U.S.A. has to go back to the lathe.

Texeme.Construct(function(x)=Participation(x))

Dear John Rynn,

There is something new concerning me about the global challenge potentially posed by the gigantic scale and fully anticipated rapid growth rate of the global economy that I would like to understand better. Would someone with an adequate background in economics kindly comment on the research of the economist, Clive L. Spash?

Perhaps this good doctor of the economy is one of those rare economists who is actually ecologically-minded rather than religiously growth-oriented. If this fellow is somehow on the right track, we will be served well by stepping up our efforts to raise awareness of the prospect of economic or ecologic collapse or both......sooner than anyone I know is anticipating such an unwelcome occurrence.

The following link will provide an introduction to his work.

http://www.euroecolecon.org/pdf/Spash_on_Stern

Thanks,

Steve

Steven Earl Salmony, Ph.D.,M.P.A.
AWAREness Campaign on The Human Population
http://sustainabilitysoutheast.org/

Obviously, at least to me, if we keep going on the path we are on, the authors of "Limits of growth" will unfortunately be proven correct, and most ecosystems will breakdown.  So some sustainable economics needs to be developed -- I like to think that growth in such a system would be much more modest and information-based, as opposed to big-house-big-car-based.