I consider Definite Optimism as Human Capital to be my most creative piece. Unfortunately, it’s oblique and meandering. So I thought to write a followup to lay out its premises more directly and to offer a restatement of its ideas.

The goal of both pieces is to broaden the terms in which we discuss “technology.” Technology should be understood in three distinct forms: as processes embedded into tools (like pots, pans, and stoves); explicit instructions (like recipes); and as process knowledge, or what we can also refer to as tacit knowledge, know-how, and technical experience. Process knowledge is the kind of knowledge that’s hard to write down as an instruction. You can give someone a well-equipped kitchen and an extraordinarily detailed recipe, but unless he already has some cooking experience, we shouldn’t expect him to prepare a great dish.

I submit that we have two big biases when we talk about technology. First, we think about it too much in terms of tools and recipes, when really we should think about it more in terms of process knowledge and technical experience. Second, most of us focus too much on the digital world and not enough on the industrial world. Our obsession with the digital world has pushed our expectation of the technological future in the direction of cyberpunk dystopia; I hope instead that we can look forward to a joyful vision of the technological future, driven by advances in industry.

Process knowledge is represented by an experienced workforce. I’ve been studying the semiconductor industry, and that has helped to clarify my thoughts on technological innovation more broadly. It’s easy to identify all three forms of technology in the production of semiconductors: tools, instructions, and process knowledge. The three firms most responsible for executing Moore’s Law—TSMC, Intel, and Samsung—make use of each. All three companies invest north of $10 billion a year to push forward that technological frontier.

The tools and IP held by these firms are easy to observe. I think that the process knowledge they possess is even more important. The process knowledge can also be referred to as technical and industrial expertise; in the case of semiconductors, that includes knowledge of how to store wafers, how to enter a clean room, how much electric current should be used at different stages of the fab process, and countless other things. This kind of knowledge is won by experience. Anyone with detailed instructions but no experience actually fabricating chips is likely to make a mess.

I believe that technology ultimately progresses because of people and the deepening of the process knowledge they possess. I see the creation of new tools and IP as certifications that we’ve accumulated process knowledge. Instead of seeing tools and IP as the ultimate ends of technological progress, I’d like to view them as milestones in the training of better scientists, engineers, and technicians.

The accumulated process knowledge plus capital allows the semiconductor companies to continue to produce ever-more sophisticated chips. The doubling of transistor density every 24 months wouldn’t be possible if these firms didn’t already possess deep pools of process knowledge. It’s not just about the tools, which any sufficiently-capitalized firm can buy; or the blueprints, which are hard to follow without experience of what went into codifying them. The US has many decades of experience in designing and fabricating semiconductors, and it has developed the talent ecosystem that succeeds in pushing Moore’s Law forward. This cluster of talent allows the US to maintain its lead on a critically-important technology.

The US industrial base has been in decline. But sustained innovation in semiconductors is an exception in US manufacturing. The country used to nurture vibrant communities of engineering practice (a term I like from Brad DeLong), which is another way to talk about the accumulated process knowledge in many segments of industry. But not all communities of engineering practice have been in good shape.

The real output of the US manufacturing sector is at a lower level than before the 2008 recession; that means that there has not been real growth in US manufacturing for an entire decade. (In fact, this measure may be too rosy—the ITIF has put forward an argument that manufacturing output measures are skewed by excessive quality adjustments in computer speeds. Take away computers, which fewer and fewer people are buying these days, and US real output in manufacturing would be meaningfully lower.) Manufacturing employment peaked in 1979 at nearly 20 million workers; it fell to 17 million in 2000, 14 million in 2008, and stands at 12 million today. The US population has grown by 40% since 1979, while the number of manufacturing workers has nearly halved.

When firms and factories go away, the accumulated process knowledge disappears too. Industrial experience, scaling expertise, and all the things that come with learning-by-doing would decay. I visited Germany earlier this year to talk to people in industry. One point Germans kept bringing up was that the US has de-industrialized itself and scattered its production networks. While Germany responded to globalization by moving up the value chain, the US manufacturing base mostly responded by abandoning production.

Brad Setser has shown that the US stands out amongst rich countries for its low level of manufactured goods exports. Call me simple-minded, but I believe that the world’s most developed country ought to be responsible for exporting goods around the world. Instead, the US runs both a trade deficit and a current account deficit. The US trade deficit is high not only because it imports a lot of goods; it’s high also because it doesn’t export very much. In order for other countries to import more from the US, first it should have better goods to sell.

Knowledge should circulate throughout the supply chain, flowing both up and down the stack. Successful industries tend to cluster into tight-knit production networks. The easiest way to appreciate the marvel of clusters is to look at Silicon Valley, where capital, academia, a large pool of eager labor, and companies both large and small sit next to each other. To any of us who have spent some time in Silicon Valley, it’s obvious that this concentration of economic linkages is part of the magic that makes the system work.

There are many other examples of industrial clusters. Taiwan’s semiconductor industry was founded and is still centered around a small industrial park south of Taipei. Silicon Valley is so-named because it was the center of semiconductor production (and it has enough toxic Superfund sites nearby to prove that heritage). It’s not just chips: autos, electronics, biotech, aviation, and machine parts all tend to be geographically clustered.

Proximity makes it easier to generate process knowledge. But what happens when we tear apart these production networks by separating design and manufacturing? Sometimes it’s no big deal, sometimes it works out great. But I believe that in most cases, dislocation makes it more difficult to maintain process knowledge.

Both the design process and production process generate useful information, and dislocation makes it difficult for that information to circulate. I think we tend to discount how much knowledge we can gain in the course of production, as well as how it should feed back into the design process. Maybe it’s easier to appreciate that with an example from computing. Arjun Narayan tells me that good software design requires a deep understanding of chips, and vice versa. The best developers are those who understand how processes interact both up and down the stack.

What happens when we stop the flow of knowledge up the stack? I think that the weakness of the US industrial robotics sector is instructive. The US has little position in making high-end precision manufacturing equipment. When it comes to factory automation systems, machine tools, robot arms, and other types of production machinery, the most advanced suppliers are in Japan, Germany, and Switzerland. I think the reason that the US has little position can be tied directly to the departure of firms from so many segments of manufacturing. How do engineers work on the design of automation systems if they don’t have exposure to industrial processes?

A quote from the article: “A report to President Barack Obama on advanced manufacturing, prepared by his council of science advisers in 2012, concluded that the ‘hard truth’ was that the U.S. lagged other rich nations on manufacturing innovation.”

I don’t see enough Americans being troubled by the idea that America isn’t making advanced industrial robots. It might be fine to think that robots will be doing all the manufacturing work in the future; but someone has to build these robots, and own the IP of advanced robotmaking, and for the most part, that someone is not the US. It can’t be an accident that the countries with the healthiest communities of engineering practice are also in the lead in designing tools for the sector. They’re able to embed knowledge into new tools, because they continue to generate process knowledge.

Let’s try to preserve process knowledge. The decline of industrial work makes it harder to accumulate process knowledge. If a state has lost most of its jobs for electrical engineers, civil engineers, or nuclear engineers, then fewer young people will enter into these fields. Technological development slows down, and it turns into a self-reinforcing cycle of decline. I think we should try to hold on to process knowledge.

Japan’s Ise Grand Shrine is an extraordinary example in that genre. Every 20 years, caretakers completely tear down the shrine and build it anew. The wooden shrine has been rebuilt again and again for 1,200 years. Locals want to make sure that they don’t ever forget the production knowledge that goes into constructing the shrine. There’s a very clear sense that the older generation wants to teach the building techniques to the younger generation: “I will leave these duties to you next time.”

Regularly tearing down and rebuilding a wooden temple might not sound like a great use of time. But I’m not sure if local priorities are entirely screwed up here. These people understand that it’s too difficult to write down every instruction necessary for building even a single wooden structure; imagine how much more difficult it is to create instructions for a machinery part, or a chip. Every so often we discover ancient tools of which we have no idea how to use. These shrine caretakers have decided that preservation of production knowledge is important, and I find that admirable.

Building a vast industrial base and practicing learning-by-doing used to be the American way. Brad DeLong again: “When the technologies of the second industrial revolution arrived, the United States with its cotton and wide market, and its rich natural resources, and its communities of engineering excellence, was able to leap ahead—and in fact greatly surpass Britain in manufacturing productivity pretty much everywhere. So that the 20th century became an American century, rather than a second British century, in large part because of the bets Hamilton had induced the United States to make on not simply following comparative advantage.”

The future should be more than services. Isn’t manufacturing always the low value-added stuff, and that the future should be driven by services instead? I’m not so sure. I’m skeptical that we can pin all our hopes on the services sector because it tends to have two big problems: a lot of it is winner-take-all, and much of the rest is zero-sum.

One of the issues with services jobs in the US is that most of the gains are captured by very few workers. Two services sectors are enormously productive: tech and finance. But other sectors, like retail, hospitality, and food services don’t generate productivity growth quite as quickly. Therefore, while aggregate production can rise, consumption doesn’t tend to keep up. That’s because overall production gains in services are asymmetrically generated by hedge fund managers and machine learning engineers, not the hotel workers and retail staff, and these highly productive workers can only consume so much.

Another issue with a lot of service work is that much of it is zero-sum, a point made very well by Adair Turner. Too many service jobs are meant to cancel out the efforts of other service jobs, for example in litigation, where a plaintiff’s lawyer creates a job for the defendant’s lawyer. And often the zero-sumness is asymmetric: a dozen hackers make a theft, and companies everywhere subsequently need to spend collective billions on staff or contractors to protect themselves; a few criminal plague a state, and the government subsequently needs to hire hundreds of officers to make people feel safe; a few people commit accounting fraud, and the ensuing uproar forces companies and banks to ramp up the size of their compliance departments by tens of thousands in the aggregate.

There’s an entertaining line in the Brad Setser piece I linked to earlier. He tells us that one of the reasons that the US has such a high surplus in the services trade is that Americans have a low propensity to travel abroad. I don’t view that as a great way to earn a trade surplus.

My favorite genre of the Bloomberg column has become Noah Smith dunking on the United Kingdom. Services make up about 80% of the British economy, and that has brought along a host of problems. These include low levels of productivity growth over the last two decades, extraordinary vulnerability to the financial crisis, and low levels of R&D spending by its biggest companies. Matt Klein has put forward a fun claim: “Take out Greater London—the prosperity of which depends to an uncomfortable degree on a willingness to provide services to oligarchs from the Middle East and the former Soviet Union—and the UK is one of the poorest countries in Western Europe.”

One more thing on the UK: I really enjoyed Power to Compete, a book made up of the dialogue between two Japanese thinkers. (Thanks to Noah for making the recommendation.) There are many good lines, one that jumped out at me was: “If you look at the United Kingdom, I think the policy of prioritizing debating and thinking has failed them.” (I would also suggest that this liberal arts emphasis on argument turns universities into incubators of Girardian terror.)

Power to Compete is worth reading because it’s by two people who clearly recognize the problem of low growth and are serious about offering solutions. There is no attitude I find more refreshing.

How are we going to be a technologically accelerating civilization without an industrial base? I’ve made the negative case for services; is there a positive case for industry? Yes, I think so.

The internet is important, and we’re likely still underrating its effects. But I don’t think that we should let innovation be confined entirely to the digital world, because there’s still too much left to build. The world isn’t yet developed enough that everyone has access to shelter, food, water, and energy at a low share of income. Hundreds of millions still live in extreme poverty, which means that manufacturing and logistics haven’t overcome the obstacles of delivering cheap material comfort to all.

And I submit we can’t bring ourselves to calling it the “developed” world until we’ve built so many other things, a point made best by Peter Thiel. We go to work in subways built in the ‘70s, guided by signals equipment put in place in the ‘20s. We’ve been moving more slowly across the planet ever since we decommissioned the Concorde, at a time when global travelers want faster access to major hubs. Are we sure that the developed world is not undergoing its own premature deindustrialization? When people bring up that the fact that the digital world has become very fun, I tend to think that the response smacks of “Let them eat iPhones.”

I’m not saying that manufacturing has special moral worth, and I’ve previously acknowledged that much of manufacturing is unpleasant and hazardous. I’m interested in industry because I see the maintenance of an industrial base as a precondition to building the science fiction technologies of the future.

What are some of the things I’m looking for? For starters: energy too cheap to meter; colonies on Mars and beyond; re-forestization of our deserts; nanotechnology that lets us print basic materials; medical devices and pharmaceuticals that prevent, treat, or cure most ailments; a deeper understanding of materials; and so many other things. To make these all happen, we need to have the development of a lot more tools and machinery.

People who grew up during the Space Age remind us how much lower we’ve re-calibrated our technological expectations. Here’s George Dyson, son of Freeman, after watching a space tourist rocket launch from Baikonur: “When I grew up as a child, Freeman was building this spaceship that was supposed to leave in 1965 with 50 people for Mars and Saturn. The question then was whether the Americans or the Russians would take over the solar system. Here we are, 50 years later after Sputnik, and I’m watching an American pay $35 million to ride on a Soviet-era rocket into low Earth orbit.”

Let’s stay on the subject of space travel. It’s possible that there are warm oceans on the various moons of Jupiter. Why have we not made it a priority to look for extraterrestrial life that might exist on our planetary doorstep, within our very own solar system? I’m volunteering right now to go on the mission that explores these oceans. If I must crowdfund my way up there, I’ll offer to write the next Moby-Dick, or Twenty Thousand Leagues Under the Sea, depending of course on the nature and economic value of the monsters that dwell in those depths.

I acknowledge that there’s a chance that all these innovations will come. Cars are becoming self-driving, and they may even fly soon; the private space efforts look very cool indeed; Boom might be bringing back supersonic jets. But I don’t find their potential sum to be sufficiently exciting. And we may not get them all: The US hasn’t been able to create a national tolling system because it’s too difficult to ask different states to shift their transponders to the same radio frequency (even after an act of Congress required them to do so). If we can’t figure out an interoperable toll system across the states, how soon will we be able to work out the regulatory system for self-driving cars?

The US should emulate a different country. There’s a country I admire whose experiences thread together many of the themes of this piece: I think that the US should learn from Germany. I think of Germany as the country that has done the best job of nurturing its communities of engineering practice. For decades, or maybe centuries, Germany has engaged in industrial deepening.

I was there earlier this year to study its excellence in industry. I can’t claim to totally understand how the systems all work, but I can identify at least a few factors of success: academic collaboration, corporate encouragement, and a commitment to pass on skills all play a part. I’m especially struck by the attitude of older workers, who feel they have a responsibility to transfer their knowledge to younger workers. Today, German companies remain leaders in many segments of industrial technologies.

That’s not to say that everything is going great for Germany. Germany and the rest of Europe seem to have missed the bus to the digital age. It’s hard to name many European companies started in the last 30 years that are leaders in their industry; the best example I can think of is Infineon, a semiconductor spinoff from Siemens with a market cap of $30 billion, and I guess we can include Spotify, though I’m not sure if it’s really a leader. Here’s a remarkable line from the Economist: “If Ericsson and Nokia continue to shrink, only one European firm, Schneider Electric, would be left among the world’s 35 biggest tech companies by revenue.”

Germany and the US have different strengths. The former is good at industry, the latter is good at information technology. But I find it odd that each is poor at what the other is good at. There’s no principle I can discern that forces us to choose one or the other, and I’m optimistic that a country should be able to excel at both industry and the internet.

Both the US and Germany have experienced disappointing growth over the last few decades; I can identify incriminating data points for each country. In the US, rent growth in major cities have outpaced income growth; for reasons I can’t yet get my mind around, homeowners in cities like San Francisco have the ability to veto the creation of new housing stock. Who can believe that they’re able to get away with this? In Germany, more than half of all wealth is now inherited, up from 20% in the 1970s (bringing it nearly to UK levels). It seems like people have mostly given up on the idea of generating wealth by doing new things.

Here’s another issue: the US government is slowly giving up its room for fiscal maneuver. Non-defense discretionary spending made up over 60% of the federal budget in 1962. By 2017, that figure has fallen to 15%, and it’s expected to continue its decline. As that share falls, I wonder how that affects the mindset of legislators, who anticipate diminishing responsibility for allocating funds. In absolute terms, the budget they control is still enormous. But I suspect that it takes away the initiative of US politicians: they can simply let the government go on autopilot, since their predecessors have already committed most available funds. If legislators no longer have room to identify new initiatives for spending, what is there to do except find new things to ban, and then argue with the other side?

The US and Germany are innovative in different ways, and they each have big flaws. I hope they fix these flaws. I believe that we can have a country in which wealth is primarily created by new economic activity, instead of by inheritance; which builds new housing stock, instead of permitting current residents to veto construction; which has a government willing to think hard about new projects that it should initiate, instead of letting the budget run on autopilot. I don’t think that we should have to choose between industry and the internet; we can have a country that has both a vibrant industrial sector and a thriving internet sector.

Development is the only hard truth (or, the social consequences of economic growth). It’s easy to discount the benefits of economic growth if one has lived in a low-growth society for too long. Acceptance of low economic growth is the hidden premise in most commentary that I read. I consider it to be the deepest bias in American and European intellectual society today: it pervades nearly every piece of discourse, from blog posts and bestselling books to movies and pop songs. And I find no theme more radical and refreshing than generalized frustration that economic growth is way too low.

I’d like more people to consider that there are major positive consequences for high economic growth. When people have experienced a few years of high growth, they’re conditioned to expect more of it. That expectation increases risk appetites for both companies and individuals: people have seen their lives getting better in a hundred different ways in the last four decades, and they can be optimistic that more things will improve. They’d be more comfortable starting new businesses or trying on new careers, and these activities won’t even feel like risky events, because new opportunities have always been coming along.

All of this is on top of the fact that higher growth improves our capabilities to deal with various problems. If we’re accustomed to low growth, it’s more difficult to imagine a big improvement to our lives unless we can force a redistribution of wealth. But if we’ve experienced high income growth for a few decades, then it’s easier to imagine that we can make our problems go away because we keep accruing greater resources to deal with them.

It’s the same story with businesses, which can feel emboldened to expand and try new things, because they expect demand to be greater next year than today. I think that these principles are clear to companies in Silicon Valley, where executives make decisions based on their expected position in six months rather than their current position. I suspect that a history of growth also has positive effects on government policies. It encourages the government to engage in long-term planning, because legislators have seen things get better and expect greater room for maneuver.

That view is informed by Bryan Caplan’s idea trap, with which I had not been familiar when I wrote my original piece. I find Caplan’s idea compelling, and it has influenced my baseline model of the world. The countries with low growth will continue to stagnate, because economic rigidity is self-reinforcing; the countries with high growth will continue to grow, because dynamism is self-reinforcing. The latter will have optimistic people, while the former have settled into complacency.

Dystopian science fiction is the natural outcome of stagnant growth; no wonder so much of the science fiction published in the last few decades has been so bleak. What else should we expect when digital technology accelerates but nothing else does? If nicer shops and more hipster cafés are one’s only exposure to physical change, then it’s hard to imagine how the future can be radically different. On the other hand, if cities are rezoning and reinventing themselves every decade, it’s much easier to expect change.

My message to US, Japanese, and European voters is to please cast off this appalling indifference to low economic growth. It seems like you can get the electorate fired up on any political issue except for serious discussions on how to reach a sustained acceleration of GDP. How about electing leaders who can offer a plan to reach 3% GDP growth and sustain it for a few decades? Unfortunately, not even Caplan is sure about how to escape the idea trap, because he says that the only way to break out of this equilibrium is “luck.”

Optimism as a propellant of growth (or, more industry and less Twitter). Instead of waving my hands around to claim that growth comes down to luck, I’d like to wave my hands around in a different way and say that it comes down to a choice to be optimistic. I concede the circularity to the argument, because optimism is probably endogenous to growth. But I’d suggest that optimism can also be the result of proximity to industry, greater enjoyment of science fiction, and avoiding Twitter and politics.

I wish that more of us would study the ‘30s, a decade which saw the systematic application of American ingenuity to the improvement of machinery. That was a time of fantastic advances in chemicals, rubber, electrical machinery, scientific instruments, and many other things. It was a decade in which “technology” referred to advances in aviation, radios, oil recovery, cinemas, and more. How refreshing to consider that people thought that technology was accelerating on many fronts, not just a handful.

1939 was the year of the New York World’s Fair. It was an enormous production that encouraged people to imagine the promise of industrial technologies and to think about how the future will be better than the past. It’s fun to read some of the accounts of Futurama exhibit: “Sponsored by General Motors to the tune of seven million dollars, the equivalent of ninety-one million dollars today, it was the largest animated model ever built: 35,738 square feet. It required the labor of some three thousand carpenters, electricians, draftsmen, and model-makers, and the manufacture of five-hundred thousand miniature buildings varying in scale, and fifty thousand futuristic silver automobiles—ten thousand of them designed to move.”

I think that US culture took a wrong turn when we decided to make fun of plastics and subsequently to celebrate Wall Street instead. Plastics are extraordinary, but the graduates of our top schools are much more enthusiastic about joining an investment bank than to improve our mastery over materials. If we view excellent talent as a scarce resource, then I think it’s regrettable that asset management attracts so many smart young people. I’m not sure that improvements to capital allocation is the most critical accelerant of our technological civilization; on the margin, the more direct improvement probably comes from having smart people make their careers in industry.

I’d like more of us to have greater exposure to industrial processes. Let’s look more at heavy machinery, chemicals, rockets, and all the marvels of the industrial world. Would anyone else like to subscribe to a magazine on industrial goings-on? I’d like for there to be a monthly publication that features interviews of engineers in different segments of industry. We can hear about the current state of the art, how they got here, what are the current constraints, what’s coming down the pipeline, and then to speculate a bit: If we solve some of the big constraints, what kind of advances can we look forward to?

That’s all stuff I hope more of us can develop an interest in. On the margin, what should we be diverting our attention from? Easy: Twitter and politics.

I mean to tune out the angry side of Twitter. The good parts of Twitter are very good indeed, and every day I marvel at how many great links are dropped into my feed by people I follow. I tweet/retweet three things: informationally-dense pieces, interesting pictures, and good jokes. Generally I try to follow people who do the same. Occasionally the waves of angry Twitter wash up on my happy island, but it’s not frequent.

There’s an endless array of social issues to get mad about: we can argue all day on Facebook, Reddit, or Twitter, as indeed some of us do. I confess surprise at the amount of outrage that Twitter can muster over “takes.” The national sport of Twitter is to denounce columnists of the New York Times, which anyone can play from the sidelines. I submit that we don’t have to give in and let everyone know we feel that a column is trash, that the columnist is awful, and that the paper deserves censure as a whole. 

Most of us don’t need to pay attention to the day-to-day of politics, no matter how much the media is trying to convince us otherwise. Let’s turn our minds to more productive uses, like reading books and acquiring skills. One of the first things I did after the 2016 election was to cancel my subscription to the New Yorker; I’m still proud of myself for having quickly taken decisive action. Another possibility is to leave the US, as I did. I understand that this is not an option for everyone, but for some young people at least, maybe this is a good time to spend time abroad. Get out when unproductive debate is the ambient national mood, and move to a more sane environment where you can really learn something instead.

I know few people who are broadly curious about the material world and industrial technologies. I hope that we can turn our minds towards studying them, at the expense of paying attention to politics.

People with the right priorities. In my previous post, I cited Neal Stephenson’s ideas extensively. His novels stress the importance of the material world; and he believes in the capacity of science fiction to inspire optimism. I find that Matt Levine is another writer who has a clear sense of the limits of digital technologies. His newsletters feature many examples of how the real world is a mess, and that it can’t be dealt with entirely as a financial or digital abstraction.

Here are a few other people I want to highlight as having the right priorities. They each played some role in helping to build out the digital world. After they put in that work, they mostly switched their attention to improving the material world.

Bill Gates. What did the co-founder of Microsoft decide to focus his energy on after he left the company? Not computers, the internet, or mobile. Instead, it’s philanthropy, with an emphasis on health, education, and energy. He thought that there were enough people working on the digital world, and that he (and his capital) should mostly try to improve the material world instead.

Freeman Dyson has a wild imagination, and usually his crazy ideas have nothing to do with the digital world. There has never been a Dyson interview that I haven’t enjoyed reading. Here’s one of his early projects: “We decided we would go around the solar system with a spaceship driven by nuclear bombs. We would launch the ship into space — ‘bomb, bomb, bomb, bomb,’ about four bombs per second — going up all the way to Mars and then afterwards to Jupiter and Saturn, and we intended to go ourselves.”

Andy Grove. The former Intel CEO became a vocal advocate for American manufacturing in his later years. He laid out his case in a 2010 Bloomberg Businessweek essay. I’ll just lay out the most bare of summaries here: Grove was skeptical that startups can provide a large number of jobs; that the US should focus on scaling up the startups into big companies; and that when the US exports jobs, it also exports innovative capacity and scaling expertise. In other words, he lamented the loss of process knowledge. He recognizes that when manufacturing jobs left the US, “we broke the chain of experience that is so important in technological innovation.”

Here’s more from Grove: “Our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don’t just lose jobs—we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.”

Grove ended his essay with a call to rebuild the US industrial commons; or as I would put it, to regain the pools of process knowledge. A lot of this piece is driven by what I’ve been learning about the semiconductor industry, and I find it heartening to discover that one of the industry’s most important figures thought in similar terms. I’m happy to flag that the ideas of Andy Grove, Tyler Cowen, and Peter Thiel are the driving forces behind this essay.

Does better capital allocation always lead to technological acceleration? I don’t think so. In fact, I would argue that some of the responsibility for the loss of process knowledge can be attributed to the US financial sector, consisting of both investors and financial analysts, with its emphasis on return on capital. (This is also something that Andy Grove brought up.)

My fundamental argument is that technology ultimately progresses because of people, and in particular the amount of process knowledge they’ve managed to accumulate. In my opinion, the US financial sector has underappreciated how important it is to have a deep pool of technically-experienced workers. It’s certainly much easier to identify and measure the stock of tools and IP instead of process knowledge, which exists in people’s heads. As a result, investors and financial analysts have systematically rewarded the firms that are most eager to reduce headcount, which they see as a cost. But just because we struggle to straightforwardly measure process knowledge doesn’t mean that we can dismiss its importance.

I believe that tools and IP are the natural consequence of developing process knowledge. The opposite sequence, however, doesn’t hold: merely having a large stock of tools and IP is no guarantee that we can create more of them. Thus I’m nervous about the loss of process knowledge, and admire countries like Germany and Japan that have kept up the health of their communities of engineering practice.

What are some challenges to these views? I’d like to preserve process knowledge, because I think it’s important for growth and to build the industrial technologies of the future. I also acknowledge that there are many challenges to my argument. Here are a few I find most interesting.

The number of German manufacturing workers has also been in decline. Yes, the number of German manufacturing employees has also been falling (see the statistics, and the chart in this Brad DeLong piece). Doesn’t that suggest that my favored country also hasn’t preserved its communities of engineering practice? I would cite a few things to say that it has preserved them. First, while real output of manufacturing in the US is still at a lower level than in 2008, German real manufacturing output has significantly surpassed its pre-recession levels and has returned to its long-run growth trend. And if we take a look at the sectors that have experienced job losses, we can see that they’re concentrated in lower-value sectors like mining and textile production; over the last decade, Germany has gained employment in higher-value sectors like chemicals, autos, machinery, and electrical equipment. Digging into the data makes me more confident in my claim that Germany reacted to globalization in the correct way, by shedding jobs that aren’t likely to make big gains in process knowledge, and continuing to move up the value chain.

Dematerialization. I remember reading a post by Scott Sumner outlining all the ways that we’re no longer interested in physical things. Sumner is prolific and I can’t find the post anymore; I just remember that he offered many examples in which young people have become more interested in experiences than in owning stuff. (If anyone can email that post to me, I’d be happy to link to it here. Update: The post is here.) If it’s really the case that we’re more interested in establishing status through going to concerts and on exotic vacations, then it’s possible that we won’t have the aggregate demand required to sustain a growing industrial base.

Has most process knowledge already been embedded into tools? One of the best essays I read recently is by Willy Shih, who argues for the affirmative. I recommend reading the whole thing, that essay is one of the prompts for this piece. I’m not sure if it’s easy to cite any aggregate statistics to try to refute it, but I can gesture at a few things. I don’t think it’s the case yet that everyone is effectively able to use the latest tools; we see that companies in semiconductors, aviation, and the internet are mostly concentrated in a few countries. Relatedly, income between countries has continued to diverge even though any sufficiently-capitalized firm can buy the same advanced machinery. These facts suggest that some countries are using tools more effectively than others, probably because they have more process knowledge.

I’m happy to acknowledge that there are many more challenges that I haven’t laid out. I’m not saying that I’ve figured out which industries should be better developed and when to let an unproductive industry go. It’s probably wrong to be critical about rational business decisions if I feel that they get rid of process knowledge. The thrust of my piece is to ask more people to consider how process knowledge grows and to suggest that we should be pushing forward the technological frontier on many more fronts.

There’s more cool artwork of space colonies from the Nasa Ames Research Center.

Definite optimism as human capital. I want to tie this piece off by returning to semiconductors. I believe that technological progress is not inevitable, and that we have agency on how hard to push it forward. A doubling of transistor density every 24 months is not some foreordained natural law, gifted to us through heavenly benevolence. That sort of progress doesn’t happen unless we put a bit of thought into it. Moore’s Law is not a promise, but a challenge, and we’ve met it pretty well so far.

One day, we can throw up our hands and declare that we’ve had enough innovation in semiconductors. “The future is in services instead, not in this kind of toxic manufacturing work.” We can fire all the nerds, throw out all their books, and shut down all these fabs. Let’s say it takes a few years for us to come back to our senses. When we subsequently want to revive the industry, it may not be as simple as plugging in the machines, blowing the dust off of the blueprints, and then happily expect production to resume at prior levels. The hard-won process knowledge held by these engineers will have decayed, and the workers will have to relearn a bunch of things.

I think this decay in process knowledge has happened to a lot of industries. That’s not exactly the case in Germany (although it has its own problems). When I talked to Germans about industry, they declared that they’re vigilant against de-industrialization. They say that engineering is a part of the German identity, and they’re not likely to let go of that very easily. I find that a wonderful thing to believe in. Let’s take a look again at the UK, which seems to have made a conscious decision that it will no longer do industry: “Van Reenen determined that British firms had lagging R&D investment across most of the country’s industrial sectors. This decline was compounded by a significant withdrawal of government support for R&D in the 1980s.” It’s easy to let industry decline if we want it to.

I wish that more of us would study production networks. That means thinking more in terms of systems. Healthy ecosystems are hard to maintain, but if you build them up and continue to inject vitality into them, they deliver sustained breakthroughs. These types of production systems can be grasped well enough by people in service sectors like tech and law; I hope that we can consider the industrial base in those terms as well.

I don’t contend that the internet is anything but amazing. But I think that the marvels of the digital world have made it harder to see how slowly everything else has moved. Many segments of technology have made cautious progress, and we neglect to see that because our phones engross us so. Our apps keep getting better while our physical world is mostly stagnant; I think that the wonders of consumer internet have deluded us on how contingent our technological foundations have been.

Here’s Peter Thiel: “The first step is to understand where we are. We’ve spent 40 years wandering in the desert, and we think that it’s an enchanted forest. If we’re to find a way out of this desert and into the future, the first step is to see that we’ve been in a desert.”

One of the possible consequences is that much of the science fiction published in the last few decades veer towards cyberpunk dystopia. (The Three Body Problem is an exception.) We don’t see much change in the physical landscape of our cities, and instead we get a proliferation of sensors, information, and screens. By contrast, the science fiction of the ‘50s and ‘60s were much more optimistic. That was the space age, a time when we were busy reshaping our physical world, and by which point the industrial achievements of the ‘30s had made themselves obvious. Industrial deepening leads to science fiction that is optimistic, while digital proliferation pushes it towards dystopia.

The Futurama exhibit at the 1939 World’s Fair was enormously popular: people thought that the science fiction technologies of the exhibit really would come along by 1960. But people subsequently began to lower their expectations. Here’s an excerpt from the book about technology in the ‘30s: “A quarter-century later, GM tried to replicate its earlier success with a new Futurama, looking forward another quarter century and beyond… It was unable to capture the popular imagination, and its forecasts of the future have proved far off the mark. The contrasting receptions of these two similarly titled exhibits are consistent with what the aggregate and sectoral data are trying to tell us.”

I’d like for us to return to optimism. It’s not enough to tell everyone: “Just choose to be optimistic.” Instead, I’m suggesting that we can nurture optimism by developing a greater appreciation for industry and by reaching for higher economic growth. Pushing forward the technological frontier should not simply be someone else’s problem. Instead, the question of how to do so should preoccupy many more of us.

Please see my followup essay: 2019 Letter
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