Why Andy Grove is right

commentary Former Intel CEO Andy Grove is dead on about the dire need to come up with policies to create more manufacturing jobs in the U.S. Look no further than the bustling economies in Asia if there is any doubt.

Here's a key point Grove makes in the Bloomberg piece. "Our fundamental economic beliefs, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best economic system--the freer, the better...So we stick with this belief, largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better."

And, in a corollary, he says that the relentless push by U.S. companies to move manufacturing overseas breaks the innovation and job-creating chain, what he calls "scaling up" where companies "work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter."

Grove continues. "Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today's 'commodity' manufacturing can lock you out of tomorrow's emerging industry."

Grove is right. I lived in Japan for 10 years (until 1993). I worked mostly as a journalist, covering the Japanese high-technology industry. In one job, I translated and rewrote reams of articles from the Japanese industrial dailies (covering machine tools, cars, chemicals, computer components) over a three-year period (which, by the way, we sent to clients like AT&T, Motorola, and IBM), giving me pretty good insight into Japan's vaunted manufacturing system.

The underlying philosophy--monozukuri (making things)--was so beneficial to the Japanese economy and Japanese employment that it was copied all over Asia. Taiwan, South Korea, and China, to mention a few. I don't think I need to argue how successful those economies have become. In fact, the problem for Japan is that those countries have been so adept at aping monozukuri that they have become formidable Japanese manufacturing rivals and sucked a lot of the manufacturing out of Japan.

Witness Taiwan's Hon Hai Precision Industry, Co., which seems to make everything under the sun including the iPhone and iPad. And Samsung, now the No. 1 manufacturer of LCDs and flash memory chips and the supplier of the core silicon in both the iPad and iPhone 4 (where Intel is conspicuously absent).

But that means little to purist free-marketers. Leave it to purists (here is a quick rebuke from a Wall Street Journal blog) to immediately jump on Grove's case and make dubious, tired arguments, which I will address below.

To free-marketers, Grove's practical, moderate argument that suggests small tweaks to the U.S. system to accommodate global realities, is heresy. The problem of course is that the rest of the world operates differently than the U.S. Japan, China, South Korea--to mention some of the largest economies--value domestic manufacturing because it creates jobs (duh!) and allows companies to not only develop products but extend the innovation chain to manufacturing--where a lot of innovation takes place, by the way.

Let's look at two old free-market purist arguments. Here's an oldie but goodie: Oh, no--a trade war! As though China isn't already fighting a fierce war to protect its domestic production juggernaut. (And who can blame it?) To use a sports analogy: it's like the U.S. is losing to China 10-0 in the ninth inning but doesn't want to use its best pitchers and hitters because, perish the thought, that might make China mad.

A seemingly ridiculous analogy but one that's very close to the way the U.S. approaches trade. I saw it happen time and again in Japan, where the Japanese government would block access to U.S. companies using ingenious non-tariff--i.e., non-transparent--barriers. (And no, it wasn't all Japan's fault that U.S. companies failed to penetrate the Japanese market in the 1980s. In some cases the blame fell squarely on a U.S. company's refusal to adapt.)

The U.S. would bluster and complain and threaten a "trade war" that, ironically, Japan was already fighting and winning. When the U.S. would threaten to take action, that was the cue for Japanese politicians. It was like shooting fish in a barrel. "Look, look the U.S. is threatening to become protectionist while we maintain free-market principles." It was a sad, sad two-act play that repeated itself over and over.

The other free-market argument is that U.S. consumers will face higher prices. That's a small price (no pun intended) to pay for creating more jobs in the U.S. (Grove points out that 250,000 employees at Hon Hai Precision Industry Co.--also known as Foxconn--in southern China make Apple's products. While Apple has about 25,000 employees in the U.S.) Moreover, if you take that free-market argument to its logical conclusion, the U.S. would make virtually nothing because it's always cheaper to make something in China. As a consequence, U.S. unemployment would be catastrophic, making the 1930s depression look like a tea party.

Yes, the free market is a powerful force and invaluable for creating companies and jobs. But it's not perfect and not, in its pure form, practically applicable in a world that plays by other rules. That's what Grove is saying. Far from radical, it's a prudent and necessary argument.

Correction at 4:11 p.m. PDT: This post initially mislabeled Hon Hai Precision Industry, Co., as Chinese. It's headquartered in Taiwan.