Financial markets are the most critical obstacle to the revival of U.S. manufacturing and constitute a significant reason for its decline. Indeed, I believe American finance is even more destructive to innovation and investment in productive assets—human and physical—than Suzanne Berger suggests. Nonetheless, financial markets are unlikely to change, and focusing on the negative influence of shareholder value might distract from what can be done to rebuild manufacturing.

Successful industrial systems across the globe have effective and diverse mechanisms for creating and sustaining essential semipublic goods, most importantly production-enhancing R&D, human capital, and shared assets. While the American system remains the best at stimulating and incentivizing novel product innovation (through, for example, venture capital and intellectual property protection), we fail at the kind that contributes most to sustained industrial growth: incremental process and production innovation. That is, the constant improvement of products and services, their production, distribution, and maintenance.

The United States was the undisputed leader in so-called I&P innovation after World War II. What happened?

While Berger dates the decline of American manufacturing to the restructuring of financial markets thirty years ago, I&P innovation began failing before then and was in full retreat by the early 1980s, defeated by superior systems of production, such as Japan’s. In fact financial systems changed partly in reaction to this failure. The changes that Berger documents, which limit the ability of public companies to engage in industrial-ecosystem creation, are at the core of the new American system of innovation—the Silicon Valley model. This system has propelled the United States to global leadership in novel product innovation.

Financial markets won't change; we need to focus elsewhere.

Yet the Silicon Valley model stands at odds with the needs of I&P innovation. The core assumption of the Silicon Valley model is that firms and their employees are products to be sold and bought on the market. The core product is startups, not the goods and services that these startups profess to develop. For the last two decades, Silicon Valley has been more about the constant churn of creating and selling companies and much less about the building of the next General Electric, General Motors, or Timken.

How then can we create more production in the United States without major changes to American finance that might prove disastrous to our current system of innovation as well as politically impossible to implement?

Decades of research tell us that other rich economies excel in production when they have a competitive advantage on the shop floor and institutional systems that constantly create and diffuse production as well as incremental innovation. From South Korea to Germany to Nordic Europe, production systems are built on high-skilled labor. Workers have a strong voice in the organization of production, including the development and implementation of innovation, and a lesser one in corporate management. Successful production economies also have diverse public and semipublic organizations and institutions that conduct R&D and diffuse it as widely as possible to small and medium-sized manufacturers. The most successful innovation ecosystems consist of networks of firms that facilitate trust and enable collective action around public policy. Finally, successful systems include financial organizations, incentivized by specific regulations, which specialize in funding small and mid-sized manufacturers.

These characteristics of successful economies suggest a starting place. In the United States, our best hope of following their model is at the state, or, better yet, local level. Without public leadership to stimulate and incentivize business, we should not expect the private sector—neither the multitude of small firms facing existential challenges nor larger public companies facing financial market pressures—to be able to sustain their efforts.

We need to work on the micro-institutions of our industrial ecosystems: tailor and refashion our training systems so they fit the needs of the particular locale; with respect to R&D, create a new division of labor between public or semipublic institutions and smaller manufacturing firms, where the former focus on research and the latter on development; encourage public-private partnerships that create unique shared assets; and incentivize financiers to put capital in production facilities and innovation. At the local level, it may take only a few million dollars, invested every year, to change the manufacturing landscape. And what if we change our tax code to make it profitable for publicly listed companies to invest in domestic production assets instead of pushing them to achieve a high return on assets by avoiding owning any?

None of these would ensure the revival of production and production innovation in America. But, unlike the hope for transformative change of the American financial system, each is feasible and offers potential for success.