The scaling process is no longer happening in the U.S. And as long as that's the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They 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.

Andy Grove , the third employee of Intel and former CEO, directly challenges conventional wisdom and current policy on the need for US manufacturing and industrial policy - in Bloomberg! H/T Naked Capitalism

Grove recaps the history of Intel, founded in 1968 with $3 million in capitalization, IPO three years later and Intel employed 13,000 by 1980. Other companies in "Silicon Valley" were also able to grow to scale in the US. China was not yet open for business.

As time passed, wages and health-care costs rose in the U.S., and China opened up. American companies discovered they could have their manufacturing and even their engineering done cheaper overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering. U.S. Versus China Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers. .... 10-to-1 Ratio Until a recent spate of suicides at Foxconn's giant factory complex in Shenzhen, China, few Americans had heard of the company. But most know the products it makes: computers for Dell and HP, Nokia Oyj cell phones, Microsoft Xbox 360 consoles, Intel motherboards, and countless other familiar gadgets. Some 250,000 Foxconn employees in southern China produce Apple's products. Apple, meanwhile, has about 25,000 employees in the U.S. -- that means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other U.S. tech companies. You could say, as many do, that shipping jobs overseas is no big deal because the high-value work -- and much of the profits -- remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work -- and masses of unemployed? Since the early days of Silicon Valley, the money invested in companies has increased dramatically, only to produce fewer jobs. Simply put, the U.S. has become wildly inefficient at creating American tech jobs. We may be less aware of this growing inefficiency, however, because our history of creating jobs over the past few decades has been spectacular -- masking our greater and greater spending to create each position.

While I disagree with Grove's characterization of the current problems with job creation as "early indicators" his analysis is right on target:

Should we wait and not act on the basis of early indicators? I think that would be a tragic mistake because the only chance we have to reverse the deterioration is if we act early and decisively. Already the decline has been marked. It may be measured by way of a simple calculation: an estimate of the employment cost- effectiveness of a company. First, take the initial investment plus the investment during a company's IPO. Then divide that by the number of employees working in that company 10 years later. For Intel, this worked out to be about $650 per job -- $3,600 adjusted for inflation. National Semiconductor Corp., another chip company, was even more efficient at $2,000 per job. Making the same calculations for a number of Silicon Valley companies shows that the cost of creating U.S. jobs grew from a few thousand dollars per position in the early years to $100,000 today. The obvious reason: Companies simply hire fewer employees as more work is done by outside contractors, usually in Asia.

Grove goes on to show that we have repeated this process in the areas of green manufacturing and in battery technology and production.

There's more at stake than exported jobs. With some technologies, both scaling and innovation take place overseas....That's a problem. A new industry needs an effective ecosystem in which technology know-how accumulates, experience builds on experience, and close relationships develop between supplier and customer.

Grove doesn't touch on the capture of Washington and academic economics by the US financial elite but he does illustrate the extent to which this is a problem:

Consider this passage by Princeton University economist Alan S. Blinder: "The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became `just a commodity,' their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success." I disagree. 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. 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. Our generation has seen the decisive victory of free-market principles over planned economies. 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.

Grove's prescription:

"(J)ob creation must be the No. 1 objective of state economic policy." "

"Long term, we need a job-centric economic theory -- and job-centric political leadership -- to guide our plans and actions." He cites the effectiveness of the planning of several Asian nations over the last forty years, as analyzed by Robert Wade of The London School of Economics.

He notes that currently Venture Capitalists insure that start ups have a "China strategy" for performing manufacturing in China and urges that the US Government change the incentives so that all start ups using US capital have to have a US strategy.

"The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars -- fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations."

Speaking of his fellow technologists and entrepreneurs Grove notes: "Can we expect them to take on yet another assignment, to work on behalf of a loosely defined community of companies, employees, and employees yet to be hired? To do so is undoubtedly naive. Yet the imperative for change is real and the choice is simple. If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us."

Such considerations were a major part of the diaries and comments of our old friend Techno and are familiar to and have been reflected in the comments of many at ET, but it is good to see them stated so forcefully at Bloomberg by someone with the credibility and stature of Andy Grove. But the major obstacle that he omits is the capture of Washington and academia by Wall Street and the resulting primacy of next quarter's returns for the financial sector, which is the golden calf of the current mainstream economic cult as worshiped in the mass media, as practiced on Wall Street and as entrenched in policy by Washington.

The real reason we are in the current fix is that we have fecklessly allowed the financial sector to kill and cook the goose that for decades had laid the golden eggs. The only solution is to take policy out of these folks hands and give it to leaders who have the interest of the broader society at heart. But where do we find such leaders today? Given the opportunity, they will emerge. They always have.