(FORTUNE Magazine) – | In a series of interesting and successful books about economic affairs, Robert B. Reich has established himself as the leading liberal political economist, succeeding his retired Harvard colleague John Kenneth Galbraith. Reich's most ambitious and important effort to date is his latest, The Work of Nations (Knopf, $24). As the title's play on Adam Smith suggests, the book takes up the age-old riddle of the origin of wealth while addressing an all too current question: Can Americans maintain their standard of living in a world that has been making many of them poorer? Reich came to public attention at the end of the Carter era as co-author of Minding America's Business, which argued that America's prosperity depended on forging a forward-looking industrial policy. Washington, he argued, needed to use tax breaks, research subsidies, and other forms of government assistance to help tomorrow's growth industries find their places in the sun. A year later, in The Next American Frontier, Reich urged policymakers to put their bets on computerized, flexible manufacturing technology. Then came New Deals, a paean to the kind of pragmatic statecraft that gave us Lee Iacocca and the Chrysler loan guarantee. But that was then, this is now, and Robert Reich has given up on industrial policy. ''There is no longer any reason for the United States -- or for any other nation -- to protect, subsidize, or otherwise support its corporations,'' he declares. Lest anyone infer that, having gone off the liberal reservation, he's a reborn Reaganite, Reich adds that he has no use for conservative industrial policy, either: ''Nor are there grounds for reducing public expenditures and cutting taxes in order to give the nation's citizens more money to invest.'' Industrial policy is a way of redistributing resources within a society. It takes from one industry group, economic activity, or generation and gives to another in accord with a particular political philosophy or pattern of political power. For this to work, economic activity must take place largely within the boundaries of nation-states. The problem with industrial policy, Reich argues, is that it has been steamrollered by a stronger force -- the rise of global markets for capital, labor, management, and technology. Now that nations are no longer closed economic systems, efforts to build up an industry or company or technology produce advantages that tend to be enjoyed by people, companies, and countries other than the ones doing the building. SUPPOSE the U.S. government decided to subsidize the Silicon Valley industries, Reich hypothesizes. With Apple doing R&D in Singapore, Fairchild being a subsidiary of France's Schlumberger, and Texas Instruments making memory chips in Japan and doing programming in India, Washington's help would end up creating jobs, profits, and opportunities in the very countries it was trying to stay ahead of -- or catch up with. Corporate nationality is all but irrelevant, Reich declares. Whether a U.S.-owned company is profitable and growing may have little connection with the economic fate of people living in the U.S. By the same token, the fact that companies based in the U.S. might be owned or run by people who live in Japan or France or South Korea doesn't matter much either. What matters, he argues, is not what a nation or its companies own, but the knowledge its people possess and the work their knowledge enables them to do. The wealth of nations is the human capital of the people who live in them. We're no longer rich or poor because we're citizens of rich or poor nations, Reich says. We're rich or poor today because the work we do as individuals commands a high or low price in the global marketplace. Thus, the fortunes of Americans no longer tend to rise or fall in unison. Economically speaking, we are no longer all in the same boat. Instead, Reich holds, most Americans are dispersed among three different boats according to the function they perform in the world market. Two of these boats are sinking, one is rising. The rising boat holds ''symbolic analysts'' -- professionals, managers, and creative types who ''solve, identify, and broker problems.'' They make up about a fifth of the U.S. population, and amid booming worldwide demand for their services, spurred by the digital communications revolution, their incomes have been rising smartly. In earlier works Reich put many of these folks down as ''paper entrepreneurs.'' Now he argues that the data, for example, U.S. corporations' share of world exports, indicate that they were performing reasonably well after all. Reich foresees a very bright future for America's symbolic analysts. They have been trained, he says, in the world's best universities, then mentored and networked to a fare-thee-well in vast, fluid, upscale, urban fields of dreams like Manhattan, northwest Washington, D.C., and west Los Angeles. SUFFERING the opposite fate are the ''routine producers,'' that is, the factory workers and the low- and middle-level managers supervising them, who constitute a quarter of the American work force. Once beneficiaries of unions' clout and oligopolies' largess, they have been increasingly competing with lower-paid, often more productive workers around the globe, and over the years have taken a terrible beating. Routine producers' wages are way down, their jobs are disappearing, and their boat is capsizing. Stuffed into the third boat are the ''in-person service'' workers -- the biggest, fastest-growing part of the work force. Some three million new in- person service jobs were created in bars, restaurants, and fast-food outlets alone in the 1980s -- more than the total number of routine production jobs in U.S. auto, steel, and textile companies at decade's end. Wages in this sector, never high, have been drifting down unevenly under pressure from forces such as automation and immigration. With exceptions, Reich expects them to continue heading south. So more than half -- and by one way of figuring as much as 80% -- of the American work force has been getting poorer since the 1960s and is likely to keep on losing ground. A mere 20% have been getting richer and can look ahead to flusher times. It's a bad situation, made worse, he contends, by the symbolic analysts' slow secession from the rest of society, through intensified residential segregation by income, a widening gap in educational opportunity and achievement, a less progressive tax system, and more privatization of services from child care to personal security. Reich notes there are more private security guards than police officers in America. Security guards constitute an astonishing 2.6% of the labor force. This is more than a problem. In a country built on the promise of mass upward mobility, it's a disaster, possibly even a social-contract breaker. If Reich is right, then America is in for a bumpy ride, and we should all be doing some serious worrying and thinking about our future together. But it's on this very point that this fine book is a little disappointing. It's not that he ignores the problem. Having begun by giving up on industrial policy, Reich concludes, sensibly, by urging a renewed emphasis on social policy, mainly more and better education, together with other steps to increase human capital and raise the value of the work Americans do. Less persuasively, he proposes to expand income-transfer programs to compensate for the depressed real incomes he anticipates for most Americans, who he thinks won't ever get back to where they once were economically. Also less than persuasive is his call for a big boost in the progressivity of the income tax to pay for it all. Reich, to his credit, acknowledges the weaknesses of his program. It flies in the face of what remains the prevailing political sentiment in the U.S. -- to move away from using tax policy to redistribute wealth and toward lowering tax rates. It ignores the disentwining of citizens' economic fates that makes the secession of the symbolic analysts a logical expression of self-interest. At one point Reich even admits that the problems he's put his finger on raise the question of whether in a global marketplace the interventionist, redistributive nation-state has any future at all, and whether citizens will feel they owe one another anything, let alone vastly increased payments to help those whose careers in low-value-added work naturally earn them below-par incomes. But instead of dealing with that question, Reich punts. In his closing paragraphs, he creates hope for his policy proposals out of thin air by imagining how glowing their prospects would be if the American political culture were to change, and something resembling the climate of the early and mid-1960s -- cosmopolitan, compassionate, redistributionist, pro-growth, optimistic -- were revived. Right, and if my grandmother had wheels, she'd be a bicycle.

THE FACT that Reich chooses this wishful way to get off stage suggests both how little liberalism is left in liberalism's leading political economist, and how strongly he refuses to give up the ghost entirely. The fact that Reich's solutions don't measure up to the problem he's identified may also mean that he's learning to be more cautious about projecting his symbols and analyses too far or too confidently into the future. A few books ago, remember, this same fellow was saying that the fate of the republic depended on the introduction of flexible manufacturing technology. At the time that advice seemed persuasive. Today it sounds both simplistic and dated. By the same token, a few years from now we may look back and agree that the important fact about the global marketplace described so well in The Work of Nations wasn't the symbolic analysts' rise to primacy in it, but the system's adaptability and benign rationality. A world economy truly freed from the burdens and illusions of industrial policy could turn out to be a surprisingly rewarding place -- not just for those who manipulate symbols or make markets in problems, but also for ordinary folks who earn their livings by turning out honest products and serving people's needs.

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EXCERPT: We are living through a transformation that will rearrange the politics and economics of the coming century. There will be no national products or technologies, no national corporations, no national industries . . . All that will remain rooted within national borders are the people who comprise a nation.