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Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes (2019)

Chapter: 7 Afterword - Rationale for Continued Engagement with the Institutes

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Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
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7

Afterword—Rationale for Continued Engagement with the Institutes

To conduct this study, the committee faced a fundamental question—why should the Department of Defense (DoD) continue to play a role in the advanced manufacturing institutes and their public–private partnership model? Manufacturing plays a key role in national security, both in providing equipment for the military and also in building a strong, resilient economy required to fund national defense. DoD requires technology leadership, and that requires manufacturing technology leadership.1

DoD plays a key role in the U.S. manufacturing ecosystem, purchasing 8 percent of U.S. manufacturing output2 and accounting for approximately 15 percent of total U.S. research and development (R&D) spending.3 Thus, DoD not only plays

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1 U.S. Department of Defense (DoD), 2018, Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States, Office of the Undersecretary of Defense for Acquisition and Sustainment and Office of the Deputy Assistant Secretary of Defense for Industrial Policy, September 19, 24-31.

2 L. Uchitelle, 2017, Making It, Why Manufacturing Still Matters, The New Press, New York (citing Bureau of Economic Analysis data).

3 Fifteen percent of R&D spending; see American Association for the Advancement of Science, “Estimates of Congressional Action on FY 2016 R&D Budgets by Agency,” AAAS Research and Development Funding in FY2016 Appropriations 2017, http://www.aaas.org/sites/default/files/16c%20RD%20Agency.jpg (includes Defense 6.1-6.3 Science and Technology funding of $15.41 billion, plus $58.06 billion in later stage funding) (see also table in Option C); National Science Board, Science and Engineering Indicators 2018, Table 4-1, https://www.nsf.gov/statistics/2018/nsb20181/report/sections/research-and-development-u-s-trends-and-international-comparisons/recenttrends-in-u-s-r-d-performance#u-s-total-r-d-and-r-d-intensity, accessed January 2, 2019 ($495 billion in 2015 U.S. R&D expenditures by performing sector and source of funds).

Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×

an important role in the U.S. manufacturing ecosystem but also crucially depends on a strong civilian manufacturing base.

While most Americans believe the United States is losing manufacturing to low-cost producers in Asia, Germany’s manufacturing experience tells a different story. Its manufacturing wages are much higher than in the United States, yet manufacturing accounts for almost twice as large a share of gross domestic product (GDP) as in the United States, and it runs a massive manufacturing trade surplus, including with Asian nations. Germany maintains a strong manufacturing ecosystem for its manufacturers that closely ties innovation and production. It undertakes collaborative R&D between small and large firms and university engineering and has a world-renowned skilled manufacturing workforce.4 Its system of more than 70 Fraunhofer institutes is a public–private partnership conceived in 1949 that effectively pursues each of these tasks.

In contrast, the United States faces a series of gaps in its manufacturing innovation system:

  • Low productivity.

    While U.S. manufacturing productivity was increasing by an average of 2 percent per year from 1992-2004, it declined by an average of 0.3 percent per year from 2004-2016.5 Manufacturing productivity has grown at less than 1 percent for the past 8 years.6 The low productivity level is a signal of an underlying innovation system problem.

  • Its supporting manufacturing ecosystem has thinned out.

    U.S. manufacturing investment in capital plant, equipment, and information technology is also at historically low levels. Ironically, at the same time, the United States is running a massive trade deficit in manufactured goods, rising to $868 billion in 2016,7 including a 2018 deficit in excess of $120 billion in advanced technology goods.8

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4 W.B. Bonvillian and P.L. Singer, 2018, Advanced Manufacturing, The New American Innovation Policies, MIT Press, Cambridge, MA, 178-183.

5 Bureau of Labor Statistics, 2018, “Multifactor Productivity Slowdown in U.S. Manufacturing,” Monthly Labor Review, July, https://www.bls.gov/opub/mlr/2018/article/multifactor-productivityslowdown-in-us-manufacturing.htm.

6 Bureau of Labor Statistics, 2019, “Productivity and Costs,” News Release, February 6, https://www.bls.gov/news.release/pdf/prod2.pdf. (See also S.N. Houseman, 2018, “Understanding the Decline of U.S. Manufacturing Employment,” Upjohn Institute Working Paper 18-287, https://doi.org/10.17848/wp18-287).

7 Statista, “Trade Deficit of Goods Manufactured in the United States, 2000-2016,” https://www.statista.com/statistics/814589/manufactured-goods-trade-deficit-us/.

8 Bureau of Economic Analysis and Census Bureau, 2018, “U.S. International Trade in Goods and Services,” November, Exhibit 16, U.S. Trade in Advanced Technology Products, https://www.bea.gov/system/files/2019-02/trad1118_4.pdf.

Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
  • The loss of one-third of manufacturing jobs between 2000 and 2010 is a signal of a hollowing sector, with 64,000 plants closing from 2000-2013.9,10 For a series of reasons, the U.S. financial sector has pressured firms to go “asset light” to lower risk; in this less integrated system small and medium-size firms are left “home alone.”11

  • It has an innovation access and scale-up problem for Main Street firms and start-ups.

    While there are many industrial sectors, there tend to be three kinds of manufacturing firms. While large multinationals are generally strong, they are global, need to be in international markets, and increasingly have been producing abroad.

    Small and medium-size manufacturers (under 500 employees), which produce 46 percent of U.S. output,12 have trouble obtaining financing to scale innovation. To survive, they tend to be risk averse, to be thinly capitalized, and perform little R&D; thus, they have trouble implementing innovation despite their importance to output.13

    While segments of the U.S. economy rely on entrepreneurial start-ups with venture capital financing for innovation, venture capital has focused on returns from software, services, and biotechs.14 “Hardtech” firms that plan to manufacture received only 5 percent of venture funding investments in 2015; the lack of an alternative financing method is a significant obstacle to scaling their innovations.15

  • It has delinked innovation and production.

    R&D, not manufacturing, is seen in the United States as “the” innovation system. Yet innovation is about turning an idea into a solution that adds value from a customer’s perspective. It is a full system, from R&D through

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9 Levels of employment and value-added in manufacturing since 2013, but levels of employment and non-computer value-added in manufacturing do not come close to those of two decades ago.

10 S.N. Houseman, 2018, “Understanding the Decline of U.S. Manufacturing Employment,” Upjohn Institute Working Paper 18-287, https://doi.org/10.17848/wp18-287.

11 S. Berger and the MIT Task Force on Production and Innovation, 2013, Making in America, MIT Press, Cambridge, MA.

12 Small Business Administration, 2012, “Frequently Asked Questions About Small Business, Small Businesses Comprise What Share of the U.S. Economy,” https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf.

13 S. Helper and T. Mahoney, 2017, “Next Generation Supply Chains,” Mforesight, July, http://mforesight.org/projects-events/supply-chains/.

14 W.B. Bonvillian and P.L. Singer, 2018, Advanced Manufacturing, MIT Press, Cambridge, MA, pp. 185-215. See also W. Lazonick, 2009, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States, W.E. Upjohn Institute, Kalamazoo, MI.

15 Bonvillian and Singer, 2018, Advanced Manufacturing, pp. 193-194.

Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
  • production stages; failure to understand production as a key part of this system is a fragmented view.

    Production, especially initial production of a new technology, requires very creative engineering and typically reconsideration of the underlying science in dense feedback loops leading to final design and production.

    In the postwar period, the United States had a system of “innovate here/produce here” and obtained the full spectrum of gains from every stage. The United States has increasingly shifted, however, to a distributed system of “innovate here/produce there.”16

    Because production is part of the innovation system and most products require close connection between production and innovation, a system of “produce there” increasingly risks a system of “produce there/innovate there” as the production and the innovation tied to it shifts abroad.

    Yet a strong innovation system is crucial to DoD. A technology strategy that is disconnected from manufacturing advance leads to a broken innovation system. That is what DoD is now starting to face.

  • It has a weak and highly decentralized workforce education system.

    Although the United States lost 5.8 million manufacturing jobs between 2000 and 2010, 17 percent of those jobs have come back. Other countries are facing increasing production costs (especially China), and there is a greater awareness of the hidden costs of offshoring, such as those mentioned above. The United States has traditionally been a high-wage nation, but the German approach shows that the most likely path to success for the United States is to combine its R&D system with a highly skilled workforce, able to speed new technologies into production by adopting and debugging these new technologies quickly.17

    Yet the United States has reduced its spending on training, in manufacturing, and generally.

Corporate spending on training as a share of GDP declined from more than one-half of a percent in 2000 to one-third of a percent in 2013. . . . The government also significantly underinvests in workforce training programs, dedicating just 0.1 percent of GDP in active labor market programs compared with the Organization for Economic Development (OECD) average of 0.6 percent of GDP. Moreover, the United States now invests less than half of what it did on such programs 30 years ago, as a share of GDP.18

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16 Ibid., pp. 57-58.

17 Berger and MIT Task Force, 2013, Making in America; S. Helper and R. Martins, “The High Road in Manufacturing,” in Strategies for Improving Job Quality in Low-wage Industries (P. Osterman, ed.), MIT Press, Cambridge, MA, forthcoming 2019.

18 W.B. Bonvillian and S.E. Sarma, “The Quest for Quality Jobs,” Issues in Science and Technology, Fall 2018, https://issues.org/the-quest-for-quality-jobs/.

Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×

The broken U.S. labor market lacks both an information system to help employers and employees navigate it and a system for effective skills training.19 One must then ask, if the innovation system for production has significant gaps, could the United States apply its still strong R&D innovation system to fill them?

Although the United States has R&D-led innovation, other countries—notably Germany, Japan, Korea, Taiwan, and now China—have manufacturing-led innovation. Because the United States led world production output after World War II with its remarkable mass production capability—no other nation was close—the United States simply assumed that its production leadership would be ongoing, and it focused on the R&D stage.20 Japan’s leadership of the quality production paradigm led the United States to try to catch up in the 1970s and 1980s but not to adopt a manufacturing-led innovation capability along with its R&D-led innovation.

Scientists and engineers now tell us that a series of new advanced manufacturing paradigms may be in range that could transform manufacturing efficiency, productivity, and returns. The opportunities include digital production, advanced materials, nanomanufacturing, mass customization, and specific new technology areas in photonics, biofabrication, power electronics, advanced composites, etc. The core idea behind advanced manufacturing, then, is to bring the still strong U.S. innovation system into “innovate here/produce here/prosper here” manufacturing.

The U.S. key trading partners and competitors spend vastly more on maintaining their manufacturing base and investing in advanced manufacturing than does the United States—8 to 50 times more, as shown in Table 3.3.

The importance of maintaining this base in the United States is increasingly being recognized.21 No one actor, even DoD through its contracting role, can generate all of the new manufacturing technologies and skilled workers and suppliers that it depends on. Instead, DoD can help foster a network of manufacturing innovation institutes where a dense web of firms, universities, labor, and national and corporate laboratories all come together to both supply and demand increasingly sophisticated technology.

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19 S.E. Sarma and W.B. Bonvillian, 2018, “Fixing an Imperfect Labor Market Information System,” Issues in Science and Technology, Fall 2018, https://issues.org/fixing-an-imperfect-labormarket-information-system.

20 Bonvillian and Singer, 2018, Advanced Manufacturing, p. 34.

21 Executive Office of the President and the President’s Council of Advisors on Science and Technology (PCAST), 2011, Report to the President on Ensuring American Leadership in Advanced Manufacturing, June, Washington, DC; Executive Office of the President and PCAST, 2014, Report to the President: Accelerating Advanced Manufacturing, October, Washington, DC; G.P. Pisano and W. Shih, 2012, Producing Prosperity: Why America Needs a Manufacturing Renaissance, Harvard Business School Press, Cambridge, MA; Berger and MIT Task Force, 2013, Making in America; Uchitelle, 2017, Making It; Bonvillian and Singer, 2018, Advanced Manufacturing.

Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×

The market alone does not support efficient levels of investment in these networks, variously called a “manufacturing ecosystem” or “the industrial commons.” The institute model deals with the gaps in the U.S. manufacturing ecosystem:

  • Connecting small and large firms in collaborative innovation to restore the thinned-out ecosystem,
  • Relinking innovation and production in collaboration between firms and universities,
  • Pursuing production innovations to grow efficiencies and productivity,
  • Providing shared facilities for scale-up, and
  • Building a skilled workforce in the advanced technologies.

These address key structural issues, but the timetable is longer than the institutes’ current 5-year terms. These are longer-term problems and require longer-term leveraging from federal investments. At stake is the industrial base that DoD understands it must have if it is to have the sustained technology leadership required for long-term national security.

A 2015 National Academy of Engineering study, Making Value for America, noted that manufacturers serve and depend on complex networks of activities that span multiple locations, companies, and economic sectors and include services and software.22

These networks create complex value chains. We fail to understand the importance of manufacturing if we focus only on the production moment; it is core to a much larger system. The report found that value chains that rely on manufactured goods as either a part or as a delivery mechanism “account for 25 percent of employment, over 40 percent of gross domestic product, and almost 80 percent of R&D spending” in the United States.23

Manufacturing, then, is indeed a critical area for national economic strength. The report found that “the greatest threat to American prosperity is not that other countries will get better and catch up to—or surpass—the United States; it is that the United States will fail to keep improving itself and thus fall behind as other countries continue to improve.”24 Reliant on these value chains for much of its activity, DoD has a disproportionate stake in this outcome.

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22 National Academy of Engineering, 2015, Making Value in America, Embracing the Future of Manufacturing, Technology and Work, The National Academies Press, Washington, DC, p. 14, https://www.nap.edu/catalog/19483.

23 Ibid., p. 15.

24 Ibid., p. 27.

Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×

Debates over manufacturing support are not new. During the summer of 1791, Alexander Hamilton drafted his “Report on Manufactures,” battling with Jefferson over whether America’s future should be commercial and industrial or agrarian. At that time, Hamilton proposed that “manufactures, and particularly the means of promoting such . . . will tend to render the United States independent of foreign nations for military and other essential supplies.”25 This point on the relation between manufacturing strength and independence is arguably an enduring lesson. Concerning this military-industrial connection, he found, “It would, also, be a material aid to manufacturers of this nature, as well as a mean of public security, if provision should be made for an annual purchase of military weapons, of home manufacture. . . .”26 And applying innovation to manufacturing was one of his ideas; he advocated federal encouragement of “new inventions . . . particularly those, which relate to machinery.” A few months later he concluded that “a spirit of manufacturing . . . will serve to promote essentially the industry, the wealth, the strength and the independence and the substantial prosperity of the country.”27

In his remarks at the study’s workshop, Jeff Wilcox (Vice President, Digital Transformation, Lockheed Martin Corporation) noted that:

We’re entering an era where we’ve moved beyond thinking about manufacturing as an explicit distinct function into manufacturing as a community, which is the fulcrum for digital value creation. I don’t know that everybody has their brain around that. So to the extent to which you think about the strategic posture of the institutes going forward, you can think in terms of how are they supporting industry 4.0, how are they supporting this fourth industrial revolution, how are they coming together to leverage data and to take a strategic posture towards our data as a U.S. industrial commons.

He later continued:

I’m always struck by how much the conversation in this room today is like the conversation we had 225 years ago. It’s really fascinating. And that’s a good thing. It doesn’t go away—public–private partnerships. Hamilton was the progenitor of public–private partnerships.

He noted that Hamilton’s 1792 “Society for the Establishment of Useful Manufactures (SUM),” a public–private partnership with Patterson, New Jersey, used the

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25 A. Hamilton, 1791, “Report on Manufactures” (to the U.S. House of Representatives), December 5, Introduction, from Hamilton, Henry Cabot Lodge, ed., The Works of Alexander Hamilton (Federal Edition), Industry and Commerce, reproduced at https://oll.libertyfund.org/titles/hamilton-the-works-of-alexander-hamilton-federal-edition-vol-4#lf0249-04_head_012.

26 Hamilton, 1791, “Report on Manufactures,” under Iron.

27 A. Hamilton, 1792, Report Relative to the Additional Supplies for the Ensuing Year (to the Speaker of the House), Treasury Department, March 16, from National Archives, Founders Online, https://founders.archives.gov/?q=%20industry%20Author%3A%22Hamilton%2C%20Alexander%22&s=1111311111&r=51.

Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×

Passaic Falls, a 77-foot water drop, to found what became a cluster of factories now considered the birthplace of America’s industrial revolution. With government improvements providing power from the river, industry arrived in Patterson to use it. By 1837 it had become the site of early American steam locomotive production, and in 1897 it was the site where the first engine-powered submarine was produced.

The final question is, then, are we prepared—as a nation—to lead in advanced manufacturing through the 21st century or are we willing to surrender global leadership?

As a nation, the consequences are too dire to surrender; we must take the lead. With this lens, the restoration of production innovation leadership is crucial to America’s continued defense technology leadership. The public–private institute partnership model, because it addresses current structural problems in the U.S. innovation system, is a critical route for DoD to continue to embrace in order to preserve our national security.

We’re a frontier nation, we make things. It’s really how we think about ourselves. And so getting this right and not losing this capability and not having it atrophy is an existential issue for us as a nation … prosperity and security are intertwined, and the wellspring of both I believe is the industrial commons.

—Jeffrey Wilcox, Vice President, Digital Transformation, Lockheed Martin Corporation Keynote Speech at Study Workshop, January 28, 2019

Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×

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Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
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Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
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Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
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Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
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Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
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Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
Page 79
Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
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Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
Page 81
Suggested Citation:"7 Afterword - Rationale for Continued Engagement with the Institutes." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
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To effectively mature and transition DoD manufacturing science and technology advances into production, DoD must have access to a robust and responsive U.S. industrial base which is often driven by advanced manufacturing technologies. The Manufacturing USA institutes are considered crucial and game-changing catalysts that are bringing together innovative ecosystems in various technology and market sectors critical to DoD and the nation.

Since 2012, DoD has invested $600 million directly in its Manufacturing USA institutes with the understanding that the initial federal investment included (1) core funding and (2) one-time, start-up funding to establish the institutes within a period of 5 to 7 years. As the institutes now begin to reach year five, DoD is evaluating the effectiveness of the institutes in fulfilling their goals and the best on-going roles for the federal government, including on-going funding options, to ensure optimal benefit to U.S. competitiveness. This report reviews the role of DoD’s investment to date in establishing its eight institutes as public–private partnerships and its engagement with each institute after it has matured beyond the start-up period.

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