Austin Mitchell: Once Britain was the workshop of the world... now we've taken the road to a disastrous future

This problem is not one of deficits or borrowing. The real disaster is that growth may now be impossible because we have built a towering financial sector on a shrinking industrial base – battering manufacturing so badly in the process that it can neither pay the nation's way, nor support the jobs and superstructures, of an advanced society. Growth now comes from financial bubbles, not the real productivity gains others enjoy.

This long manufacturing decline has produced a gaping trade deficit, an inequitable tax structure, a lopsided economy and an increasing dependence on selling off family silver and luring in funny money and curious companies like a national hedge fund in a dodgy tax haven.

The emerging crisis won't be solved by pumping up yet another bubble like the one which plunged us into recession. Only a resurgence of the manufacturing we have been running down for decades can save us. That can't be left to the market as everything has for so long.

When Britain was the workshop of the world, manufacturing paid our way. The rise of the City and Britain's emergence as a world financial power relegated and damaged our real economy of making things and selling them abroad.

The City's interests are worldwide. It would rather invest in Dubai than Doncaster. Manufacturing needs a competitive exchange rate. The City prefers a high and stable one to acquire assets and manipulate money round the world. So, as it grew to hegemony dominating economic policy in the Thatcherite creative destruction, manufacturing shrank.

It was viewed as old hat and expendable. Since phoenixes grow from ashes manufacturing was better turned into them.

Labour, industry's child and traditional friend, softened that. Yet preoccupied with a war against inflation fought with dear money and a high exchange rate to keep imports cheap, it forced industry into maintaining competitiveness by cutting costs and firing workers. So employment and manufacturing's share of GDP fell from 20 per cent to a mere 12 per cent and still falling.

All this undermined Britain's ability to pay its way in the world. Over recent decades, manufacturing paid roughly 60 per cent of it, oil 20 per cent and financial services and overseas investments about the same. With manufacturing's share falling, the result is a growing deficit, 48bn or six per cent of GDP in 2008, and higher than America's. With oil's contribution dwindling, and the City a busted flush, Britain's prospects are dire.

The long manufacturing decline is the basic cause and a revival of manufacturing the only escape. We can pay our way and provide the jobs a growing population needs only by making more, and better goods and selling more on world markets.

Yet Government still doesn't realise this and has pumped huge sums into the banks, little into manufacturing. Even quantitative easing to buy back government debt from Finance boosts asset and share inflation, not industry. Encouraging restructuring and industrial investment like the Germans, is not even on the agenda. So plants close, employment shrinks and skills are dissipated. Contempt for manufacturing has led to the disaster. Yet the experience of the industrialising nations shows that manufacturing can grow quickly and flourish.

It is the only source of real productivity growth. It alone can provide jobs for the young people we are training for an otherwise jobless future. But its revival depends on a total reversal of the norms of policy to embrace the low exchange rate which triggered manufacturing growth in industrialising countries from Germany to China.

All started with a low and competitive exchange rate, making manufactured exports profitable and building up powerful exporting sectors with huge economies of scale. This leads to a virtuous cycle of profitability attracting investment and high quality management and boosting productivity.

The US vainly tried to persuade each in turn to raise their exchange rates. All refused, to keep exporting powerfully. In Britain by contrast, manufacturing concentrated on a home market which it gradually lost. Our competitors realised that growth comes from exports. They grew. We deindustrialised and savants claimed Britain could live on services, creative industries and perhaps air.

They ignored the lessons of Britain's intermittent devaluations in 1949, 1967, 1971 and 1992. Each demonstrated the benefits of a lower exchange rate. Production and productivity increased until Government choked off revival by encouraging interest rates and the pound back up in a "war on inflation" which cluster bombed manufacturing.

The exchange rate is not a phallic symbol but a market clearing mechanism and the key to manufacturing revival. Because it translates our costs into prices on overseas markets, it can allow us to reduce those costs below that of competitors by a competitive exchange rate, properly defined as one which clears markets in conditions of growth and full employment. That means a low rate to boost exports, tax imports and make manufacturing profitable. That profitability must be maintained long-term to attract the investment expansion needs. This time we can't let the pound drift up.

The recent 25 per cent fall in sterling opens the door, helped by the fact that the euro is high and the dollar kept up artificially because China recycles its dollars back to the US, to keep consumers buying its exports. This opportunity to grow must be seized by keeping the pound down, ending the dominance of the City and boosting manufacturing with a new industrial strategy recognising that a competitive exchange rate is a necessary but not sufficient condition of recovery.

Government must also channel investment into manufacturing, ease difficulties of transport, utility costs and planning, finance research, design and marketing and remove bottlenecks in skills. It must also reject EU efforts to stop Britain winning back the ground lost to European competitors.

This is a policy revolution but an essential one. Only manufacturing revival can provide the jobs, and generate the productivity increases

and the exports we need. It will take growth and employment out of

London where the City enriched the few and spread it round the deprived areas which were once our industrial heartlands. Manufacturing is the

future, not the past, and its best prospects are back home where it grew and once prospered.

Austin Mitchell is the Labour MP for Greater Grimsby.