Thanks all for your input. Going to try to quote a few people here.
I laughed out loud when I read this: This actually is the way things work in real life, sadly
You got me! If realism is what you crave, enjoy this part of the game!

What I was trying to do was not complain that the waste was there (in other words, complain about the rules of the game). What I was looking for was a way that the game allows the player to track it, and I think I found it in my last game. In the Civilization Management screen there is a table that lists all your colonies. I love this screen. So if you see a colony with high social production that is not building anything, go fix the problem
Social production is indeed "Wasted". This was a game balance decision. The manual is incorrect is all. It would be much harder to manage your economy if the net revenue was changing drastically every time you got a new technology that started upgrading your planetary improvements.
If you have a strong economy, you can make use of that industrial capacity fully. For many players, the challenge is having enough industrial capacity to keep up with their economy.
Cool, it is confirmed from stardock, so now we know. SD has my respect for making a great game and they do not have to justify all their decisions to me, although an explanation is always welcome. On the second point, thank god I never read the manual

Good point about revenue changing when upgrading improvements, it does already happen a lot and I wish we could set the industrial cap slider based on credits and not on %, but I can see why the decision was made.
Strategic note, if anyone is having the problem mentioned above (too much money), I guess you could start by tearing down your trade centers and replacing them with labs/factories? Reduce taxes and tear down entertainment centers? I will work harder on running into this problem
To amanasleep: I generally agree that I don't like how the economy system works. If you are mad enough that you would like to read someone else complain about it, read my in-depth gripe that I link to in my first post

Lets try to be nice enough about it that SD changes it for GC3
The only thing missing in your post is what actually fuels the economy.
Sorry, I thought I had explained. Let me try from a different angle, since you already said you know that factories dont just give you production for free and labs dont give you free research. At any moment in time you have a certain maximum industrial or research capacity. In GC, capacity = the ability to spend money in order to get IP's or RP's. Also at any moment in time, you are using a percentage of that capacity between 0 and 100. Let's call that percentage X%. Finally, you are dividing that X% among Military, Social, and Research, so that X% is between 0 and 100% and M% + S% + R% = X%.
Lets just stick with industry to keep it simple. Total capacity is determined by the number of factories you have, the tech level of those factories, any tile bonuses that you have. Certain bonuses (i.e. precursor mine) just increase the maximum capacity, or the maximum number of IP's that you can "buy". Certain bonuses supposedly also give you bonus IPs for 'free', so you spend the same amount but get more. Unfortunately the game NEVER elaborates on which bonuses fall into which category, so I can't say without experimenting further.
Now a scenario. It is CRITICALLY IMPORTANT to realize that if your "Spending" slider is set to 1,000 credits, and you set your "Military" slider to 30%, you are NOT telling the game to spend 300 credits on the military. You are telling the game to take your total industrial capacity and "activate" 30% of it. This absolutely confounds most new players trying to understand the economy, since the game never explains what is really happening.
So to answer your question "What makes the economy go?", population, trade centers, and morale do NOT appear to affect your ability to build UNDER THE NORMAL CONDITIONS THAT I HAVE TESTED WITH. I mean when you have healthy morale and at least a few billion people. In the scenario above, the ONLY things that would increase military production are:
Increase the spending slider. This represents a % of maximum industrial activation, or X%
Increase the 'military' slider. This represents a PORTION of the above % to activate factories for military production. Corresponds to M% above. Remember that M% + S% + R% can never exceed 100%.
Build more factories. This will make the M% value represent a greater amount of the total industrial capacity and YOU WILL SPEND MORE TO GET MORE.
Where things really stop making sense is when you start trading production for research. Unfortunately it gets more complicated when you balance production and research, because they are drawing on an artificial resource that has nothing to do with your income, treasury, factories, or labs. That "resource" is the percentage at which you've set the 3 sliders. The result is that on a planet with 20 factories and 2 labs, you have to shut down 10 of the factories in order to fire up 1 lab. And vice versa. This is the SHORT explanation, for the real in-depth analysis see my giant post that I link to at the top. I don't like how it works and it's my biggest gripe about this excellent game.
Casual readers and players, stay away from the linked post. It is a few pages long. Only read if you are dying to know what the sliders really mean. On the other hand, if it helps you make sense of things, please reply and let me know
Thanks again to SD for all their great work, seeing the review sites recognize GC2 was almost better than GC2 itself, because it means there's a chance that more devs/publishers will make better games.