Its not “innovate or steal” its “innovate or repress”

Who hasn’t, I ask, been tempted to compare modern political economy to computer games? Its fun, but wrong, like most fun things, come to think of it…

Anyway, before I’m sidetracked, Noah Smith asks “Why should China innovate when it can just steal?” Good question. Its one that highlights how vital industrial espionage and intellectual property theft have been for every newly industrialised country since Germans started engraving “Made in Sheffield” on their Hamburg steel. “Stealing” technology to help drag people out of intense suffering is pretty much a Good Thing in my opinion.

What Noah doesn’t note is that successful countries always and everywhere begin innovating themselves – there is no choice between innovation and spying. None.

There are important reasons China cannot continue to steal technology forever. The first is technical. Technologies do not exist as comfortable chunks of something which are easy to steal, very often the successful operation of a technology requires tacit knowledge by those using it. You can get Ford to build you a factory, as the Soviet Union did, but without the knowledge of Ford’s workers your factory will be significantly less productive. Newer technologies require more tacit knowledge – because nobody has been able to codify and simplify it yet – and hence you cannot steal your way to prosperity, only to a certain ratio.

More fundamentally, Noah has got the trade-off completely wrong, exemplified in his penultimate [1] paragraph.

Anyone who is rooting for China’s economy should not be so worried by the innovation limitations discussed in articles like this one, unless they also believe that China’s demonstrated capacity for forced tech transfer and espionage are also diminishing.

Woah there!

A lack of innovation is not a policy choice with good consequences if you consider innovation to be natural. Let me clarify. Although many polities have repressed innovation, and despite technical progress being slow through most of human history this has been the result of political structures which have worked to either punish potential innovators or to expropriate successful ones. Even given this history of repression people have still sought to improve technology, especially where they have been allowed to keep some of the spoils from doing so. Eric Jones is very good on this – look to the efflorescence  of Song China or the slow acceleration of growth after the Glorious Revolution.

To shift resources from innovation to spying requires a repression of innovation akin to the suppression of the printing press in the Ottoman empire, or Elizabeth I’s successful attempt to stamp out Lee’s stocking weaving innovation in the British textile industry (!). You cannot make that trade-off as costlessly as Noah imagines.

In fact, I would argue that there is no trade-off between spying and innovation at all: spying is a military expense and innovation is a political expense. You pay spies out of taxes or corporate profits, you pay for innovations by suffering the economic and political losers of creative destruction. They operate at completely different margins.

China’s primary challenge is not to choose between innovation and spying, because that is not a choice. The Chinese needs to decide whether they want to deal with the political and economic instability but dynamism of creative destruction or not – if they do they can have a little more espionage and a little more innovation, if not then they’ll have little of either. If this decision is left to their elites only, then China will likely fail, if left to the people there is a decent chance China will continue to prosper.

This is in part the basis for Michael Pettis and Free Exchange‘s bet on whether China will achieve even 3% growth in the coming decade. Can China shift from a centralisedish investment boom to diffuse growth through innovation? States either embrace creative destruction or seek to repress it. Both innovation and spying are sources of creative destruction but only successful states with inclusive political and economic institutions can successfully cope creative destruction.


[1] I hope you’ll be as interested as I was to learn that penultimate refers to the song prior to the ultimate (i.e. last) song in an opera. Neat huh?

UPDATE: I realise now, having woken up a little that my first paragraph stands alone a little. Noah refered to “a game called Master of Orion II” which inspired, or was used as a hook, for his post. I meant to refer to it but didn’t. That sort of sloppy writing is probably one reason I wasn’t shortlisted for the Orwell Prize by central party lickspittle my pal Hopi Sen.

UPDATE II: Repetition of “a little” above would annoy me in someone else’s writing.


*Sigh* Ford didn’t pay high wages so that his employees could afford his cars

From Richie (via Chris):

When Henry Ford built his car plant he realised that unless the product he made was cheap enough for the workers to buy then there was no point in building it: there was no market to supply. This was the basis of Fordism.

Nope. The main element of Fordism is mass production of standardised products and scientific management of that process. The high wages were added later and not for the reasons Richie gives.

The high wages typically associated with Fordism were efficiency wages, wages paid to ensure people continued to work hard even though they were being managed intensively and told exactly how to do a boring repetitive job by annoying people with clipboards. Always with the clipboards.

After introducing the production line Ford was annoyed that his very profitable company was suffering because of high labour turnover and worried because this high turnover was damaging productivity. He was not worried that his potential market was not big enough.

The US economy was the richest country in the world, growing strongly and still attracting lots of migrants, his market was secure and he was always bloodymindedly sure that meant the US would need cars, lots of cars.

He decided to do the sensible thing and offer more money to his workers. That this enabled his workers to afford to buy one of his cars was incidental to the logic behind the move, although it made for good propaganda.

He didn’t do this to increase the size of his market, but because people tend to work harder for more money. Don’t take it from me though, a lowly blogger, try Larry Summers and Daniel Raff:

Ford’s decision to increase wages dramatically is most plausibly portrayed as the consequence of labor problems of the kind stressed by efficiency wage theorists. The structure of the five-dollar day program is consistent with the predictions of efficiency wage theories. There is vivid evidence that the five-dollar day resulted in substantial queues for Ford jobs. Finally, significant increases in productivity and profits at Ford accompanied the introduction of the five-dollar day.

 Moral of the story: don’t go valorising old capitalisms.