Misunderestimating China

Scratch Carly Fiorina from the list of viable presidential candidates. She doesn’t have a clue. Specifically:

“I also think the argument for Common Core is frequently, ‘Oh, we have to compete with the Chinese,’” Fiorina told the blog.

Fiorina cited her overseas business experience in China.

“I’ve been doing business in China for decades, and I will tell you that yeah, the Chinese can take a test, but what they can’t do is innovate,” Fiorina said. “They’re not terribly imaginative. They’re not entrepreneurial, they don’t innovate, that’s why they’re stealing our intellectual property.”

What Nobel Laureate Edmund Phelps calls “mass flourishing,” the explosive propagation of productivity enhancements, has nothing to do with what we usually think of as “innovation.” All the science that went into the Industrial Revolution was discovered in the 17th century and settled in the 18th, Phelps observed, and all the inventions that made it possible were in place by the last third of the 18th century. But it wasn’t until 1815 that the real revolution in output and living standards began. It isn’t the science or the technology or the invention that brings about economic revolutions, but the readiness of the whole population to embrace innovation and change behavior. As Phelps writes:

The advent of the modern economy brought a metamorphosis: a modern economy turns people who are close to the economy, where they are apt to be struck by new commercial ideas, into the investigators and experimenters who manage the innovation process from development and, in many cases, adoption as well. In a role reversal, scientists and engineers are called in to assist on technical matters. In fact, it turns all sorts of people into ‘idea-men,’ financiers into thinkers, producers into marketers, and end-users into pioneers.

Whether the Chinese are more innovative on average than others is beside the point; coming from behind, they found it was cheaper to copy than to invent. But anyone who doubts China’s ability to innovate should spend a few hours at the exhibition hall of Huawei, China’s big communications equipment producer, in Shenzhen. Huawei spends as much on R&D as Apple, and employs thousands of Western scientists and engineers at research facilities around the world. Even that is beside the point.

What matters is that 500 million Chinese have moved from countryside to city in the past 35 years–the equivalent of the whole population of Europe from the Ural Mountains to the Atlantic. Uprooted from traditional life and placed in new and more promising circumstances, the Chinese as a people are more prepared to embrace change than any people in the history of the world.

Meanwhile, once-disruptive American tech companies have turned into stable consumer franchises run by patent lawyers rather than engineers. They trade like stable consumer franchises. Back in the disruptive 1990s, the volatility of the S&P tech subsector index was double that of the S&P 500. Now it’s roughly the same. In the meantime, China’s Shenzhen exchange is in an IPO frenzy, with tech companies achieving fantastic pricing. Call it a bubble, but that’s irrelevant: the Chinese are betting massively on innovation, the way Americans did 20 years ago, but don’t any more.

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We Americans (to paraphrase my old boss, Ace Greenberg), have come to mistake our own body odor for perfume. To dismiss the Chinese as a nation of copycats incapable of innovation is just plain stupid. Carly Fiorina should find something better to do with her time than run for president.

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Categories: David P. Goldman, Spengler

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