On Andy Grove, Mercantilist Schwerpunkts And Free Trade Kool Aid

If one is serious about re-industrializing the United States to create high wage manufacturing jobs, one probably should shun hapless pundits and other ideological purveyors. To be fair the braying comes from all sides: ‘Free Markets’ cant or the tiresome “What Would Hamilton Do Today”? As par for the course, the most visible ‘experts’ provided to us on the cable news wall often can’t read a spreadsheet, think EBITDA is a new social networking site, haven’t actually worked for an industrial company or consistently met a payroll.

Economic development requires a more serious mind. But then, one could say the same about war. And look at that.

Even more than killing dark people, a sustained development concept in Bubble-addicted America is particularly challenging. Americans expect to earn inflated income by performing essentially meaningless and frivolous output. Haven’t we essentially outsourced the wars, too?

Andy Grove laments the decline of the hi-tech industry’s domestic manufacturing. He’s right that it is essentially now a (temporary) branding and marketing channel for Asian manufacturers. “Made in China, Designed By Apple In California”. Our friend comment shared this link from Grove on point: Sadly, one has to ask: where precisely have you been for the last 30 years, Andy? (Let’s overlook the Intel billions invested in India, Malaysia and China along the way.)

Can Americans Even Have An Intelligent Policy On Re-Industrialization?

Americans we will assert seem generally uninterested in development matters, especially historical economic development. So it’s important to put forth first principles to frame a conversation. Say a president visits a failed state like Michigan. He declares ‘new manufacturing jobs in America’ [cue ritual applause] will come. But before that can happen, we should be clear on what’s the goal of American economic activity? To promote *consumer* welfare measured in the here and now? Or to develop a social and economic infrastructure that maximizes *societal* welfare in the medium to long term? An infrastructure to enable other economic and social expenditures (military, standard of living, life expectancy, etc.)?

The first is America 1960-2010; ‘consumer welfare’ is the metric. The second? Delayed consumption, lower standards of living and capital accumulation for the future. How one answers these questions determines divergent paths.

The Four Models

For statesmen or serious students of Great Power history (this excludes by definition march of trumpets Boys Life ‘history’ ala Victor Davis Hanson et. al.), there are 4 essential, successful modern development models: (a) the British until 1870s (the end of the mercantalist First Empire and commingling with ‘Wealth of Nations’ and ‘White Man’s Burden’ era); (b) the Germans from 1870-1914; (c) the American from 1880s-1960s; (d) the Soviets 1917-1970s; (e) Japan from 1945-1991; (f) the Four Tigers (copying Japan); and (g) China (1980s-today). The latter three are essentially variations on the Japanese dual economy mercantalist approach. (The BRICs are more notional, still in China’s shadow).

Each development model has structural micro and macro features unique to itself and also reflecting contemporary domestic and international environments. Of them all, only the Soviet example can be said to be reasonably autarkic. Trotsky and Preobrazhensky’s ‘Primitive Socialist Accumulation’ explored how to industrialize a peasant society with a dictatorship; Stalin’s hijacking of the Left Opposition’s platform in 1929 with the first Five Year Plan just dialed it all the way up to genocide. Even here, however, autarky had limits. For example, American Ford technology built factories in Tsaritsyn/Stalingrad, American tank designer sold Moscow plans for his tank (and especially suspension) which became the BT series and evolving into the later T-34, etc.

Few can deny the industrial achievements. Even fewer could even consider tolerating the costs.

The First British Empire (pre-Yorktown) was almost single minded in its mercantilism. It outfought the Dutch. That focus did not survive the industrial revolution and England’s unanticipated unipolar position post Waterloo. Still, the First Empire’s achievements provided much of the real wealth that supported the Second Empire’s embrace of Adam Smith’s ideology and later decline, to be ground up at the Somme, Ypres, etc. One need not be Corelli Barnett to note that India and other possessions, by requiring supply lines, governing classes, naval coaling stations, etc. were a net drain on British wealth. The numbers are striking.

Not coincidentally, the United States’ rise coincided with British infatuation with ‘free trade’ and economically debilitating imperial activity. As long as ‘Free Trade’ meant immediate price point, the U.S. with unique continental scale could ride the British as both beneficiary and parasite, staying in the British slipstream. All while America pursued its own development goals and promotion of national industrial champions. J.P. Morgan’s (the man) loans to the Empire for WW I said it all. Does anyone think American support for post-war de-colonization was purely humanitarian?

Economic Development And The Free Rider Phenomenon

American natural resources and continental scale ensured eventual industrial and economic pre-eminence. Combined with British reliance on ‘Free Trade’ and capital mobility, America’s time became inevitable. Hamilton had little to do with it. A national bank? Promoting some physical infrastructure? Important as policy gestures but the concept long jettisoned in American eyes. British profligacy and American scale mattered far more.

An ‘American Century’ might have happened without British blindness but likely later and less clear cut. British reliance on ‘Free Trade’ ideology empirically and manifestly undermined British economic interests from the 19th Century’s close. Lend Lease a bitter recognition of the future. In our view, Hamilton the man offers little for solving today’s development predicament. Perhaps he’d be a useful AgitProp facade to mask implementing something altogether different.

The German model naturally is more organized. Ironically it starts from the most disorganized political position. Prussia’s use of the zollverein customs union tool to unify Germany first against Austria and then to incorporate Austria into the Empire is adroit political-economic statesmanship. It was nevera foregone conclusion. Germans pioneered focusing on key industrial sectors. These national champions were unleashed within the Second British Empire’s global ‘Free Trade’ framework. Initial examples include chemicals and optics.

The 1914-1918 civilizational disaster didn’t alter German concerns. Much of the corporal’s later semi-coherent economic thought focused on how to meet the American continental challenge of scale. How could Germany gain resources and industrial means to compete (survive in his view) with the other two great global/continental powers – Great Britain and the U.S.? (It’s not coincidence that his adjutants reported hearing him say privately in the Fall of 1942 the war was lost when Germany failed to secure Soviet oilfields (pre-Stalingrad kessel )).

His focus on scale was shared. Willing historians have buried how much industrial and financial classes in Occupied Europe agreed. It’s instructive to recall how often past is prologue. One reason the post-war European Coal and Steel Community, founded in 1950 to help begin European unification was so successful? It in many ways continued and built upon trans-national relationships and working partnerships established by Speer during the war.

Why Everyone From Moscow To Beijing Looks At Toyko

Japanese success is the most remarkable of them all. No natural resources to speak of; prostrate, with paper cities in embers, a generation led them to become the second largest economy in the world. One can debate how much the Japanese fooled SCAP and MacArthur and maintained nationalist structures (outlawed zaibatsu became today’s keiretsu, etc.). Or whether we went along after 1950 because we needed a staging area for Korea. Regardless, Japanese success set the template for nations to come: targeted selection of export industries, supported by massive barriers to entry in domestic markets, enforced savings and capital accumulation. They created from ruins the largest transfer of wealth in human history at the time. Way beyond OPEC.

Americans mistook their accidental post WW II unipolar hegemonic position as the natural order of things just as the British had over a century before. We still do, oddly. American wealth and economic power is ineffable, ‘the American way'; free trade was a law like gravity. Company after company giving away intellectual property for a song. As we’ve written at length (IIRC) at STSOZ 1.0, the Zenith vs. Matsushita litigation is painfully comical. American judges and lawyers repeating tautologies such as ‘Japanese companies are private entities in the business of making money, ergo, they would not ‘dump’ televisions in the U.S. below their cost’. And so on.

Americans forgot how their economy worked. Meanwhile, the Japanese could glance at sophisticated input/output tables and see theirs. Chess versus checkers. Key American inventions like the transistor, the integrated circuit all quickly turned against entire sectors of an economy – what Grove likes to call scalability, others call supply chains and eco-systems. Watching Detroit become Dresden must have offered grim satisfaction for those who ran or who had parents try to run from the formations of B-Sans firebombing Tokyo. MITI made mistakes, of course. Honda is a classic example of a company mandarins told to die but refused, going to Americans for money instead. They clearly met the overall macro goal of national capital accumulation.

Nothing is ever perfect. Academic (i.e., non Jon Stewart- ‘Our guest tonight has written a new book on . . .’) literature on the Japanese success and its price of a dual economy worth a re-read. Bernanke has written thoughtful pieces on Japan post 1989, for example. Granted, the model — like the 1955 Political System itself — stayed in place too long. Economic and political power can seduce and become entitlement. Ideally, the model should have begun relaxing in the mid 1980s – with or without the Plaza Accords (James Baker’s coup de main). The free money from the real estate bubble instead jammed the accelerator. Old practices and protecting inefficient domestic services industries prolonged the ‘Lost Decade’. Say what one will. They still remain the second largest economy. From literal ash.

The Four Tigers and China we submit are following essentially the Japanese model. China, however, out hustled the Japanese, aided by their awesome population pool and continental scope. The Pearl River Complex we’ve written about at length should be a mandatory case study. It’s intriguing and even nostalgic that Sharp alone refuses to offshore fabrication of LCD TVs (Sony more or less re-sells Samsung or other OEMs). What all of them have in common is that they suppressed immediate *consumer welfare* for capital accumulation and long term goals.

Step Right Up And Enjoy The Joyride . . . Hello, You Fool

All of the 20th and 21st century mercantilist powers require a free rider. The U.S. mindlessly still plays that role for all of them. When you hear Obama talk about adding 75 new ‘high tech green manufacturing jobs’ at some fender assembly plant, or Summers discuss how new jobs will come from ‘high tech industries of the future’, think about all this. Or that hoary chestnut “Nothing can stop the creativity and productivity of the American worker” – except the Japanese development model, the Four Tigers, China and the rest of the BRICs.

Andy Grove writes an interesting piece from the perspective of looking through a straw. The challenges are far more than about ‘bringing back American jobs’. More to the point, if the U.S. should stop (or is forced to stop) being the free rider for external development across Asia, who will permit American re-industrialization? ‘Free trade’ as an ideology (and it is ideology, no matter how many curves someone draws on a chalkboard or napkin) only works when there is true, undistorted comparative advantage. In this global environment for the foreseeable future, who is willing to stop their success and play the demonstrably unsuccessful U.S. role? What development model will work for the U.S. surrounded by mercantilist schwerpunkt export powers?

What Can One Expect Of A QVC/Home Shopping Power?

Too harsh? For a nation that celebrated over 30% of its economic growth came from ‘financial engineering’? Ask yourself: Is the U.S. prepared to make the coordinated national sacrifices across economic sectors to mobilize, compete and win? Can the U.S. even think in such strategic terms? It’d be nice to think so.