Arthur Kroeber: recommendation

Transcript context

…There’s a couple of things. First of all, even if you go back to like 2005-2006, when we started thinking about this, everyone was saying that green energy was going to be an important industry in the future. You had the Kleiner Perkins guy. John Doerr was the big VC who said circa 2007, “I'm going to put all of my bets on green energy because this is the future.” He turned out to be wrong from the standpoint of his investment returns. But he turned out to be totally correct in terms of this being a really big thing. It was just not that wild a bet to say that green energy was going to be really important and that we should place a lot of bets on that. Why does this work and why is this different from a central planning thing? That's a really important point. First of all, the Chinese system, like the systems that preceded it in East Asia—Japan, Korea, Taiwan, and so forth—has always put a lot of emphasis on being good at exporting. There are a lot of pressures within the system to create industries that can export. The reason this is important is if you have a totally closed system—which frankly is what I think Donald Trump is trying to create in the United States—and people are just producing essentially for domestic consumption, there's no incentive to keep up with global technology developments. If you have this constant export focus, essentially what everyone is trying to do… If you have a closed domestic market, you can rig the domestic market and buy off your connections in the government to make sure that you, as a company, have your market share. There are a lot of ways to win that do not involve technological upgrading. That is what dooms all import substitution regimes. If you're an export-driven economy, you can't rig the global economy. Ultimately you have to compete. You can't compete just on price, you have to compete on raising your game. Japan did this successfully, Taiwan did this successfully, Korea did this successfully. China's done that successfully. So that's answer one. You had this underlying system which was heavily incentivized towards technological upgrading across the board. That's what you were sitting on top of. It was completely different from the old central planning regime, which was autarkic and inward-looking. Second, you had this domestic competition environment which was really cutthroat and involved a lot of international companies. This is a little bit of a difference from Japan, which always kept the foreign companies out of its domestic market. Their companies operated globally very, very well, but the domestic market was very protected. China's domestic market was not that protected. They were always willing to bring in companies that they thought would be able to spark some technological change. So what this did is it created a field in which whether the government has the right ideas, or whether they don't, you have a crucible in which their ideas can be tested. rk some technological change. So what this did is it created a field in which whether the government has the right ideas, or whether they don't, you have a crucible in which their ideas can be tested. You have a very competitive domestic market where you have a lot of the big international players doing their own thing as well. So the things that work get some validation and you can keep building on those successes. That's really important. Then just the sheer scale at which they were able and willing to support what appeared to be losing bets for a long time does matter. You could contrast their view, for example, in solar energy. They said, “Look, we want to be big in solar energy.” Again, they started thinking about this in 2005. “What do we need to do?” So they identified the whole supply chain, from the raw silicon inputs to all of the modules in the finished panels. They said, “We want to be in every stage of that.” So they had a pretty deliberate strategy of trying to create people at every point in the supply chain. And they were willing to go through cycles of people not making any money. The obvious comparison in the United States is that the US government gives one loan to one company, Solyndra. It goes bad and everyone says this is proof that industrial policy does not work. China actually has the right answer to that question. We had the wrong answer to that question. You have to be willing to accept some failures and some loss of government money along the way if you want to get to the end. But I really stress the ecosystem because a lot of this would not have worked just by the government saying, “Oh, we want to do solar. ” It would not have worked unless you had this broader ecosystem system of export-driven manufacturing, high competition, and international participation across many, many sectors of the economy. They all converged to create a succesful result. I want to put some of these bureaucrats in a Factorio speedrun and see how they do so. I just interviewed Ken Rogoff, so Japan's top of mind for me. It's really interesting that even though Japan had this export discipline, maybe the reason that the growth didn't continue after the 80s is because you had this convoy system where banks were incentivized to lend to people they knew in these conglomerates. These conglomerates have been around for decades, even before World War II. I have a question now about China. You have these companies which have become national champions and are conglomerates, the same companies producing a phone and a car and everything in between. Given the intrinsic nature of authoritarian systems, or systems with financial repression, will we go to a system that is closer to what Japan had in the 80s? They’re going to give money to Huawei because Huawei or BYD are the right people. Or will it remain dynamic, especially in the sectors which are coming up over the next few decades?…

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