Arthur Kroeber: prediction

Transcript context

…Here you get to a sort of conceptual fork in the road. In many respects the communist leaders in China have a lot in common conceptually with the techno optimists of Silicon Valley in their, what I would call, technological fetishism. The Chinese leadership throughout the last 40 years, but even going back further, has had this notion that technological upgrading is the key to wealth and power. The fundamental idea here goes back to the 1840s when you had this great Chinese empire that had been sitting around for a thousand years doing great. They thought they were the best in the world. Then these upstarts from England come and crush them repeatedly, militarily, and impose this very humiliating political settlement on them through the Opium Wars. The basic analysis among the Chinese elites was, “Okay, we fell behind technologically. Therefore we must catch up technologically. This is the central thing that we need to do.” This was recognized among some elites, but it ran into a lot of encrusted political pressure in the late imperial Chinese regime. They didn't get very far. After the empire fell in 1911 you had a republican government. Basically, if you look back at the things that they were saying and doing, they're pretty similar to what the Chinese Communist Party has been saying and doing. They just did them somewhat less effectively. They were dealing with civil wars and various other problems. The basic insight remained the same, “We need to catch up with the west technologically. This is the fundamental thing. It's just a question of how do we do this?” What the current regime in China has been able to do is to take that basic idea and actualize it. They have been successful at this task of technological upgrading and catch-up. This is really central to the conception of Chinese elite thinking. The number one job of the government is to figure out how to mobilize the resources of Chinese society so as to maximize technology acquisition, creation, and upgrading. But there are a lot of flavors of this. Starting in the 1980s, that was a big part of the philosophy. But the other part of the philosophy was just, “We have to grow as fast as possible and we are fairly agnostic as to where the growth comes from. We realize that there are many different sources of growth. Foreign investment, exports, construction, infrastructure. We're going to do all of these things. Basically the incentive structure that they set up was just to tell local officials that their job was to maximize GDP growth. That will make all of these other things happen. If they tell local government officials, “Your job is to maximize technology development, they'll do a lot of dumb stuff and waste a lot of money. That's not the right way to do it. Let's just have GDP as the KPI. The end.” That turned out to be incredibly successful. Then Xi Jinping came along in 2012 and said, “The problem with this is that it's now gone too far. way to do it. Let's just have GDP as the KPI. The end.” That turned out to be incredibly successful. Then Xi Jinping came along in 2012 and said, “The problem with this is that it's now gone too far. It's led to a lot of corruption, it's led to a lot of inequality. It's led to a lot of local governments doing wasteful and duplicative things. Now we need to hunker down and focus a little bit more on the really central task, which is this technology task.” The mentality is less of “growth at all costs.” Basically, the implicit idea there is, “We've got this figured out. Growth will take care of itself. We have a growth machine in China. The resources of the government now need to be focused on specifically the technology question.” Everything that he has done—particularly since about 2015-2016 when he really started to see this come into focus—has been, “Let's worry less about the growth target and more about the technology targets.” Particularly after Trump launched his trade war and the Biden administration followed that up with a lot of controls on exports of technology to China, the focus got intense. They were saying, “The US really wants to prohibit, constrain our technological rise. They kind of have the ability to do so. Therefore we have to double down on efforts to replicate all of these core technologies so that we're not reliant on the US or its allies anymore. We just have to go full tilt on technology at all costs.” That was an accelerant of this tendency. But then there is also a macroeconomic theory. Go back and read some of the statements that he put out in the late 2000s and 2010s about their vision of the future. They talk about all these technological developments. They didn't mean Alibaba and Tencent and all of these great Internet companies. They meant physical technology, semiconductors, new material, green energy, industrial robots, all this stuff. Essentially their view was, “This is going to be the productivity engine of the future. Growth in the overall economy and incomes, it's all going to be driven by these technological investments.” That is essentially what they sincerely believe. There are some problems with that. The vast majority of people in the economy do not work in those sectors. You can get very good at making semiconductors and industrial robots and whatnot. The people who work in those industries do extremely well. But that is a tiny fraction of the totality of the population. How do you have spillovers that enable everyone in the economy—regardless of how remote they are from this engine room of the high tech sector—to enjoy gains to income? The answer in the United States historically has been, “We're just going to have this great consumer economy. We're essentially going to be demand driven. Consumers will tell us what they want and companies will arise to make what they want, which is increasingly not stuff, but services, experiences. We will create a financial system that produces very good financial rewards for the companies and people that produce these kinds of services. ” Then you generate huge amounts of actually very high paid employment in the services economy. t produces very good financial rewards for the companies and people that produce these kinds of services.” Then you generate huge amounts of actually very high paid employment in the services economy. The Achilles heel of any industrial policy-driven growth model like China—but you can see variants of this basically throughout East Asia—is that they are very materialist. They're convinced that it's only really the physical stuff that matters. They think if you get really good at making the physical stuff, that will somehow magically spill over into the rest of the economy. The evidence that we have is that that actually doesn't work that much. Most of the demand in a modern industrial economy, the really high wage, high income economies, comes from intangible services. There's a more complicated interaction between this high tech core and wider economic growth. I don't see in China how they set up the linkage between all these great high tech industries that they have and 90% or so of the economy which is doing something else.…

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