In the Agora: Bill Gates is Wrong

« Tough Day at LewRockwell.com | Main | Local Knowledge Digitized »

January 30, 2005

Bill Gates is Wrong

Josh asked me to comment on a Bill Gates speech at the World Economic Forum in Davos. Gates takes as his thesis that China's low wages, intelligent leadership, low medical and legal overhead, and huge surplus labor pool has resulted in a new form of capitalism.

If past is prologue, Gates's adoption of this hypothesis is a signal that its day is waning. Gates famously came late to the Internet revolution, ignoring the Web until Netscape, AOL and a new host of Internet companies had succeeded in threatening Microsoft's core businesses. It remains to be seen whether the Giant of Redmond can fend off the challenges; I suspect, in the long term, that Microsoft will have to exit the businesses it today considers its core, and use its vast cash reserves to buy up expertise to remain profitable in newer, more competitive IT fields. The market has a logic all its own.

When Gates began turning Microsoft around, it was fashionable to speak of a New Economy. There has been a productivity revolution in the United States, and there will be an increasing effect as IT permeates our lives even more. (Does anyone live without a mobile phone today? And does anybody's cell phone only send and receive calls anymore?) But the fundamental logic of supply and demand, of micro- and macroeconomics, still hold. It is only that we can do more with the same amount of resources.

Similarly, Gates's description of China, and in particular his admiration for the brainy, reflective scholar-administrators of China (I really do not understand his thinking on this point), is reminiscent of previous claims of capitalism's overthrow. Always the predictions are tiresomely repetitive. Either it is the sudden scarcity or surplus of some material deemed crucial to the economy that threatens the system; the venality or saintliness of politicians or business leaders or both is often a contributing factor. Sometimes capitalism's demise leads to devastation and poverty, other times it is the first step on the way to that long-promised, long-delayed worker's utopia.

To respond to Gates's specific points: China's low wages will inevitably have to come up--the reports of workers' unrest in the Pearl River Delta, and particularly in textile industries, are signs that one way or another a new bargain will have to be struck. The surplus labor pool will continue to feed into the vast manufactories of southern and coastal China, but the government will not permit it to occur all at once--the chance for political agitations and disruptions is too great. Already we hear reports of massive disturbances in the country's centre. The legal overhead is increasing, too, as a new generation of hypercompetitive Chinese legal students begin to work to protect Western intellectual property and Chinese IP as well. And I can hardly see a real-estate market like China's ever become stable without scads of lawyers, like locusts, descending on the land. The medical costs, too, will rise eventually, as the newly empowered Chinese middle class seeks its satisfaction not in political, but in material forms, and particularly in the reduction of insecurity. Indeed, it is not only the bourgeois who will be concerned: A recent study showed that life expectancies in several Chinese cities are falling because of high pollution, and this is a situation few will tolerate for long.

Finally, China's leadership is neither unitary, nor saintly, nor all-seeing. There is always the chance that the People's Liberation Army or some clique will find it beneficial or ideologically necessary--or, perhaps, simply emotionally satisfying--to lead the mainland into a war with Taiwan, or--more remotely--Japan. Or a war could break out as the result of a miscalculation on the part of Washington, Taipei or Beijing. China's leaders act according to a host of motivations, but among those motivations is the desire of nearly all government officials: The desire to remain in power. This desire can come from a sincere belief in the justness of their cause, as well as from equally sincere but less laudable roots, but whatever its derivation it remains a guiding force in their calculations. And the mandarins of the modern empire will no more tolerate reforms that endanger their rule than Gates would allow Steve Ballmer to act independently.

Most importantly, Hayek and two generations of economists and political scientists have argued consistently and convincingly that planning does not work. China, I have been told, is more capitalist and open to markets than France--but for all that it is not yet efficient at accurately capturing and acting upon the information contained in its economy. In part this is because of a lack of capability: China's banking system, being reformed, and its capital markets and ownership structures are all opaque. Massive public-works projects, like the Three Gorges dam or the run-of-the-mill and highly duplicative airports and highways being thrown up in the country's vast western regions are the consequence of resources being applied not because of genuine need, but rather because of miscalculation. This miscalculation may be inadvertent, but it is often intentional, because Chinese politicians, like those everywhere, know that it is easy to buy support with government funds.

Gates likely finds the Chinese model strangely comforting. He is no longer a capitalist himself, except as he owns capital privately; he is now more like a feudalist, who owes his position in the power structure no longer to his individual exertions but to the support of a vast legal structure (namely, IP law itself) and some quirks of economics. As a bureaucrat in the private sector, Gates must imagine the Chinese bureaucracy to run as smoothly as China's; and as the head of a vast bureaucracy, Gates must not know that this is a better analogy than he imagines. The man at the top of the pyramid is always isolated from the facts, unless he works day and night to uncover the truth, and even then the whole truth will elude his grasp. China's leaders, too, are isolated, and they no more than Gates are able to know the truth about their business. And they, like Gates, will commit grave strategic errors, and probably have done so already.

Posted by Paul Musgrave at January 30, 2005 05:53 PM

Comments

Recently heard about an amazing business going on in China that is as genius as I've ever run across. They play people to play MMORPG's, pay them in yuan of course, and then sell the in-game items they have for dollars on ebay. Freaking genius. Wonder if I can get in on that one.

Posted by: C M at January 30, 2005 07:48 PM | permalink

I'm afraid that Dani Rodrik at Harvard would disagree with you. the leaders in China did make some smart reforms that wisely went against the Washington Consensus.

The models of supply and demand are not that fundamental for growth/development. There are several things all economies must do, but there are several different ways to go about doing them.
dlw

Posted by: dlw at January 30, 2005 08:05 PM | permalink

Hm. And the Washington Consensus is precisely equivalent to capitalism.

China's decision to restrict capital mobility has been proven wise by experience. But that is about the best that can be said for their non-market adventures. Are we to say the Three Gorges Dam is the product of sound planning?

In any event, comments like these are the most frustrating an author can receive. It is all right for the commenter to airily declare that so-and-so disagrees with the author; no one expects anything of a commenter, there is no burden on him; but he places one on the author, who has to respond to the criticisms thus made--even if, to be precise about the matter, no real criticism has been adduced, and there is nothing to respond to except the vaguest atmosphere of disagreement.

Posted by: Paul at January 30, 2005 08:14 PM | permalink

Supply and demand has fairly little to do with Hayek's claims about the limits to economic knowledge and their consequences for government planning.

Fundamental for growth and development are several things that the government must not do--and several things that it should.

First, it must not seek to nationalize or subvert foreign investments. It must curb as much as possible its urge to subsidize, tax, and over-regulate. It must not collapse into revolution or civil war.

Second, government has to guarantee transparency and the rule of law. It must ensure at least roughly predictable outcomes in litigation, currency values, and government fiscal policy. It must allow a significant measure of free trade.

Why is South Korea rich, and North Korea poor? Why is Japan rich (though lacking in natural resources), and Congo poor (though overflowing with them)? A stable government that respects property rights and the rule of law is the single biggest guarantee of economic success. China has improved vastly since the 1950s and 1960s, though it still has a long way to go. And given its eagerness to micro-manage (to say nothing of lingering religious and political dissent), I am not so optimistic about its future.

Posted by: Jason Kuznicki at January 30, 2005 10:05 PM | permalink

"Supply and demand has fairly little to do with Hayek's claims about the limits to economic knowledge and their consequences for government planning."

Jason, I disagree. The preferences of a demand curve, being internalized and local, can't be known by governments, leading to the road to serfdom; and without the intersection of the curves, you can't get (real) prices, and prices are a critical market signal.

Posted by: Paul at January 31, 2005 02:19 AM | permalink

Try competing head to head with a firm operating in China and you will tilt towards the Gates analysis. Any product that is made. In the USA the maker of goods faces a 25% cost of government on each item made. Our regulatory stupidity only works in a closed market. Our market has been Open Door for some time now with predictable results to our manufacturing base. Even with the increase in productivity mentioned, try going head to head and see what happens.

Posted by: Anonymous at January 31, 2005 05:29 PM | permalink

Well, there's only two major errors in economic theory here. As for the first, I'll just say "comparative advantage." As for the second, may I point out that it has proven difficult to outsource haircuts? (Or, for that matter, financial services, policing, construction...)

Now, the empirical errors, and the minor theoretical errors, could fill a whole post--but look! They already have!

Posted by: Paul at January 31, 2005 05:35 PM | permalink

Paul,

You are right in your observation about local demands being inherently difficult to measure, though as I understood it (and admittedly it's been a while), Hayek's insight applied to many other forms of economic information as well.

Posted by: Jason Kuznicki at January 31, 2005 08:14 PM | permalink

Not so fast, nor so flippant? Instead of comparative advantage try absolute advantage. As to your second point I am at a loss to understand how haircuts got to be considered manufacturing-I had thought them a service job (we aren't talking about Evan's wig). Financial services and many other services? Egad! Begin your instruction by inquiry as to the physical location of the excellent English speaking Indians who are increasingly making reply to telephoned inquiries, from India.

Posted by: Anonymous at February 1, 2005 01:33 PM | permalink

Jason,

Hayek did talk about information in a lot of ways (the new NYU journal on liberty and something has a good article). But this was one aspect I thought applicable.

Anonymous troll,

The distinction between comparative and absolute advantage is such an elementary one that I am afraid you are unqualified to discuss this matter fully. You are quite correct that haircuts are not manufacturing, but--lo and behold--America is now, and has been for a while, a service industry. The outsourcing of jobs to India has been much ballyhooed, but also much overblown, and in any event we will be better off in the long run for the trade. (After you grasp the intricacies of the Ricardian two-state, two-good model, then we can discuss the distinction between tradable and nontradable goods.)

Posted by: Paul at February 1, 2005 03:39 PM | permalink