Is the U.S. tech industry oiling its own guillotine?

http://blogs.techrepublic.com.com/hiner/?cat=641

by dfox • 16 years ago

20 28 16 years ago

blogs.techrepublic.com.com

davidw3• 16 years ago

Here's economist Tyler Cowen's response, which was a good one:

http://www.marginalrevolution.com/marginalrevolution/2010/07...

dfa• 16 years ago

I know economists still have soft spots in their hearts for Smith and Ricardo, but how, in 2010, could anyone honestly cite comparative advantage in support of free trade when the markets for land, labor, and capital have gone global? No nation has an inherent advantage over any other in producing a particular good or service. The idea that we should specialize in producing what we're best at producing and trade for everything else makes less sense in a world where raw materials can be mined in Africa, refined in India, and assembled into a finished product by workers in China to be sold abroad at a 98% markup by a multinational corporation. All too often the primary "comparative advantage" other nations have over us is their lax labor and environmental regulation. And even if we were to follow the tenets of free trade and specialize in what we're best at, what, again, would that be? Economists told us that high-tech jobs would replace the outgoing manufacturing ones. What will replace the high-tech jobs?

I also thought it was amusing to see Tyler suggest that we could learn something from those countries in East Asia eating our lunch. Apparently he is unaware that those countries all have neomercantilist systems that favor exports over imports, encourage personal saving, and discourage consumption.

As for the original article, the claim that no nation ever got rich by engaging in protectionism is ridiculous. The US pursued a protectionist trade policy from its inception (The American System) up until Smoot-Hawley and even then continued to and still continues to in certain sectors (see the US Sugar Program as a prime example). Great Britain became the most powerful empire on Earth while engaging in protectionism, starting with the infamous Navigation Acts. This is not to say that America and Britain became prosperous because of protectionism, only that it is not as absolutely fatal to an economy as some suggest. Thriving European countries today engage in protectionism against us by putting a VAT on American exports.

Lastly, though this post may have seemed like a defense of protectionism, it isn't. The problem with protectionism is that its antonym is not "free trade" but "free markets." Doctors, lawyers, dentists, and many other white collar professionals enjoy immense economic protection in our system. Rather than adding even more, on behalf of engineers, why not reduce the protection of other professions? If people stopped seeing society throw engineers to the wolves of the market while guaranteeing doctors, lawyers and others comfortable, upper-middle class lifestyles, more people might go into engineering.

davidw3• 16 years ago

You make some good points. However:

> No nation has an inherent advantage over any other in producing a particular good or service.

Which is why we drink so much Norwegian wine here in Italy lately.

I think your claim is overly broad.

korch• 16 years ago

Bingo! You're completely right.

I cringe whenever I see someone drag out Ricardo's comparative advantage BS, dating from the 1800's. Economics, as it is taught in the schools, opposed to the real world of business, is mostly fiction.

Sure, you can demonstrate the validity of comparative advantage on paper using a simple matrix of Guns & Butter, and because it's so simple we get all these Randroids who believe they understand how the world truly works through the lens of basic freshman level math.

But these Macroecon textbooks are also wearing the kid gloves for the benefit of innumerate undergrads in order to pass off an illusion as scientific fact. (Econ is the dismal science after all).

Instead, let's scale the Guns & Butter matrix up to 1,000,000 variables, which is still embarassingly low compared to the complexity of real life, and let's add a time dimension too. Now just try to find the fucking comparative advantage! Good luck even finding the eigenvalues of that matrix before the heat death of the Universe. And if you happen to get lucky and find some minimum, you won't be able to know if it's global or if you're going to be wandering around in a false local minimum for eternity. Faced with this kind of uncertainty, your smartest evolutionary move is to grab whatever you can buy or sell and defend it within your territory. Period.

Ricardo's theorem is to economics as play-dough is to architecture.

I often amuse myself by wondering this: what if our entire idea that our post-modern global society has transitioned to free trade and free markets is a delusion, a folie a deux, a cynical ploy by the rich & powerful to control everyone, and in fact historical mercantilism is still the basis of global political economy? Just look at the balance sheet of the Federal Reserve sometime and ask yourself if hoarding currency is still the primary determinant of a nation's wealth?

Sure, we've changed the language we use to describe it, we've changed the playing field itself, added incomparable technology, and re-shuffled the boundaries and identities of nations through a few world wars, all underneath an expanding teleological architectonic of democracy and freedom around the world, but ultimately everything is still the same basic pattern being played out across the nations. Hoard currency! Perhaps mercantilism & protectionism is the only Game theoretic dominant economic strategy for any nation or collective group?

kls3• 16 years ago

He has one problem with his argument, he brought Germany into the equation which is a bad example. Germany has some of the most stringent manufacturing protection policies in the first world. Not to long ago they went after Nokia for "caravan capitalism" for moving manufacturing bases from Germany to Romania. Germany is probably the most piss poor example one could use to strengthen their anti-protectionism argument. They are protectionist (in actions not in words) and they are doing the best through this whole mess.

binaryfinery• 16 years ago

FTLA: "Those results are not definitive, and might be wrong, but so far they're better than anything Grove serves up."

If they are wrong, how are they better exactly?

Fact: the Global Market makes a ton of money for the ultra rich, and screws the poor. That this is happening is simply because they now have the anti-personel weapons to defeat a civilian population should it try to revolt.

davidw3• 16 years ago

[citation needed]

Also, if I may, that sort of commentary is exactly what fuels the "HN is going the way of reddit" posts, and a good example of why it's best we simply avoid articles like these on economics/politics.

skowmunk6• 16 years ago

I would agree with Grove's anslysis of the problem and that loss of manufacturing technology leadership will give lead to eventual loss of technology leadership itself, because manufacturing technology is a critical component of high end technology. Its like giving off potential competitors some of your chips, not realizing that those chips might enable your competitors to get more chips in the future, enough to give you more serious competition.

But at the same time, the solution he suggests could backfire very badly. If it were a case where the US was the only technology leader, then protectionism could have been possibly used to re-establish local manufacturing. But thats not the case, there are competitiors there too, japan, Korea, Taiwan, not to mention China.

If the US does resort to protectionism, it would put at stake the massive revenues that american companies are getting from foreign markets. For many of the top American companies, the foreign markets are the fastest growing markets and in many, they have started being more than 50% of revenues.

The moment American companies start being 'idealistic' or the government starts protectionistic, that would set american companies at a massive disadvantage in foreigh markets. Japanese, Korean, Taiwanese and Chinese companies would be more than willing to take advantage of those disadvantages that American companies would face.

The evntual losers would be the investors in American companeis, that includes the multitudes of Americans who invest in them through pension funds, mutual funds, 401s, etc. Of course, they will lose in other wasy if they keep losing the manufacturing jobs too.

This is like a highly complex Game theory scenario with multiple players, multiple possible strategic moves, with gains and losses for each move. A simplistic or idealistic answer would not solve it

I think what the Gates foundation is doing, spending on education to increase the supply of more highly qualified people within the US, in the future, is definitely a move in the right direction.

As for Grove, I think he is just doing his best to serve his masters the best. Earlier his masters were the investors in Intel, so he was making sure that it was profitable and keeps surviving. Now, that he no longer has to serve those previous masters, he has decided to serve his primary master, the USA of which he is a citizen

(Please note, my use of the words 'masters' and 'serving' is not meant to be derogatory, he is just doing his patriotic duty now that there is no conflict with his corporate duties. I am not going to judge him based on that, life is not black and white, and he still remains very high in my list of idols.)

sprout2• 16 years ago

>If the US does resort to protectionism, it would put at stake the massive revenues that american companies are getting from foreign markets. For many of the Fortune 500 companies, the foreign markets are the fastest growing markets and in many, they have started being more than 50% of revenues.

Increasingly it seems that the interests of American companies and the American people cannot be reconciled, and we must choose. I for one know where I'd throw my lot.

skowmunk6• 16 years ago

With no disrespect,

I would be curious to know which side you would go with.

What exactly would you do to throw your lot with whichever side you would go with?

What would you be ready to sacrifice personally to make that side win?

would you be ready to give up some time? how much?

Would you be ready to give up some money? how much?

What if you were to look back deep into history and find out that the symibotic and parasitic (both going both ways) relationships between the two parties, the corporates and the people, always existed simultaneously?

Just curious.

(btw, what, why, how, they are my favorite words, sorry to bore you all with them1)

gaius• 16 years ago

And he should know - Intel used to be in the RAM business, remember. Why did they switch to CPUs? Because they couldn't compete on RAM with the Far East fabs.

The solution then was to move up the value chain - why's now different?

SkyMarshal• 16 years ago

Relying on your ability to survive by staying one step up on the value chain is putting all your eggs in that basket. The risks:

1. High rate of technological development in Japan, Korea, and China right now. China particularly is hellbent on creating Chinese alternatives to everything, including x86 CPUs.

2. Some black-swan type discovery elsewhere that enables other nations - say Taiwan with its manufacturing expertise - to leapfrog you in value chain.

I'm sure there are others. It's just not wise strategy to complacently rely on single competitive advantage for leadership in such an important part of the economy.

It makes us economically fragile, when our objective should be to become economically robust and redundant. We lose one advantage, we have other strengths to fall back on.

kls3• 16 years ago

I don't understand how one comes to this conclusion. One only needs to look to our debt to China on federal bonds to see that the revenue is not flowing inward rather it is flowing outward. The fortune 500 mentioned do not "bring that money home" because they are now multi-national corporations that have no loyalty to "home" because they don't have one. Home for the moment is the best tax haven.

Simply put what Andy is proposing is that if you profess to be an American corp than act like it.

There is nothing wrong with muti-national corps. But we should be rewarding the American ones that take care of Americas not because of nationalistic pride but rather because like it or not, we are in the boat together and for better or worse at a certain level your interest are my interest. We should be rewarding the ones that row the boat together at every level. Naturaly when you go upward we are in the boat together with all humanity but you have to protect the small boats from the wake of the big ones because sinking one to float another does nothing to bring everyone up.

So at that level, I am all for my boat that my forefathers floated and that I worked all my life to float not be submerged to float someone else boat. It is not fair, we should be lifting everyone up but not at the expense of others.

I am all for rewarding companies that pay homage to the boat that floated them and allowed them to set sail to new waters. We can lift others up without dragging ourselves down. But it starts with sane limits. Something the "haves" call protectionism. "Greed is good" has failed, it has dragged us to hell in a hand basket.

Do you think we are better off now than we where in the 50's when a single income could provide a better standard of living that most make today with two incomes and government assistance.

We look a lot like the USSR right before the wall came down. Massive state assistance, huge social programs, job growth coming from the state sector and a broken manufacturing base. We really pissed it away.

skowmunk6• 16 years ago

So I guess you woudldn't agree with any of these:

1) Increase in stock prices by getting good growth and profits (irrespective of where those come from) is generally a better wealth creator than distribution of those profits

2) companies desperately need to hold on to profits, as it is ammunition in a war of survival, whether its by parking in tax havens or some other way, so that they can deploy it when and where required to continue their survival

3) its more important for companies to have the ability to survive and provide employment to people in the long run than to distribute profits for making people happy in the short term

Retric• 16 years ago

China has been extremely protectionist from 1970 to now and their economy has steadily grown thought that time period.

gamble• 16 years ago

Because the US is willing to accept a non-reciprocal arrangement. Protectionism works pretty well when the other party represents a huge market and where ideology and special interests prevent them from responding in kind.

Tamerlin2• 16 years ago

"will give lead to eventual loss of technology leadership itself"

I'm not convinced that you're using the correct tense here.

Consider -- what technology do we develop here in the US now?

Most of the world's major high-tech fabrication is now in Taiwan and Korea -- including AMD's. Most of our manufactured products, from tents to designer clothing, are made overseas. It's gotten to the point where "made in America" is unique enough to be a selling point!

"I think what the Gates foundation is doing, spending on education to increase the supply of more highly qualified people within the US, in the future, is definitely a move in the right direction."

I agree. We've been dumbing down our education system, and ever since the tech bubble burst, there's been less interest in technology related education. Andy Grove among others started the H1b thing, and it backfired badly -- the PR that it generated when combined with the bubble bursting discouraged a lot of people from pursuing the tech industry in general, which reinforced the talent deficit problem. Some might argue that it CREATED the talent deficit.

skowmunk6• 16 years ago

Don't shortchange the US. US is still the world's largest generator of patents.

A123, Tesla, SpaceX, Amgen, Google, Microsoft, Apple, Medtronic all these are in the US, not to mention most of the biggest companies in the world.

The problem is all those patents are definitely turning into profits, quite a lot of which does get distributed to Americans directly or indirectly, but definitely not by generating enough jobs to keep everybody employed.

May be the number of patents that are being produced has to be increased, to generate enough jobs to overcome the producctivty gains caused by new technology?

Of course, for that to happen, there should be the ability to produce still more patents, for which in turn the bottlneck is people, that is, qualified people.

geebee• 16 years ago

I'd be interested in hearing Grove's thoughts on the H1B in light of his recent comments on the decline of tech in the US.

It's easy to be cynical about Grove and the other people who supported this program, but one thing I realize early was that the H1B looks incredibly different depending on who is using it. Intel probably just figured it was a way to hire people out of Stanford and Berkeley's engineering grad schools, and why on earth wouldn't you let someone do that? Other people, the ones who saw the body shops at work (or were part of those heavily coerced "knowledge transfer" programs) couldn't understand why anyone was defending the program at all.

Honestly, I do think that this program played a substantial role in the erosion of interest in graduate level science and engineering people who grew up in the US - not because it allowed talented people to come here (that is a good thing), but because it was expanded to such a scale that it allowed companies to hire people at all levels of the talent spectrum at wages that weren't competitive with other options outside tech (law, medicine, MBA).

I think it was difficult to detect this at first, because there was of course some inertia (older Americans still in the field, takes a while for younger Americans to change their behavior and start avoiding sci/eng grad programs). The problem is, there is inertia on the other side - if wages do improve, it'll take a long time for young Americans to respond the new market signals.

I hate this, because I had so many good friends in grad school who were from overseas, but it really disturbed me that kids who had grown up in California (or even the US) were almost totally absent from graduate engineering in a school called "The University of California"). The presence of international students is a great thing, but not when the levels of US citizens starts to drop to dangerous lows. And while Grove and others described this as a kind of crisis, they never really connected it with wage erosion or potential displacement from the visa programs.

I think this is a hidden factor that will become far more pronounced when demand for engineers from Asia increases. It's already happening, of course, but the US still gets to keep a lot of the talent that came here for grad school.

I think we should compete for this talent, of course, but I also think we should realize that will will not be a top tech power if we don't produce and sustain a healthy flow of engineering and science talent from our own population. So far, this isn't controversial - the disagreement comes from the extent to which visa programs add rather than displace.

dmethvin• 16 years ago

> In that speech [Andy Grove] decried the U.S. patent system, explaining that in the early days of the transistor there was much more cross-licensing of patents and a greater spirit of companies building upon the same technologies -- even among fierce competitors.

At the time, however, the largest consumer of electronics was the U.S. government. They required second-sourcing of just about every electronic component they purchased. Intel had to share its technology to get that business. Do you think Intel would have licensed x86 to AMD otherwise? Once Intel got powerful enough they tried to go back on that deal, but the courts ruled for AMD. Even back then it was about money.

lefstathiou• 16 years ago

I've had this nacent idea percilating in my mind that in our lifetime we are going to see the (economic) separation of American industry from the American homeland. If we look at it from a nationalistic perspective (ie America versus the world) then yes, America has much to lose if it cant get it's shit together and thus has to resort to protectionism (which ultimately will fail). If we look at it from the corporate perspective, American companies have everything to gain from continued globalization, assuming they have free access to these markets. What's the big deal of Intel engineers in California design chips manufactured by Intel engineers in Vietnam? At the end of the day this is still Intel.

We see this phenomenon playing out more dramatically as many of America's leading firms (in Finance, Energy, Tech) are pulling in tremendous amounts of money while the Nation is engaging in historic trade deficits. Long term, this has fairly dangerous implications because the interests of your nation should coincide with the long term interests of its corporations. When this fails, I can see some of these super multi-jurisdictional firms making a case for why they should no longer be "American" corporations. Coming from the Finance industry, there really is no reason why I have to be in NYC to do what i do. I could do it in Hong Kong where there is 15% income tax or Dubai where I hear it's even less. In that case, I win, America loses.

These are dark times...

dasil003• 16 years ago

Look at the factors that made America prosperous in the post-war period: most industrialized nations in ruins, huge land and natural resources, long-term instability in latin america, big demand for semi-skilled labor, etc.

We were living in a fairy tale scenario. No wonder a factory worker could buy a nice house in the 'burbs for his wife and 3 kids and drink scotch every night.

All this hand-wringing about how to get back to that is fundamentally misguided. We're not slipping, it's just that our most significant advantages have evaporated, and we are used to a certain standard of living that is an order of magnitude above what the developing world expects. We still have cards to play, but eventually we will have to compete with developing countries and accept the devaluation of our work.

supahfly_remix• 16 years ago

Manufacturing is bad for the environment, and I think US environmental regulation is partly to blame for the decline of manufacturing in the US. I, for one, am happy with this tradeoff, but I think any discussion about manufacturing should acknowledge this.

Is the U.S. tech industry oiling its own guillotine?

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