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Foreign Affairs: The New Crisis of Democracy

Can America Be Fixed?

The New Crisis of Democracy

By Fareed Zakaria

We built that: President Barack Obama visiting the Hoover Dam, October 2, 2012. (Kevin Lamarque / Courtesy Reuters)

In November, the American electorate, deeply unhappy with Washington and its political gridlock, voted to maintain precisely the same distribution of power — returning President Barack Obama for a second term and restoring a Democratic Senate and a Republican House of Representatives. With at least the electoral uncertainty out of the way, attention quickly turned to how the country’s lawmakers would address the immediate crisis known as the fiscal cliff — the impending end-of-year tax increases and government spending cuts mandated by earlier legislation.

As the United States continues its slow but steady recovery from the depths of the financial crisis, nobody actually wants a massive austerity package to shock the economy back into recession, and so the odds have always been high that the game of budgetary chicken will stop short of disaster. Looming past the cliff, however, is a deep chasm that poses a much greater challenge — the retooling of the country’s economy, society, and government necessary for the United States to perform effectively in the twenty-first century. The focus in Washington now is on taxing and cutting; it should be on reforming and investing. The United States needs serious change in its fiscal, entitlement, infrastructure, immigration, and education policies, among others. And yet a polarized and often paralyzed Washington has pushed dealing with these problems off into the future, which will only make them more difficult and expensive to solve.

Studies show that the political divisions in Washington are at their worst since the years following the Civil War. Twice in the last three years, the world’s leading power — with the largest economy, the global reserve currency, and a dominant leadership role in all international institutions — has come close to committing economic suicide. The American economy remains extremely dynamic. But one has to wonder whether the U.S. political system is capable of making the changes that will ensure continued success in a world of greater global competition and technological change. Is the current predicament, in other words, really a crisis of democracy?

That phrase might sound familiar. By the mid-1970s, growth was stagnating and inflation skyrocketing across the West. Vietnam and Watergate had undermined faith in political institutions and leaders, and newly empowered social activists were challenging establishments across the board. In a 1975 report from the Trilateral Commission entitled The Crisis of Democracy, distinguished scholars from the United States, Europe, and Japan argued that the democratic governments of the industrial world had simply lost their ability to function, overwhelmed by the problems they confronted. The section on the United States, written by the political scientist Samuel Huntington, was particularly gloomy.

In 1980, the United States’ gross government debt was 42 percent of its total GDP; it is now 107 percent.

We know how that worked out: within several years, inflation was tamed, the American economy boomed, and confidence was restored. A decade later, it was communism and the Soviet Union that collapsed, not capitalism and the West. So much for the pessimists.

And yet just over two decades further on, the advanced industrial democracies are once again filled with gloom. In Europe, economic growth has stalled, the common currency is in danger, and there is talk that the union itself might split up. Japan has had seven prime ministers in ten years, as the political system splinters, the economy stagnates, and the country slips further into decline. But the United States, given its global role, presents perhaps the most worrying case.

Is there a new crisis of democracy? Certainly, the American public seems to think so. Anger with politicians and institutions of government is much greater than it was in 1975. According to American National Election Studies polls, in 1964, 76 percent of Americans agreed with the statement “You can trust the government in Washington to do what is right just about always or most of the time.” By the late 1970s, that number had dropped to the high 40s. In 2008, it was 30 percent. In January 2010, it had fallen to 19 percent.

Commentators are prone to seeing the challenges of the moment in unnecessarily apocalyptic terms. It is possible that these problems, too, will pass, that the West will muddle through somehow until it faces yet another set of challenges a generation down the road, which will again be described in an overly dramatic fashion. But it is also possible that the public is onto something. The crisis of democracy, from this perspective, never really went away; it was just papered over with temporary solutions and obscured by a series of lucky breaks. Today, the problems have mounted, and yet American democracy is more dysfunctional and commands less authority than ever — and it has fewer levers to pull in a globalized economy. This time, the pessimists might be right.


The mid-1970s predictions of doom for Western democracy were undone by three broad economic trends: the decline of inflation, the information revolution, and globalization. In the 1970s, the world was racked by inflation, with rates stretching from low double digits in countries such as the United States and the United Kingdom to 200 percent in countries such as Brazil and Turkey. In 1979, Paul Volcker became chair of the U.S. Federal Reserve, and within a few years, his policies had broken the back of American inflation. Central banks across the world began following the Fed’s example, and soon, inflation was declining everywhere.

Technological advancement has been around for centuries, but beginning in the 1980s, the widespread use of computers and then the Internet began to transform every aspect of the economy. The information revolution led to increased productivity and growth in the United States and around the world, and the revolution looks to be a permanent one.

Late in that decade, partly because the information revolution put closed economies and societies at an even greater disadvantage, the Soviet empire collapsed, and soon the Soviet Union itself followed. This allowed the Western system of interconnected free markets and societies to spread across most of the world — a process that became known as globalization. Countries with command or heavily planned economies and societies opened up and began participating in a single global market, adding vigor to both themselves and the system at large. In 1979, 75 countries were growing by at least four percent a year; in 2007, just before the financial crisis hit, the number had risen to 127.

These trends not only destroyed the East but also benefited the West. Low inflation and the information revolution enabled Western economies to grow more quickly, and globalization opened up vast new markets filled with cheap labor for Western companies to draw on and sell to. The result was a rebirth of American confidence and an expansion of the global economy with an unchallenged United States at the center. A generation on, however, the Soviet collapse is a distant memory, low inflation has become the norm, and further advances in globalization and information technology are now producing as many challenges for the West as opportunities.

The jobs and wages of American workers, for example, have come under increasing pressure. A 2011 study by the McKinsey Global Institute found that from the late 1940s until 1990, every recession and recovery in the United States followed a simple pattern. First, GDP recovered to its pre-recession level, and then, six months later (on average), the employment rate followed. But then, that pattern was broken. After the recession of the early 1990s, the employment rate returned to its pre-recession level 15 months after GDP did. In the early part of the next decade, it took 39 months. And in the current recovery, it appears that the employment rate will return to its pre-recession level a full 60 months — five years — after GDP did. The same trends that helped spur growth in the past are now driving a new normal, with jobless growth and declining wages.

With only a few exceptions, the advanced industrial democracies have spent the last few decades managing or ignoring their problems rather than tackling them head-on.


The broad-based growth of the post-World War II era slowed during the mid-1970s and has never fully returned. The Federal Reserve Bank of Cleveland recently noted that in the United States, real GDP growth peaked in the early 1960s at more than four percent, dropped to below three percent in the late 1970s, and recovered somewhat in the 1980s only to drop further in recent years down to its current two percent. Median incomes, meanwhile, have barely risen over the last 40 years. Rather than tackle the underlying problems or accept lower standards of living, the United States responded by taking on debt. From the 1980s on, Americans have consumed more than they have produced, and they have made up the difference by borrowing.

President Ronald Reagan came to power in 1981 as a monetarist and acolyte of Milton Friedman, arguing for small government and balanced budgets. But he governed as a Keynesian, pushing through large tax cuts and a huge run-up in defense spending. (Tax cuts are just as Keynesian as government spending; both pump money into the economy and increase aggregate demand.) Reagan ended his years in office with inflation-adjusted federal spending 20 percent higher than when he started and with a skyrocketing federal deficit. For the 20 years before Reagan, the deficit was under two percent of GDP. In Reagan’s two terms, it averaged over four percent of GDP. Apart from a brief period in the late 1990s, when the Clinton administration actually ran a surplus, the federal deficit has stayed above the three percent mark ever since; it is currently seven percent.

John Maynard Keynes’ advice was for governments to spend during busts but save during booms. In recent decades, elected governments have found it hard to save at any time. They have run deficits during busts and during booms, as well. The U.S. Federal Reserve has kept rates low in bad times but also in good ones. It’s easy to blame politicians for such one-handed Keynesianism, but the public is as much at fault. In poll after poll, Americans have voiced their preferences: they want low taxes and lots of government services. Magic is required to satisfy both demands simultaneously, and it turned out magic was available, in the form of cheap credit. The federal government borrowed heavily, and so did all other governments — state, local, and municipal — and the American people themselves. Household debt rose from $665 billion in 1974 to $13 trillion today. Over that period, consumption, fueled by cheap credit, went up and stayed up.

Other rich democracies have followed the same course. In 1980, the United States’ gross government debt was 42 percent of its total GDP; it is now 107 percent. During the same period, the comparable figure for the United Kingdom moved from 46 percent to 88 percent. Most European governments (including notoriously frugal Germany) now have debt-to-GDP levels that hover around 80 percent, and some, such as Greece and Italy, have ones that are much higher. In 1980, Japan’s gross government debt was 50 percent of GDP; today, it is 236 percent.

The world has turned upside down. It used to be thought that developing countries would have high debt loads, because they would borrow heavily to finance their rapid growth from low income levels. Rich countries, growing more slowly from high income levels, would have low debt loads and much greater stability. But look at the G-20 today, a group that includes the largest countries from both the developed and the developing worlds. The average debt-to-GDP ratio for the developing countries is 35 percent; for the rich countries, it is over three times as high.


When Western governments and international organizations such as the International Monetary Fund offer advice to developing countries on how to spur growth, they almost always advocate structural reforms that will open up sectors of their economies to competition, allow labor to move freely between jobs, eliminate wasteful and economically distorting government subsidies, and focus government spending on pro-growth investment. When facing their own problems, however, those same Western countries have been loath to follow their own advice.

Current discussions about how to restore growth in Europe tend to focus on austerity, with economists debating the pros and cons of cutting deficits. Austerity is clearly not working, but it is just as clear that with debt burdens already at close to 90 percent of GDP, European countries cannot simply spend their way out of their current crisis. What they really need are major structural reforms designed to make themselves more competitive, coupled with some investments for future growth.

Not least because it boasts the world’s reserve currency, the United States has more room to maneuver than Europe. But it, too, needs to change. It has a gargantuan tax code that, when all its rules and regulations are included, totals 73,000 pages; a burdensome litigation system; and a crazy patchwork of federal, state, and local regulations. U.S. financial institutions, for example, are often overseen by five or six different federal agencies and 50 sets of state agencies, all with overlapping authority.

The danger for Western democracies is not death but sclerosis.

If the case for reform is important, the case for investment is more urgent. In its annual study of competitiveness, the World Economic Forum consistently gives the United States poor marks for its tax and regulatory policies, ranking it 76th in 2012, for example, on the “burden of government regulations.” But for all its complications, the American economy remains one of the world’s most competitive, ranking seventh overall — only a modest slippage from five years ago. In contrast, the United States has dropped dramatically in its investments in human and physical capital. The WEF ranked American infrastructure fifth in the world a decade ago but now ranks it 25th and falling. The country used to lead the world in percentage of college graduates; it is now ranked 14th. U.S. federal funding for research and development as a percentage of GDP has fallen to half the level it was in 1960 — while it is rising in countries such as China, Singapore, and South Korea. The public university system in the United States — once the crown jewel of American public education — is being gutted by budget cuts.

The modern history of the United States suggests a correlation between investment and growth. In the 1950s and 1960s, the federal government spent over five percent of GDP annually on investment, and the economy boomed. Over the last 30 years, the government has been cutting back; federal spending on investment is now around three percent of GDP annually, and growth has been tepid. As the Nobel Prize-winning economist Michael Spence has noted, the United States escaped from the Great Depression not only by spending massively on World War II but also by slashing consumption and ramping up investment. Americans reduced their spending, increased their savings, and purchased war bonds. That boost in public and private investment led to a generation of postwar growth. Another generation of growth will require comparable investments.

The problems of reform and investment come together in the case of infrastructure. In 2009, the American Society of Civil Engineers gave the country’s infrastructure a grade of D and calculated that repairing and renovating it would cost $2 trillion. The specific number might be an exaggeration (engineers have a vested interest in the subject), but every study shows what any traveler can plainly see: the United States is falling badly behind. This is partly a matter of crumbling bridges and highways, but it goes well beyond that. The U.S. air traffic control system is outdated and in need of a $25 billion upgrade. The U.S. energy grid is antique, and it malfunctions often enough that many households are acquiring that classic symbol of status in the developing world: a private electrical generator. The country’s drinking water is carried through a network of old and leaky pipes, and its cellular and broadband systems are slow compared with those of many other advanced countries. All this translates into slower growth. And if it takes longer to fix, it will cost more, as deferred maintenance usually does.

Spending on infrastructure is hardly a panacea, however, because without careful planning and oversight, it can be inefficient and ineffective. Congress allocates money to infrastructure projects based on politics, not need or bang for the buck. The elegant solution to the problem would be to have a national infrastructure bank that is funded by a combination of government money and private capital. Such a bank would minimize waste and redundancy by having projects chosen by technocrats on merit rather than by politicians for pork. Naturally, this very idea is languishing in Congress, despite some support from prominent figures on both sides of the aisle.

The same is the case with financial reforms: the problem is not a lack of good ideas or technical feasibility but politics. The politicians who sit on the committees overseeing the current alphabet soup of ineffective agencies are happy primarily because they can raise money for their campaigns from the financial industry. The current system works better as a mechanism for campaign fundraising than it does as an instrument for financial oversight.

In 1979, the social scientist Ezra Vogel published a book titled Japan as Number One, predicting a rosy future for the then-rising Asian power. When The Washington Post asked him recently why his prediction had been so far off the mark, he pointed out that the Japanese economy was highly sophisticated and advanced, but, he confessed, he had never anticipated that its political system would seize up the way it did and allow the country to spiral downward.

Vogel was right to note that the problem was politics rather than economics. All the advanced industrial economies have weaknesses, but they also all have considerable strengths, particularly the United States. They have reached a stage of development, however, at which outmoded policies, structures, and practices have to be changed or abandoned. The problem, as the economist Mancur Olson pointed out, is that the existing policies benefit interest groups that zealously protect the status quo. Reform requires governments to assert the national interest over such parochial interests, something that is increasingly difficult to do in a democracy.


With only a few exceptions, the advanced industrial democracies have spent the last few decades managing or ignoring their problems rather than tackling them head-on. Soon, this option won’t be available, because the crisis of democracy will be combined with a crisis of demography.

The industrial world is aging at a pace never before seen in human history. Japan is at the leading edge of this trend, predicted to go from a population of 127 million today to just 47 million by the end of the century. Europe is not far behind, with Italy and Germany approaching trajectories like Japan’s. The United States is actually the outlier on this front, the only advanced industrial country not in demographic decline. In fact, because of immigration and somewhat higher fertility rates, its population is predicted to grow to 423 million by 2050, whereas, say, Germany’s is predicted to shrink to 72 million. Favorable U.S. demographics, however, are offset by more expensive U.S. entitlement programs for retirees, particularly in the area of health care.

To understand this, start with a ratio of working-age citizens to those over 65. That helps determine how much revenue the government can get from workers to distribute to retirees. In the United States today, the ratio is 4.6 working people for every retiree. In 25 years, it will drop to 2.7. That shift will make a huge difference to an already worrisome situation. Current annual expenditures for the two main entitlement programs for older Americans, Social Security and Medicare, top $1 trillion. The growth of these expenditures has far outstripped inflation in the past and will likely do so for decades to come, even with the implementation of the Affordable Care Act. Throw in all other entitlement programs, the demographer Nicholas Eberstadt has calculated, and the total is $2.2 trillion — up from $24 billion a half century ago, nearly a hundredfold increase.

However worthwhile such programs may be, they are unaffordable on their current trajectories, consuming the majority of all federal spending. The economists Carmen Reinhart and Kenneth Rogoff argued in their detailed study of financial crises, This Time Is Different, that countries with debt-to-GDP burdens of 90 percent or more almost invariably have trouble sustaining growth and stability. Unless its current entitlement obligations are somehow reformed, with health-care costs lowered in particular, it is difficult to see how the United States can end up with a ratio much lower than that. What this means is that while the American right has to recognize that tax revenues will have to rise significantly in coming decades, the American left has to recognize that without significant reforms, entitlements may be the only thing even those increased tax revenues will cover. A recent report by Third Way, a Washington-based think tank lobbying for entitlement reform, calculates that by 2029, Social Security, Medicare, Medicaid, and interest on the debt combined will amount to 18 percent of GDP. It just so happens that 18 percent of GDP is precisely what the government has averaged in tax collections over the last 40 years.

The continued growth in entitlements is set to crowd out all other government spending, including on defense and the investments needed to help spur the next wave of economic growth. In 1960, entitlement programs amounted to well under one-third of the federal budget, with all the other functions of government taking up the remaining two-thirds. By 2010, things had flipped, with entitlement programs accounting for two-thirds of the budget and everything else crammed into one-third. On its current path, the U.S. federal government is turning into, in the journalist Ezra Klein’s memorable image, an insurance company with an army. And even the army will have to shrink soon.

Rebalancing the budget to gain space for investment in the country’s future is today’s great American challenge. And despite what one may have gathered during the recent campaign, it is a challenge for both parties. Eberstadt points out that entitlement spending has actually grown faster under Republican presidents than under Democrats, and a New York Times investigation in 2012 found that two-thirds of the 100 U.S. counties most dependent on entitlement programs were heavily Republican.

Reform and investment would be difficult in the best of times, but the continuation of current global trends will make these tasks ever tougher and more urgent. Technology and globalization have made it possible to do simple manufacturing anywhere, and Americans will not be able to compete for jobs against workers in China and India who are being paid a tenth of the wages that they are. That means that the United States has no choice but to move up the value chain, relying on a highly skilled work force, superb infrastructure, massive job-training programs, and cutting-edge science and technology — all of which will not materialize without substantial investment.

The U.S. government currently spends $4 on citizens over 65 for every $1 it spends on those under 18. At some level, that is a brutal reflection of democratic power politics: seniors vote; minors do not. But it is also a statement that the country values the present more than the future.


Huntington, the author of the section on the United States in the Trilateral Commission’s 1975 report, used to say that it was important for a country to worry about decline, because only then would it make the changes necessary to belie the gloomy predictions. If not for fear of Sputnik, the United States would never have galvanized its scientific establishment, funded NASA, and raced to the moon. Perhaps that sort of response to today’s challenges is just around the corner — perhaps Washington will be able to summon the will to pass major, far-reaching policy initiatives over the next few years, putting the United States back on a clear path to a vibrant, solvent future. But hope is not a plan, and it has to be said that at this point, such an outcome seems unlikely.

The absence of such moves will hardly spell the country’s doom. Liberal democratic capitalism is clearly the only system that has the flexibility and legitimacy to endure in the modern world. If any regimes collapse in the decades ahead, they will be command systems, such as the one in China (although this is unlikely). But it is hard to see how the derailing of China’s rise, were it to happen, would solve any of the problems the United States faces — and in fact, it might make them worse, if it meant that the global economy would grow at a slower pace than anticipated.

The danger for Western democracies is not death but sclerosis. The daunting challenges they face — budgetary pressures, political paralysis, demographic stress — point to slow growth rather than collapse. Muddling through the crisis will mean that these countries stay rich but slowly and steadily drift to the margins of the world. Quarrels over how to divide a smaller pie may spark some political conflict and turmoil but will produce mostly resignation to a less energetic, interesting, and productive future.

There once was an advanced industrial democracy that could not reform. It went from dominating the world economy to growing for two decades at the anemic average rate of just 0.8 percent. Many members of its aging, well-educated population continued to live pleasant lives, but they left an increasingly barren legacy for future generations. Its debt burden is now staggering, and its per capita income has dropped to 24th in the world and is falling. If the Americans and the Europeans fail to get their acts together, their future will be easy to see. All they have to do is look at Japan.

Capital Misallocation: Captain Philips

Of you haven’t seen Captain Phillips yet, get the bluray now. Tom Hanks does a fantastic job. Keeps you on the edge of your seat, rooting for the good guys.

The idea of a ship flying an American flag getting into trouble, then the US Navy and the SEAL special forces snipers come to the rescue seems like a success on the surface, especially compared to the Chinese Govt negotiating a $4 million ransom.

USS Bainbridge 270 soldiers USS Halyburton 226 soldiers vs 4 Somali pirates

Obviously the US government thinks this episode is quite a success. Enough that the Navy was supportive of making a film about this event, and enough that the lifeboat involved is on display at the Navy SEAL Museum.

Then I started thinking about this in more details. How much money does the US spend per year on military related applications? Officially the US spends more than $680 BILLION per year on our military, and some estimates put the number above w Continue reading Capital Misallocation: Captain Philips

The Myth of Asia’s Miracle (Foreign Affairs 1994)

1994 Foreign Affairs article written by 2008 nobel prize winning economist Paul Krugman holding the line on why the western economies have it right and why East Asia is appears important but will not continue to be. Written 20 years ago, this makes for an interesting reflection. Western political economists continue to predict the intrinsic strengths of the west will overcome any challengers, meanwhile East Asia continues to accumulate investment, technology, jobs, and foreign currency reserves. Fascinating to see that the shift of power to Asia was already predicted in the early 1990’s, and the understanding of the Asian System was already wide spread. The Asian System itself is unquestionably characterized by high savings and high investment. Students of Asian policy such as James Fallows and Chalmers Johnson also point to targeted industrial policy, protectionism, and subsidizing production rather than consumption.


Once upon a time, Western opinion leaders found themselves both impressed and frightened by the extraordinary growth rates achieved by a set of Eastern economies. Although those economies were still substantially poorer and smaller than those of the West, the speed with which they had transformed themselves from peasant societies into industrial powerhouses, their continuing ability to achieve growth rates several times higher than the advanced nations, and their increasing ability to challenge or even surpass American and European technology in certain areas seemed to call into question the dominance not only of Western power but of Western ideology. The leaders of those nations did not share our faith in free markets or unlimited civil liberties. They asserted with increasing self-confidence that their system was superior: societies that accepted strong, even authoritarian governments and were willing to limit individual liberties in the interest of the common good, take charge of their economies, and sacrifice short-run consumer interests for the sake of long-run growth would eventually outperform the increasingly chaotic societies of the West. And a growing minority of Western intellectuals agreed.

The gap between Western and Eastern economic performance eventually became a political issue. The Democrats recaptured the White House under the leadership of a young, energetic new president who pledged to “get the country moving again” – a pledge that, to him and his closest advisers, meant accelerating America’s economic growth to meet the Eastern challenge.

The time, of course, was the early 1960s. The dynamic young president was John F. Kennedy. The technological feats that so alarmed the West were the launch of Sputnik and the early Soviet lead in space. And the rapidly growing Eastern economies were those of the Soviet Union and its satellite nations.

While the growth of communist economies was the subject of innumerable alarmist books and polemical articles in the 1950s, some economists who looked seriously at the roots of that growth were putting together a picture that differed substantially from most popular assumptions. Communist growth rates were certainly impressive, but not magical. The rapid growth in output could be fully explained by rapid growth in inputs: expansion of employment, increases in education levels, and, above all, massive investment in physical capital. Once those inputs were taken into account, the growth in output was unsurprising – or, to put it differently, the big surprise about Soviet growth was that when closely examined it posed no mystery.

This economic analysis had two crucial implications. First, most of the speculation about the superiority of the communist system – including the popular view that Western economies could painlessly accelerate their own growth by borrowing some aspects of that system – was off base. Rapid Soviet economic growth was based entirely on one attribute: the willingness to save, to sacrifice current consumption for the sake of future production. The communist example offered no hint of a free lunch.

Second, the economic analysis of communist countries’ growth implied some future limits to their industrial expansion – in other words, implied that a naive projection of their past growth rates into the future was likely to greatly overstate their real prospects. Economic growth that is based on expansion of inputs, rather than on growth in output per unit of input, is inevitably subject to diminishing returns. It was simply not possible for the Soviet economies to sustain the rates of growth of labor force participation, average education levels, and above all the physical capital stock that had prevailed in previous years. Communist growth would predictably slow down, perhaps drastically.

Can there really be any parallel between the growth of Warsaw Pact nations in the 1950s and the spectacular Asian growth that now preoccupies policy intellectuals? At some levels, of course, the parallel is far-fetched: Singapore in the 1990s does not look much like the Soviet Union in the 1950s, and Singapore’s Lee Kuan Yew bears little resemblance to the U.S.S.R.’s Nikita Khrushchev and less to Joseph Stalin. Yet the results of recent economic research into the sources of Pacific Rim growth give the few people who recall the great debate over Soviet growth a strong sense of deja vu. Now, as then, the contrast between popular hype and realistic prospects, between conventional wisdom and hard numbers, remains so great that sensible economic analysis is not only widely ignored, but when it does get aired, it is usually dismissed as grossly implausible.

Popular enthusiasm about Asia’s boom deserves to have some cold water thrown on it. Rapid Asian growth is less of a model for the West than many writers claim, and the future prospects for that growth are more limited than almost anyone now imagines. Any such assault on almost universally held beliefs must, of course, overcome a barrier of incredulity. This article began with a disguised account of the Soviet growth debate of 30 years ago to try to gain a hearing for the proposition that we may be revisiting an old error. We have been here before. The problem with this literary device, however, is that so few people now remember how impressive and terrifying the Soviet empire’s economic performance once seemed. Before turning to Asian growth, then, it may be useful to review an important but largely forgotten piece of economic history.


Living in a world strewn with the wreckage of the Soviet empire, it is hard for most people to realize that there was a time when the Soviet economy, far from being a byword for the failure of socialism, was one of the wonders of the world – that when Khrushchev pounded his shoe on the U.N. podium and declared, “We will bury you,” it was an economic rather than a military boast. It is therefore a shock to browse through, say, issues of Foreign Affairs from the mid-1950s through the early 1960s and discover that at least one article a year dealt with the implications of growing Soviet industrial might.

Illustrative of the tone of discussion was a 1957 article by Calvin B. Hoover.1 Like many Western economists, Hoover criticized official Soviet statistics, arguing that they exaggerated the true growth rate. Nonetheless, he concluded that Soviet claims of astonishing achievement were fully justified: their economy was achieving a rate of growth “twice as high as that attained by any important capitalistic country over any considerable number of years [and] three times as high as the average annual rate of increase in the United States.” He concluded that it was probable that “a collectivist, authoritarian state” was inherently better at achieving economic growth than free-market democracies and projected that the Soviet economy might outstrip that of the United States by the early 1970s.

These views were not considered outlandish at the time. On the contrary, the general image of Soviet central planning was that it might be brutal, and might not do a very good job of providing consumer goods, but that it was very effective at promoting industrial growth. In 1960 Wassily Leontief described the Soviet economy as being “directed with determined ruthless skill” – and did so without supporting argument, confident he was expressing a view shared by his readers.

Yet many economists studying Soviet growth were gradually coming to a very different conclusion. Although they did not dispute the fact of past Soviet growth, they offered a new interpretation of the nature of that growth, one that implied a reconsideration of future Soviet prospects. To understand this reinterpretation, it is necessary to make a brief detour into economic theory to discuss a seemingly abstruse, but in fact intensely practical, concept: growth accounting.


It is a tautology that economic expansion represents the sum of two sources of growth. On one side are increases in “inputs”: growth in employment, in the education level of workers, and in the stock of physical capital (machines, buildings, roads, and so on). On the other side are increases in the output per unit of input; such increases may result from better management or better economic policy, but in the long run are primarily due to increases in knowledge.

The basic idea of growth accounting is to give life to this formula by calculating explicit measures of both. The accounting can then tell us how much of growth is due to each input – say, capital as opposed to labor – and how much is due to increased efficiency.

We all do a primitive form of growth accounting every time we talk about labor productivity; in so doing we are implicitly distinguishing between the part of overall national growth due to the growth in the supply of labor and the part due to an increase in the value of goods produced by the average worker. Increases in labor productivity, however, are not always caused by the increased efficiency of workers. Labor is only one of a number of inputs; workers may produce more, not because they are better managed or have more technological knowledge, but simply because they have better machinery. A man with a bulldozer can dig a ditch faster than one with only a shovel, but he is not more efficient; he just has more capital to work with. The aim of growth accounting is to produce an index that combines all measurable inputs and to measure the rate of growth of national income relative to that index – to estimate what is known as “total factor productivity.”2

So far this may seem like a purely academic exercise. As soon as one starts to think in terms of growth accounting, however, one arrives at a crucial insight about the process of economic growth: sustained growth in a nation’s per capita income can only occur if there is a rise in output per unit of input.3

Mere increases in inputs, without an increase in the efficiency with which those inputs are used – investing in more machinery and infrastructure – must run into diminishing returns; input-driven growth is inevitably limited.

How, then, have today’s advanced nations been able to achieve sustained growth in per capita income over the past 150 years? The answer is that technological advances have led to a continual increase in total factor productivity – a continual rise in national income for each unit of input. In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U.S. per capita income, with increased investment in capital explaining only the remaining 20 percent.

When economists began to study the growth of the Soviet economy, they did so using the tools of growth accounting. Of course, Soviet data posed some problems. Not only was it hard to piece together usable estimates of output and input (Raymond Powell, a Yale professor, wrote that the job “in many ways resembled an archaeological dig”), but there were philosophical difficulties as well. In a socialist economy one could hardly measure capital input using market returns, so researchers were forced to impute returns based on those in market economies at similar levels of development. Still, when the efforts began, researchers were pretty sure about what they would find. Just as capitalist growth had been based on growth in both inputs and efficiency, with efficiency the main source of rising per capita income, they expected to find that rapid Soviet growth reflected both rapid input growth and rapid growth in efficiency.

But what they actually found was that Soviet growth was based on rapid growth in inputs – end of story. The rate of efficiency growth was not only unspectacular, it was well below the rates achieved in Western economies. Indeed, by some estimates, it was virtually nonexistent.4

The immense Soviet efforts to mobilize economic resources were hardly news. Stalinist planners had moved millions of workers from farms to cities, pushed millions of women into the labor force and millions of men into longer hours, pursued massive programs of education, and above all plowed an ever-growing proportion of the country’s industrial output back into the construction of new factories. Still, the big surprise was that once one had taken the effects of these more or less measurable inputs into account, there was nothing left to explain. The most shocking thing about Soviet growth was its comprehensibility.

This comprehensibility implied two crucial conclusions. First, claims about the superiority of planned over market economies turned out to be based on a misapprehension. If the Soviet economy had a special strength, it was its ability to mobilize resources, not its ability to use them efficiently. It was obvious to everyone that the Soviet Union in 1960 was much less efficient than the United States. The surprise was that it showed no signs of closing the gap.

Second, because input-driven growth is an inherently limited process, Soviet growth was virtually certain to slow down. Long before the slowing of Soviet growth became obvious, it was predicted on the basis of growth accounting. (Economists did not predict the implosion of the Soviet economy a generation later, but that is a whole different problem.)

It’s an interesting story and a useful cautionary tale about the dangers of naive extrapolation of past trends. But is it relevant to the modern world?


At first, it is hard to see anything in common between the Asian success stories of recent years and the Soviet Union of three decades ago. Indeed, it is safe to say that the typical business traveler to, say, Singapore, ensconced in one of that city’s gleaming hotels, never even thinks of any parallel to its roach-infested counterparts in Moscow. How can the slick exuberance of the Asian boom be compared with the Soviet Union’s grim drive to industrialize?

And yet there are surprising similarities. The newly industrializing countries of Asia, like the Soviet Union of the 1950s, have achieved rapid growth in large part through an astonishing mobilization of resources. Once one accounts for the role of rapidly growing inputs in these countries’ growth, one finds little left to explain. Asian growth, like that of the Soviet Union in its high-growth era, seems to be driven by extraordinary growth in inputs like labor and capital rather than by gains in efficiency.5

Consider, in particular, the case of Singapore. Between 1966 and 1990, the Singaporean economy grew a remarkable 8.5 percent per annum, three times as fast as the United States; per capita income grew at a 6.6 percent rate, roughly doubling every decade. This achievement seems to be a kind of economic miracle. But the miracle turns out to have been based on perspiration rather than inspiration: Singapore grew through a mobilization of resources that would have done Stalin proud. The employed share of the population surged from 27 to 51 percent. The educational standards of that work force were dramatically upgraded: while in 1966 more than half the workers had no formal education at all, by 1990 two-thirds had completed secondary education. Above all, the country had made an awesome investment in physical capital: investment as a share of output rose from 11 to more than 40 percent.6

Even without going through the formal exercise of growth accounting, these numbers should make it obvious that Singapore’s growth has been based largely on one-time changes in behavior that cannot be repeated. Over the past generation the percentage of people employed has almost doubled; it cannot double again. A half-educated work force has been replaced by one in which the bulk of workers has high school diplomas; it is unlikely that a generation from now most Singaporeans will have Ph.D.s. And an investment share of 40 percent is amazingly high by any standard; a share of 70 percent would be ridiculous. So one can immediately conclude that Singapore is unlikely to achieve future growth rates comparable to those of the past.

But it is only when one actually does the quantitative accounting that the astonishing result emerges: all of Singapore’s growth can be explained by increases in measured inputs. There is no sign at all of increased efficiency. In this sense, the growth of Lee Kuan Yew’s Singapore is an economic twin of the growth of Stalin’s Soviet Union – growth achieved purely through mobilization of resources. Of course, Singapore today is far more prosperous than the U.S.S.R. ever was – even at its peak in the Brezhnev years – because Singapore is closer to, though still below, the efficiency of Western economies. The point, however, is that Singapore’s economy has always been relatively efficient; it just used to be starved of capital and educated workers.

Singapore’s case is admittedly the most extreme. Other rapidly growing East Asian economies have not increased their labor force participation as much, made such dramatic improvements in educational levels, or raised investment rates quite as far. Nonetheless, the basic conclusion is the same: there is startlingly little evidence of improvements in efficiency. Kim and Lau conclude of the four Asian “tigers” that “the hypothesis that there has been no technical progress during the postwar period cannot be rejected for the four East Asian newly industrialized countries.” Young, more poetically, notes that once one allows for their rapid growth of inputs, the productivity performance of the “tigers” falls “from the heights of Olympus to the plains of Thessaly.”

This conclusion runs so counter to conventional wisdom that it is extremely difficult for the economists who have reached it to get a hearing. As early as 1982 a Harvard graduate student, Yuan Tsao, found little evidence of efficiency growth in her dissertation on Singapore, but her work was, as Young puts it, “ignored or dismissed as unbelievable.” When Kim and Lau presented their work at a 1992 conference in Taipei, it received a more respectful hearing, but had little immediate impact. But when Young tried to make the case for input-driven Asian growth at the 1993 meetings of the European Economic Association, he was met with a stone wall of disbelief.

In Young’s most recent paper there is an evident tone of exasperation with this insistence on clinging to the conventional wisdom in the teeth of the evidence. He titles the paper “The Tyranny of Numbers” – by which he means that you may not want to believe this, buster, but there’s just no way around the data. He begins with an ironic introduction, written in a deadpan, Sergeant Friday, “Just the facts, ma’am” style: “This is a fairly boring and tedious paper, and is intentionally so. This paper provides no new interpretations of the East Asian experience to interest the historian, derives no new theoretical implications of the forces behind the East Asian growth process to motivate the theorist, and draws no new policy implications from the subtleties of East Asian government intervention to excite the policy activist. Instead, this paper concentrates its energies on providing a careful analysis of the historical patterns of output growth, factor accumulation, and productivity growth in the newly industrializing countries of East Asia.”

Of course, he is being disingenuous. His conclusion undermines most of the conventional wisdom about the future role of Asian nations in the world economy and, as a consequence, in international politics. But readers will have noticed that the statistical analysis that puts such a different interpretation on Asian growth focuses on the “tigers,” the relatively small countries to whom the name “newly industrializing countries” was first applied. But what about the large countries? What about Japan and China?


Many people who are committed to the view that the destiny of the world economy lies with the Pacific Rim are likely to counter skepticism about East Asian growth prospects with the example of Japan. Here, after all, is a country that started out poor and has now become the second-largest industrial power. Why doubt that other Asian nations can do the same?

There are two answers to that question. First, while many authors have written of an “Asian system” – a common denominator that underlies all of the Asian success stories – the statistical evidence tells a different story. Japan’s growth in the 1950s and 1960s does not resemble Singapore’s growth in the 1970s and 1980s. Japan, unlike the East Asian “tigers,” seems to have grown both through high rates of input growth and through high rates of efficiency growth. Today’s fast-growth economies are nowhere near converging on U.S. efficiency levels, but Japan is staging an unmistakable technological catch-up.

Second, while Japan’s historical performance has indeed been remarkable, the era of miraculous Japanese growth now lies well in the past. Most years Japan still manages to grow faster than the other advanced nations, but that gap in growth rates is now far smaller than it used to be, and is shrinking.

The story of the great Japanese growth slowdown has been oddly absent from the vast polemical literature on Japan and its role in the world economy. Much of that literature seems stuck in a time warp, with authors writing as if Japan were still the miracle growth economy of the 1960s and early 1970s. Granted, the severe recession that has gripped Japan since 1991 will end soon if it has not done so already, and the Japanese economy will probably stage a vigorous short-term recovery. The point, however, is that even a full recovery will only reach a level that is far below what many sensible observers predicted 20 years ago.

It may be useful to compare Japan’s growth prospects as they appeared 20 years ago and as they appear now. In 1973 Japan was still a substantially smaller and poorer economy than the United States. Its per capita GDP was only 55 percent of America’s, while its overall GDP was only 27 percent as large. But the rapid growth of the Japanese economy clearly portended a dramatic change. Over the previous decade Japan’s real GDP had grown at a torrid 8.9 percent annually, with per capita output growing at a 7.7 percent rate. Although American growth had been high by its own historical standards, at 3.9 percent (2.7 percent per capita) it was not in the same league. Clearly, the Japanese were rapidly gaining on us.

In fact, a straightforward projection of these trends implied that a major reversal of positions lay not far in the future. At the growth rate of 1963-73, Japan would overtake the United States in real per capita income by 1985, and total Japanese output would exceed that of the United States by 1998! At the time, people took such trend projections very seriously indeed. One need only look at the titles of such influential books as Herman Kahn’s The Emerging Japanese Superstate or Ezra Vogel’s Japan as Number One to remember that Japan appeared, to many observers, to be well on its way to global economic dominance.

Well, it has not happened, at least not so far. Japan has indeed continued to rise in the economic rankings, but at a far more modest pace than those projections suggested. In 1992 Japan’s per capita income was still only 83 percent of the United States’, and its overall output was only 42 percent of the American level. The reason was that growth from 1973 to 1992 was far slower than in the high-growth years: GDP grew only 3.7 percent annually, and GDP per capita grew only 3 percent per year. The United States also experienced a growth slowdown after 1973, but it was not nearly as drastic.

If one projects those post-1973 growth rates into the future, one still sees a relative Japanese rise, but a far less dramatic one. Following 1973-92 trends, Japan’s per capita income will outstrip that of the United States in 2002; its overall output does not exceed America’s until the year 2047. Even this probably overestimates Japanese prospects. Japanese economists generally believe that their country’s rate of growth of potential output, the rate that it will be able to sustain once it has taken up the slack left by the recession, is now no more than three percent. And that rate is achieved only through a very high rate of investment, nearly twice as high a share of GDP as in the United States. When one takes into account the growing evidence for at least a modest acceleration of U.S. productivity growth in the last few years, one ends up with the probable conclusion that Japanese efficiency is gaining on that of the United States at a snail’s pace, if at all, and there is the distinct possibility that per capita income in Japan may never overtake that in America. In other words, Japan is not quite as overwhelming an example of economic prowess as is sometimes thought, and in any case Japan’s experience has much less in common with that of other Asian nations than is generally imagined.


For the skeptic, the case of China poses much greater difficulties about Asian destiny than that of Japan. Although China is still a very poor country, its population is so huge that it will become a major economic power if it achieves even a fraction of Western productivity levels. And China, unlike Japan, has in recent years posted truly impressive rates of economic growth. What about its future prospects?

Accounting for China’s boom is difficult for both practical and philosophical reasons. The practical problem is that while we know that China is growing very rapidly, the quality of the numbers is extremely poor. It was recently revealed that official Chinese statistics on foreign investment have been overstated by as much as a factor of six. The reason was that the government offers tax and regulatory incentives to foreign investors, providing an incentive for domestic entrepreneurs to invent fictitious foreign partners or to work through foreign fronts. This episode hardly inspires confidence in any other statistic that emanates from that dynamic but awesomely corrupt society.

The philosophical problem is that it is unclear what year to use as a baseline. If one measures Chinese growth from the point at which it made a decisive turn toward the market, say 1978, there is little question that there has been dramatic improvement in efficiency as well as rapid growth in inputs. But it is hardly surprising that a major recovery in economic efficiency occurred as the country emerged from the chaos of Mao Zedong’s later years. If one instead measures growth from before the Cultural Revolution, say 1964, the picture looks more like the East Asian “tigers”: only modest growth in efficiency, with most growth driven by inputs. This calculation, however, also seems unfair: one is weighing down the buoyant performance of Chinese capitalism with the leaden performance of Chinese socialism. Perhaps we should simply split the difference: guess that some, but not all, of the efficiency gains since the turn toward the market represent a one-time recovery, while the rest represent a sustainable trend.

Even a modest slowing in China’s growth will change the geopolitical outlook substantially. The World Bank estimates that the Chinese economy is currently about 40 percent as large as that of the United States. Suppose that the U.S. economy continues to grow at 2.5 percent each year. If China can continue to grow at 10 percent annually, by the year 2010 its economy will be a third larger than ours. But if Chinese growth is only a more realistic 7 percent, its GDP will be only 82 percent of that of the United States. There will still be a substantial shift of the world’s economic center of gravity, but it will be far less drastic than many people now imagine.


The extraordinary record of economic growth in the newly industrializing countries of East Asia has powerfully influenced the conventional wisdom about both economic policy and geopolitics. Many, perhaps most, writers on the global economy now take it for granted that the success of these economies demonstrates three propositions.

  1. First, there is a major diffusion of world technology in progress, and Western nations are losing their traditional advantage.
  2. Second, the world’s economic center of gravity will inevitably shift to the Asian nations of the western Pacific.
  3. Third, in what is perhaps a minority view, Asian successes demonstrate the superiority of economies with fewer civil liberties and more planning than we in the West have been willing to accept.

All three conclusions are called into question by the simple observation that the remarkable record of East Asian growth has been matched by input growth so rapid that Asian economic growth, incredibly, ceases to be a mystery.

Consider first the assertion that the advanced countries are losing their technological advantage. A heavy majority of recent tracts on the world economy have taken it as self-evident that technology now increasingly flows across borders, and that newly industrializing nations are increasingly able to match the productivity of more established economies. Many writers warn that this diffusion of technology will place huge strains on Western society as capital flows to the Third World and imports from those nations undermine the West’s industrial base.

There are severe conceptual problems with this scenario even if its initial premise is right. But in any case, while technology may have diffused within particular industries, the available evidence provides absolutely no justification for the view that overall world technological gaps are vanishing. On the contrary, Kim and Lau find “no apparent convergence between the technologies” of the newly industrialized nations and the established industrial powers; Young finds that the rates in the growth of efficiency in the East Asian “tigers” are no higher than those in many advanced nations.

The absence of any dramatic convergence in technology helps explain what would otherwise be a puzzle: in spite of a great deal of rhetoric about North-South capital movement, actual capital flows to developing countries in the 1990s have so far been very small – and they have primarily gone to Latin America, not East Asia. Indeed, several of the East Asian “tigers” have recently become significant exporters of capital. This behavior would be extremely odd if these economies, which still pay wages well below advanced-country levels, were rapidly achieving advanced-country productivity. It is, however, perfectly reasonable if growth in East Asia has been primarily input-driven, and if the capital piling up there is beginning to yield diminishing returns.

If growth in East Asia is indeed running into diminishing returns, however, the conventional wisdom about an Asian-centered world economy needs some rethinking. It would be a mistake to overstate this case: barring a catastrophic political upheaval, it is likely that growth in East Asia will continue to outpace growth in the West for the next decade and beyond. But it will not do so at the pace of recent years. From the perspective of the year 2010, current projections of Asian supremacy extrapolated from recent trends may well look almost as silly as 1960s-vintage forecasts of Soviet industrial supremacy did from the perspective of the Brezhnev years.

Finally, the realities of East Asian growth suggest that we may have to unlearn some popular lessons. It has become common to assert that East Asian economic success demonstrates the fallacy of our traditional laissez-faire approach to economic policy and that the growth of these economies shows the effectiveness of sophisticated industrial policies and selective protectionism. Authors such as James Fallows have asserted that the nations of that region have evolved a common “Asian system,” whose lessons we ignore at our peril. The extremely diverse institutions and policies of the various newly industrialized Asian countries, let alone Japan, cannot really be called a common system. But in any case, if Asian success reflects the benefits of strategic trade and industrial policies, those benefits should surely be manifested in an unusual and impressive rate of growth in the efficiency of the economy. And there is no sign of such exceptional efficiency growth.

The newly industrializing countries of the Pacific Rim have received a reward for their extraordinary mobilization of resources that is no more than what the most boringly conventional economic theory would lead us to expect. If there is a secret to Asian growth, it is simply deferred gratification, the willingness to sacrifice current satisfaction for future gain.

That’s a hard answer to accept, especially for those American policy intellectuals who recoil from the dreary task of reducing deficits and raising the national savings rate. But economics is not a dismal science because the economists like it that way; it is because in the end we must submit to the tyranny not just of the numbers, but of the logic they express.


1 Hoover’s tone – critical of Soviet data but nonetheless accepting the fact of extraordinary achievement – was typical of much of the commentary of the time (see, for example, a series of articles in The Atlantic Monthly by Edward Crankshaw, beginning with “Soviet Industry” in the November 1955 issue). Anxiety about the political implications of Soviet growth reached its high-water mark in 1959, the year Khrushchev visited America. Newsweek took Khrushchev’s boasts seriously enough to warn that the Soviet Union might well be “on the high road to economic domination of the world.” And in hearings held by the Joint Economic Committee late that year, CIA Director Allen Dulles warned, “If the Soviet industrial growth rate persists at eight or nine percent per annum over the next decade, as is forecast, the gap between our two economies . . . will be dangerously narrowed.”

2 At first, creating an index of all inputs may seem like comparing apples and oranges, that is, trying to add together noncomparable items like the hours a worker puts in and the cost of the new machine he uses. How does one determine the weights for the different components? The economists’ answer is to use market returns. If the average worker earns $15 an hour, give each person-hour in the index a weight of $15; if a machine that costs $100,000 on average earns $10,000 in profits each year (a 10 percent rate of return), then give each such machine a weight of $10,000; and so on.

3 To see why, let’s consider a hypothetical example. To keep matters simple, let’s assume that the country has a stationary population and labor force, so that all increases in the investment in machinery, etc., raise the amount of capital per worker in the country. Let us finally make up some arbitrary numbers. Specifically, let us assume that initially each worker is equipped with $10,000 worth of equipment; that each worker produces goods and services worth $10,000; and that capital initially earns a 40 percent rate of return, that is, each $10,000 of machinery earns annual profits of $4,000. (Cont’d.)

(Cont’d.) Suppose, now, that this country consistently invests 20 percent of its output, that is, uses 20 percent of its income to add to its capital stock. How rapidly will the economy grow?

Initially, very fast indeed. In the first year, the capital stock per worker will rise by 20 percent of $10,000, that is, by $2,000. At a 40 percent rate of return, that will increase output by $800: an 8 percent rate of growth.

But this high rate of growth will not be sustainable. Consider the situation of the economy by the time that capital per worker has doubled to $20,000. First, output per worker will not have increased in the same proportion, because capital stock is only one input. Even with the additions to capital stock up to that point achieving a 40 percent rate of return, output per worker will have increased only to $14,000. And the rate of return is also certain to decline – say to 30 or even 25 percent. (One bulldozer added to a construction project can make a huge difference to productivity. By the time a dozen are on-site, one more may not make that much difference.)The combination of those factors means that if the investment share of output is the same, the growth rate will sharply decline. Taking 20 percent of $14,000 gives us $2,800; at a 30 percent rate of return, this will raise output by only $840, that is, generate a growth rate of only 6 percent; at a 25 percent rate of return it will generate a growth rate of only 5 percent. As capital continues to accumulate, the rate of return and hence the rate of growth will continue to decline.

4 This work was summarized by Raymond Powell, “Economic Growth in the U.S.S.R.,” Scientific American, December 1968.

5 There have been a number of recent efforts to quantify the sources of rapid growth in the Pacific Rim. Key readings include two papers by Professor Lawrence Lau of Stanford University and his associate Jong-Il Kim, “The Sources of Growth of the East Asian Newly Industrialized Countries,” Journal of the Japanese and International Economies, 1994, and “The Role of Human Capital in the Economic Growth of the East Asian Newly Industrialized Countries,” mimeo, Stanford University, 1993; and three papers by Professor Alwyn Young, a rising star in growth economics, “A Tale of Two Cities:Factor Accumulation and Technical Change in Hong Kong and Singapore,” NBER Macroeconomics Annual 1992, MIT Press; “Lessons from the East Asian NICs: A Contrarian View,” European Economic Review Papers and Proceedings, May 1994; and “The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience,”NBER Working Paper No. 4680, March 1994.

5 These figures are taken from Young, ibid. Although foreign corporations have played an important role in Singapore’s economy, the great bulk of investment in Singapore, as in all of the newly industrialized East Asian economies, has been financed out of domestic savings.

6 See Paul Krugman, “Does Third World Growth Hurt First World Prosperity?” Harvard Business Review, July 1994.

Inflation: Compounding the Lie

“He lied like a finance minister on the eve of a devaluation” -Warren Buffett

What if all inflation numbers were a lie? What if the inflation number reported by the Bureau of Labor Statistics pushed inflation down by 3% per year? At that rate, it would take less than 25 years to cut the value of your savings and income in half even after it was supposedly inflation adjusted.

  • Government Intervention in the basket of goods associated with consumer price index (milk pricing is handled by the USDA)
  • Clinton era Hedonic Adjustments to the consumer price index (deflator variables in use by bureau of labor statistics)
  • So called Core Inflation that excludes Energy and Food prices (how do you live without food and energy)
  • Outsourcing production overseas (short term appears to control inflation, long term creates massive transfer of wealth out of country)
  • Asset Inflation (if house prices skyrocket, home owners think they made money, but what can that money buy? but rents not prices are used for the CPI)
  • Tax Collection (income tax rates are variable based on income brackets, unreported inflation means everyones tax rate goes up!)
  • Cancelled reporting of M3 (total quantity of money) as of March 23rd 2006 (just another way to make oversight more difficult for the citizen)

Politicians want to get re-elected, and they want to pay off their debts to the companies that finance their elections. Nobody ever won re-election for slowing the financial bleeding. Perhaps most importantly, nobody likes to pay higher taxes, and there are entire sections of the underground illicit economy that go untaxed. If you want to fund infinite government expenses, you’ve got to be creative.

Of course every union leader and every financier knows how inflation works, so they make sure long term contracts are inflation adjusted. If inflation is 10%, then the following year Social Security benefits, Government Wages and inflation adjusted government contracts will all be raised accordingly next year.

The politicians goal is to spend big but report a low inflation number, so that it’s easier to continue to spend big!

Torture the Numbers Enough, They Will Confess to Anything -Saying at GE

There are financial instruments like TIPS (Treasury Inflation Protected Securities) that supposedly are protecting you from inflation, but these are just another example of finance ministers massaging the numbers. Your not going to get paid in actual inflation terms, you’ll be paid in terms of reported inflation.

If the only thing restraining the elites from taking your money is self restraint, then you might read: The Best Way to Rob a Bank is to Own One.

You can read through the details of the CPI report, there’s no place that you’ll find the actual price paid. You’ll find the category such “Milk: Fresh Whole Milk” but you won’t see the price. More interesting, the entire price of Milk is itself a US Department of Agriculture orchestrated mess…

You should read the BLSs rebuttal to concerns that inflation is understated. They point out that the switch from measuring house prices to rental equivalencies was designed to isolate the “investment” nature of housing from it’s function. Pre-1981 numbers were based on prices. BLS also points out that EuroStat and many OECD countries (probably the UK) calculate their inflation numbers just like the US does.

John Williams at ShadowStats also wrote a response to the BLS rebuttal that I mostly agree with, though I propose a more direct challenge.

If the BLS numbers were not overstating inflation, instead of writing a report explaining that they are experts and you are not, they would simply release the RAW on each of the 8000 basic indexes in the 38 areas they measure. It’s a trivial amount of data by todays standards. Any modern computer can crunch this data easily. Of course, the BLS isn’t going to do that because the inflation numbers are significantly higher than reported. We’re talking an Excel table with:

  • 8000 items in “basket” measured for inflation.
    • Even if each “item” is the sum of other items, 80,000 or even 800,000 rows is still easily manageable
  • 38 regions measured by month
  • For each year, 1950 – present
  • Changes in weight assigned to that item

In addition to the ever more ridiculous understatements of inflation, this detail would also show how inflation numbers have been politically adjusted to help (or potentially hurt) certain candidates. Just remember how we got here…

“He lied like a finance minister on the eve of a devaluation” -Warren Buffett

The Inevitable Police State

Since 2000, I’ve been closely following news releases from the ACLU, EFF, and updates regularly posted by Bruce Schneier. The civil liberties situation in the United States is tragic, and as the economy of the US continues to decline, more innocent citizens will certainly become victims of the state’s ever expanding police powers.

But I’ve decided the situation is simply too depressing to continue thinking about. It’s like trying to hold back the tides in the ocean.

A fundamental rule in technology says that whatever can be done will be done.
- Andrew Grove

If technology can be made, it will be made. Horrible devices will be made (nuclear weapons, biological weapons) but amazing things will be made too (the internet, growing replacement organs in labs, treatment of DNA based diseases)

The police state will evolve, and countermeasures will evolve. it’s a tug of war.

Even though i despise the american “terrorism” obsession, i do think it is a very real threat over the long term (but not quite yet)… it’s about math really.

Technology makes us all more powerful. it’s a force multiplier. If you assume that 1% of society is always going to be downtrodden, but smart and organized – the guys that create a new gov’t during the times of revolution…. well, those guys are present all the time, whether it’s their moment to shine or not. Yet our system only permits one president at a time. So what if it’s not “time” for a revolution? These guys will still agitate, they organize, and in order to get their way, a certain percentage will even be willing to destroy.

  • Think about how far little drone airplanes have come for cinematography. but instead of loading them with cameras, they could be loaded with weapons. then fly them into crowded subway stations.
  • Or think about a team of 20 people driving pickup trucks each releasing a cargo of long nails onto the busiest freeway interchanges at exactly, at exactly the busiest moment.
  • Or think about packing 100 shipping container full of explosives, and choosing delivery routes for those containers so that they are on the bottom row, sinking each ship… choose the right 100 ships, synchronize the deployment time, and you could do massive economic damage.

We live in a new world.

  • People drive faster, walk faster, commute farther than days past.
  • Supply chains are longer, connecting the entire world through fewer centralized points (airports, subway stops, container terminals, petrol pipelines, highways).
  • Remote data transmission, remote cameras (targeting), night vision, miniaturization, GPS and mobile data networks, drone vehicles (from RC cars and aircraft to to googles new car).

These hypothetical attacks would have been major operations that only nationally sponsored (CIA, KGB) agitators could have pulled off 50 years ago, but an angry, well funded frat house could pull them off today, and within our lifetime one individual acting alone could do it.

Our system supporting the life of seven billion humans is fragile, and even a little SNAFU that say took out 1% of us, that’s SEVENTY MILLION INNOCENT PEOPLE. Remember that WWII killed 2.5% of the world population, only 60 million at that time. One man acting alone would be hard pressed to kill hundreds a half century ago, and one man acting alone could easily kill 10,000 in the not distant future.

Yes, i hate the bureaucrats. Yes, it’s horrible that the US is investing scarce economic assists into repressive technology while we’ve allowed many good middle class jobs to be relocated to Asia and have nothing to replace them with. It’s tragic that since the average americans economic condition will worsen, they’ll be more likely to agitate, and therefore more likely to become an enemy of the state.

Technology can destroy us, and technology can save us, and set us free.

How The World Works: List vs Smith

James Fallows, President Jimmy Carter’s chief speechwriter for two years was the youngest person ever to hold that job. Fallows has been a visiting professor at a number of universities in the U.S. and China. Fallows has been a national correspondent for The Atlantic Monthly for many years. Fallows has lived periodically in Asia for much of the last thirty years, and wrote this article for the Atlantic in 1993. The full article is still archived on The Atlantic website, but it’s a long article and I’ve highlighted the most economic portions below. Fallows also maintains an excellent blog updated daily.

Americans persist in thinking that Adam Smith’s rules for free trade are the only legitimate ones. But today’s fastest-growing economies are using a very different set of rules. Once, we knew them—knew them so well that we played by them, and won. Now we seem to have forgotten.

IN Japan in the springtime of 1992 a trip to Hitotsubashi University, famous for its economics and business faculties, brought me unexpected good luck. Like several other Japanese universities, Hitotsubashi is almost heartbreaking in its cuteness. The road from the station to the main campus is lined with cherry trees, and my feet stirred up little puffs of white petals. Students glided along on their bicycles, looking as if they were enjoying the one stress-free moment of their lives.

They probably were. In surveys huge majorities of students say that they study “never” or “hardly at all” during their university careers. They had enough of that in high school.

I had gone to Hitotsubashi to interview a professor who was making waves. Since the end of the Second World War, Japanese diplomats and businessmen have acted as if the American economy should be the model for Japan’s own industrial growth. Not only should Japanese industries try to catch up with America’s lead in technology and production but also the nation should evolve toward a standard of economic maturity set by the United States. Where Japan’s economy differed from the American model—for instance, in close alliances between corporations which U.S. antitrust laws would forbid—the difference should be considered temporary, until Japan caught up.

Through the 1980s a number of foreign observers challenged this assumption, saying that Japan’s economy might not necessarily become more like America’s with the passing years. Starting in 1990 a number of Japanese businessmen and scholars began publicly saying the same thing, suggesting that Japan’s business system might be based on premises different from those that prevailed in the West. Professor Iwao Nakatani, the man I went to Hitotsubashi to meet, was one of the most respected members of this group, and I spent the afternoon listening to his argument while, through the window I watched petals drifting down.

On the way back to the station I saw a bookstore sign advertising Western-language books for sale. I walked to the back of the narrow store and for the thousandth time felt both intrigued and embarrassed by the consequences of the worldwide spread of the English language. In row upon row sat a jumble of books that had nothing in common except that they were published in English. Self-help manuals by Zig Ziglar. Bodice-rippers from the Harlequin series. A Betty Crocker cookbook. The complete works of Sigmund Freud. One book by, and another about, Friedrich List.

Friedrich List! For at least five years I’d been scanning used-book stores in Japan and America looking for just these books, having had no luck in English-language libraries. I’d scoured stores in Taiwan that specialized in pirated reprints of English-language books for about a tenth their original cost. I’d called the legendary Strand bookstore, in Manhattan, from my home in Kuala Lumpur, begging them to send me a note about the success of their search (it failed) rather than make me wait on hold. In all that time these were the first books by or about List I’d actually laid eyes on.

One was a biography, by a professor in the north of England. The other was a translation, by the same professor, of a short book List had written in German. Both were slim volumes, which, judging by the dust on their covers, had been on the shelf for years. I gasped when I opened the first book’s cover and saw how high the price was—9,500 yen, about $75. For the set? I asked hopefully. No, apiece, the young woman running the store told me. Books are always expensive in Japan, but even so this seemed steep. No doubt the books had been priced in the era when one dollar was worth twice as many yen as it was by the time I walked into the store. I opened my wallet, pulled out a 10,000-yen note, took my change and the biography, and left the store. A few feet down the sidewalk I turned around, walked back to the store, and used the rest of my money to buy the other book. I would always have regretted passing it up.

WHY Friedrich List? The more I had heard about List in the preceding five years, from economists in Seoul and Osaka and Tokyo, the more I had wondered why I had virtually never heard of him while studying economics in England and the United States. By the time I saw his books in the shop beneath the cherry trees, I had come to think of him as the dog that didn’t bark. He illustrated the strange self-selectivity of Anglo-American thinking about economics.

I emphasize “Anglo-American” because in this area the United Kingdom and the United States are like each other and different from most of the rest of the world. The two countries have dominated world politics for more than a century, and the dominance of the English language lets them ignore what is being said and thought overseas—and just how isolated they have become. The difference shows up this way: The Anglo-American system of politics and economics, like any system, rests on certain principles and beliefs. But rather than acting as if these are the best principles, or the ones their societies prefer, Britons and Americans often act as if these were the only possible principles and no one, except in error, could choose any others. Political economics becomes an essentially religious question, subject to the standard drawback of any religion—the failure to understand why people outside the faith might act as they do.

To make this more specific: Today’s Anglo-American world view rests on the shoulders of three men. One is Isaac Newton, the father of modern science. One is Jean-Jacques Rousseau, the father of liberal political theory. (If we want to keep this purely Anglo-American, John Locke can serve in his place.) And one is Adam Smith, the father of laissez-faire economics. From these founding titans come the principles by which advanced society, in the Anglo-American view, is supposed to work. A society is supposed to understand the laws of nature as Newton outlined them. It is supposed to recognize the paramount dignity of the individual, thanks to Rousseau, Locke, and their followers. And it is supposed to recognize that the most prosperous future for the greatest number of people comes from the free workings of the market. So Adam Smith taught, with axioms that were enriched by David Ricardo, Alfred Marshall, and the other giants of neoclassical economics.

The most important thing about this summary is the moral equivalence of the various principles. Isaac Newton worked in the realm of fundamental science. Without saying so explicitly, today’s British and American economists act as if the economic principles they follow had a similar hard, provable, undebatable basis. If you don’t believe in the laws of physics—actions create reactions, the universe tends toward greater entropy—you are by definition irrational. And so with economics. If you don’t accept the views derived from Adam Smith—that free competition is ultimately best for all participants, that protection and interference are inherently wrong—then you are a flat-earther.

Outside the United States and Britain the matter looks quite different. About science there is no dispute. “Western” physics is the physics of the world. About politics there is more debate: with the rise of Asian economies some Asian political leaders, notably Lee Kuan Yew, of Singapore, and several cautious figures in Japan, have in effect been saying that Rousseau’s political philosophy is not necessarily the world’s philosophy. Societies may work best, Lee and others have said, if they pay less attention to the individual and more to the welfare of the group.

But the difference is largest when it comes to economics. In the non-Anglophone world Adam Smith is merely one of several theorists who had important ideas about organizing economies. In most of East Asia and continental Europe the study of economics is less theoretical than in England and America (which is why English-speakers monopolize Nobel Prizes) and more geared toward solving business problems.

In Japan economics has in effect been considered a branch of geopolitics—that is, as the key to the nation’s strength or vulnerability in dealing with other powers. From this practical-minded perspective English-language theorists seem less useful than their challengers, such as Friedrich List.

Two Clashing World Views

BRITONS and Americans tend to see the past two centuries of economics us one long progression toward rationality and good sense. In 1776 Adam Smith’s The Wealth of Nations made the case against old-style mercantilism, just as the Declaration of Independence made the case against old-style feudal and royal domination. Since then more and more of the world has come to the correct view—or so it seems in the Anglo-American countries. Along the way the world has met such impediments as neo-mercantilism, radical unionism, sweeping protectionism, socialism, and, of course, communism. One by one the worst threats have given way. Except for a few lamentable areas of backsliding, the world has seen the wisdom of Adam Smith’s ways.

Yet during this whole time there has been an alternative school of thought. The Enlightenment philosophers were not the only ones to think about how the world should be organized. During the eighteenth and nineteenth centuries the Germans were also active—to say nothing of the theorists at work in Tokugawa Japan, late imperial China, czarist Russia, and elsewhere.

The Germans deserve emphasis—more than the Japanese, the Chinese, the Russians, and so on because many of their philosophies endure. These did not take root in England or America, but they were carefully studied, adapted, and applied in parts of Europe and Asia, notably Japan. In place of Rousseau and Locke the Germans offered Hegel. In place of Adam Smith they had Friedrich List.

The German economic vision differs from the Anglo-American in many ways, but the crucial differences are these:

“Automatic” growth versus deliberate development

The Anglo-American approach emphasizes the unpredictability and unplannability of economics. Technologies change. Tastes change. Political and human circumstances change. And because life is so fluid, attempts at central planning are virtually doomed to fail. The best way to “plan,” therefore is to leave the adaptation to the people who have their own money at stake. These are the millions of entrepreneurs who make up any country’s economy. No planning agency could have better information than they about the direction things are moving, and no one could have a stronger incentive than those who hope to make a profit and avoid a loss. By the logic of the Anglo-American system, if each individual does what is best for him or her, the result will be what is best for the nation as a whole.

Although List and others did not use exactly this term, the German school was more concerned with “market failures.” In the language of modern economics these are the cases in which normal market forces produce a clearly undesirable result. The standard illustration involves pollution. If the law allows factories to dump pollutants into the air or water, then every factory will do so. Otherwise, their competitors will have lower costs and will squeeze them out. This “rational” behavior will leave everyone worse off. The answer to such a market failure is for the society—that is, the government—to set standards that all factories must obey.

Friedrich List and his best-known American counterpart, Alexander Hamilton, argued that industrial development entailed a more sweeping sort of market failure. Societies did not automatically move from farming to small crafts to major industries just because millions of small merchants were making decisions for themselves. If every person put his money where the return was greatest, the money might not automatically go where it would do the nation the most good. For it to do so required a plan, a push, an exercise of central power. List drew heavily on the history of his times—in which the British government deliberately encouraged British manufacturing and the fledgling American government deliberately discouraged foreign competitors.

This is the gist of List’s argument, from The Natural System of Political Economy, which he wrote in five weeks in 1837:

The cosmopolitan theorists [List’s term for Smith and his ilk] do not question the importance of industrial expansion. They assume, however, that this can be achieved by adopting the policy of free trade and by leaving individuals to pursue their own private interests. They believe that in such circumstances a country will automatically secure the development of those branches of manufacture which are best suited to its own particular situation. They consider that government action to stimulate the establishment of industries does more harm than good…. The lessons of history justify our opposition to the assertion that states reach economic maturity most rapidly if left to their own devices. A study of the origin of various branches of manufacture reveals that industrial growth may often have been due to chance. It may be chance that leads certain individuals to a particular place to foster the expansion of an industry that was once small and insignificant—just as seeds blown by chance by the wind may sometimes grow into big trees. But the growth of industries is a process that may take hundreds of years to complete and one should not ascribe to sheer chance what a nation has achieved through its laws and institutions. In England Edward III created the manufacture of woolen cloth and Elizabeth founded the mercantile marine and foreign trade. In France Colbert was responsible for all that a great power needs to develop its economy. Following these examples every responsible government should strive to remove those obstacles that hinder the progress of civilisation and should stimulate the growth of those economic forces that a nation carries in its bosom.

Consumers versus producers

The Anglo-American approach assumes that the ultimate measure of a society is its level of consumption. Competition is good, because it kills off producers whose prices are too high. Killing them off is good, because more-efficient suppliers will give the consumer a better deal. Foreign trade is very good, because it means that the most efficient suppliers in the whole world will be able to compete. It doesn’t even matter why competitors are willing to sell for less. They may really be more efficient; they may be determined to dump their goods for reasons of their own. In either case the consumer is better off. He has the ton of steel, the cask of wine, or—in today’s terms—the car or computer that he might have bought from a domestic manufacturer, plus the money he saved by buying foreign goods.

In the Friedrich List view, this logic leads to false conclusions. In the long run, List argued, a society’s well-being and its overall wealth are determined not by what the society can buy but by what it can make. This is the corollary of the familiar argument about foreign aid: Give a man a fish and you feed him for a day. Teach him how to fish and you feed him for his life.

List was not concerned here with the morality of consumption. Instead he was interested in both strategic and material well-being. In strategic terms nations ended up being dependent or independent according to their ability to make things for themselves. Why were Latin Americans, Africans, and Asians subservient to England and France in the nineteenth century? Because they could not make the machines and weapons Europeans could.

In material terms a society’s wealth over the long run is greater if that society also controls advanced activities. That is, if you buy the ton of steel or cask of wine at bargain rates this year, you are better off, as a consumer, right away. But over ten years, or fifty, you and your children may be stronger as both consumers and producers if you learn how to make the steel and wine yourself. If you can make steel rather than just being able to buy it, you’ll be better able to make machine tools. If you’re able to make machine tools, you’ll be better able to make engines, robots, airplanes. If you’re able to make engines and robots and airplanes, your children and grandchildren will be more likely to make advanced products and earn high incomes in the decades ahead.

The German school argued that emphasizing consumption would eventually be self-defeating. It would bias the system away from wealth creation—and ultimately make it impossible to consume as much. To use a homely analogy: One effect of getting regular exercise is being able to eat more food, just as an effect of steadily rising production is being able to consume more. But if people believe that the reason to get exercise is to permit themselves to eat more, rather than for longer term benefits they will behave in a different way. List’s argument was that developing productive power was in itself a reward. “The forces of production are the tree on which wealth grows,” List wrote in another book, called The National System of Political Economy.

The tree which bears the fruit is of greater value than the fruit itself…. The prosperity of a nation is not … greater in the proportion in which it has amassed more wealth (ie, values of exchange), but in the proportion in which it has more developed its powers of production.

Process versus result

In economics and politics alike the Anglo-American theory emphasizes how the game is played, not who wins or loses. If the rules are fair, then the best candidate will win. If you want better politics or a stronger economy, you should concentrate on reforming the rules by which political and economic struggles are waged. Make sure everyone can vote; make sure everyone can bring new products to market. Whatever people choose under those fair rules will by definition be the best result. Abraham Lincoln or Warren Harding, Shakespeare or Penthouse—in a fair system whatever people choose will be right.

The government’s role, according to this outlook, is not to tell people how they should pursue happiness or grow rich. Rather, its role is that of referee—making sure no one cheats or bends the rules of “fair play,” whether by voter fraud in the political realm or monopoly in the economic.

In the late twentieth century the clearest practical illustration of this policy has been the U.S. financial market. The government is actively involved—but only to guard the process, not to steer the results. It runs elaborate sting operations to try to prevent corporate officials from trading on inside information. It requires corporations to publish detailed financial reports every quarter, so that all investors will have the same information to work from. It takes companies to court—IBM, AT&T—whenever they seem to be growing too strong and stunting future competitors. It exposes pension-fund managers to punishment if they do not invest their assets where the dividends are greatest.

These are all ways of ensuring that the market will “get prices right,” as economists say, so that investments will flow to the best possible uses. Beyond that it is up to the market to decide where the money goes. Short-term loans to cover the budget deficits in Mexico or the United States? Fine. Long-term investments in cold-fusion experimentation? Fine. The market will automatically assign each prospect the right price. If fusion engines really would revolutionize the world, then investors will voluntarily risk their money there.

The German view is more paternalistic. People might not automatically choose the best society or the best use of their money. The state, therefore, must be concerned with both the process and the result. Expressing an Asian variant of the German view, the sociologist Ronald Dore has written that the Japanese—”like all good Confucianists”—believe that “you cannot get a decent, moral society, not even an efficient society, simply out of the mechanisms of the market powered by the motivational fuel of self-interest.” So, in different words, said Friedrich List.

Individuals versus the nation

The Anglo-American view focuses on how individuals fare as consumers and on how the whole world fares as a trading system. But it does not really care about the intermediate levels between one specific human being and all five billion—that is, about communities and nations.

This criticism may seem strange, considering that Adam Smith called his mighty work The Wealth of Nations. It is true that Smith was more of a national-defense enthusiast than most people who now invoke his name. For example, he said that the art of war was the “noblest” of the arts, and he approved various tariffs that would keep defense-related industries strong—which in those days meant sailcloth making. He also said that since defense “is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England.” This “act of navigation” was, of course, the blatantly protectionist legislation designed to restrict the shipment of goods going to and from England mostly to English ships.

Still, the assumption behind the Anglo-American model is that if you take care of the individuals, the communities and nations will take care of themselves. Some communities will suffer, as dying industries and inefficient producers go down, but other communities will rise. And as for nations as a whole, outside the narrow field of national defense they are not presumed to have economic interests. There is no general “American” or “British” economic interest beyond the welfare of the individual consumers who happen to live in America or Britain.

The German view is more concerned with the welfare, indeed sovereignty, of people in groups—in communities, in nations. This is its most obvious link with the Asian economic strategies of today. Friedrich List fulminated against the “cosmopolitan theorists,” like Adam Smith, who ignored the fact that people lived in nations and that their welfare depended to some degree on how their neighbors fared. In the real world happiness depends on more than how much money you take home. If the people around you are also comfortable (though, ideally, not as comfortable as you), you are happier and safer than if they are desperate. This, in brief, is the case that today’s Japanese make against the American economy: American managers and professionals live more opulently than their counterparts in Japan, but they have to guard themselves, physically and morally, against the down-and-out people with whom they share the country.

In the German view, the answer to this predicament is to pay explicit attention to the welfare of the nation. If a consumer has to pay 10 percent more for a product made by his neighbors than for one from overseas, it will be worse for him in the short run. But in the long run, and in the broadest definitions of well-being, he might be better off. As List wrote in The National System of Political Economy

Between each individual and entire humanity, however, stands the NATION, with its special language and literature, with its peculiar origin and history, with its special manners and customs, laws and institutions, with the claims of all these for existence, independence, perfection, and continuance for the future, and with its separate territory; a society which, united by a thousand ties of mind and of interests, combines itself into one independent whole.

Economic policies, in the German view, will be good or bad depending on whether they take into account this national economic interest. Which leads to

Business as peace versus business as war

By far the most uplifting part of the Anglo-American view is the idea that everyone can prosper at once. Before Adam Smith, the Spanish and Portuguese mercantilists viewed world trade as a kind of battle. What I won, you lost. Adam Smith and David Ricardo demonstrated that you and I could win at the same time. If I bought your wine and you bought my wool, we would both have more of what we wanted, for the same amount of work. The result would be the economist’s classic “positive sum” interaction. Your well-being and my well-being added together would be greater than they were before our trade.

The Germans had a more tragic, or “zero sum”-like, conception of how nations dealt with each other. Some won; others lost. Economic power often led to political power, which in turn let one nation tell others what to do. Since the Second World War, American politicians have often said that their trading goal is a “level playing field” for competition around the world. This very image implies a horizontal relationship among nations, in which they all good-naturedly joust as more or less equal rivals. “These horizontal metaphors are fundamentally misleading,” the American writer John Audis has written in the magazine In These Times.

Instead of being grouped horizontally on a flat field, nations have always been organized vertically in a hierarchical division of labor. The structure of the world economy more accurately resembles a pyramid or a cone rather than a plane. In the 17th century, the Dutch briefly stood atop the pyramid. Then, after a hundred year transition during which the British and French vied for supremacy, the British emerged in 1815 as the world’s leading industrial and financial power, maintaining their place through the end of the century. Then, after about a forty-year transition, the U.S. came out of World War II on top of the pyramid. Now we are in a similar period of transition from which it is likely, after another two decades, that Japan will emerge as the leading industrial power.

The same spirit and logic run through List’s arguments. Trade is not just a game. Over the long sweep of history some nations lose independence and control of their destiny if they fall behind in trade. Therefore nations must think about it strategically, not just as a matter of where they can buy the cheapest shirt this week.

In The Natural System of Political Economy, List included a chapter on this theme, “The Dominant Nation.” Like many other things written about Britain in the nineteenth century, it makes bittersweet reading for twentieth-century Americans. “England’s manufactures are based upon highly efficient political and social institutions, upon powerful machines, upon great capital resources, upon an output larger than that of all other countries, and upon a complete network of internal transport facilities,” List said of the England of the 1830s, as many have said of the United States of the 1950s and 1960s.

A nation which makes goods more cheaply than anyone else and possesses immeasurably more capital than anyone else is able to grant its customers more substantial and longer credits than anyone else….By accepting or by excluding the import of their raw materials and other products, England—all powerful as a manufacturing and commercial country—can confer great benefits or inflict great injuries upon nations with relatively backward economies.

This is what England lost when it lost “dominance,” and what Japan is gaining now.

Morality versus power

By now the Anglo-American view has taken on a moral tone that was embryonic when Adam Smith wrote his book. If a country disagrees with the Anglo-American axioms, it doesn’t just disagree: it is a “cheater.” Japan “cheats” the world trading system by protecting its rice farmers. America “cheats” with its price supports for sugar-beet growers and its various other restrictions on trade. Malaysia “cheated” by requiring foreign investors to take on local partners. And on and on. If the rules of the trading system aren’t protected from such cheating, the whole system might collapse and bring back the Great Depression.

In the German view, economics is not a matter of right or wrong, or cheating or playing fair. It is merely a matter of strong or weak. The gods of trade will help those who help themselves. No code of honor will defend the weak, as today’s Latin Americans and Africans can attest. If a nation decides to help itself—by protecting its own industries, by discriminating against foreign products—then that is a decision, not a sin.

Wishing Away Reality

WHY bring the Germans into it? Because they had a lasting effect—outside the Anglo-American bloc. With the arrival of Commodore Matthew Perry and his American warships in 1853, the Japanese realized that the Western world had far outstripped them in both commercial and military technology. Throughout the rest of Asia were examples of what happened to countries that were weaker than the Europeans or the Americans: they turned into colonies. Through the rest of the nineteenth century Japan’s leaders devoted themselves to modernizing the country, so that it would no longer be vulnerable. During the decades of sustained creativity known as the Meiji era, from 1868 to 1912, Japanese scholars, industrialists, and administrators carefully studied Western theories about how economies grew. In the writings of List and other continental theorists they found a set of prescriptions more persuasive than the laissez-faire teachings of Adam Smith.

The most important part of the German-Asian argument is its near invisibility in the English-speaking world, especially the United States. The problem is not that Americans don’t accept the German analysis: in many ways it is flawed. The problem is that they don’t know that it exists. For instance, a popular dictionary of economics, edited by American and British economists and published in 1991, has a long explanation of the Laffer curve but no mention of List.

Some “real” economists are not quite so closed-minded. Since at least the early 1980s economists at several American universities have, in essence, rediscovered Friedrich List. (But not at all universities. In 1992 Robert Wade, the author of the influential book Governing the Market, went looking in the MIT library for List’s work. Wade previously had been teaching in Korea, and there he had found plenty of copies of List’s works in every campus bookstore. But in the catalogue of MIT’s vast library system Wade found an entry for just a single volume by List, The National System of Political Economy, in an edition published in 1885. When Wade finally obtained the book, he found that it had last been checked out in 1966.) They have examined more and more failures in the Anglo-American model. They have found more and more evidence that “cheating,” in the form of protectionism, can increase a nation’s wealth. But very little of this news has trickled down to the realms where economics is usually discussed—newspaper editorials, TV talk shows, and the other forms of punditry that define reasonable and unreasonable ideas. When Americans talk about wealth, poverty, and their nation’s place in the world, they often act as if Adam Smith’s theories were the only theories still in play.

After the World Bank’s meeting in Bangkok in 1991 an editorial writer for The Wall Street Journal proclaimed that “with a few sickly exceptions, such as the decaying Communist holdouts of China and Vietnam, it seems that the ideas of Adam Smith, of Alfred Marshall, of Milton Friedman, have triumphed. We are all capitalists now.”

This is true only if we accept the most vulgar and imprecise statement of what being a capitalist means. The economies that have grown most impressively over the past generation—from Germany to Thailand to Korea to Japan all certainly believe in competition. Toyota and Nissan grow strong fighting each other. Daewoo and Hyundai compete on products from cars to computers to washing machines. But it would be very hard to find a businessman or an official in these countries who would say, with a straight face, that these industries grew “automatically” or in a “natural” way.

Two years ago another Wall Street Journal item, this one a review of a book on trade, said,

[The author] puts it well: ‘The benefits of unilaterally adopting free trade now are greater than the benefits of multilateral adoption of free trade ten or fifteen years from now.’ Ask Hong Kong, which has totally shunned retaliation and not coincidentally has had the highest growth rate in the world over the past three decades.

Yes, indeed—ask Hong Kong. Since the end of the Second World War its policy has generally been laissez-faire. Compared with the rest of Asia, Hong Kong interferes less, plans less, and leaves market forces more on their own. What has been the result? During the 1980s the real earnings of Hong Kong’s people rose more slowly than those of the people of Korea, Singapore, Thailand, and Taiwan. It is a busy, bustling entrepot of merchants, especially those handling commerce in and out of China. But as an industrial center it is falling behind its neighbors.

In the mid-1980s David Aikman, a journalist for Time, wrote a book about the “miracle” economies of Asia. The successes of Taiwan and Hong Kong, he wrote, “demonstrate just how faithful, consciously or not, the rulers of these two countries have been to American conceptions of free enterprise.”

Despite Hong Kong’s lack of regulations, though, and despite the small businesses that abound in Taiwan, to say that either of these places behaves in an “American” way is to drain the term of all meaning. For example, as late as 1987 most imports of steel into Taiwan had to be approved by the nation’s big steel maker, China Steel. The United States, too, protects its steel industry, but this is presumably not what the author meant in saying that Taiwan had been “faithful” to American concepts of free enterprise.

“There is a great deal of misinformation abroad about the trade regimes of [Taiwan and Korea], misinformation which is cultivated by the governments to conceal how much real protection there has been,” the economist Robert Wade wrote in an exhaustive study that concentrated on Taiwan and rebutted virtually everything in Aikman’s book.

East Asian trade regimes are inconsistent in important ways with even a modified version of the standard economist’s account of what a good trade regime looks like…. It is amazing and even scandalous that the distinguished academic theorists of trade policy…. have not tried to reconcile these facts about East Asian trade regimes with their core prescriptions [emphasis added]….

Anyone who reads American or British newspapers or listens to political speeches in English could provide other examples. But they’re not necessary. The Anglo-American theories have obviously won the battle of ideas—when that battle is carried out in English. The concepts of consumer welfare, comparative advantage, and freest possible trade now seem not like concepts but like natural laws. But these concepts are detached from historical experience.

When We Acted the Way They Do

IN 1991 the economic historian William Lazonick published an intriguing book,Business Organization and the Myth of the Market Economy. It examined the way industrial economies had behaved during the years when they became strongest—England in the eighteenth and nineteenth centuries, the United States in the nineteenth and twentieth centuries, and Japan from the late nineteenth century on.

These countries varied in countless ways, of course. The United Kingdom had a huge empire; the United States had a huge frontier; Japan had the advantage of applying technology the others had invented. Yet these success stories had one common theme, Lazonick showed. None of the countries conformed to today’s model of “getting-prices right” and putting the consumer’s welfare first. All had to “cheat” somehow to succeed.

Friedrich List had railed on about exactly this point in the 1840s, when England was the only industrial success story to observe. The British were just beginning to preach free-trade theory in earnest. They abolished the famous Corn Laws in 1846, exposing their inefficient domestic farmers to competition from overseas. Yet over the previous 150 years England had strong-armed its way to prosperity by violating every rule of free trade. It would be as if Japan, in the 1990s, finally opened its rice market to competition, in the name of free trade—and then persuaded itself that it had been taking a hands-off approach to industry for the previous 150 years. When England was building its technological lead over the rest of the world, Lazonick said, its leaders did not care just about the process of competition. They were determined to control the result, so that they would have the strongest manufacturers on earth.

British economists began talking about getting prices right only after they succeeded in promoting their own industries by getting prices wrong. Prices were wrong in that cheap competition from the colonies was forbidden. They were wrong in that the Crown subsidized and encouraged investment in factories and a fleet. They were right in that they made British industry strong.

By the time Adam Smith came on the scene, Lazonick said, the British could start lecturing other countries about the folly of tariffs and protection. Why should France (America, Prussia, China…) punish its consumers by denying them access to cheap, well-made English cloth? Yet the British theorists did not ask themselves why their products were so advanced, why “the world market…in the late eighteenth century was so uniquely under British control.” The answer would involve nothing like laissez-faire.

The full answer would instead include the might of the British navy, which by driving out the French and Spanish had made it easier for British ships to dominate trade routes. It would involve political measures that prevented the Portuguese and Irish from developing textile industries that could compete with England’s. It would include the Navigation Acts, which ensured a British monopoly in a number of the industries the country wanted most to develop. The answer involved land enclosure and a host of other measures that allowed British manufacturers to concentrate more capital than they could otherwise have obtained.

Lazonick summed up this process in a passage that exactly describes the predicament of the United States at the end of the twentieth century.

The nineteenth-century British advocated laissez-faire because, given the advanced economic development that their industries had already achieved, they thought that their firms could withstand open competition from foreigners. [They wanted] to convince other nations that they would be better off if they opened up their markets to British goods….[They] accepted as a natural fact of life Britain’s dominant position as the “workshop of the world” [emphasis added]. They did not bother to ask how Britain had attained that position…. But the ultimate critique of nineteenth-century laissez-faire ideology is not that it ignored the role of national power in Britain’s past and present. Rather, the ultimate critique is that laissez-faire failed to comprehend Britain’s economic future—a future in which, confronted by far more powerful systems of national capitalism, the British economy would enter into a long-run relative decline from which it has yet to recover.

America’s economic history follows the same pattern. While American industry was developing, the country had no time for laissez-faire. After it had grown strong, the United States began preaching laissez-faire to the rest of the world—and began to kid itself about its own history, believing its slogans about laissez-faire as the secret of its success.

The “traditional” American support for worldwide free trade is quite a recent phenomenon. It started only at the end of the Second World War. This period dominates the memory of most Americans now alive but does not cover the years of America’s most rapid industrial expansion. As the business historian Thomas McCraw, of the Harvard Business School, has pointed out, the United States, which was born in the same year as The Wealth of Nations, never practiced an out-and-out mercantilist policy, as did Spain in the colonial days. But “it did exhibit for 150 years after the Revolution a pronounced tendency toward protectionism, mostly through the device of the tariff.”

American schoolchildren now learn that their country had its own version of the Smith-List debate, when Thomas Jefferson and Alexander Hamilton squared off on what kind of economy the new nation should have. During George Washington’s first term Hamilton produced his famous “Report on Manufactures,” arguing that the country should deliberately encourage industries with tariffs and subsidies in order to compete with the mighty British. Jefferson and others set out a more pastoral, individualistic, yeoman-farmer vision of the country’s future. As everyone learns in class, Hamilton lost. He was killed in a duel with Aaron Burr, he is not honored on Mount Rushmore or in the capital, as Jefferson is; he survives mainly through his portrait on the $10 bill. Yet it was a strange sort of defeat, in that for more than a century after Hamilton submitted his report, the United States essentially followed his advice.

In 1810 Albert Gallatin, a successor of Hamilton’s as Secretary of the Treasury, said that British manufacturers enjoyed advantages that could keep Americans from ever catching up. A “powerful obstacle” to American industry, he said, was “the vastly superior capital of Great Britain which enables her merchants to give very long term credits, to sell on small profits, and to make occasional sacrifices.”

This, of course, is exactly what American manufacturers now say about Japan. Very little has changed in debates about free trade and protectionism in the past 200 years. If the antique language and references to out-of-date industries were removed from Hamilton’s report of 1791, it could have been republished in 1991 and would have fit right into the industrial-policy debate. “There is no purpose to which public money can be more beneficially applied, than to the acquisition of a new and useful branch of industry” was the heart of Hamilton’s argument—and, similarly, of many modern-day Democratic Party economic plans.

In the years before the American Revolution most leaders in the Colonies supported the concept of British protectionist measures. They were irritated by new taxes and levies in the 1760s and l770s—but they had seen how effective Britain’s approach was in developing industries. Through the nineteenth century the proper level of a national tariff was on a par with slavery as a chronically divisive issue. Northerners generally wanted a higher tariff, to protect their industries; farmers and southerners wanted a lower tariff, so that they could buy cheaper imported supplies. Many politicians were unashamed protectionists. “I don’t know much about the tariff,” Abraham Lincoln said, in what must have been an aw-shucks way. “But I know this much. When we buy manufactured goods abroad we get the goods and the foreigner gets the money. When we buy the manufactured goods at home, we get both the goods and the money.” The United States had, just before Lincoln’s term, forced the Japanese to accept treaties to “open” the Japanese market. These provided that Japan could impose a tariff of no more than five percent on most imported goods. America’s average tariff on all imports was almost 30 percent at the time.

In the 1880s the University of Pennsylvania required that economics lecturers not subscribe to the theory of free trade. A decade later William McKinley was saying that the tariff had been the crux of the nation’s wealth: “We lead all nations in agriculture; we lead all nations in mining; we lead all nations in manufacturing. These are the trophies which we bring after twenty-nine years of a protective tariff.” The national tariff level on dutiable goods had varied, but it stayed above 30 percent through most of the nineteenth century. When the United States began to preach or practice free trade, after the Second World War, the average duty paid on imports fell from about nine percent in 1945 to about four percent in the late 1970s.

In addition to the tariff, nineteenth-century America went in heavily for industrial planning—occasionally under that name but more often in the name of national defense. The military was the excuse for what we would now call rebuilding infrastructure, picking winners, promoting research, and coordinating industrial growth. As Geoffrey Perret has pointed out in A Country Made by War, many evolutions about which people now say “That was good for the country” occurred only because someone could say at the time “This will be good for the military”—giving the government an excuse to step in.

In the mid-nineteenth century settlers moving west followed maps drawn by Army cartographers, along roads built by Army engineers and guarded by Army forts. At the end of the century the U.S. Navy searched for ways to build bigger, stronger warships and along the way helped foster the world’s most advanced steel industry.

Just before Thomas Jefferson took office as President, the U.S. government began an ambitious project to pick winners. England surpassed America in virtually every category of manufacturing, and so, to a lesser degree, did France. Wheels turned and gears spun throughout Europe, but they barely did so in the new United States. In 1798 Congress authorized an extraordinary purchase of muskets from the inventor Eli Whitney, who was at the time struggling and in debt. Congress offered him an unprecedented contract to provide 10,000 muskets within twenty-eight months. This was at a time when the average production rate was one musket per worker per week. Getting the muskets was only part of what Congress accomplished: this was a way to induce, and to finance, a mass-production industry for the United States. Whitney worked round the clock, developed America’s first mass-production equipment, and put on a show for the congressmen. He brought a set of disassembled musket locks to Washington and invited congressmen to fit the pieces together themselves—showing that the age of standardized parts had arrived.

“The nascent American arms industry led where the rest of manufacturing followed,” Perret concluded. “Far from being left behind by the Industrial Revolution the United States, in a single decade and thanks largely to one man, had suddenly burst into the front rank.” America took this step not by waiting for it to occur but by deliberately promoting the desired result.

For most of the next century and a half the U.S. government was less interested in improving the process of competition than in achieving a specific result. It cared less about getting prices right and more about getting ahead. This theme runs through the Agriculture Extension Service, which got information to farmers more rapidly than free-market forces might have; the shipbuilding programs of the late nineteenth century, which stimulated the machine-tool and metal-working industries; aircraft-building contracts; and medical research.

What America actually did while industrializing is not what we tell ourselves about industrialization today. Consumer welfare took second place; promoting production came first. A preference for domestic industries did cost consumers money. A heavy tariff on imported British rails made the expansion of the American railroads in the 1880s costlier than it would otherwise have been. But this protectionist policy coincided with, and arguably contributed to, the emergence of a productive, efficient American steel industry. The United States trying to catch up with Britain behaved more or less like the leaders of Meiji (and postwar) Japan trying to catch up with the United States. Alexander Hamilton, dead and unmourned, won.

Thomas McCraw says that the American pattern was not some strange exception but in fact the norm. The great industrial successes of the past two centuries—America after its Revolution, Germany under Bismarck, Japan after the Second World War—all violated the rules of laissez-faire. Despite the obvious differences among these countries, he says, the underlying economic strategy was very much the same.

Neat Theory, Messy Reality


NEAR the end of his long career the great economist Joseph Schumpeter speculated on what he would do if he were young again. Suppose he woke up as a bright-eyed graduate student in economics rather than a wizened professor. What would he choose to do with his new allotment of years?


Modern economics research followed three main branches: economic theory, statistics, and economic history. By the time Schumpeter wrote, economic theory was clearly the most glamorous of the callings, and statistics seemed the most practical. But, Schumpeter said, he would surely devote his life to studying economic history.


This may seem a boring choice, and if it does, it goes to the heart of how we think about economic life. Since the end of the Second World War, and perhaps since the time of Adam Smith, the glamorous work in economics has been deeply unhistorical. In part this is just a matter of cosmetics. With each passing year since 1945 American economics textbooks have been jammed fuller and fuller of formulas, graphs, mathematical variables, and regression analyses. At the same time, they have lightened the dosage of real examples from the real world. In the mid-1980s researchers surveyed 212 students at the most prestigious American graduate schools of economics, asking them what factors were more or less essential for success as a professional economist. Sixty-five percent of the graduate students said it was very important to be “smart in the sense of being good at problem-solving” in order to succeed as an economist. Only three percent said it was very important to have “a thorough knowledge of the economy.”


Modern economics has become exceedingly precise about one kind of problem but less and less interested in another. Anglo-American economists devote much of their effort to “equilibrium studies” and “constrained optimization”—in essence, laboratory experiments involving economics. In a laboratory you can control many variables—the temperature, the amount of lighting or contamination—so as to focus on the single factor you want to understand. In mathematical economics you can “control” many variables by taking them for granted, and then focus on what you want to understand. You assume, as a given, that some people are owners and others are laborers, that Korea has a semiconductor industry and Mali does not, that women earn less than men. Then you calculate, within these constraints, the best possible outcome—what trade policy Mali should pursue, what rate of inheritance tax will make an economy grow fastest.


Within this set of laboratory conditions the tools of economic analysis are very powerful. By getting prices right Mali will make the best use of the resources it has at hand. But the most interesting and important economic questions concern the assumptions and constraints themselves. Why are some countries chronically so poor? Why have others done so much to pull ahead?


Economic analysis can tell you where you can get the best return on an investment this week. It can tell you how a change in tax rates might affect the unemployment rate this year. It can even tell you how a new tariff level is likely to affect the volume of world trade over the course of this decade. But it has a very hard time accounting for the larger rises and falls in world affairs: why it was England and not France that dominated the nineteenth-century world economy; why it was Germany and not Poland that industrialized so rapidly at the end of that century; why Japan caught up in the early twentieth century and again now. Economics is a wonderful tool for analyzing trends and changes once nations have assumed their ranks. But getting prices right is not so good for understanding how they got to those ranks, and why the ranks change.


This would not be a serious failing except that most people believe that getting prices right tells us about the long run as well as the short. Indeed, the long-run evidence suggests that getting prices wrong—that is, violating the rules of Anglo-American economics may be indispensable for nations that are trying to get ahead.


In the late 1980s the economist Alice Amsden wrote a book about the Korean economy called Asia’s Next Giant. In that book and subsequent writings she said that Korea’s post-Second World War rise had much in common with Japan’s industrial miracles and with Germany’s industrialization in the nineteenth century. In none of these cases, she said, did the country get prices right, letting investors and consumers freely decide where they would put their money. The real secret, she said, was that unless a country deliberately rigged the markets so as to get prices wrong, it had no hope of catching up in the industrial race.


THE key to capitalistic development, in this view, is finally capital. If you want to build factories, leapfrog your competitors in efficiency, train your people so that they can outproduce others, you need money. If you are a poor nation, you don’t have enough money sitting around to begin with; and if you are a rich nation, you are likely to have committed your extra money to pension and benefit programs, as the United States has now. Still, you need the money—for new factories, for research, for distribution networks. How do you get it?


Historically, Amsden concluded, successful nations have gotten extra money by rigging their markets. The goal is to get people to save more of their paychecks, and banks to lend more money for long-term industrial expansion, than normal market forces would allow. To make its people save, a country needs to jack up interest rates; to allow businesses to invest, it needs to keep the rates low. Under Anglo-American theory the country would just let these two forces fight it out until they reached the natural equilibrium. But that is not how successful development has actually occurred, Amsden said.


Industrial expansion depends on savings and investment, but in ‘backward’ countries especially savings and investment are in conflict over the ideal interest rate, high in one case, low in the other. In Korea and other late-industrializing countries, this conflict has been mediated by the subsidy…. Thus, the government established multiple prices for loans, only one of which could possibly have been “right” according to the law of supply and demand. Moreover, the most critical price—that for long-term credit—was wildly ‘wrong’ in a capital-scarce country, its real price, due to inflation, being negative.


That is, in order for Korea to get enough money into the hands of its industries, it needed to bend the rules. The crucial thing about this undertaking, Amsden emphasized, is that it was not some Korean quirk. Every country that has caught up with others has had to do so by rigging its rules: extracting extra money from its people and steering the money into industrialists’ hands.


Today’s Americans and Britons may not like this new system, which makes their economic life more challenging and confusing than it would otherwise be. They are not obliged to try to imitate its structure, which in many ways fits the social circumstances of East Asia better than those of the modern United States or Britain. But the English-speaking world should stop ignoring the existence of this system—and stop pretending that it doesn’t work. 


Finally an Apple Alternative

Like everything else about Apple, Apple Mail is well past it’s high point. It may work OK if you’ve got a small Inbox, but if you’ve got many GB of messages, the app responds very slow, crashes often, and most importantly, looses messages. Yes – that’s right – LOOSES YOUR EMAIL.

Sparrow was a nice alternative for a few months. It sprouted up to number one on the App store, indicating that I’m not alone in looking for something better than Unfortunately, is like the dollar of Mac land. The tallest midget. It’s horrible, but everything else is even more flawed.

I give Thunderbird a try every year or so, but it’s always weird, consistent with Mozilla but not with Mac OS X, and it’s even slower than

MailMate looks like a good possible solution. It’s keyboard oriented. It’s made for handling LARGE indexes. It has a very useful “Correspondence” Window and even a handy “Distortion Mode” for screenshots.

I’ll keep using it for a few weeks and hopefully have a solution for my Mac OS X woes…

Book Recommendations

Everyone Should Read

  • The Red Queen (Ridley)
  • The Blank Slate (Pinker)
  • Influence: Phychology of Persuasion
  • 7 Habits of Highly Effective People
  • The E-Myth
  • Demon Haunted World

Everyone in Business Should Read

  • Grinding It Out
  • Made In America
  • Alchemy of Finance
  • The Art of Profitability
  • Adventure Capitalist
  • Investment Biker

US Steps up in Asia

The Obama administration has been talking about a “pivot back into Asia” for several months now, yet we have seen little evidence that the United States is prepared to challenge China in East Asia. That may finally be changing. According to Japanese media, Secretary of Defense Leon Panetta on Aug. 5 discussed the potential for U.S. RQ-4 Global Hawk patrols over the disputed Senkaku/Diaoyu Islands.

The Northrop Grumman RQ-4 Global Hawk is an unmanned aerial vehicle (UAV) used by the United States Air Force and Navy as a surveillance aircraft. High altitute survelliance and intelligence, similar to the Lockheed U-2 1950s spy plane. Global Hawk provides high resolution Synthetic Aperture Radar (SAR) that can penetrate cloud-cover and sandstorms and Electro-Optical/Infrared (EO/IR) long range imagry. Can survey 40,000 square miles of terrain/day.

When former US Ambassador to China, Roy, now of the Kissinger Institute was in Shanghai a few months ago, he pointed out that legalistically, the US relationship with the Senkaku/Diaoyu islands is different from the relationships in the South China Sea. The US is obligated to protect Japanese interests in the Diaoyu islands as part of the US/Japan defence treaty.

Stratfor has an interesting take, that:

By suggesting that the United States will take a more proactive role in assuring Japan’s continued control of the Senkakus, Washington is attempting to assuage concerns among other potential partners and allies in the Asia-Pacific region. Washington aims to demonstrate its willingness to consistently and reliably counter any perceived Chinese overreach, allowing regional partners to feel confident about strengthening ties with the United States in spite of Chinese assertiveness.

M.I.A. – But I’m Back

Life has been very busy lately, so I haven’t had much time to write. The more I see, the less that I feel like writing about it. It seems that anything we write could always be used against at some point in the future, but if we simply stay silent – there is no downside.

There are so many things that I wish I could talk more about here. About the distribution business. About other business ideas. About personal life. Unfortunately, the three biggest things that I would like to talk about seem to be off limits at the moment.

At least there’s hope that I can talk more about one of these on a daily bais in another year or two.

We’ll see.

At this time, I can continue to share my thoughts about:

  • What’s happening in China now and what may happen next.
  • US/China relations.
  • Chinese language learning and accent perfection.
  • Business/Economics/Politics.

That said, I’ve been writing for a while, and I haven’t added a significant amount to the discussion in these areas – so perhaps the direction of the blog should be reconsidered.

subject chart

Some things that do come to mind that are worth knowing about for many people are:

  • Travel tips for people coming to China
  • Intersting places to visit in China
  • Chinese Language Learning Tips
  • The inns and outs of navigating China by train, plane and automobile

Last, I also need to improve the formatting of the Quotes on the top of the website, and provide a way to easily view all of the great quotes that I’ve collected!

Brookings: US-China Strategic Distrust

Very accurate review of Sino-US relations by the Brookings Institute. Brief (six minute) video.

Kenneth G. Lieberthal, April 02, 2010

Although both Beijing and Washington consider the U.S.-China relationship to be the most important in the world, distrust of each other’s long term intentions (“strategic distrust”) has grown to a dangerous degree.

The coauthors of this path-breaking study—one of America’s leading China specialists and one of China’s leading America specialists—lay out both the underlying concerns each leadership harbors about the other side and the reasons for those concerns. Each coauthor has written the narrative of his government’s views without any changes made by the other coauthor. Their purpose is to enable both leaderships to better fathom how the other thinks. The coauthors have together written the follow-on analysis and recommendations designed to improve the potential for a long-term normal major power U.S.-China relationship, rather than the adversarial relationship that might otherwise develop.

Watch the video

Ambassador Roy at AmCham Shanghai

Presentation focused on:

  • Future of US China relationship.
  • Comprehensive Measures of Intl Power vs Nations GDP.
  • Physiological issues are bigger.

Ambassador Roy also presented at the Shanghai Institute of Intl Studies before the []AmCham Shanghai]( presentation.

  • US may be distracted by domestic difficulties.
  • It’s a psychological battle – perception – not reality
  • Asians want engagement, not “US leadership”

The Future

  1. Measured rhetoric as a tool, but don’t take action
  2. We already invest less AND trade less than China than in SE-Asia
  3. US is not competitive
  4. As China becomes more influential, why would China defer to the US?

Problem: – There will be a period where China is economically dominant, but the US is militarily dominant. – The problem is the period of time from the beginning to the end of this transition.

  1. China gets stronger every day
  2. The US gets weaker every day
  3. Time is working against the US

There is zero Int’l support for “containment” of China. Nobody is willing to go against China.

There is no inherent reason for conflict with China.

China Telecom “temp_box” Popup Ads 中国电信运营商投放广告

“China Telecom” high-speed Internet service in Shanghai is actually quite good, much better than anything else I’ve used in Mainland China during six years of extensive travel here, but I noticed ads started popping up on pages that I’m certain never had ads before. Moreover, the ads all look the same.

I did a bit of searching, and some Chinese users have came to the same (irritated) conclusion as I, that China Telecom (中国电信) is actually inserting these ads into 3rd party web pages, without any regard for the original content of the page.

If you dig into the actual page code, you’ll see something along the lines of:

Fortunately, it seems that “” is on the FireFox AdBlock Plus black list, so I’ve installed the FireFox AdBlock Plus plugin to prevent these China Telecom ads from popping up.

Best of luck!

Rittenberg’s People’s Daily Article – April 8th 1967

Sidney Rittenberg came to China in 1944, after 2 years studying Chinese at Stanford. He lived in China from 1944 – 1949 (5 years) and was then imprisoned for 6 years (1949 – 1955). During the Cultural Revolution, Twelve years after his release (total of 23 years in China) he managed to take control of China Radio International (CRI), and publish the following article in the People’s Daily.

11 months after this article was published, Sidney was imprisoned again, from 1968 – 1977 (9 years). After his release in 1977, Sidney continued living in China for 3 more years (Total of 36 years, 16 in prison), and in March of 1980 he returned to the United States.

I’ve met few Chinese people who speak, read or write Chinese as well as Sidney – and it’s hard to imagine any other person not exposed to Chinese during their childhood attaining his level of fluency.

Bottom line, even after 6 years in China, I had to check my dictionary several times on reading through Sidney’s People’s Daily article: Chinese Cultural Revolution Opens Leadership Channel for Communism.


美国 李敦白 1967年04月08日

我到中国来的时候,根本不知道什么叫毛泽东思想。当时我对毛泽东思想 ,对中国共产党的路线、方针、政策都不了解,因为这些与美国共产党的一套 太不相同了。经过相当时间,我的脑子才转过来,认识到什么是真马列主义, 什么是假马列主义。我认识到中国共产党是真正的马克思列宁主义的革命党。

我对毛主席是非常尊敬的。我年青时候在一家纺织厂工作。我们工会开会 是在一个商店的楼上,是一间破破烂烂的房子,墙上只挂着一张相片,就是毛 主席。那时候,我已经知道有一个毛泽东,也知道毛泽东是中国的列宁。

我记得到延安以后,毛主席跟我谈过几次话。每次谈话的时间不长,但是 留下的印象很深。因为在每次谈话以后,我总是思考,毛主席为什么这么提, 为什么同我脑子里原来的想法不一样。解放战争时期,我就开始有这样的想法 :要解决美国革命问题,答案就在中国的土窑洞和土平房里。虽然美国的实际 情况与中国很不相同,但是我感到美国的革命,应该走毛泽东思想所指引的道 路。

去年六月,我又到了延安,同那里的一些老同志和青年座谈时讲到,以前 ,美共在南方的党,很小,但很坚强。南方党员入党搞革命,几乎每个人都挨 过打,坐过牢,受过压迫。组织从来没有瓦解,能坚持下去,有一定的发展。 三K党的迫害,没有能消灭它;政府的镇压,没有能消灭它;派进去的一些特 务的破坏,也没有能消灭它。但是后来党和它的群众组织一下子消灭了。这是 美共变成了修正主义以后,下命令要我们自己动手解散的。我到中国以后,每 当回想起这些,心里就很气愤。我们的党,不是帝国主义从外面把它压垮的, 而是敌人在我们内部培养修正主义,从内部把它搞垮的。那时我们不懂得反对 奴隶主义,不懂得如何区别资产阶级盲目的纪律和无产阶级自觉的纪律,也不 懂得造反,当然也就没有顶住这股修正主义的反革命逆流。怎样找一个防止党 内出修正主义的根本办法呢?我一直找不到一个明确的答案。在解放战争时期 和刚解放以后,我开始形成一个想法,就是要把毛泽东思想,要把马列主义真 理,与自己国家的革命实践相结合,这样,就可以防止出修正主义,就是出了 修正主义,也能够战胜它,打倒它。在当时可以说只是在理论上意识到了这个 问题。而在这次无产阶级文化大革命中,我对这个问题不仅在理论上,而且在 实践上又有了进一步的认识。

文化大革命使我感到了新生,年轻了二十岁。文化大革命为怎样防止和反 对修正主义找到了道路。我感到中国有这样的红卫兵小将,有这样在毛泽东思 想哺育下成长的革命青少年,世界革命的前途是完全可以放心的。中国的文化 大革命对世界革命是具有决定性意义的。

现在的世界局势,就是劳动人民和一切爱好自由的人民为一边,人类最凶 恶的敌人美帝国主义和各国反动派为一边,进行全球的阶级斗争,可以说,这 是一场全球性的阶级战争。美帝国主义要霸占全球,到处镇压革命运动。苏修 领导集团作为美帝的盟友,公开出来压制革命群众,出卖革命群众,替美帝国 主义效劳。中国无产阶级文化大革命,给了帝国主义、修正主义和各国反动派 以毁灭性的打击。

中国无产阶级文化大革命,进一步地把世界革命的领袖、世界革命的指导 思想、世界革命的中心这些问题突出地摆在全世界革命人民的面前。这样,全 世界的无产阶级革命派就有了明确的方向,这是革命成败的关键所在。中国无 产阶级文化大革命开辟了世界革命新的一页。

我觉得赫鲁晓夫修正主义对世界革命的一个严重打击,就是所谓反对个人 迷信。赫鲁晓夫的这个罪恶行动,对世界革命造成的损失是巨大的。如果不打 退这股反革命逆流,革命就不能前进,更不能胜利。否定无产阶级的革命领袖 ,实际上就肯定了资产阶级的领袖。美国黑人起来战斗,他们是很能看清这一 点的。我看到他们的一些油印小报,政治上很敏感,就是喊:“毛泽东!毛泽 东!毛泽东!”美国黑人处在美国社会的最下层,阶级觉悟最高,再加上民族 压迫,就更敏感。他们的出发点很简单,美帝是最凶恶的敌人,它最反对毛泽 东,那么毛泽东一定是最正确的。于是他们就拚命去找毛泽东的书,一看,就 感到很亲切,觉得就是给他们自己写的,给他们指出了道路。谁是他们的领袖 、他们的导师,他们心里非常明白。他们就是从毛泽东思想根本的一条出发: “凡是敌人反对的,我们就要拥护;凡是敌人拥护的,我们就要反对。”他们 从心底喊出:“毛泽东万岁!”北京的一位外国朋友到美国去,参加了一个辩 论会。辩论的问题是,毛主席是全世界革命人民心中最红最红的红太阳,这句 话怎么看?一个黑人青年站起来说:“你们在理论上辩论很多问题我不了解, 但是对我来讲,没有什么可辩的。在我心中,毛泽东就是最红最红的红太阳!”

毛主席是当代最伟大的马克思列宁主义者,是当代世界革命的伟大天才, 是当代革命最伟大的旗手。文化大革命充分证明,照毛主席指示去做,革命就 前进,离开了毛主席指示,革命就失败。对中国是这样,对全世界革命派也是 这样。毛主席天才地、创造性地、全面地继承、捍卫和发展了马克思列宁主义 ,把马克思列宁主义提高到一个崭新的阶段。毛泽东思想是在帝国主义走向全 面崩溃,社会主义走向全世界胜利的时代的马克思列宁主义。毛泽东思想是唯 一正确的指导革命、引向胜利的马列主义。

中国无产阶级文化大革命,在世界革命人民的心目中更加明确地解决了世 界革命的领袖、世界革命的指导思想、世界革命的中心等重大问题,这是对世 界革命的一个最根本的贡献。世界各国真正的无产阶级革命派,高举毛泽东思 想旗帜,高举毛主席是全世界革命领袖的旗帜,不顾反动派的种种迫害,大胆 前进。他们对毛泽东思想无限热爱,对本国的革命作出越来越大的贡献。

中国无产阶级文化大革命解决了当代无产阶级革命的一个极为重大的问题 ,就是在无产阶级夺取了政权以后,怎样防止资本主义复辟,怎样巩固和发展 无产阶级专政和社会主义制度以及怎样打开通向共产主义的道路的问题。这个 问题解决以后,就会使全世界革命运动打开新的局面,开始新的阶段,就是说 帝国主义要在全世界被打垮,社会主义、共产主义事业要在全世界取得胜利。 一八七一年巴黎公社有了无产阶级夺取政权的经验。一九一七年俄国十月 革命发展了这个经验。怎样巩固和发展政权,这方面过去有过的经验,只是抵 抗外部武装进攻和进行内部战争来维护政权。

但是,有一个问题没有解决,就是无产阶级掌握政权以后,如何不出修正 主义,如何不让资本主义复辟,如何把无产阶级政权发展下去,把革命进行到 底,怎样把已经胜利的社会主义国家继续发展下去,把无产阶级革命发展下去 ,成为世界革命的基地,保卫无产阶级革命,这个重大问题过去没有解决,这 次文化大革命才得到明确的解决。无产阶级在夺取政权以后,还要继续造资产 阶级的反,造修正主义的反,造一切剥削阶级意识形态的反,破资产阶级世界 观,用无产阶级世界观武装广大群众。无产阶级用武力夺取政权是普遍规律。 夺权以后,如何自下而上地发动广大人民群众开展无产阶级文化大革命,扫除 资产阶级思想,进行第二次夺权,这也是普遍规律,但以前根本不知道。现在 不但是在理论上已经知道,而且在实践上也有了经验。

夺取政权以后,必须继续夺头脑中资产阶级思想的权,否则旧世界不能破 得彻底,新世界创立不起来。

《修养》这本书危害很大。我自己受害之大,控诉几天几夜也说不完。《 修养》是大毒草,培养你当奴隶,如果你按着他的《修养》去做,不反抗,你 就能往上爬,万一犯了错误,遮遮掩掩,也能过去。这本书还提倡“吃小亏占 大便宜”,就是自己“修养”好,是为了个人有好处,对小集团有好处,这是 十足的资产阶级剥削思想。

《修养》是完全违反毛泽东思想的。毛主席提倡树立无产阶级世界观,树 立彻底为人民服务的思想,毫不利己,专门利人,用为人民服务的思想来考验 一个人在斗争中的表现。

过去我们都很信任苏联,看着克里姆林宫上面的红五角星,就觉得有了希 望。后来这个灯灭了。我们就想,中国革命有朝气,现在还在支持各国革命派 。但是有什么把握可以保证不变?亚洲、非洲、拉丁美洲同志,一到中国都提 出这个问题。一九六三年,毛主席发表了支持美国黑人斗争的声明,同时还接 待了我们两个美国人和十八个非洲国家的代表团。喀麦隆一个代表站起来说: “有一句话,我们不好意思讲,但是我们受武装斗争青年的委托,让我们问, 有什么把握证明中国今天支持我们,明天是不是还支持我们?”文化大革命清 楚地回答了这个问题。文化大革命使社会主义中国永葆革命青春,誓把革命进 行到底。通过文化大革命,现在可以得出这样一个结论:中国变不变的问题, 用不着担心了。经过阶级斗争风浪锻炼的广大中国革命青年和革命群众就是保 证,毛泽东思想就是保证。

中国革命进行到底,就一定会把世界革命进行到底。中国的无产阶级文化 大革命重新打开了被赫鲁晓夫修正主义阻塞的通向共产主义的航道。

中国无产阶级文化大革命的伟大胜利沉重地打击了帝国主义、现代修正主 义和各国反动派。“五敢”精神是把一切反动派都是纸老虎的思想,和战略上 藐视帝国主义、修正主义和一切反动派的思想贯彻到实际行动中去。知道了是 纸老虎,应该怎么办?就要有敢想、敢说、敢干、敢闯、敢革命的“五敢”精 神,中国的文化大革命做出了样板,英勇的红卫兵小将提供了榜样。在文化大 革命中,把“五敢”精神,革命造反有理的思想,提到了第一位。把革命造反 有理的思想交给各国革命派,这对促进世界革命将有巨大的意义。

中国的文化大革命也是对全世界无产阶级革命派政治上和各方面的支援。 这使帝修反非常害怕。《纽约时报》的一个叫杜尔敦的、研究中国问题的特务 记者,在文化大革命初期,就在报上写过一篇报道说,过去把希望寄托在毛泽 东的第二代,现在看来这第二代可能比第一代还要厉害。

中国的文化大革命提供了防修反修的战略和策略,是防修反修的大演习。 苏修领导集团非常了解这一点。他们拚命捣乱,特别是从上海的“一月革命” 开始,苏修豁出来了。柯西金到英国女王面前骂中国,骂中国的文化大革命, 竟然公开乞求帝国主义赏识他,援助他,一切面子都不要了。中国的文化大革 命激动了革命人民的心,也激动了苏联人民的心。中国的文化大革命把苏修的 老底揭露出来了。苏修怕得要死,于是大造谣言,他们胡说什么中国无产阶级 文化大革命不是无产阶级的,不是文化的,不革命的,甚至是反革命的。这简 直是胡说八道。苏修统治集团骂中国比帝国主义骂的还凶,因为它心虚得很。 它尤其怕打倒奴隶主义!怕打倒党内走资本主义道路的当权派和无产阶级革命 造反有理的响亮口号!中国人民在文化大革命中高举毛泽东思想伟大红旗,毛 主席成了世界革命人民心中的红太阳。苏修的日子越来越不好过了。修字号的 先生大叫大嚷说,文化大革命是别有用心的。这个用心是可以承认的,就是决 心在中国挖掉修正主义的根子。中国文化大革命增强了修正主义国家人民的斗 争勇气和信心。这些国家的人民一定会起来用适合他们需要的办法进行革命造 反。

为什么杜尔敦写这样的文章?为什么一谈越南问题,往往就联系到中国的 文化大革命?因为帝国主义的反动阶级本质引起它注意中国的文化大革命。文 化大革命堵住了帝修妄图在中国搞“和平演变”的道路,对美国的全球战略是 个沉重的打击,对各国人民革命斗争是有力的支援。中国无产阶级文化大革命 的伟大成就鼓舞着世界革命人民。成为世界革命基地的中国的日益强大,也大 大增强了世界革命人民的斗争信心。斯特朗同志现在的思想非常活跃,她说: “我这人已经八十一岁,但是还能干革命宣传工作,还能看许多东西,大概我 能看得到的中国革命、世界革命的事情,比我原来设想的可能多得多!我这个 八十一岁的老革命还是很有奔头!”我觉得她有这种感觉,外国的许多青年更 应该有这个感觉。

* * *

文化大革命以来,我在许多方面确实变了。我的思想变了,我的一些根深 蒂固的生活习惯,也开始变了。怎么变的?就是因为心中有红太阳。我学习了 毛泽东思想,我进一步认识到毛主席是伟大的革命领袖和伟大的导师,我就有 了一种新的力量。我深深地感到,一个人有了毛泽东思想,心里有了红太阳, 他就可以打破自己原来的思想,可以超脱原来的范围,成为大集体中十分有力 量的一员,发挥自己全部的光和热来参加革命事业。红卫兵小将们不是生来就 勇敢的,而是因为他们心里有了红太阳,所以勇敢。

毛主席不仅是中国人民心中的红太阳,也是全世界革命人民心中的红太阳 。全世界革命人民永远跟着红太阳,一定会把世界革命进行到底!

The Economist for Free? Only in the Workers’ Paradise

Yesterday a friend of mine was telling me about a chinese website where the economist was translated each week by an army of Chinese volunteers. One of them subscribes to the magazine, and then the rest of them translate and put the translation online for free:

Screenshot of the website homepage

关于我们 ECO中文网创建于2006年,是《经济学人》爱好者的家园,凝聚了世界各地的华人力量翻译每期《经济学人》的精彩文章。《经济学人》最早于1843年9月由詹姆士·威尔逊创办,以独立和全球化的视角著称。创办的目的是“参与一场推动前进的智慧与阻碍我们进步的胆怯无知之间的较量”。


About Us: The “ECO” Chinese language website was established in 2006, it is <The Economist> magazine’s hobbyists homeland, made up through the power of Chinese people all over the world translating every issue of The Economist’s brilliant articles. The Economist was founded in September 1843 by James Wilson, and has stood alone with it’s pro globalization prospective. The economist was founded to take part in “a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress”.

Kind of funny to watch the Chinese Black Market “economically” handling distribution for The Economist. See it for yourself: