On feudal capitalism

Willy Shih fears that the U.S. is headed towards feudal capitalism. He doesn’t say that directly in The U.S. Can’t Manufacture the Kindle And That’s a Problem, but it’s what he means. By innovating without manufacturing, we cede the future of our economy, and with it the fate of most of our citizens.

Shih may be affected by his background: he was long a high-ranking executive at IBM, Digital and Kodak, all of which at some point failed as manufacturers, if not for the same reasons. His builds his case not around these firms but around the Kindle, the current darling of the innovation set. In the Kindle, Amazon.com has packaged a clever technology innovation from a company called E-Ink into the first device to make electronic reading feel like a natural human act.

Shih does some speculative arithmetic and argues that the bulk of the Kindle’s profits really go to its Asian component suppliers. While E-Ink looks like an American success story, he expects its presence in the U.S., especially its manufacturing, to go overseas. That’s because E-Ink has been acquired by a Taiwanese partner, PVI. So E-Ink’s loss of control means fewer U.S. jobs, and thus very little direct benefit for this innovation.

If Shih is correct, it would follow the trend set in VCRs, CDs, computers, many types of semiconductors, cell phones and other high-tech products: U.S. companies¬† invent something, but either never make it or can’t make it profitably.
Thus these U.S. firms become subject to feudal capitalism. They create intellectual fiefs, based on an innovation and the people that are needed to help spread it. Such fiefs depend on manufacturing guilds to actually create the innovative new product. If, as in high tech, the manufacturing guilds sit in a different country than the intellectual fief, Shih argues that innovation will move there, too. In other words, the manufacturing guilds will naturally want to strengthen themselves by co-opting the most profitable part of the process, the innovation. Any country that only has intellectual fiefs will find itself growing weaker over time.
Shih could be wrong. David Yoffie thinks so. So does the respected venture capitalist Andy Rappaport. Both look at Apple, Nvidia, Qualcomm and other virtual high-tech firms as examples of how knowledge work is far more profitable for U.S. firms, and how the Japanese, Korean and Chinese firms that now make everything from televisions, memory chips and iPods get stuck in a low-margin cesspool. Look at Dell, they say, once lauded for its manufacturing prowess, now stuck with albatross factories.

That Dell argument misleads. Dell never made its own laptops, for instance, and its direct distribution model drew on its ability to control production. Even so, the arguments for Silicon Valley-style knowledge companies that avoid costly investments in manufacturing are beguiling, especially when you look at the kinds of problems affecting Shih’s former employers. Factories are like fortresses — they need guarding and constant investment, limiting your ability to invest in something new.

Still, Silicon Valley’s prowess as a source of innovative ideas masks the truth that it doesn’t create many new jobs. It’s better in some ways at destroying existing jobs. The same is true for Massachusetts, home to E-Ink and a perennial in the top three places for innovation in the U.S.

So what, you may ask. In the last 60 years, the U.S. has an incredible track record of creating new jobs. Yes, we’re in the process of dumping lots of highly-paid manufacturing jobs. Those are fortress jobs that create little of real economic value, hence it makes sense to cede them to foreign manufacturing guilds.Perhaps. But the miracle of modern capitalism is not the Kindle or any other individual innovation; it’s that entire societies moved past hand-to-mouth survival. Fortress jobs had a lot to do with that success. Sixty years is not enough time to tell much of anything about human history; it took hundreds of years for industrial capitalism to lift people out of Malthusian squalor, and it will take more than 60 for feudal capitalism to drive them back. I hope Shih is wrong, but that is the stakes of the debate.

5 thoughts on “On feudal capitalism

  1. Shih misses the point. This is a study in comparative advantage. Innovation is the higher value added activity and the U.S. specializes in that. Our educational system, such as it is, turns out well-trained engineers and professionals in large quantities, and our political/economic system attracts others from abroad. The U.S. also has well-developed venture infrastructure, the rule of law, and robust financial markets.

    Other nations have what the U.S. does not, which is relatively less expensive labor. Alternatively put, U.S. labor costs render manufacturing comparatively uneconomic. The invisible hand and the process of creative destruction will continue to allocate opportunity efficiently in this manner, to the benefit of all.

    Calling this feudalism is a sophomoric attempt to cast comparative advantage as a class struggle.

  2. “to the benefit of all?” Have you been to Detroit in the last 30 years? Never mind the industrial wasteland. Have you talked to someone in Silicon Valley making the median wage over the last decade? They do exist, somehow.

    Shih may be wrong to raise the specter of decline, and i may be sophomoric to suggest that if what he’s saying comes to pass it will lead to some kind of feudal capitalism of the sort that may in fact exist right now in India and China, where the vast majority of people live in poverty. But let’s be clear: in America, for some millions of people, creative destruction turns the invisible hand into a slap in the face. Those people their lives disrupted and never get back to where they were. It isn’t about class struggle. Where there is comparative advantage, there exists the possibility of comparative disadvantage.

  3. Comparative advantage and liberal economies mean that there will be localized dislocation as comparative advantage shifts and the process of creative destruction occurs. Not everyone benefits individually, and you are correct to point out that Detroit is suffering significantly. People will lose jobs and companies will fail. This is not a bad thing and is how a free economy cleanses itself of its excesses. In fact, one sign of a growing economy is increasing bankruptcies, interestingly enough. Society as a whole is better off, however, because the process of innovation and economic liberty results in better and cheaper goods and services and new opportunities for the dislocated.

    As regards Detroit, two things. First, the only alternative is trade restrictions, so think Yugos and Trabants/Trabis, or at least Pintos, Mavericks and Trans Ams, instead of Prii (or whatever the plural or Prius is). Second, U.S. automobile manufacturing is robust and expanding in states with lower taxes and more liberal employment laws, including those that give individual employees the choice whether to join a union. Detroit is not one of these places. South Carolina, Alabama, and Tennessee are.

    Innovation and comparative advantage don’t lead to stagnation or decline. In fact, they lead to far greater social welfare.

  4. of course what you say is true about Detroit and non-union competitors. Even as a one-time michigander, I do not favor trade barriers.

    i’m not particularly concerned about the failure of industries, either, including my own. But, when do average real wages stop stagnating for the country as a whole? It’s been 30 years of stagnation and decline. When do literacy rates stop declining? Do you know that nearly 20 percent of our population is now illiterate? And btw, the right-to-work states that do great work on making cars have the worst schools in the nation. what happens to those people when india an dChina start exporting excellent cars for half the price of the ones they make?

    These are not small problems to be brushed aside with neoclassical bromides. Is it really a social good if only the highly educated reap all the monetary benefits of innovation? I mean, really, are cheaper LCD TVs, $6 pairs of jeans and Facebook the way we define social good? wake me when we get back to $50,000 median home prices. Better yet, private school tuition under $15K a year.

  5. Ah, different problems, and very significant and alarming ones. Innovation and economy aren’t the problem, they’re just the tide coming in and out.

    The real question is how to design an increasingly knowledge-based economy to provide increased living standards and real wages for the average worker.

    The more knotty question is this: In an increasingly knowledge-driven economy, how does the average worker acquire the skills to participate?

    Unquestionably, educational performance in many right-to-work states is low. It’s also low in California, which is less choice-oriented, so I doubt the correlation between employee choice and educational standards is that strong and regardless can imagine no causal connection between the two.

    We come back, again, to individual accountability and the role of government. If one drops out of school or otherwise declines training, will or should the government support that person? What is compassionate, what is efficient, and what is fair? Age-old questions.

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