Job creation: What Andy Grove giveth, Deng Xiaoping taketh away

Excellent article (“How to Make an American Job Before It’s Too Late”) on job creation by ex-Intel CEO Andy Grove on Bloomberg. He highlights how the US tech industry has been cannibalising itself, potentially cutting America off from future streams of innovation by the pursuit of higher profit margins now. While Silicon Valley remains a hub of innovation, the jobs that spring from that innovation increasingly go to Asia and not to the USA.

The story comes to mind of an engineer who was to be executed by guillotine. The guillotine was stuck, and custom required that if the blade didn’t drop, the condemned man was set free. Before this could happen, the engineer pointed with excitement to a rusty pulley, and told the executioner to apply some oil there. Off went his head.

He argues that it’s not enough to be the engine of innovation while outsourcing the bulk of the jobs (Apple employs 10 contract-workers outside of the US for every US employee), it’s vital that at least part of the scaling occur in the host country.

Consider this passage by Princeton University economist Alan S. Blinder: “The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became ‘just a commodity,’ their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success.”

I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today’s “commodity” manufacturing can lock you out of tomorrow’s emerging industry.

Our fundamental economic beliefs, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best economic system — the freer, the better. Our generation has seen the decisive victory of free-market principles over planned economies. So we stick with this belief, largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.

Such evidence stares at us from the performance of several Asian countries in the past few decades. These countries seem to understand that job creation must be the No. 1 objective of state economic policy. The government plays a strategic role in setting the priorities and arraying the forces and organization necessary to achieve this goal.

The rapid development of the Asian economies provides numerous illustrations. In a thorough study of the industrial development of East Asia, Robert Wade of the London School of Economics found that these economies turned in precedent- shattering economic performances over the 1970s and 1980s in large part because of the effective involvement of the government in targeting the growth of manufacturing industries.

Consider the “Golden Projects,” a series of digital initiatives driven by the Chinese government in the late 1980s and 1990s. Beijing was convinced of the importance of electronic networks — used for transactions, communications and coordination — in enabling job creation, particularly in the less developed parts of the country. Consequently, the Golden Projects enjoyed priority funding. In time, they contributed to the rapid development of China’s information infrastructure and the country’s economic growth.