Tuesday, February 2, 2010

New Yorker on China and Innovation

My brother recently sent me an email responding to this article in the New Yorker. Here are a couple of his points.

"...government infusion of cash doesn't necessarily equate to technological breakthroughs or economical success in industry. In fact, when the government gets involved, ...money follows "success," and success can only be measured by preconceived norms. A company may be successful at coming up with a better version of a preexisting technology, because norms have been standardized with which to compare progress. But new ideas and innovations can have a harder time succeeding in an environment where business is competing for government dollars when the outcome is unclear or the technology is previously unknown. "Add as many mail coaches as you please, you will never get a railroad" is a great metaphor for the risk-averse Chinese philosophy pointed out in the article."

"Through taxation (and therefore, at some level, economic deprivation) and questionable living conditions (and therefore, at some level, quality of life deprivation), the Chinese citizens bear the brunt of the cash infused in the tech sector, and the gains made thereby. This is a radically different approach when compared to venture capitalism: in the latter, the contributors have the choice to participate.

"And that is basically what to me is at the heart of this article: the assumption that redistribution of wealth (in this case, to advance technologies) is for the greater good, when compared with the freedom to choose to participate, or to refrain from participation, according to the dictates of one's own conscience, of free market capitalism. I argue that the majority of technologies, advances, one could say "creature comforts" (I despise the term) that we enjoy today are the result of the latter."

I want to add that:

1) Government investment displaces private investment. This is for two reasons, the first being that private investors don't like to compete with institutional investors (this is the 'picking winners' problem - I don't want to invest in a company whose competitor is being financed and protected by the government), and the second being that the government dollars had to come from somewhere - specifically they came out of what would have been private spending and investment.

2) Though the author pretends to address the 'picking winners' problem, he actually doesn't. No matter how you slice it, government bureaucrats divvying out dollars is significantly different from the marketplace divvying out dollars. For one thing, the government is more likely to keep throwing good money after bad when an investment has failed to pay off (because the government doesn't risk insolvency by doing so, and because it's difficult to change a policy once it's been accepted and implemented). The market is quick to reallocate investment when it's clear that a risk has gone bad. Another difference is that the market will naturally fund MANY competing ventures, and the best ones will win. The government tends to choose a handful of firms to back, and then tries to ensure that the investment will pay off by using regulation to make sure THOSE firms win. So the survival of the fittest dynamic is lost. Finally, the market crowd sources problems by aggregating the intelligence gathering of MANY individuals, while the government must rely on relatively few experts to try to make decisions. 

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