Economics & Finance

Economic Development: From the Roof, or From the Foundations?

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An interesting thread by Kamil Galeev:

Why the USSR failed? There are two ways for a poor, underdeveloped country to industrialise: Soviet vs Chinese way. Soviet way is to build the edifice of industrial economy from the foundations. Chinese way is to build it from the roof. 1st way sounds good, 2nd actually works.

To proceed further, I need to introduce a new concept. Let’s divide the manufacturing industry into two unequal sectors, Front End vs Back End: Front End – they make whatever you see on the supermarket shelf Back End – they make whatever that stands behind, that you don’t see
Front End industries are making consumer goods. That is, whatever you buy, as an individual. Toys, clothes, furniture, appliances all falls under this category. The list of top selling amazon products gives a not bad idea what the front end sector is, and how it looks like.
Still, the production of ready consumer goods comprises only the final, ultimate element of manufacturing chain. The rear part of the chain remains hidden from our sight. We call it the Back End Back end products are not recognisable. You never bought an SMX 700 radial forge.

Read the whole thing.

I’m reminded of something Peter Drucker wrote in 1969:

In any aid program, the economist, especially the development economist employed by government, tends to impose his own values on the choice of priorities and projects. Understandably he likes things that look big, impressive, and “advanced”: a petrochemical plant, for instance. He likes the things he knows the poor “ought” to have. He has nothing but contempt for the “frivolous,” e.g., small luxuries. In this respect there is amazingly little difference between the Russian planners and the economists in the governments of the most “capitalist” nation.

The factory girl or the salesgirl in Lima or Bombay (or the Harlem ghetto) wants a lipstick. She lives in a horrible slum and knows perfectly well that she cannot, in her lifetime, afford the kind of house she would like to live in—the kind of house her counterpart in the rich countries (or the white suburbs) can afford. She knows perfectly well that neither she nor her brothers can get the kind of education they would like to have. She probably knows perfectly well that—if lucky—she will marry some boy as poor as herself and as little educated who, within a few years, \vill start beating her out of sheer despair. But at least she can, for a few short years, try to look like the kind of human being she wants to be, respects, and knows she ought to be. There is no purchase that gives her as much true value for a few cents as cheap cosmetics.

A cosmetics plant gives more employment per dollar of investment than a petrochemical plant. It trains more people capable of developing and running a modem economy. It generates managers, technicians, and salesmen. Yet the economist despises it. And the reliance on aid makes it possible for his moralism to prevail over economics and for his desire for control to prevent development.

(The Age of Discontinuity)

Of course Drucker understood the importance of the petrochemical plant; his argument is that things work better when the petrochemical plants are called forth by the cosmetics factories and other consumer-facing businesses, rather than planned from the top.

I don’t think the above points just apply to poor & undeveloped nations.  In the US, the development of the computer and semiconductor industries benefited greatly from the sales volumes and technical challenges created by the computer game field…which is not the kind of thing that a central planner would be likely to earmark as a critical industry for the future.

In a market economy, ‘industrial policy’ intended to spur vital industries via subsidies and tax incentives will often seem to make sense–the US certainly does need it own ability to produce high-end chips, for example–but carries the danger of starving other industries of investment dollars and talent. And some of those industries may turn out to have been just as critical, or more critical, than the ones focused on by the industrial policymakers.

Trade, Tariffs, and Prices

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Several items:

1–At X, there’s some knowledgeable commentary on the relationship between tariffs and retail prices, from Craig Fuller @FreightAlley: “When products are imported into the US, the importer is charged a tariff based on the declared value of those imports, not the marked-up retail price consumers will eventually pay…The markup might be only 5% for big-ticket items like cars, while it could be as high as 500% for luxury goods. Most retail goods have markups of over 100% over their declared value.”  He discusses the alternatives available to importers and suppliers,  of which ‘raise retail prices’ is only one.  Link.

2–The WSJ, a while back, had several letters on tariffs in response to an article on that subject. One of them said:

Phil Gramm and Donald J. Boudreaux don’t mention the basic evil of tariffs: that they negate comparative advantage. If Product A can be produced cheaply or efficiently in Location 1 and Product B in Location 2, each location should concentrate on its speciality and trade to the benefit of both.

Imagine Massachusetts enacting a tariff on oranges to protect an industry of heated orange groves and Florida a tariff to support air-conditioned cranberry bogs. State politicians could trumpet creating a new industry, but OJ would be $25 a glass in Boston and cranberry sauce would be $10 a scoop in Miami. Tariffs amount to a “beggar thyself” policy. The Constitution’s framers recognized this and crafted the Commerce Clause to forbid restriction of trade by states. The same principle applies to trade between nations.

Trade based on relative efficiency of production, as for the orange/cranberry example, is a classic example of the advantages of trade.  But a high proportion of trade today is not of this nature: it is simply labor arbitrage, based on differentials in wages.  The primary reason why products made in China have been so much lower cost than those made in the US is because Chinese people would work for lower wages than US people. There was nothing inherent in Chinese geography or climate, or Chinese skill sets, that made assembly of iPhone more efficient in China than in Iowa.

3–In my Labor Day post for 2021, I said:

In a world with global and highly-efficient transportation and communications…and billions of people who are accustomed to low wages…is it possible for a country such as the United States to maintain its accustomed high standards of living for the large majority of its people?…and, if so, what are the key policy elements required to do this?

This question should be fundamental to discussions of trade policy, along with national defense and resilience considerations.

4–Bill Waddell, a very experienced manufacturing practitioner and consultant, who used to comment here sometimes, has a new book out:  Reclaiming American Manufacturing: Take Back the Middle Class From Globalism. A quick and worthwhile read, available on Amazon Unlimited.  Also, this post at LinkedIn.

5–Although offshoring is usually discussed in terms of its impact on manufacturing, there is also plenty of offshoring going on in service: Telemigration.

Your thoughts?

Taxes and the Total State

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Biden has proposed a rather draconian tax initiative: you can read some of the details and an analysis here.   It will be justified, of course, by claims about “asking the rich to pay their fair share”, and “equity”…and I’ve already seen arguments that no one should be concerned about this unless they are very high income or soon expect to be, and that there aren’t many people in that category.

Some responses are obvious: Taxes originally targeted at high income levels have a way of migrating downward through the income levels–the income tax itself is an example.   The capital gains rates are in reality much higher than they look, because of the effect of inflation on asset prices.   Corporate income tax increases can affect everybody, regardless of income levels, in their roles as workers, consumers, and/or investors. And there is the matter of fairness–true fairness, not faux fairness:   it is not truly fair, democratic, or even civilized to assume that because there is only a small number of people in a given group, the rest of the society is entitled to do anything to them that they feel like doing.

But there is also, I think, an even more important point to be made.   A tax structure like this Biden plan–with its likely extensions and increases over time–acts to prevent the establishment and sustainment of individuals and families wealthy enough to act as a countervailing force to the government–media–academic complex.   I think the kind of people who inhabit the Biden administration, and who dominate today’s Democratic Party, do not like to see power & influence centers outside of this complex.   They really, really don’t like it, for example, that someone like Elon Musk can bypass their censorship efforts by buying and running a social media company.

Woodrow Wilson disliked the whole idea of separation of powers within government, which seemed to him to violate some kind of organic principle.   Totalitarians of all kinds have striven to eliminate alternative centers of loyalty and influence within their overall societies.   As Benito Mussolini put it:   “Everything in the State, nothing outside the State, nothing against the State.”

Whatever your current and expected income and wealth levels–if you value the continuation of America as a free society, then you have a dog in this fight.

Worthwhile Reading

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Academia Versus Civilization, at Quillette

A talk by  Jensen Huang, founder & CEO of NVDIA, at Stanford.   Very, very good.   Related post and discussion.

Ruxandra Teslo  notes that student protestors in the 1960s wanted less bureaucracy and more freedom…today, most of them seem to want less freedom and more bureaucracy.

It’s not the phones, says Marc Andreessen, referring to the psychological dysfunction that seems to afflict so many of today’s young people.   He’s responding to a post by  Jash Dholani, who says “the young aren’t driving, f******, and drinking because high energy activity is fundamentally incompatible with modern ethics. If you’re always told to be harmless (but also guilty!) then your innate will to power withers. You vegetate. Man, the greatest animal, turned to plant.”

Elon Musk  says:

Many movies exist about a lone inventor in a garage having a eureka moment, but almost none about manufacturing, so it’s underappreciated by the public. Compared to the insane pain of reaching high-volume, positive-margin production, prototypes are a piece of cake.

(Not many such movies,   but one that comes to mind is  Valley of Decision, a 1945 film centered around family-owned steel mill in Pittsburgh.   I reviewed the movie, and the book on which it is based,  here.   Also, there’s Executive Suite, a film from 1954 which involves executive succession at a furniture manufacturer…mentioned in a batch of reviews that I posted  here)

In a comment at an earlier version of this post at Ricochet, Gary McVey noted that

“the eastern Europeans (in other words, the Communists, if not always the Soviets) were pretty good about trying to publicize the drama of start-up, the challenges of production. When we mock those days for films “about a couple falling in love at the tractor factory”, we are mocking something that, if you actually see the films, is in fact objectively a good thing. Some of them, by the Poles, Hungarians, and Czechs, were good. The best of them had little or nothing to do with Marxist theories, just the everyday achievements of construction, engineering, and metalwork that sated Western audiences found dull as dishwater.

A tractor factory’s a good thing to have, if you care to eat. There was nothing contemptible about making movies about it.”

Ashwin Varma  argues that the usual narrative about WWII industrial production is defective, in that it does not give sufficient credit to the role of government.

The Department of Education embarked on a project to modernize and simplify the process for applying for student aid.    It is not going well.

The Biden administration  is supporting the reopening of a nuclear plant in Michigan.   As Stephen Green says, it’s the right thing to do, but the Democrats doing it reeks of desperation.

gCaptain  is a good source on the Baltimore bridge disaster and on all matters nautical.

In my post Visit to a Noteworthy Robot, I described a trip to a store equipped with Amazon’s no-check-out system.   Now, Amazon has decided to drop this system in most of the stores in which it is being used…problem is that too much human intervention (1000 people in India reviewing images that the AI can’t reliably interpret) to be cost-effective.

Cultural Theory of Mind and the consequences of not having it, especially the foreign-policy consequences.

Interesting chart: the ratio of commodity prices to the S&P 500.

An argument that the theft of national sovereignty at the Euro level was orchestrated entirely by legal elites – not political, much less economic, ones.

What kind of people tend to block (what they think are) sources of misinformation?

GE’s energy business has now been spun off as a separate corporation, GE Vernova.   They seem to be pretty well-positioned in nuclear; it will be interesting to see how much emphasis they put on this sector vis-a-vis their gas and wind businesses.

Speaking of nuclear, here’s a chart on the temperature ranges required for various industrial processes versus the temperature ranges available from various types of reactors.

What Things Cost, Then and Now

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When reading about earlier times, the costs of various items are often mentioned, as are   wages for different kinds of work. To get any sense of meaning from these   numbers, they need to be compared somehow with equivalent costs in our present currency. But the estimation of inflation is far from an exact science.

Here’s a site that looks at historical vs current costs from multiple angles:   Measuring Worth.   I haven’t studied it in any detail yet, but it looks interesting.

See also this:   Prices and Wages by Decade, 1600s-2000s

Also What Things Cost in America, 1776-2010