There is a certain “type of guy” in the West who looks at China and thinks “why can’t we build trains, buildings, and infrastructure like that? It must be a governance problem… If I write a good enough blog post, it will solve it…” (ironic given that this is literally me and I won’t stop).
I suspect it is a lot more structural than that. I’ve been focusing a lot of my reading on China lately and just finished Apple in China which made this quite clear: China is developing on a base of physical capital where the West is developing on a base of intellectual capital. Many of our challenges are downstream of this.
Nobody in the West can ever understand how China attracts so many factories. It’s literally — you’re given land. They’ll build the infrastructure for you. If you expect the buildings, they’ll build them for you. They’ll help you with your interprovince migration. If there’s not enough labor in the zone they want you to go on, they’ll get you the people and they’ll bear that cost.
Relying on intellectual capital to expand and invest in physical infrastructure is a lot harder than physical capital. With physical capital, you know the value of the machines. You can predict what sort of output you’re going to get. You can do a calculation of what “improving” the land will do.
Intellectual capital is a lot tougher to value, predict, or calculate the benefit for. How much is a nicer office actually worth? How much value does being in-person provide compared to being remote? Venture capital and equity markets play a larger role in the West’s economy, but are also representative of how speculative intellectual capital is.
Developing on intellectual capital is also a lot more susceptible to intellectual blockers. Without a clear calculation of the benefits some intellectual capital development provides, zoning, well-being, and environmental concerns are much more powerful blockers.
Although I haven’t read Breakneck by Dan Wang yet, the idea of the US being run by lawyers and China being run by engineers fits in here too. Lawyers are powerful because of the amount and share of intellectual capital in the economy. You need a legal system, contracts, and institutions to do intellectual capital development. Physical capital can grow faster under looser governance, since the assets are concrete and visible.
China is also developing much more intellectual capital. A key part of Apple in China was relaying how large an investment in training and manufacturing processes able was making and the impact this had on the businesses they worked with:
Gou rotated his works on Apple projects to maximize learning. They used their new skills in areas that were more lucrative. Apple would then be forced to teach a new cohort of people.
And China as a whole:
In this game, one American company—Tesla in cars and Apple in phones—gets to win, they don’t care if all their US competitors lose. It’s actually better for them. But on the other side, all Chinese companies win.
The takeaways here are: