Chapter 9. Trends and Progress – Leading Positive Change

Cultures of China and the USA: Implications for Global Leadership

For this first edition of the Guide, let’s consider just one interesting and relevant question that may be particularly dependent on sociocultural foresight.

China is now the second largest national economy after the USA. They’ve become manufacturers for the world in a miraculously short period of time. How much further may China go in the next few decades? Could the USA lose its global economic leadership to China, and even some of its sociopolitical and defense leadership, in the next one to three generations (twenty to sixty years)?

China’s rise is due to a number of factors. One of the most important factors, early in its modern rise, has been the strategies that the state applied. Complexity and development scholar Yuen-Yuen Ang clarifies these in her excellent book, How China Escaped the Poverty Trap (2016). Beginning in the late 1970s, China employed a smart liberalization strategy Ang calls directed improvisation, a set of policies that allowed immediate bottom up innovation by villages and townships, even years before new institutions, property rights and markets could be established, as well as clear guidance on what kind of local government activities were not allowed, combined with objectives, but no details on how to reach them, that would encourage local political and economic innovation. This is a truly evo devo approach (Chapter 11) to development policy, and there are lessons here for other big developing nations like India, which at present are far less bottom-up empowering. Directed improvisation is a political example of the 95/5 Rule (95% of important change should be bottom-up), and explains how the right rulesets were able to so quickly unleash China’s unique collectivism and industriousness as a culture.

Evo devo thinking argues that the wealthier China gets, the more its authoritarian (top-down) political system will hinder its further rise, and the more technology, entrepreneurship, education and cultural factors become key to further bottom-up innovation. A few decades hence, the ways in which China employs intelligent technology will also be a key driver of their rise, but for now at least, China’s entrepreneurship, education, and culture are arguably the major gating factors for the kinds of continued progress we can expect in the next generation.

Tech and entrepreneurship can change the fastest, as witnessed by the economic powerhouses of Shenzen and other Chinese cities, now unleashing a new generation of inventive companies, as is excellently described in The next wave: China’s audacious and inventive new generation of entrepreneurs, The Economist, 9.23.2017. Technologically, China has new infrastructure everywhere, and is now deeply web and mobile-based. They did $8.6T in mobile payments last year, a 4X increase in just the last year. Their new cashless economy is one of the reasons they are becoming FinTech leaders. The US had just $112B in mobile payments by comparison. Education for the new urban youth is now essentially delivered by the web, in continuous and just-in time fashion, in China and elsewhere. The new entrepreneurs route around the limits of their educational systems, and think globally. Getting money for their ventures is no longer a problem. They have 89 unicorns (startups valued at $1B or more) approaching the combined value of America’s unicorns. China now has 609 billionaires, vs 552 in America. So tech, entrepreneurship, money, and education are less of a hindrance than ever before. That leaves politics and culture. 

Of all of these, culture changes the slowest, and so we’ll focus on it in this article. Cultural factors will also play a big role in the USA’s leadership going forward, and how it responds to China’s continued rise. So let’s do a small exercise in cultural foresight, and see what seems reasonable to say.

To better understand the cultures of China and the USA, let’s turn to Geert Hofstede’s six factor model of culture. This exercise should help us understand a lot more about how each nation views themselves, others, and their future, as well as some of the ways other nations are likely to view them as leaders on the world stage.

Here are the similarities and differences that his team has found:

Six Factor Model of Culture (Hofstede et al. 2010)

The similarly high scores on Masculinity in this model (USA 62, China 66) tells us that both nations are driven to succeed in an assertive and materialist manner. That goes a little way (but just a little, as many other factors are involved) toward understanding their economic dominance.

Now consider the five differences between these two cultures. Four are particularly different, Class-Accepting (“Power Distance”), Individualist (“Individualism”) Long-Term Oriented (“Pragmatism”), Reward-Seeking (“Indulgence”) and the fifth is just a bit different, Uncertainty Tolerant (“Uncertainty Avoidance”) but in a way you might not expect.

1. Class-Accepting (what Hofstede calls, in a less intuitive term, “Power Distance”). China scores an impressive 80 (out of 100) on this factor. This tells us that Chinese citizens are comfortable living with a much greater degree of persistent, structural, class-based economic and social inequality than the USA. We can understand this, and their deep Collectivism (the next factor below) only by recognizing their history of being ruled not just by a handful of elites as in the US, but by a large elite class, for several millennia. China’s current ruling class today is called the Communist Party, but they are but a blip on China’s history. The ruling class has had many different names in dynasties past, and China is much more fundamentally a classist culture than it is communist. That can change of course, but it will take generations to do so. Culture moves quite slowly relative to other societal factors, and we can depend on it to tell us a lot about the next few generations, which is the future we are contemplating here.

Americans, by contrast, score only 40 on this factor, half of the Chinese value. Americans have had much greater social mobility and fluidity in their history, with new faces regularly becoming economic and political elites, and ours is a much shorter history as well. Thus Americans expect social mobility, or at least the promise of it (the American Dream), and we are much less happy with persistent, classist social differences. It is true that we have seen plutocracy grow rapidly in the USA over the last three generations, but we beat it back in the 1890s to 1940’s in our last major democratic swing, and we seem set to do so again in the next few generations, using new tools like personal AIs, as I’ve argued in Chapter 7 of the Guide. Because we are so Individualist (the next factor below) we’d rather just talk about the plutocracy problem at present, and it is easy for politicians to sell us false solutions. Doing any kind of mass social action, strikes, or social change to address inequality, as is commonly seen in France or China, is beyond our thinking, for now. Mass collective action has always been a reluctant activity in our culture.

2. Individualist. The USA scores an extreme 91 on this factor. By history and temperament, being an immigrant nation of people willing to cross an ocean to find a better life, we’ve always been very self-reliant. America’s indigenous peoples are also individualist, and 12 kya, were immigrants from Asia. Read 500 Nations (1994) to appreciate how many different ways of living North American indians chose. But for European immigrants to America, even more than the Canadian territories, this individualism became particularly pronounced. The drive to self-determination and individual freedom that led to the American Revolution, and the social and economic advances that occurred early in our republic are both central to that unique cultural promise we call the American Dream. Being so individualist, we want a certain degree of social and economic inequality, and we know all the ways that inequality can foster innovation. Unfortunately, we’ve been successful at this self-determination for so long that we think the global rules don’t apply to us. Charles Murray’s American Exceptionalism: An Experiment in History (2013) is a great introduction to the ways we Americans consider ourselves first among nations, and the historical and geographic reasons why we have almost always sought to chart our own way first, and to collaborate second. A measure of 40 on Class Acceptance, and 91 on Individuality,  tells us that Americans care about social mobility but will also be slow to react to growing social inequalities that can threaten it. Surveys show that when Americans are confronted with data on the true degree of current economic, political, and social inequality, and how we’ve returned to inequalities like the late 1800s again, we become indignant, pessimistic, depressed, or angry. Only a minority of folks shrug their shoulders or try to come up with some rationalization for the plutocracy. We’re problem solvers, and we don’t like to see major social trends going in the wrong direction. But so far, and perhaps not until we reach the world of personal political sims, will we come to agree on what systemic changes we want to address the problem.

China, for its part, is an incredibly Collectivist country, scoring just 20 out of 100 on Individualism, or 80 out of 100 on Collectivism. Note the other nations that share this level of collectivism, and even more, in Gert Jan Hofstede’s (son of Geert Hofstede’s) Collectivism vs Individualism World Map, at right. The Chinese people like to do big things together all the time, and that collectivism, along with other aspects of China’s culture, is why they’ve advanced so far, so fast relative to the other large underdeveloped country, India, once China allowed capitalism, first with their farmers in 1978, and then broadly a decade later. Yet as the Chinese citizens get richer, they also get more and more individualist, and the desire for social reforms to their political system grows every year.

Political scientist David Shambaugh’s China’s Future? (2016) is a great overview of options ahead for China, including Neo-Totalitarianism (fundamentalist backlash and regression), Hard Authoritarianism (the current reality), Soft-Authoritarianism (moderate social and political reforms), and Semi-Democracy (significant social and political liberalization and regular transitions of power to a new, more representative governing group). Moving to Soft-Authoritarianism seems by far the most likely path over the next generation or two, if economic advances continue, or one of the first two options if they don’t. Current Chinese culture makes Semi-Democracy extremely improbable in this timeframe.

3. Long-Term Oriented (what Hofstede calls “Pragmatism”). China is an amazingly long-term oriented country, scoring 87 on this factor. Chinese governments religiously make five year plans, and they are always thinking and investing for the long term. This includes educating their children for the futures they expect. That’s why they already outspend the USA on nanotechnology research and outpublish us on deep learning research, even though they have 1/3 of our federal budgets. Their governments, as unrepresentative as they are, are still run by engineers. They listen to the data, and turn the entire ship in incredibly impressive ways when the data show they need to change. Consider climate change. China made a goal, in 2015, to peak their CO2 emissions by 2030. They are now the largest CO2 emitter. But they are so focused on replacing coal with less warming energy sources, and are moving so aggressively to get out of coal and into nuclear power, wind, solar, and natural gas, that they are now on track hitting maximum CO2 emissions in 2025, and going negative thereafter, five years earlier than their plan. They’ve cut coal use for three years in a row as of this writing in 2017. The USA is still arguably doing more to reduce absolute CO2 emissions than China, but that can’t last. Their rate of emissions reduction is dramatically faster than ours. When they make a commitment, they go big. Expect them to clean up their filthy air and water next, and eventually, their soil too. They’ll round the Environmental Kuznets Curve faster than any large nation ever has or ever will, when we are considering human-run nations prior to the singularity.

The USA, by contrast, is very short-term, present-, and tradition-oriented, scoring only 26 on this factor. This particular cultural trait may be most largely a consequence of our past record of fabulous success, and our privileged status as the global economic and security leader. Americans have seen so much progress, and have been wealthy and dominant for so long, we no longer think hard or prepare much for the future. When North America was in our Puritan era, in the 1600s to 1700s, and success was still far from assured, our culture was much more Long-Term Oriented. I’d be willing to bet it was as roughly as long-term oriented as China is today. Cultures change, but they take generations to do so, as our histories, institutions, rulesets, resources, media, and opportunities change. In the meantime, we must recognize, and work with, who and what we are today.

4. Reward-Seeking (“Indulgence”). As with Class-Intolerance (the innovation-centric inverse of Class-Acceptance), the USA takes a strong lead on this factor, scoring 68 out of 100. America is an instant-gratification society, always entertainment- and reward-seeking. This cultural trait has some upsides. For one, we are and will remain better marketers and salespeople, better manufacturers of desire and demand, than any less reward-seeking nation. We’ll continue to innovate more products and services that satisfy more people, because satisfying desires, real or manufactured, via marketing, sales, and psychology, is such a deep cultural trait for us, as we’ve been blessed with freedom, plenty, and aspirations for advancement for so long. In another advantage of being reward-seeking, our digital entertainment is now and will remain one of the USA’s major exports. Our stories will continue to be more popular, because as a culture we are always searching for the next novelty, the next dopamine hit, however insubstantial and evanescent it might be.

There are also plenty of downsides of being such reward-seekers. We aren’t willing to delay our gratification nearly enough, to do the hard work, when hard work is needed. That limits the kind of innovation we do, because as Thomas Edison said, success is 1% inspiration and 99% perspiration. Fortunately for America, our culture of individualism, of being risk-seekers and rulebreakers first, and permission-seekers as a distant second, and our naive optimism and American Dream are all very proinnovative. So we are and will remain the most innovative society in the world, yet as that honest curmudgeon Edison would surely tell us today, most of it is fluffy, low-value instant-reward innovation. We innovate style over substance, but that style is very effectively marketed to the world nonetheless. In the meantime, the innovative solutions that require hard R&D work and investment remain unfunded, waiting patiently for the future. Increasingly, those are taken by China, and this is where America loses competitive ground the fastest.

China scored 24 on this factor, being very good at delay of gratification, and denying unnecessary pleasures when there’s bootstrapping work to be done. This isn’t true for China’s rich, who gamble and carouse as much or more than their American compatriots, but for the general working public in China.  I’m sure most American children would score much lower on the Marshmallow Test than most Chinese children, especially once both nation’s kids get out of elementary school into high school, where delay of gratification really starts to matter to one’s achievement. As China develops, they will clearly become more reward-seeking than they are today. But they’ve got a long way to go to get to our level.

5. Uncertainty Tolerant (or in Hofstede’s inverse term, which I find less intuitive, “Uncertainty Avoidant”). Though this factor is less different between the two nations than the four we’ve just discussed, the difference runs in a direction many Americans wouldn’t expect. China is significantly more tolerant of economic and societal uncertainty, at 70 out of 100 (in the inverse metric we are using) than the USA at 54 out of 100. One might think American entrepreneurship and innovation would make us more Uncertainty Tolerating than China, but that is not the case.

This factor tells us a lot about more about cultural resilience to chaos than it tells us about innovation. Together with the other factors, it also tells us about the nature of Chinese vs. American entrepreneurship. It tells us (along with the other cultural factors and historical factors, which we won’t discuss at present) why China was so resilient to abandoning Communist economics, while Russia was so poor at escaping them, and had to first fall apart, and then was culturally-fated to quickly move next to economic plutocracy and authoritarianism. Russian culture is much more fatalist and less resilient to chaos, and they require stability, even if it’s a kind of stability they don’t actually like. Chinese are even more able to live with chaos than India or Israel, which is rather impressive.

This factor also tells us why China is so adept at entrepreneurship and manufacturing, which requires entrepreneurs with an ability to tolerate substantial technical, social, and economic chaos, including a lot of IP violation (and later rights negotiation). The easiest is copying entrepreneurship, the kind with objective engineering paths ahead for how to succeed. Historically it has been harder for China to master innovation entrepreneurship (making substantially new products and services) as that requires an individualist, imaginative, class-intolerant, reward seeking culture, at least in urban areas and among the entrepreneurs. While last generation of Chinese entrepreneurs had a harder time with innovation, the new generation has managed to change their culture, even as greater Chinese culture has been slower to change. The best of China’s new entrepreneurs are global in ambition, open in collaboration, and innovation and customer centric. In just one generation, the greatly growing wealth and technological sophistication in of urban centers, and the massive opportunity in China’s largely unconsolidated markets, and China’s uncertainty tolerance values have helped their urban culture to become innovation leaders in just one generation.

Some say that we’ll soon see an end to China’s growth. The Financial Times says in a silly and breathless video, The End of the Chinese Miracle, 3.9.2016, that the end of mass migration to the cities is going to end China’s rise. That is a classic monotrend extrapolation error, as we describe in Chapter 12 (Visions and Challenges). The real work, the real value production in society, is increasingly done by our machines. As we’ve said elsewhere in the Guide, since the information age began it is technical productivity that matters more every year to our GDP. People productivity matters ever less, every year forward as the machines get smarter. We’re finally beginning to acknowledge that now. Far more important to the future of productivity are things like accelerating digitization, connectivity, artificial intelligence, and automation, which all continue to generate massive new wealth and throw people out of work.

Whether throwing people out of work is a problem for any country is a separate issue, and depends on its politics, economics, and culture. Consider that China’s government and culture are better set to deal with the disruptions of continued mass automation than the US, both due to its authoritarianism and to China’s collectivist culture. Their politics and culture also make them better equipped to do periodic wealth redistributions to the masses than many other countries, including the US.

The hidden secret in job disruption is that as long as we are given make-work jobs (wealth redistribution) subsidized directly or indirectly by the state, jobs that keep us feeling busy, we’ll be happy. Humans actually need to produce less and less, the richer and smarter our societies and their machines get. We can all take a well-deserved and long overdue break from generations of toil, and we all need progressively less time in the office in order to feel satisfied and productive.

Wages Will Never Go Away

There’s a myth circulating in many utopian futurist communities, that we are headed to a Star Trek like future where wages and paid work will disappear. Like the Israeli Kibbutzim, socialism, or communism, that’s obviously incompatible with human nature. Most people want to do at least some amount of regular work, and they want to be evaluated, by their peers, in their ability to produce value. That evaluation involves income, and wages, however you want to account for them.

Those futurists who say that for thousands of years of recorded history, humans did not work for wages, and had lots of idle time, are trying to compare apples to oranges. Those eras were Feudal Pyramids, where the masses were denied power and property and information, and innovation ran so slowly that the elites could capture and control it. For the last 250 years, our leading human societies have been Democratic Diamonds, dependent on a middle class wealthy and educated enough to vote and do mass consumption. In the coming world of sims, those humans will be guided to link arms and become groupnets wherever it benefits them. Groupnets are superhuman collections of people and machines doing amazing things no individual could ever accomplish. Groups have always beat individuals. Evolutionary psychologists tell us our ingroup and outgroup ethics formed because it is so easy to become “superhuman” by linking arms and working together. In the coming world, groups of people and their sims will be even more superhuman, and superintelligent.

So the phrase “wage slavery”, sometimes floated by Basic Income idealists, is an oxymoron. Most of us will continue working, in temporary or permanent groups, increasingly intelligently assembled, to do things, for money. But the intensity of that work will surely also subside, the more luxuries and abundance the world provides.

In Jack Ma Predicts the Future, UniCommonKnowledge, 9.8.2017, Jack Ma, the foresighted CEO of Alibaba Group, offers an excellent observation about the future of work. He notes that his grandfather worked a farm 16 hours a day, 6 days a week, and felt very busy. We work 8 hours a day, five days a week, and we feel very busy. In the next thirty years, people will work (formally or flextime) 4-6 hours a day, four or five days a week, and feel very busy. We won’t see any silly no-work utopias, another monotrend extrapolation error. Humans need regular work to feel productive and satisfied. But the wealthier the world gets, the fewer hours of work, and the less formal forms of work most of us will need to do in order to feel productive. We’ll spend the rest of our time on entertainment, travel, helping others, and various forms of local activism and community engagement.

Finally, the smarter our personal AIs get, and the more transparent and intelligent our infrastructure becomes, the easier we can keep people out of counterproductive activities with their growing free time. Problems like addiction, crime, violent activism, and ethnic and religious strife will be increasingly managed by our intelligent systems. There are of course challenges with this, and authoritarian cultures will misuse these tools, but we’ll also have many examples of societies that use them in greatly empowering ways.

Consider that once our personal AIs arrive in a particularly developed form in the 2030’s, we’ll be increasingly dependent on their work, on their ability to keep us out of trouble when we aren’t working, and on their ever more refined attitudes toward work and everything else, not ours. Managing our sims well, to give us more of the Five Es (empowerment, equity, empathy, evidence-basedness, and entertainment) is surely the last job that biological humans will engage in, on the way to whatever postbiological future awaits us.

We’ve made a lot of sweeping generalizations in this cultural foresight exercise, and ignored many intragroup differences. Perhaps Prof. Hofstede’s team would also consider this analysis far too much a just-so story, not yet adequately supported by the data. But futurists are pattern seekers and meaning makers, and we should never shy away from making cultural judgments as inputs to strategy. The best we can do is make them transparent, and subject them to critique. I hope you find culture foresight work valuable for yourself and your clients. It’s hard to do, but an important part of our future.

The American Dream and Capitalist Social Democracy Are Global Dreams Too

Regardless of what some social scientists may tell you, the American Dream, and Western Liberal Democracy, are what the vast majority of the world wants. They will continue to be a developmental future we move toward. America’s culture, the norms, laws, and institutions we’ve built, and our history of success to date are aspired to, by and large, everywhere. Nations shouldn’t be foolish enough to copy all of our systems of course. There’s lots of evidence, as I’ve written elsewhere, that our constitution is quite old and undemocratic relative to newer countries, and insufficient to protect us from the downsides of periodic plutocracies. But these are relatively minor points.

The American Dream, which includes protected individual rights and freedoms, democratic representation, a government that provides collective public goods, private property, entrepreneurship and fair markets (capitalism), and the ability to advance economically and socially (or not) based on one’s own hard work, is still at the center of our aspirations. This dream also includes an embrace of socioeconomic change and deep optimism for the future. We may not do much collective long term planning or preparation, but we believe things will continue to turn out better for ourselves, if we roll up our sleeves and get to work.

The USA is the global leader in selling our dream of personal and social progress, and due to our own industriousness, geographic isolation and our particular history, we have become the most powerful and profitable capitalist social democracy by far. We are the safest global harbor for investments, and since the invention of the American System of Manufacturing in the 1810’s (it was actually imported from Britain, but caught fire first in America), we’ve been greatest innovators, though now we do more innovation in the service and information sectors than in manufacturing, as we’ll discuss next. We are also both pragmatic and collective enough to get together and demand change when things really do get bad.

The USA presently produces some 20-25% of Global World Product, depending on whose estimates you accept. While our percentage of GWP has fallen steadily, from 40% since 1960, it has done so slowly, at less than a percentage point per year, while the absolute value of our GDP continues to rise. China is projected to overtake US GDP circa 2026 in some accounts, and already has by some accounts. But GDP per capita in the USA is presently four to five times greater than in China, so it will be a few more generations before the average Chinese citizen feels as developed as we do.

Our GDP lead over other nations must continue to narrow, and with serious political mismanagement we could lose our current leadership faster. The Great Financial Crisis of 2008 was a recent major strain on our financial leadership. But it also seems obvious that barring major catastrophe, the USA economy is too far ahead in our historical, institutional and cultural orientation toward globalization and innovation processes, to be caught by China or any other nation prior to the singularity, if the singularity occurs some time around 2060 (with a range of 2040-2080), as I think is most reasonable to expect.

Frank Fukuyama was right in his prescient book on political foresight, The End of History (1992), when he argued that Western liberal democracy is the endpoint, the obvious developmental attractor for biological humanity’s sociocultural future (though he did not use this evo devo language). This book was a follow on to his prescient article, The End of History? (PDF) published in The National Interest in the Summer of 1989. The dramatic collapse of the Communist government in Poland that Summer, due to sustained mass political activism by the Solidarity trade union and workers movement, and the installation of a new Solidarity-led coalition government, signaled how weak and outmoded the old communist order had become. Fukuyama used this bellwether event, also called a precursor or leading indicator, along with other indicators of new weaknesses in the Soviet Union, to clearly see a much wider set of coming changes ahead. The book was a great example of Bellwether Foresight (see Glossary).

As political events transpired between 1989-1992, Fukuyama realized that Western liberal democracy was likely to to be the final form of human government before the AIs arrive, though he didn’t discuss AI at the time. He was right to make that clear to the world, even as it was a controversial call at the time, and even as he unjustifiably reversed himself on parts of this position when the academic critics piled on, indignant that any Western scholar would be so “elitist” in their views. But Fukuyama’s thesis wasn’t elitist, it was simply developmental. It became obvious after the Soviet Union itself collapsed in 1991, that a few nations would continue clinging to communist and extreme socialist ideals, but their autocratic leaders would increasingly die off, and the wealthier we all get, the more our our public goods would grow. Every developing nation is being pulled toward some version of a social capitalist democracy, with varying levels and kinds of social goods and safety nets, nation by nation.

Yet no one’s foresight is perfect, and even Fukuyama, author of such deep books on sociopolitical history as The End of HistoryThe Origins of Political Order (2012) and Political Order and Political Decay (2015) apparently feels threatened by, and has a mistaken future view of, both AI and biotechnology. In his uncharacteristically poor book on scientific and technological foresight, Our Posthuman Future: Consequences of the Biotechnology Revolution (2000), he called transhumanism “the world’s most dangerous idea”. Nothing could be further from the truth. Transhumanism is simply the idea that humanity will continue to use technology to become something incrementally more than our biological selves, which we’ve done since we first picked up rocks and clubs two million years ago. The Dunning-Kruger effect, a cognitive bias where we mistakenly assess our cognitive or foresight ability as greater than it is, can happen even to the most learned of us when we stray too far outside our areas of expertise, and do not get sufficient critique before we publish. That appears to be the case with this particular work, as his main arguments in this book are wrong on many levels.

Let’s consider a few of his mistaken assumptions in this regard, as this topic is so important to understanding our global future. First, he mistakenly assumes that biotechnology can and will advance rapidly enough to cause serious social disruptions in the decades ahead. Most of the scientific and technological futures he imagines in this book, like significant human genetic engineering, or human-machine cyborgs, simply can’t and won’t happen before the AIs arrive. Those engineering tasks are far too difficult, and the ethics of medical experimentation far too strict, for our biological minds to solve them in any reasonable time frame. Second, when thinking of AI, he doesn’t realize that information technology is far more important than biotechnology to our future, both near and far, and that AI will have to become a natural intelligence, an algorithmically similar, deeply biologically-inspired version of us, in order to surpass us. Third, he doesn’t see the natural morality and immunity that must always accompany and stabilize any natural (evolving, self-improving) machine intelligence, or how broadly bottom-up, with personal AIs, personal AR, and personal robotics, all this natural intelligence must be, and thus how democratic as well as plutocratic, the coming transition must be. For more on these topics, see Chapter 7 of the Guide.

Global Manufacturing and the Smile Curve – From Today to the Technological Singularity

To understand what global STEEPS leadership may look like in these final decades of weakly-intelligent machines, we need to introduce another concept, the Smile Curve. Stan Shih, founder of Taiwan’s Acer, a global IT leader, first discussed this phenomenon around 1992. Here is his observation, which he realized said quite a lot about the future of Taiwan’s industrial leadership strategy.

The Smile Curve – Value Added in Automated Production (Stan Shih, 1992)

It’s pretty obvious, when you see this curve, why Research & Development and Marketing & Sales (Sales also belongs on the graph at right) are higher value, while manufacturing (fabrication) is much lower value in the modern economy. Fabrication, as long as it is automated (we’re ignoring consumer-desired Artisan economies here, as a minor component of GWP) is broadly available, well defined (developmental) in process engineering terms, and easily movable from one contract manufacturing facility to another. The domains on either end of the smile curve are far less well-structured, and much more innovative (evolutionary) in modern mass-production economies.

As a good article on the Smile Curve noted (Smiles Aren’t Factory Made: Factories Won’t Bring Back the American Dream, Michael Schuman, BusinessWeek 18 Jun 2017) the cost of assembling an iPhone in China accounts for just 3.6% of its production cost. The remaining 96.4% was paid to parts suppliers and to Apple as its creator. Apple’s margins, as a sales and marketing leader, enjoys a net income that is 21% of its global revenues, which are very substantial. Assembly and fabrication, by contrast, are becoming as low-margin as groceries. As Tom Friedman described in The World is Flat (2005/7), manufacturing contracts are set up by global corporations so that they can be instantly moved to another supplier, who may be in another country, whose labor costs my go lower next year, whose quality goes higher, or in a few of the more noble cases, whose safety and worker protection standards go higher.

There is money to be made in manufacturing to be sure, but it always has lower margins than the other production functions. Once the scientists, engineers, and entrepreneurs learn how to do the next layer of automation, it quickly becomes common, commoditized, developmental knowledge, and low-margin again, as this kind of information has the least cost to replicate, is the hardest to defensively patent, and has by far the highest uniformity and predictability, once it is known. R&D and S&M, by contrast, as they are far less structured problems. They are much more evolutionary (diverse, contingent, unpredictable) always remain the higher value portions of the production cycle.

This curve tells us that reshoring efforts, to bring back manufacturing to the USA, using high automation, the way we’ve seen a few companies do, as with New Balance’s shoe manufacturing plant in Massachusetts, after decades of offshoring shoe production to China, are noble in aim but will always be limited and secondary ventures. In a better world, the US government would subsidize a little of this highly automated reshoring for every industry, so that our engineering students have local factories they can intern in. But we’d only offer a few such subsidies, for educational purposes, because manufacturing will always remain very low margin and easily globalized, and the lowest cost ecosystems for manufacturing will always remain in those places that have become the volume leaders. Global transportation gets ever more automated and low margin too, so the cost and time of shipping most goods is usually a small fraction of the cost of production. Even as AI and robotics scale in coming decades, reshoring isn’t going to bring back lots of jobs.

It’s much smarter for US engineers, when they come up with a better kind of automation or manufacturing process, to partner with one of the global manufacturers, who have the scale to implement it the best, and the desire to implement it ahead of their competition, and good money to pay for it, even though they have low margins. With the exception of high-customization and immediate needs products, trying to manufacture locally, even with robots, won’t be able to compete with partnering globally. In other words, local manufacturing is the least sustainable competitive advantages.

It will be curious to see what comes of China’s R&D spending and initiatives in Shenzen, which in 1980 was the first of China’s less regulated Special Economic Zones. Today Shenzen has become the most advanced manufacturing environment on Earth. It’s Nanshan district alone has 8,000 technology companies. In the next decade, China hopes to unite Shenzen, Hong Kong, Guangdong and Macau into one contiguous urban area with 60 million people. The Shenzen ecosystem could one day become the new Silicon Valley for the world, but they aren’t there yet. It will take a lot of continued economic, cultural, and political change before that happens. In the meantime, this and other leading cities in China are the best place to turn manufacturing prototypes into mass produced products, and they will remain so for the foreseeable future.

The smile curve, and the incredible rise of China’s manufacturing in the last three decades, tells us that President Trump’s fantasy of bringing manufacturing back to America as a way to improve our economic leadership is just a story that sells well to the many American victims of globalization in the last few decades. It isn’t what we need to actually increase economic value, or create better or more jobs. Factories are constantly eliminating jobs as automation advances, that’s how they work.

Since the twin forces of globalization and the information revolution really got underway in the 1980’s, the Smile Curve tells us that the real way to build jobs will include lowering the cost of access to education and capital needed to be an R&D leader or entrepreneur, to reduce startup overhead and lighten the regulatory frameworks on early stage ventures, and to greatly improve the quality and relevance of science, technology, design, entrepreneurship, and innovation education. At the same time, we need many more graduates who understand psychology, marketing, service science, data science, and related sciences and practices, graduates with more foresight education and practice in all four domains, and a deeper understanding of both universal values and cultural differences in human desires and behaviors, with expertise in using digital platforms, analytics and data to continually improve and further customize marketing, sales and all the other aspects of enterprise management.

Policy leaders must come to understand that the greatest economic value a nation or organization can create, all the way to the singularity, will typically be figuring out how to use R&D and strategic collaboration (a sales and marketing driven function) to automate and add machine intelligence to ever more aspects of product, service and information production. This automation and AI of course impact ever more jobs and economic sectors. That’s why a smartly implemented Basic Income (BI) is so necessary in developed economies going forward. The level of the BI’s annual payments—too much or too little will be counterinnovative—and the specific things that national BI policy induces people to do to get higher levels of guaranteed income—for example, to raise kids, care for elderly, go back to school, start a job, do validated community service, start a company, do research and development—are among the most important rulesets we can set prior to the singularity. After that, I expect it will be the AIs of the corporations, our governments, and our own personal AIs that will set the most important and empowering democratic rulesets, in moral and empathic interdependence with us biological beings.

Brief Thoughts on America’s STEEPS Leadership Over the Next Few Generations

All of this analysis can help us understand the challenges our continued leadership on the way to the technological singularity. With a number of broad generalizations, let’s consider the forty- to sixty-year (next two or three generations) future of America’s global leadership with respect to each of the STEEPS factors. Hopefully you find this a valuable exercise for your own thinking, whether you agree with each of these predictions or not.

Science – China will continue to beat the USA in investing and publishing in strategic sectors that China’s leaders identify as important, by a greater margin every year the wealthier they get. But their leaders won’t always identify the right sectors, so waste will exist. But scientific waste is among the most beneficial of all forms of human inefficiency. Choosing to fund science at a high level, as China increasingly does vs the US, is for more important than the question of whether the funding is determined by democratic or authoritarian means. Unless America continues to degrade and drive up costs and drive down access to our universities, the USA will continue to outrank China for another generation in major scientific advances, due to our privileged status, institutions, network, and freedom-and exploration-oriented history and culture. But China’s rapidly growing technical class will increasingly lead in the general production of scientific knowledge, in key fields.

Technology – China will remain the manufacturers for the world. The USA will continue to lead in all rapidly-moving areas of tech, like IT and nanotech. Tech unemployment will continue. Due to its individualism, America will be slow to address plutocracy, and to institute a basic income. We’ll watch others do BI experiments first. Perhaps that is for the better, as most countries probably won’t do BI with sufficient incentives for people to continue to contribute to improving social good.

Economics – R&D, Design, Innovation, Entrepreneurship, Marketing & Sales, and all the FEMMIT complex industries will continue to remain America’s strong suits. Our labor laws, allowing no-cause hiring and firing of anyone, will continue to allow greater entrepreneurship here than in other Western democracies, and greater incentive for the employee to continually shift jobs and employers to better opportunities. We’ll also continue to have health care and other benefits primarily provided by the employer, and only secondarily the state. This also creates incentive for employees to shift to better companies, and allows more useful firm experimentation and diversity. As long as we keep improving the social safety net, freeing up entrepreneurs and employees to easily move is the ideal economic choice. Europe and other countries with stricter labor laws went too far too soon to socialism, allowing their desire for equity to overtake their desire to be innovative, and so they’ll continue to solve a smaller number of the world’s problems with their products and services. China has even less regulated labor laws, but they don’t have the social safety nets, or the record of cultural freedoms, that allow their entrepreneurs and employees to maximally benefit from those freedoms. As they get richer, they’ll get closer to America’s general economic approach. Growing economic plutocracy will remain an ongoing problem in both countries, even more in China than the USA, where citizen protections are far fewer.

Environment – China’s manufacturing ecosystem will continue to capture solar, wind, nuke power and other exportable envirotech. We’ll continue to lead in social and political environmental innovation. Nativist plutocrats like Trump have little ability to change the growing sustainability values of all developed, rich cultures. 

Politics – Western liberal democracy will continue to be the main desire of the world’s citizens. Islamic and communist cultures will increasingly reform toward them. China will need generations to shed its Communist Party and state industries, and their political leadership will continue to lag the USAs until that happens. Universal health care will continue to elude Americans for a generation or so at least, as keeping all the non-critical health care with the employer allows more economic diversity, and is a spur to innovation and individualism, as long as social safety nets continue to improve. If Americans forced everyone to save some of their income for the future, whether they have good jobs or are freelancers, the way Australia has for a generation now, we’d have an even better political environment for innovation. Whether we reform ourselves in that direction or not remains to be seen.

Society – American culture will continue to be something the world aspires to. Our prosperity and plutocracy puts us a risk of becoming too addicted, distracted, and polarized to lead much in the next generation, but eventually we’ll enter a generation of reform and return to more democratic and equitable conditions, as we’ve always done. Meanwhile, the cultural promise of the American Dream, will continue to lead the world in a particular developmental direction, whether we actively continue to promote and refine that dream or not.