America's Edge: For How Much Longer?

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There is
a strong faith in science and technology in the West, but especially
in the United States. I do not share it. My faith is in the religious,
moral, cultural, and legal environment that puts science and technology
to work for the consumer. Remove these factors, and science will
not flourish. Technology can produce great weapons, but it will
not bring prosperity without a legal and social system that rewards
risky innovation with wealth.

The Communists
got cause and effect mixed up. Marx taught that morality is merely
the product of the mode of production. He promised the advent
of a new man to any society that socialized the economy. What
Marxism actually delivered was an oligarchy of old men with bladder
problems and nuclear weapons.

the elite who make decisions in the United States also tend to
get cause and effect mixed up, though not so badly as the Marxists


When I was
a junior in high school, the Soviets launched Sputnik: October,
1957. I remember it well because I saw it. Well, not the actual
satellite, but the second-stage rocket that launched it. It was
circling the globe. The whole country was watching that afternoon.
I lived at the beach in southern California. It came over just
after sunset. That was perfect for viewing. The sun did not interfere
with our line of sight out across the Pacific. Its rays would
soon reflect off the rocket, high overhead. We stood in front
of the record store where I worked in the afternoon and evening.
We looked west. Then we saw a bright light coming up over the
horizon. We watched it as it soared in an arc above us and then
disappeared over the eastern horizon.

Within days,
Congress was debating on how much money to put into education,
and whether to limit the subsidy to science. No one was arguing
that the federal government had already extended its tentacles
around higher education. No one was worried about the bureaucratic
red tape that is always attached to green pieces of paper with
Presidents’ pictures on them. The Ruskies had beaten us into space,
and now there was only one thing to do about it: throw money at
the problem.

Public education’s
performance peaked over the next six years. But by the time that
all that federal money was flowing, test scores had started down.
The SAT scores peaked in 1963. Nothing has reversed this trend.
American high school graduates perform poorly at math and science
— worse than any other industrialized country. Today, over
half of the university graduate students in science and engineering
are foreign-born.

Yet the United
States raced ahead of the Soviet Union in most categories of science
and technology. The Soviet Union collapsed economically in the
late 1980s and ceased to exist in 1991. All of the money the Soviet
government poured into scientific education did not save it from

If there
is a lesson to be learned here it is that government subsidies
failed. In education, government money was counter-productive.
The U.S. government justified the expenditures in terms of beating
the Russians in science, and what it got was poorly trained sociology
majors. The Soviets justified the expenditures in terms of world
conquest through military power, and went broke trying.

What was
missing in the Soviet Union was freedom. Its people had technical
skills, but they had little incentive to invent, develop, refine,
manufacture, and make a profit from science and technology. The
USSR was dependent on imported science and technology from 1917
until 1991. Even the ball bearings used in its MIRVed missiles
— multiple warheads per rocket — was imported from a
small firm in New England. The late Antony Sutton wrote a multi-volume
history, Western
Technology and Soviet Economic Development
, which proved
how dependent the Soviets were on the West. The academic community
ignored his work.

The defense
industry in the United States still hires thousands of science
and engineering graduates. Instead of going into private industry
to produce consumer-satisfying demand, they develop weapons systems.
Peter Drucker has estimated that any nation that spends more than
about 2% of its annual output on the military in peacetime is
undermining its private sector. The United States has spent more
than this for decades.

Japan and
China do not face such pressures. Their graduates go into the
private sector. Their capital builds up private companies that
compete with American companies for consumer loyalty.


Across the
Pacific, China is graduating almost 500,000 people a year with
college degrees in science and engineering. In a
Business Week article published in 2002
, we learn of
the immense inflow of capital from outside China. This money is
not going only to companies that produce goods for Wal-Mart. It
includes science and technology.

figures prominently in Beijing’s tech strategy. Although the
island’s government remains at odds with Beijing’s leaders,
Taiwanese businesses have invested about $70 billion in China,
and more of those investments are going toward big-ticket items
such as semiconductor plants. In September, Taiwan Semiconductor
Manufacturing Co. announced plans to invest $900 million in
its first China fab. The Chinese market "may take off pretty
rapidly," says TSMC Chairman Morris Chang. In addition,
Taiwan’s chip execs are now managing several contract-manufacturing
plants in the Shanghai area. . . .

With support
from Beijing, ethnic Chinese from around the world are following
in the footsteps of Taiwanese and forging new links to China.
Shoucheng Zhang, 39, holds joint professorships in the physics
departments at Stanford and at Beijing’s Tsinghua University.
The latter post was funded by Hong Kong billionaire Li Ka-shing,
who aims to entice more overseas Chinese scientists to spend
time on the mainland. . . .

In short,
Beijing is learning to harness Chinese intellect outside its
borders and turn it into a competitive advantage. This has already
contributed to strides in technical fields such as superconductivity,
nanotechnology, and optics. Says Zhang: "China has been
investing very wisely in the sciences. They are doing the right
thing." And while no one has attempted to measure the overseas
brain trust China could tap, it is clearly sizable, says Juan
Enriquez-Cabot, director of the Life Science Project at Harvard
Business School: "When you go into laboratories throughout
the world, some of the brightest people are Chinese." Among
the foreign-born scientists and engineers working in the U.S.,
nearly 40,000 hail from China, more than from any other country.

The flow
of capital is now becoming a flood. But if this is true, then
China should be experiencing a negative balance of payments. A
country that has a positive balance of trade — more goods exported
than imported — has to be investing money abroad. But if China is
importing more money in the form of capital than it is lending
or investing abroad, then it has be experiencing an "unfavorable"
balance of trade.

One of the
arguments in favor of the U.S. balance of payments deficit of
$500 billion a year is this: "America is the best place to
invest money. Asian capital is flowing here." This sounds
plausible until you look more closely. It turns out that Asian
central banks are buying T-bills by the billions. This money is
going down the federal rathole.

Now comes
news that has not been publicized in the U.S. China ran a negative
balance of payments in the first quarter of this year. This has
not happened in 17 years.

People’s Daily
21) reported

China recently
announced a trade deficit of 8.4 billion yuan for the first
quarter of this year, the first quarterly unfavorable balance
of trade registered by the country in 17 years.

In simple
terms, economists explain that a country with a favorable balance
of trade is lending money for others, while one with an unfavorable
balance of trade is borrowing money.

Is this good
for China? The paper quotes an economist who says that it is.
He also says that a trade surplus is good.

Dr. Ma
Xiaye, president of the Shanghai Academy for World Watch, said
that traditionally, a favorable balance of trade is encouraging
and desirable as it means money-earning, while an unfavorable
balance of trade is also advisable as it means using borrowed
money for the nation’s economic development.

Ma quoted
as an example that the long-term trade deficit of the United
States helps the country keep up its economic development with
the support of capital from worldwide.

It would
seem that Dr. Ma is a graduate of the Institute of Advanced Studies
at Ferengi University. You may recall the two main principles
of Ferengi policy: "War is good for business." "Peace
is good for business."

A trade
deficit of 8.4 billion dollars is a trifle in the context of
the total imports and exports of 239.8 billion dollars conducted
by China during the first quarter of this year, Ma noted.

in China is rising fast. This is a risk to anyone who does not
have family ties in China. The legal system in China is neither
Western nor capitalist. The currency exchange rate is set by the
government, not the free market. Getting your money out of China
is likely to be a problem. Then there is the problem of massive
monetary expansion by the Chinese central bank. This is creating
a bubble economy. Bubbles eventually pop.

But the fact
that so much money is flowing into China today indicates that
the West is fast viewing China as a source of more than low-technology
goods. Western investors are looking at a pool of highly educated
scientific talent. If investors can harness this talent in consumer-satisfying
ways, then China is going to become a fierce competitor in international
markets for mid-tech and eventually high-tech products.


In his April
22 column, Thomas Friedman, the generally leftist columnist of
the New York Times, admitted in print that the United States’
economy has a major problem: a more favorable business climate
in China than here. He visited executives in California’s silicon

executives explained to me that they were opening new plants
in Asia — not because of cheaper labor. Labor is a small component
now in an automated high-tech manufacturing plant. It is because
governments in these countries are so eager for employment and
the transfer of technology to their young populations that they
are offering huge tax holidays for U.S. manufacturers who will
set up shop. Because most of these countries also offer some
form of national health insurance, U.S. companies shed that
huge open liability as well.

Can you imagine
this? Here are a bunch of commies who are offering sweetheart
tax breaks to Western companies. Low taxes benefit business. Aren’t
commies supposed to be anti-business? I mean, what kind of crummy
Marxism is this?

Other executives
complained bitterly that the Department of Homeland Security
is making it so hard for legitimate foreigners to get visas
to study or work in America that many have given up the age-old
dream of coming here. Instead, they are studying in England
and other Western European nations, and even China. This is
leading to a twofold disaster.

one of America’s greatest assets — its ability to skim the cream
off the first-round intellectual draft choices from around the
world and bring them to our shores to innovate — will be diminished,
and that in turn will shrink our talent pool. And second, we
could lose a whole generation of foreigners who would normally
come here to study, and then would take American ideas and American
relationships back home. In a decade we will feel that loss
in America’s standing around the world.

Still others
pointed out that the percentage of Americans graduating with
bachelor’s degrees in science and engineering is less than half
of the comparable percentage in China and Japan, and that U.S.
government investments are flagging in basic research in physics,
chemistry and engineering. Anyone who thinks that all the Indian
and Chinese techies are doing is answering call-center phones
or solving tech problems for Dell customers is sadly mistaken.
U.S. firms are moving serious research and development to India
and China.

concludes: "We have got to get our focus back in balance,
not to mention our budget. We can’t wage war on income taxes and
terrorism and a war for innovation at the same time." Call
this "the education of Thomas Friedman." Who knows?
Maybe this perspective will actually have some influence on the
editorial page of the New York Times. But don’t bet your
pension money on this possibility.

This problem
is not going to go away. It is going to get worse.

Craig Barrett,
the C.E.O. of Intel, noted that Intel sponsors an international
science competition every year. This year it attracted some
50,000 American high school kids. "I was in China 10 days
ago," Mr. Barrett said, "and I asked them how many
kids in China participated in the local science fairs that feed
into the national fair [and ultimately the Intel finals]. They
told me six million kids."

Got that?
We are facing a rising tide of skilled workers whose talents will
go into meeting consumer demand. This is great news for productive
workers around the world who will produce products that the Chinese
want to buy. This is bad news for workers who have degrees in

For now,
the U.S. still excels at teaching science and engineering at
the graduate level, and also in university research. But as
the Chinese get more feeder stock coming up through their high
schools and colleges, "they will get to the same level
as us after a decade," Mr. Barrett said. "We are not
graduating the volume, we do not have a lock on the infrastructure,
we do not have a lock on the new ideas, and we are either flat-lining,
or in real dollars cutting back, our investments in physical


The idea
of free market competition has spread to China. This is what my
generation, and the generations before mine, said we hoped would
happen. That the Protestant work ethic is also Confucian makes
this transfer of ideology possible. Marxism hampered anything
like this from happening. Anti-Communists wanted to see China’s
masses abandon Marxism. To the extent that the Chinese masses
ever adopted Marxism, this has now taken place.

There is
a price to be paid here. An army of highly competitive people
is being assembled in China. The question now is this: Will these
people suffer the fate of all those bright science students in
the Soviet Union? Will their talents be squandered in fruitless
service to a bureaucratic State? The answer so far seems to be

and commitment count for more than technical education. Opportunities
to serve others through voluntary exchange is more important than
mathematical skill. A social, legal, and economic system that
allows creative people to get very rich if they satisfy consumer
demand counts for more than graduate schools in engineering.

The problems
we face are mostly home-grown. America has had these competitive
advantages for over a century. But, year by year, our governments
at all levels tighten the screws. Congress passes new laws. Bush
signs all of them. The Federal Register prints over 70,000
pages of new regulations each year.

From the
looks of things, the entrepreneurial spirit is alive and well
in China. The government is steadily pulling out of the economy.
A recession/depression may reverse this pull-out, but that is
not clear at this point.

growth takes place when politicians and bureaucrats pull out of
the economy. We are seeing a great reversal. The Communists are
pulling out, and Western governments keep adding to the maze of
regulations. Meanwhile, Asians are good at math and science. If
it turns out that they are innately gifted with entrepreneurial
skills, which the reversal of Marxism sets free, then the flow
of capital to China will accompany the flow of goods out of China.

Then who
will buy T-bills? At what interest rate?

1, 2004

North [send him mail]
is the author of Mises
on Money
. Visit
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