Tuesday, February 7, 2012

The American Challenge: Thiel, Tabarrok, and Servan-Schreiber

Ever since 2008 I have been thinking about a question and set of assumptions offered by Peter Thiel on the state of the economy, the future of innovation, and science in general. For those who know Thiel only as that guy on the movie "The Social Network", he is a Stanford grad, uber-libertarian, foil to higher education, founder of PayPal, venture capitalist, and on and on. In November 2008 he was interviewed on Uncommon Knowledge, where he was very critical of the US economy's ability to innovate and create. According to Thiel, our economic growth, in the aggregate and on a per-capita basis, has spectacularly under-performed expectations.

That charge sounds ridiculous on its face considering that I am typing this on a personal computer, with a second monitor, and have an iPhone and iPad within reach. But consider Thiel's charge from a Nov 2011 New Yorker article "No Death, No Taxes":
"The information age has made Thiel rich, but it has also been a disappointment to him. It hasn’t created enough jobs, and it hasn’t produced revolutionary improvements in manufacturing and productivity. The creation of virtual worlds turns out to be no substitute for advances in the physical world. “The Internet—I think it’s a net plus, but not a big one,” he said. “Apple is an innovative company, but I think it’s mostly a design innovator.” Twitter has a lot of users, but it doesn’t employ that many Americans: “Five hundred people will have job security for the next decade, but how much value does it create for the entire economy? It may not be enough to dramatically improve living standards in the U.S. over the next decade or two decades.” Facebook was, he said, “on balance positive,” because of the social disruptions it had created—it was radical enough to have been “outlawed in China.” That’s the most he will say for the celebrated era of social media."

In the previous month, October 2011, he penned this longish piece for National Review "The End of the Future". You could guess by the title that Thiel's thoughts run pessimistic. In his essay Thiel lays out an argument that America's growth has been stunted because of our lack of investment in science, research and development. Yes, Thiel admits, we have seen a lot of change but how much of it is progress? Are the new technologies being developed today and over the last 50 years revolutionary or merely evolutionary? For example, I drive a much safer and more capable car than my father did when he was 35 years old. But considering that my grandfather and great-grandfather also drove a car we can see that the technological progress in land-based transportation has been in degree but not in kind.

If Thiel is correct what are the consequences of such a slow-down in growth and productivity? His answer: cataclysmic.

"The technology slowdown threatens not just our financial markets, but the entire modern political order, which is predicated on easy and relentless growth. The give-and-take of Western democracies depends on the idea that we can craft political solutions that enable most people to win most of the time. But in a world without growth, we can expect a loser for every winner. Many will suspect that the winners are involved in some sort of racket, so we can expect an increasingly nasty edge to our politics. We may be witnessing the beginnings of such a zero-sum system in politics in the U.S. and Western Europe, as the risks shift from winning less to losing more, and as our leaders desperately cast about for macroeconomic solutions to problems that have not been primarily about economics for a long time."
Thiel's reference point is a then-widely popular book from the late 1960s by Frenchman Jean-Jacques Servan-Schreiber titled The American Challenge. I bought and read a copy to see what it was that got Thiel so excited. To read this book is like opening a time-capsule. Not to the extent that it informed me about how the French lived, but what they were thinking about and more germane to Thiel's argument, what they believed about us, Americans living in the 21st century.

First published in 1967 as Le Defi Americain, the relatively short book was a warning to Europe about the impending takeover, by Americans, of all things economic, cultural, and political. Because of American business dominance in nearly every aspect of science and technology Europe was, according to Servan-Schreiber, on the cusp of being left behind permanently. The book catalogs the vast differences in educational attainment, spending on investment and research, managerial competence, and in the relationships between academia-business-government in the USA as compared to Europe. It was not only that American business was outperforming Europeans it was that American companies were taking over European companies and setting up for business in Western European countries. In fact he titles the first part of the book "The Assault on Europe".

One has to take the good Frenchman's claims with a grain of salt. 1967 was only 21 years after Europe had been utterly destroyed by war. Neither Japan nor Germany reached the North American continent. American manufacturing and industry were in a much better position to grow and compete after the WWII.

But, Thiel's takeaway from Servan-Schreiber was in the predictions of how Americans would be living and what our lives would look like. To the Frenchman, American technological and scientific progress were like step-functions not smooth curves with diminishing returns. Based on a Hudson Institute study Servan-Schreiber declared, as Thiel often likes to quote, that

"In 30 years America will be a post-industrial society with a per capita income of $7,500. There will be only four work days a week of seven hours per day. The year will be comprised of 39 work weeks and 13 weeks of vacation. With weekends and holidays this makes 147 work days a year and 218 free days. All this within a single generation."

Its hard to say what it would have been like to see Americans on the moon, satellites, the creation of computers, etc.. all packed into a very small amount of time. Would we have predicted based on that moment in history that our lives today would be fantastically easy and exponentially better? Our predecessors did. If the predictions in The American Challenge were plausible, what happened?

As I read him, Thiel is not entirely clear as to what took us off the rails. However Alex Tabarrok of the blog Marginal Revolution and Professor of Economics at George Mason University has an idea. In Tabarrok's new TED book, Launching the Innovation Renaissance, he argues that America public spending on basic science and research is virtually nothing. Instead we spend money on welfare and warfare. Couple that with bad health care and environmental regulations and we get low growth. (EconTalk interview with Tabarrok here. And Tabarrok's Atlantic magazine piece here.) Basically we've cashed in our wealth and riches under the assumption that we would always be rich. We redistribute wealth, spend a lot on our military, and are less concerned with growing the economy that we are with being Europe's security umbrella.

Lots of interesting questions and proposals which I believe are more fundamental to our long-term forecast than "Should we tax the rich at a marginal tax rate of 31% or 34%?" or "Should we eliminate earmarks in Congressional bills?" or "Should we put price caps on college tuition?". Our politicians are thinking too small and quibbling over scraps. Perhaps we have ended up where Thiel feared, in a zero-sum game.

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