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China is no longer a copy cat

Beyond greed: what else inspires invention?

24 June 2019
Author: Michael PowerStrategist

Classical economics believes that invention results from financial incentives alone. But can other factors explain it?


What’s the incentive?

One of the most powerful beliefs of our age – at least in democratic capitalist countries – is major technological advances are only possible when powered by the unconstrained thinking arising from a free market democracy, one where the inventor is incentivised to succeed by the prospect of material reward.

Ayn Rand summed up this view:

“A country’s standard of living, including the wages of its workers, depends on the productivity of labour; high productivity depends on machines, inventions, and capital investment; which depend on the creative ingenuity of individual men; which requires, for its exercise, a politico-economic system that protects the individual’s rights and freedom.”

It is a nice idea, but the briefest of glances at history shows that it is simply not true. There were key inventions in the journey of humanity that preceded the coming of “a politico-economic system that protects the individual’s rights and freedom”, just as there are inventions taking place now in political and economic systems that would not fit this description.


China’s legacy of invention

Over its long history, China has been responsible for many of the world’s most significant technological advances: paper making, movable type printing, gunpowder, compasses, mechanical clocks, silk, deep drilling, iron smelting, porcelain, the seismograph, rockets, bronze, seed drills and paper money. And, of course, there were many non-Chinese inventions before the advent of democracy: fire, the wheel, the lever, the nail, lenses, the sextant, the stirrup, the sail, the abacus, the waterwheel, cement, the alphabet, writing, numbers, arithmetic, animal domestication, the plough and the arrow, to name a few.

Marie Curie’s curiosity drove her forward in her scientific research and saw her receive two Nobel prizes in physics (1903) and chemistry (1911), a feat matched only by Linus Pauling. She deliberately did not patent her inventions, nor did she profit from them. She believed that “Humanity also needs dreamers, for whom the disinterested development of an enterprise is so captivating that it becomes impossible for them to devote their care to their own material profit”. Scientific advance need not always and has not always be driven forward by the promise and premise of profit.


The original ‘Sputnik moment’

There is an idiom in English that highlights on another level just how misplaced this ideological Randian belief is: ‘Sputnik moment’. On 4 October 1957, the USSR launched the world’s first satellite, Sputnik 1. This exploration programme had been wholly funded by the communist, centrally planned state that was Russia.

The event precipitated the Sputnik crisis in the US. In 1958, President Eisenhower responded by noting that the US had to face three “stark facts”:

  1. That the US and, with it, the rest of, what Eisenhower called “the free world” had been overtaken in scientific and technological advancements relating to space by a non-market economy with politics were anything but democratic.
  2. That the US’s global standing and primacy would be lost if the USSR maintained this technological lead.
  3. That the USSR could, as a result, pose a military threat to the free market democracy that was the US.

The response to this communist-led breakthrough from the United States was dramatic and notably almost entirely state funded. Government-funded research into defence was significantly boosted, focusing on satellites, rockets, missiles and especially education. By 1965, 10% of the Federal government’s educational budget went to NASA, the National Aeronautics and Space Act.

It worked. By 1969, the US had put a man on the moon.


Public or private?

This means that arguably the most existential technological breakthrough humanity has ever achieved – putting humanity on a celestial body other than earth – was achieved by government spending. Moreover, it was spending by a government that was part of the largest free market and most potent democracy on earth.

The term ‘Sputnik moment’ contradicts the very notion that only a Jeffersonian world where government stays uninvolved in almost every activity can facilitate significant technological breakthroughs. The actions of the USSR in the 1950s and the US in the 1960s are testament to the opposite being possible.

As Bill Gates noted, “Governments will always play a huge part in solving big problems. They set public policy and are uniquely able to provide the resources to make sure solutions reach everyone who needs them. They also fund basic research, which is a crucial component of the innovation that improves life for everyone”.

A recent book by Mariana Mazzucato, The Entrepreneurial State, comprehensively debunks the claim that only the private sector can produce technological advance. She dissects the most iconic product ever produced by a free-thinking, free market – the iPhone – to prove her case. She notes the following ideas embedded in that iPhone were government-funded: microprocessors, memory chips, solid state hard drives, liquid crystal displays, lithium-based batteries, Fast-Fourier-Transform algorithms, the internet, HTTP and HTML, cellular networks, Global Positioning Systems, touchscreens and even Siri. “In fact, there is not a single key technology behind the iPhone that has not been state-funded,” she notes.


The artificial intelligence (AI) ‘Sputnik moment’?

The ZTE saga cited in part 5, whereby China’s extreme dependency on imported US-made semiconductors was exposed, might be seen by some in the US as China’s ‘Sputnik moment’. However, many Chinese commentators argue that this moment took place earlier, in Seoul, South Korea, on 15 March 2016. This was the day Lee Sedol, the undisputed world champion in the game of Go, an ancient and fiendishly complicated Chinese invention, lost a challenge 4-1 to a Britishbuilt AI-based computer, AlphaGo. More than any other event, this intellectual bombshell is said to have jumpstarted China’s research programme into artificial intelligence. As a footnote, it is worth noting that the three key men behind Deep Mind – Demis Hassabis, Shane Legg and Mustafa Suleyman – were all products of state-funded educations.

The Brits may also be helping China jumpstart its MIC2025 ambitions in another way. One of the world’s top-three multinational semiconductor and software design companies is UK-based ARM Holdings. Its products are an integral part of virtually every Apple product. Indeed, Apple was a founding investor in the company.

In 2016, ARM was bought by Japan’s Softbank. In June 2018, Softbank sold 51% of ARM to a consortium of Chinese investors including China Investment Corporation, Silk Road Fund, Singapore’s Temasek Holdings, Shenzhen’s Shum Yip Group and Hopu. Just as China has used strategic divisional purchases to buy its way to the technological front of the world of laptops – from IBM by Lenovo – and smartphones – from Motorola by Lenovo – so China seems intent on short-circuiting its way to the cutting edge of the all-important chip industry by buying ARM. Indeed, SoftBank estimates that China’s chip makers are already 95% dependent on ARM products.


Copycat no more

Trump’s claim that China is a copycat is history and now irrelevant to the future the world faces.

The Middle Kingdom is re-emerging as an R&D powerhouse and now leads the world in a growing number of spheres of scientific research as well as in the commercial application of that research. Indeed, one might believe that it is now the US which must be trying to play copycat regarding the recent Chinese inventions of Ultra High Voltage electricity distribution and China’s near perfection of the science and engineering behind bullet trains. And it would be remiss of the Pentagon were it not trying to crack the codes behind the Chinese mastering of the art of quantum cryptography.

General risks: The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made.
Michael Power
Michael Power Strategist

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