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Thoughts from the Frontline

A Nation of Shopkeepers

August 25, 2014

“To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers.”
– Adam Smith, The Wealth of Nations

One of the great pleasures of writing this letter is the fascinating correspondence and the relationships that develop along the way. The internet has allowed me to meet a wide range of people all over the world – something that never happened to me pre-1999. Not only do I get to meet a wide variety of people, I also come into contact with an even wider range of knowledge and ideas, much of which…

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Aug. 27, 7:50 a.m.

John, I very much enjoy your weekly newsletter and I have greatly benefited from your early warning on the sub-prime loan debacle.

I was very surprised to see the comment below in this week’s letter.

‘Recall Premier Deng’s legendary mandate, “It is now glorious to get rich.”’

Until I saw this reference I had thought I was one of very few Americans who were aware of this quote although the version I was given was “It is now honorable to be rich.” 

I was in China at that time and this was a major topic of discussion among our Chinese hosts the morning after Deng made his comment.

We had Chinese-born American interpreters with us and they had met with the Chinese representatives at breakfast prior to our business meetings that day to discuss the agenda. 

Our interpreters later told us that the Chinese representatives were so excited by this speech that they were not able to get the Chinese to concentrate on our upcoming meeting.

At that time cars were rare in China.  Even in the major cities, our car would be the only one on the street as we drove through tens of thousands of bicycles which would part in a giant wave as our driver pushed his way through with his horn blaring.  We were embarrassed by our driver’s show of importance.

Our Chinese hosts were extremely poor by our standards even though they had college degrees. They viewed us as super-wealthy because we had cars and appliances.  They were all too aware of how poor China was.  And Deng’s speech had lit the possibility that they might one day be rich.

Deng opened the gates for Chinese entrepreneurs.  Entrepreneurs have made all the difference in China’s economic growth.  The people have always had the attributes to achieve at much higher levels than their economic achievements would indicate.

I have told this story many times and I personally saw on subsequent trips how China advanced from that time on at a breath-taking pace.

Richard Smith

Tom Hinds

Aug. 26, 2 p.m.

Please read Dr. Paul Craig Roberts on “supply-side economics” presented in “The Failure of Laissez Faire Capitalism” pp 42-43 and elsewhere before accepting without comment Dr. Brin’s negative assessment. Supply-side is not Voodoo economics, as he explains in his book.

Aug. 26, 8:27 a.m.

I have been an ardent reader of your letters for many years.
Your article about “Adam Smith ” reminded me of Peter Foster’s recent book:“Why we bite the Invisible Hand” in which he sites an article written in “Forbes” magazine titled:
“Tale of two Tombs"it points out the irony of Smith’s and Marx’s gravesites.
quote:“Karl Marx’s cemetery is haunted by the spirit of Adam Smith”,it noted.It is privately owned and produces a tidy profit for its owners….Adam Smith’s cemetery in Edinburgh is state owned,open free of charge to anyone,and is in a terrible state of neglect.”
I thought it would bring a nice chuckle to many of your readers.
Klaus Steden Canada

paul fyke

Aug. 26, 3:36 a.m.

I highly recommend a reading of W. Edwards Deming and Ken Iverson regarding the proper utilization of the work force in modern manufacturing.  Deming, of course, is famous in Japan, for teaching them how to compete after WWII. Iverson built Nucor Steel.  Both men believed in engaging the worker in the continual improvement of processes and products, making them cheaper, better, and more competitive. By the 1970’s, the Japanese were kicking our behinds in steel, autos, and electronics. In the 1980’s, Ford finally hired Deming to help them turn things around. The US unions didn’t particularly like it. Nucor, which made no steel until the late 1970’s, is today one of if not the largest steel company in the US, has never laid off a worker, has no special perks for management, no separate lunch room, same medical plan, etc.  Everyone in the company understands that they must make steel products better and cheaper than anyone else in the world or they will all lose. They have always put the name of every employee on the cover of the annual report - in alphabetical order. You could call it socialistic if it weren’t so free market.  Nucor’s success probably has had much to do with the location of many of the foreign car manufacturers in rural areas in right to work states. I had the good fortune to know Iverson.  I asked him once why other people didn’t do what he had done.  He said that he thought one of the biggest mistakes “management” and other intellectuals (economic theorists) make is thinking the worker is not that smart. When all people are engaged, they find ways to cope and succeed. Whether we are talking about a company or the economy as a whole, this is properly regulated free market capitalism.  The fundamental flaw in liberal thinking across the board is that they believe only they are smart enough to make decisions for the unwashed. Hence their belief in an economy guided from Washington. History should tell them that this has always ended badly and is still ending badly in many places across Europe. There is simply no substitute for a properly regulated free market system as the fastest and best way to grow a company or an economy.  Deming and Iverson need to be required reading for economists.

Barry Pither

Aug. 26, 1:46 a.m.

Once I read “epigone” I couldn’t resist posting this scene from Woody Allen’s “Annie Hall”

Aug. 26, 1:33 a.m.

Dear John,

While it is futile to oppose new technology, the simple acceptance that, “In the long run we will all benefit,” ignores the speed of change today.

Just as, “Only the low paying jobs will be lost,” has proven to be a gross misjudgment, ignoring the millions who are now without meaningful, well-paying work, is killing the US 70% consumer-driven economy.

When sudden blizzard hits and you are on foot without a coat, the prospect of a warm spring is little comfort.

Aug. 25, 11:43 p.m.

Even though your article about Adam Smith and the division of labour is not new your presentation made it interesting and provoked many ideas and thoughts about the subject. However, one thought has consumed me.

Many years ago (I am only one year older than you) when I was undergoing leadership training, at a military establishment, I was taught that a well organised and motivated team can achieve much greater results than the sum of the contributions from a collection of individuals. The “organised” team chimes well with Adam Smith’s observations at the pin factory. It is worthy to note that we were instructed that leadership was about the three integrated elements: the objective, team member’s individual needs and the collective team’s needs. Of the three leadership skill elements only “the objective” matches the simple “division of labour” observations by our Scottish friend.

A well led motivated team (work force) really does need the attention to be given to individual and team needs to satisfactorily achieve its goals/objectives. The military learned this motivational lesson the hard way, particularly during the Great War, soldiers were armed and far too many untrained junior officers were shot in the back as they advanced across no-man’s land. Civilian workers have the vote not arms and so it takes longer to get a balanced result if they are treated thoughtlessly.

Mechanisation leading to full robotic manufacture just reduces the numbers directly involved; your observations on the pin manufacture illustrates this point very well. But what do we do with all workers previously employed in the pin manufacturing business - I only need one car, one washing machine, one mobile phone etc.? Should we rely on the changing demographics and allow a distorted society of more retirees than those employed profitably in trade ie. Motivate the workforce with a promise of a happy, worthwhile time in their golden years (jam tomorrow) and ignore how we are going to pay for this? Where does this end, where are we going and who is going with us?

What are our individual and community needs to make us drive forward: a roof over our heads, food to eat, ..... perhaps the stars? [I live in a county next to Gloucestershire and I can’t even find an activity course in “pin making” to while away my hours]

Mike Smith 52107546

Aug. 25, 5:33 p.m.

I read as much of the Pew review as I could take.  This was a selected group of bright people who may have some ideas and experience in things Internet but they lack experience with real factories that use robotic machines. 

My company got its big break supplying wirebonders to the semiconductor industry.  Attaching one end of a wire to the chip and the other end to the chip’s package is a key step in semiconductor assembly. 

In the 70’s most of this work was done in southeast Asia.  I was told by a factory manager there that he could not get enough women to run the manual machines that were the standard in those days.  He estimated there were 50,000 wirebonder operators in Malaysia.  Ten years later there might have been 100. 
Robotic bonders replaced those people.  At the same time, physical shrinkage of the chips required the robot’s inherent accuracy that is far superior to a human operator.
So, one might say the robot replaced the human based on skill.  Far from it.  The robot does not become fatigued.  It works 24/7.  It recognizes when something is wrong and alerts a human to come and resolve the issue. 
Say the robot’s cost is $250K.  That’s all up front.  There is no need for a break, let alone a cafeteria, parking space, HR department or is it likely to be accused of sexual harassment.  They are not employees and they will be scrapped at the end of their useful lives.  No retirement program.  They don’t quit until they become uneconomic. If you are the factory manager you say: “What’s not to like?”.

I could go on but you get the point.  Robots are taking on more jobs and human programmers are imbuing the robots with increasing decision making capabilities.  At some point, the human programmers will not be needed either and the firmware will be generated by computers.

So, what do we do with the people who thought they would have jobs in industry? Very few will be needed on the factory floor.  So lets jump to the office.  We have already seen human powered jobs diminish as computers reduce the drudge work. Government?  We are already seeing drones, satellites and NSA computers take over large swathes of turf previously handled by humans. One can see that disfunctional organizations like Congress could be replaced by a group of computers programmed to solve and implement solutions to our problems based, we hope, on rational thinking (that has yet to be developed).

While all this is happening, young people are being distracted by popular culture and games.  Their ability to think is eroding and our educational system is rather confused and hobbled by government directives that in many cases exacerbate the problems they were meant to solve.

Aug. 25, 4:45 p.m.

Thank you for another informative and thought-provoking installment of “Thoughts from the Front Line”. I appreciate your perspective and experience on a broad range of things that affect our economy, both micro- and macro-economics.

I urge you to write a book about the future of work, as you hinted at the possibility. I will, of course, buy it. I am especially interested in your views on demographics, technology and other forces that will impact how people contribute to society and are renumerated for it.

Without having done any of the research necessary for a book, may I suggest that that there is a trend toward more project-based work. People come together, work on a project to produce a specific result, and disband. The next project that comes along, they might choose to work together again, or not, based on their experience in previous projects. You can imagine this is exactly how movies, large and small, are produced.

I think technology and automation will play a large role in influencing work. There’s the old saying, “Those who know ‘HOW’ will work for those who know ‘WHY’.” Based on my own industry, software development, including Web-based and cloud-based applications, those who know “HOW” are not always the best renumerated in the project/group. However, I and my colleagues have enjoyed a higher standard of living than, for example, auto workers. Of course, with the coming automation, everyone’s job is at risk.

I believe—jumping into pure supposition here—that Gene Roddenberry’s vision (“Star Trek” and “Star Trek: The Next Generation”) of a future in which work is about self-expression and self-actualization is quite a reasonable possibility. If society can provide what each of its citizens needs at minimal cost, then the questions becomes:
1) Who will do the work—minimal as it is—that is required to support all of us?
2) How will we provide an incentive for people to contribute to society (perhaps in alignment with self-actualization) and not just twiddle their thumbs (e.g., play video games or watch cat video’s) all day?

Capitalism is very good at providing incentive for people to contribute to society, whether through innovation or simple drudgery. The pre-1979 Chinese and California communes were experiments in what happens when we all share the work and the reward. In China, they eventually went to a system where each farmer had their own land to work. “If everyone is responsible, then no one is responsible.”

Again, I urge you to write the book about the future of work because, selfishly, I am interested in reading it.

Thank you,
—Toby Sarver

David Kondner

Aug. 25, 3:53 p.m.

I’m not terribly up on all the economic theory and such from Smith, Keynes, and Hayek, but I seems to me that Smith’s criticism of “rentiers” (privileged holders of land/labor and capital) could be leveled against the current caste of “Income Investors” who don’t actually labor, or for that matter innovate (provide entrepreneurial input).  They strictly supply capital.  But, they don’t seem particularly adept at understanding how their capital is being applied.  Modern finance has effectively buffered the modern “rentiers” from the “productive” enterprises that are being financed.  Todays rentiers are too focused on absolute and/or relative return without any direct knowledge of whether the capital is actually being productive.  Too much capital is tied up financing government and big business boondoggles because it’s easier to finance.  Intuitively, do you really think government and big business (really tools/extensions of the government) are more productive than Main Street?  Meanwhile, Main Street businesses (true entrepreneurs), who depend on consumers (financially oppressed labor), are capital-starved, resulting in a stifling of the real economy.

I suspect that our economy won’t repair until the “Big Economic Reset” happens, that is, until Income Investors are forced to reap the consequences of their gross misallocation of capital.

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