Thomas Friedman Wrong? The Innovation Delusion

I can't say that I'm a fan of Friedman but it would also seem like Gomory's concerns are overwrought. While I'm far from an impartial observer, it seems that Gomory simply echoes the same concerns and fears that many Americans (and the world) had of Japan. I did a quick search for the 'myth of balanced trade' and came up with this article (written with an ideological perspective but it was written in 1986 but it could have been written today in direct response to Gomory): http://www.thefreemanonline.org/columns/protectionism-the-my...

Further this concern that the US manufacturing industry is dying or dead is a myth (and quite handily, type in 'myths of US manufacturing' and you come up with the following article among many) - an excerpt "U.S. workers produce 21% of all factory goods made globally, or about $1.7 trillion worth per year. That's significantly lower than the peak of 28% in 1985 but only slightly below the long-term average of 23% for 1970 through 2006.": http://articles.moneycentral.msn.com/Investing/CompanyFocus/...

What Gomory doesn't seem to address and why innovation factors so importantly (if Friedman, overstates his case, Gomory understates the value of innovation), ideas have far higher margins than their underlying component and fixed goods. A contract manufacturer in China might make 5% or less (that Gomory argues are already subidized by the Chinese government which implies that the Chinese government is losing money in this process) while Apple makes 30+ on the overall products it sells (and these products presumably aren't subsidized by the US government). So for that same dollar of trade that an American consumer is buying from China, more profit is retained in in the US as those same products are sold globally. This is why it's not necessary for there to be "balanced trade" and why countries like the UK had been able to run trade deficits for large periods of modern history.

If history is instructive, it's useful to also consider what's happened to Japan over the past few decades. The ascent of China, who Gomory targets, is very very far from trouble free or certain. Further, he seems to have this assumption if the US aims for balance of trade with China, those same deficits won't simply go to other developing nations. Ultimately it is consumers who bear the costs of imposing protectionist policies.

This article is so right on. I wish I had a billion downvotes for everything Friedman has ever published. He seems to think nothing bad can happen as long as your intentions are good, and his critical thinking faculties and street smarts are about nil.

Buffet and Grove have indirectly criticized his world view, but I wish more like the author (retired SVP of R&D at IBM, among other things) would directly call him out, expose his flawed world view, and replace it with some sense.

If you want a far more detailed discussion, especially one that goes into why it can't work, see Eamonn Fingleton's book Unsustainable (or the earlier version In Praise of Hard Industries, there is little difference between them).

And if you want a good story about specifically how innovation grows out of practice, see Bob Johnstone's We Were Burning about the Japanese development of the first blue-light laser diode.

Gomory mentions 3 choices for a country that stops making something: (1) import it by selling something else it makes, (2) go without, and (3) import it by promising to pay later. The Buffett article he links to says because America's been doing no.3, the foreigners will use those bonds to buy property in the US before they're inflated away, and that the US won't likely confiscate foreign-owned property.

But neither author mentions what makes the US different to China, Japan, India, and others taking over US manufacturing. Chinese can become Americans, but Americans can't become Chinese. The US (and Australia and Brazil, etc) are founded on immigration. Foreigners buying US land can be given US citizenship as an alternative to having their property confiscated. The children of Chinese (and Koreans,etc) are going to Western countries to be educated, usually hoping to stay. By offshoring manufacturing and ICT, the US, Canada, etc simply get a larger citizenship base, not lose any global competitive advantage.

Despite the rise of China, many of the younger generation of Chinese still want to live in foreign English-speaking and European countries, and that's not likely to stop. And eventually, Americans will eventually vote for the government that lets them in the easiest, because house prices will start rising again when the international students rent them and immigrants buy them.

But Americans and Australians don't become Chinese or Vietnamese, nor do they want to. An immigrant-based nation such as the US can outsource its manufacturing to ethnic-based nations such as China and India, and stay rich BECAUSE it's an immigrant-based nation. People from ethnic-based nations will generally prefer to live in the US or Canada BECAUSE they're immigrant-based nations. So the US needn't worry about outsourcing to India.

The Warren Buffett opinion piece the author links is a must read too. His ideas around Import Certificates are novel and were ahead of their time in 2003. It seems to be something that both the Democrats and Republicans could support to address the trade deficit.

http://money.cnn.com/magazines/fortune/fortune_archive/2003/...

Great article. I specially liked this part:

"At a recent meeting I heard "The only thing that matters is innovative and passionate people." These people do matter, but they are very far from being the only ones. This attitude misses the point that it was all our people, working in many different work settings, that made this country prosper. And all of them will all be needed in any viable future for our country."

Producing things is a way. Getting 5% share of any thing produced in the world is another way. Having largest and most innovative and entrepreneurial financial and economical system and largest aircraft carriers would more efficiently be used with the later way.

Summary would seem to be: innovation is good and all, but the US' trade balance is really out of whack, and you can't make up for that by just innovating.

Makes some sense. Let's not take this as a discounting of innovation, however. It's necessary, just not sufficient.