1 00:00:00,090 --> 00:00:02,430 The following content is provided under a Creative 2 00:00:02,430 --> 00:00:03,820 Commons license. 3 00:00:03,820 --> 00:00:06,030 Your support will help MIT OpenCourseWare 4 00:00:06,030 --> 00:00:10,120 continue to offer high quality educational resources for free. 5 00:00:10,120 --> 00:00:12,660 To make a donation or to view additional materials 6 00:00:12,660 --> 00:00:16,620 from hundreds of MIT courses, visit MIT OpenCourseWare 7 00:00:16,620 --> 00:00:17,992 at ocw.mit.edu. 8 00:00:23,580 --> 00:00:26,770 WILLIAM BONVILLIAN: In some ways, today's class, 9 00:00:26,770 --> 00:00:30,150 it's the most challenging of the semester. 10 00:00:30,150 --> 00:00:34,770 These are really complicated, difficult threshold issues. 11 00:00:34,770 --> 00:00:38,970 And we're just starting to see the powerful ramifications 12 00:00:38,970 --> 00:00:41,760 of having gotten a number of things wrong in this space 13 00:00:41,760 --> 00:00:44,070 and what it does. 14 00:00:44,070 --> 00:00:46,890 So I try to put the manufacturing 15 00:00:46,890 --> 00:00:51,390 stuff in early so you'd see that there are real issues here, 16 00:00:51,390 --> 00:00:55,380 not just kind of abstract science policy questions, 17 00:00:55,380 --> 00:00:58,770 but real issues that have big implications. 18 00:01:02,140 --> 00:01:09,480 So let me start with Samuelson. 19 00:01:09,480 --> 00:01:16,820 And you're all probably familiar with him, 20 00:01:16,820 --> 00:01:21,230 but probably among a handful of the most famous economists 21 00:01:21,230 --> 00:01:22,530 of the 20th century-- 22 00:01:22,530 --> 00:01:26,960 one of MIT'S great stars, an amazing figure, 23 00:01:26,960 --> 00:01:30,800 lived well into his 90s. 24 00:01:30,800 --> 00:01:36,450 I heard him talk just a few years ago, before he died. 25 00:01:36,450 --> 00:01:41,400 And he was incredibly sharp and funny and astute-- 26 00:01:41,400 --> 00:01:43,020 just a phenomenal figure. 27 00:01:43,020 --> 00:01:46,710 And he really rethought-- 28 00:01:46,710 --> 00:01:48,900 really was a foundational creator 29 00:01:48,900 --> 00:01:51,090 of neoclassical economics-- the attempt 30 00:01:51,090 --> 00:01:56,250 to bring discipline metrics to economic thinking. 31 00:01:56,250 --> 00:02:01,170 So then he writes this surprising piece 32 00:02:01,170 --> 00:02:06,340 in 2004, which takes on mainstream economics. 33 00:02:06,340 --> 00:02:09,780 Now, he had actually done writing on this topic, 34 00:02:09,780 --> 00:02:11,400 coming to somewhat similar conclusions 35 00:02:11,400 --> 00:02:13,560 much, much earlier in his career. 36 00:02:13,560 --> 00:02:16,590 But he comes back to it in this piece. 37 00:02:16,590 --> 00:02:20,310 And it took everybody aback, right. 38 00:02:20,310 --> 00:02:22,110 Mainstream economics had thought this was 39 00:02:22,110 --> 00:02:25,500 a completely settled territory. 40 00:02:25,500 --> 00:02:27,750 Mainstream economists like Greenspan, 41 00:02:27,750 --> 00:02:34,890 Jagdish Bhagwati, Gregory Mankiw, they were arguing-- 42 00:02:34,890 --> 00:02:36,870 and this is a quote from Mankiw-- 43 00:02:36,870 --> 00:02:39,720 "Yes, good jobs may be lost in the short run, 44 00:02:39,720 --> 00:02:43,260 but still total US net national product must, 45 00:02:43,260 --> 00:02:45,480 by economic laws of comparative advantage, 46 00:02:45,480 --> 00:02:47,670 be raised in the long run-- 47 00:02:47,670 --> 00:02:48,990 and in China, too. 48 00:02:48,990 --> 00:02:52,980 Never forget the real gains of consumers alongside admitted 49 00:02:52,980 --> 00:02:56,940 possible losses of some producers in this working out 50 00:02:56,940 --> 00:02:58,920 of what Schumpeter called 'creative capitalist 51 00:02:58,920 --> 00:03:00,060 destruction.' 52 00:03:00,060 --> 00:03:03,390 Correct economic law recognizes that some American groups can 53 00:03:03,390 --> 00:03:05,610 be hurt by dynamic free trade. 54 00:03:05,610 --> 00:03:08,100 But correct economic law vindicates the word 55 00:03:08,100 --> 00:03:10,680 'creative' destruction by its proof 56 00:03:10,680 --> 00:03:12,870 that the gains of the American winners 57 00:03:12,870 --> 00:03:17,010 are big enough to more than compensate for the losers." 58 00:03:17,010 --> 00:03:21,120 And then Samuelson concludes, "The last paragraph can only 59 00:03:21,120 --> 00:03:24,240 be in innuendo, for it is dead wrong 60 00:03:24,240 --> 00:03:27,990 about the necessary supply of winnings over losings." 61 00:03:27,990 --> 00:03:34,260 So here is the guy who created mainstream economics taking 62 00:03:34,260 --> 00:03:38,640 on the whole economic mainstream assumption about the benefits 63 00:03:38,640 --> 00:03:40,650 and gains of trade. 64 00:03:40,650 --> 00:03:42,480 And it's a startling moment. 65 00:03:42,480 --> 00:03:47,580 This article was like a bombshell in 2004. 66 00:03:47,580 --> 00:03:53,460 So how could the US be a loser in competition with a low wage, 67 00:03:53,460 --> 00:03:55,690 lower cost competitor like China-- obviously, 68 00:03:55,690 --> 00:03:57,000 there's others-- 69 00:03:57,000 --> 00:04:02,240 despite David Ricardo's theory of comparative advantage? 70 00:04:02,240 --> 00:04:03,990 And remember, we talked in the first class 71 00:04:03,990 --> 00:04:06,480 about Ricardo's theory of comparative advantage. 72 00:04:06,480 --> 00:04:09,600 We had the example of Portugal and England. 73 00:04:09,600 --> 00:04:11,850 England gets a lot of rain, and it has a lot of grass. 74 00:04:11,850 --> 00:04:12,475 It grows sheep. 75 00:04:12,475 --> 00:04:14,790 Portugal has a lot more sun and a lot less rain. 76 00:04:14,790 --> 00:04:15,990 It grows grapes. 77 00:04:15,990 --> 00:04:20,010 It produces wine and port. 78 00:04:20,010 --> 00:04:22,800 Each side trades to their comparative advantage. 79 00:04:22,800 --> 00:04:27,480 Now, he's thinking of a resource advantage, right. 80 00:04:27,480 --> 00:04:30,810 He's not thinking about a comparative innovation 81 00:04:30,810 --> 00:04:32,020 advantage. 82 00:04:32,020 --> 00:04:37,410 So what happens in the time from Ricardo to the present, 83 00:04:37,410 --> 00:04:41,520 is that nations begin building a comparative innovation 84 00:04:41,520 --> 00:04:44,830 advantage through building strong innovation systems, 85 00:04:44,830 --> 00:04:45,720 right. 86 00:04:45,720 --> 00:04:49,920 And arguably, the US leads that effort, coming out 87 00:04:49,920 --> 00:04:52,890 of World War II to develop a comparative innovation 88 00:04:52,890 --> 00:04:53,780 advantage. 89 00:04:58,640 --> 00:05:02,510 And Samuelson goes on to argue that if China 90 00:05:02,510 --> 00:05:04,610 or another comparable country begins 91 00:05:04,610 --> 00:05:07,580 to make productivity-enhancing gains in its production 92 00:05:07,580 --> 00:05:10,160 and couples that with a wage advantage, 93 00:05:10,160 --> 00:05:13,310 it can capture some of the comparative advantage that 94 00:05:13,310 --> 00:05:16,580 had belonged to a competitor like the US. 95 00:05:16,580 --> 00:05:22,920 So in a Ricardo sense, there's never unemployment 96 00:05:22,920 --> 00:05:24,740 that lasts forever from trade. 97 00:05:24,740 --> 00:05:27,870 It will eventually sort itself out, right. 98 00:05:27,870 --> 00:05:30,810 But the way in which it's been sorting itself out 99 00:05:30,810 --> 00:05:33,300 is that, as he puts it, real wages 100 00:05:33,300 --> 00:05:38,200 have been lowered by this version of dynamic fair trade. 101 00:05:38,200 --> 00:05:44,760 So to compete, wages come down, right, in the US. 102 00:05:44,760 --> 00:05:48,600 And that's what's been going on. 103 00:05:48,600 --> 00:05:52,530 So wages can drop after a time to a point 104 00:05:52,530 --> 00:05:55,920 where a productivity enhancement or productivity advantage 105 00:05:55,920 --> 00:05:59,970 in another country is offset. 106 00:05:59,970 --> 00:06:04,560 But these are still net harmful terms of trade. 107 00:06:08,280 --> 00:06:10,210 And this is not a new story, right. 108 00:06:10,210 --> 00:06:12,930 This story has been going on for a long time, Samuelson argues. 109 00:06:12,930 --> 00:06:15,690 So farming moves from the eastern part of the United 110 00:06:15,690 --> 00:06:18,150 States to the Midwest. 111 00:06:18,150 --> 00:06:21,420 That's a straight comparative advantage-- 112 00:06:21,420 --> 00:06:23,670 the ability to scale up agricultural production 113 00:06:23,670 --> 00:06:28,330 in the Midwest, as opposed to the more crowded East 114 00:06:28,330 --> 00:06:31,050 and hillier East and rockier East. 115 00:06:31,050 --> 00:06:31,710 We can see it. 116 00:06:31,710 --> 00:06:35,070 We understand why agricultural production 117 00:06:35,070 --> 00:06:36,750 shifts to the Midwest. 118 00:06:36,750 --> 00:06:39,960 Textile and shoe manufacturing moved from New England 119 00:06:39,960 --> 00:06:44,220 to the lower wage South early at the beginning 120 00:06:44,220 --> 00:06:45,930 of the 20th century. 121 00:06:45,930 --> 00:06:50,490 English manufacturing leadership shifts to the US, 122 00:06:50,490 --> 00:06:53,130 starting in the middle of the 19th century, right. 123 00:06:53,130 --> 00:06:57,130 We develop the early stages of mass production 124 00:06:57,130 --> 00:06:59,130 through interchangeable, machine-made parts, not 125 00:06:59,130 --> 00:06:59,630 Britain. 126 00:06:59,630 --> 00:07:02,190 And we'll talk more about that in a later class. 127 00:07:02,190 --> 00:07:04,800 So as Samuelson puts it, even where 128 00:07:04,800 --> 00:07:07,530 the leaders continue to progress in absolute growth, 129 00:07:07,530 --> 00:07:11,160 their rate of growth tended to be attenuated 130 00:07:11,160 --> 00:07:14,190 by an adverse headwind generated from lower wage 131 00:07:14,190 --> 00:07:16,680 competitors and other technical imitators 132 00:07:16,680 --> 00:07:18,160 in each one of these examples. 133 00:07:18,160 --> 00:07:21,240 Right, so this is an old economic story 134 00:07:21,240 --> 00:07:23,490 that he's raising. 135 00:07:23,490 --> 00:07:26,250 So a productivity gain in one country 136 00:07:26,250 --> 00:07:29,070 can benefit that country alone, while permanently hurting 137 00:07:29,070 --> 00:07:31,920 the other country by reducing the gains 138 00:07:31,920 --> 00:07:35,220 from trade that are possible between the two countries. 139 00:07:35,220 --> 00:07:36,600 And all of this, he acknowledges, 140 00:07:36,600 --> 00:07:42,720 is long-run Schumpeterian effects-- 141 00:07:42,720 --> 00:07:45,570 creative destruction of capitalism effects. 142 00:07:45,570 --> 00:07:49,080 And he concludes that in effect is a roulette wheel of evolving 143 00:07:49,080 --> 00:07:51,000 comparative advantage. 144 00:07:51,000 --> 00:07:54,690 Now his warning is a powerful one. 145 00:07:54,690 --> 00:07:58,680 If you respond with tariffs and protectionism, 146 00:07:58,680 --> 00:08:03,335 you will be breeding economic arterial sclerosis. 147 00:08:03,335 --> 00:08:04,710 You will be limiting your ability 148 00:08:04,710 --> 00:08:07,260 to effectively and efficiently compete. 149 00:08:07,260 --> 00:08:11,520 So that's not a fix in his mind. 150 00:08:11,520 --> 00:08:17,610 So this is one of the most important economists 151 00:08:17,610 --> 00:08:21,540 of the last century, and a good part of this, 152 00:08:21,540 --> 00:08:26,220 weighing in on an historic conclusion 153 00:08:26,220 --> 00:08:29,820 that economics came to about the overall benefits of trade, 154 00:08:29,820 --> 00:08:33,919 and saying it's a much more complicated story than that. 155 00:08:33,919 --> 00:08:39,059 So it was a powerful message when he put this out. 156 00:08:39,059 --> 00:08:42,840 So I just finished talking about Samuelson. 157 00:08:42,840 --> 00:08:48,180 So we're all set up for you to do us your view of Samuelson 158 00:08:48,180 --> 00:08:49,990 and lead us into some Q&A. 159 00:08:49,990 --> 00:08:54,244 AUDIENCE: He sounded very certain of all of this, right. 160 00:08:54,244 --> 00:08:58,590 And this was something that a lot of people actually asked 161 00:08:58,590 --> 00:09:04,300 about as well, is if he's so sure if this is something 162 00:09:04,300 --> 00:09:09,000 that's regarded to be pretty substantial, 163 00:09:09,000 --> 00:09:11,970 why did it take the mainstream and why did it take economists 164 00:09:11,970 --> 00:09:18,135 at large a lot of years to start changing their mentality? 165 00:09:18,135 --> 00:09:19,510 And I remember last week, we were 166 00:09:19,510 --> 00:09:24,330 talking about the US's hesitation as a country 167 00:09:24,330 --> 00:09:26,820 to change their economic outlook in certain ways. 168 00:09:26,820 --> 00:09:30,910 So I was wondering if anyone thought that those two were 169 00:09:30,910 --> 00:09:31,645 related somehow. 170 00:09:31,645 --> 00:09:33,270 So it's kind of two separate questions. 171 00:09:33,270 --> 00:09:35,130 Why did it take forever for people 172 00:09:35,130 --> 00:09:36,530 to start adopting his views? 173 00:09:36,530 --> 00:09:39,900 And does it have something to do with cultural factors 174 00:09:39,900 --> 00:09:43,380 in the United States or any other factors? 175 00:09:47,031 --> 00:09:49,446 AUDIENCE: Yeah, I have a comment. 176 00:09:49,446 --> 00:09:50,412 It's Lilly. 177 00:09:50,412 --> 00:09:53,793 I was thinking about the timeline. 178 00:09:53,793 --> 00:10:01,870 So Samuelson starts to put forward earlier than the 1970s 179 00:10:01,870 --> 00:10:02,757 or even in the '60s? 180 00:10:02,757 --> 00:10:05,090 Because he got the Nobel Prize in '72, and in his speech 181 00:10:05,090 --> 00:10:05,550 he talks about it. 182 00:10:05,550 --> 00:10:05,860 WILLIAM BONVILLIAN: Yeah. 183 00:10:05,860 --> 00:10:07,500 And this is not the main work for which 184 00:10:07,500 --> 00:10:09,030 he's been recognized for. 185 00:10:09,030 --> 00:10:15,480 But with an economist named Wolfgang Stolfer, 186 00:10:15,480 --> 00:10:17,610 the two of them put out a doctrine 187 00:10:17,610 --> 00:10:21,992 on advantages and disadvantages of trading regimes 188 00:10:21,992 --> 00:10:23,200 pretty early in their career. 189 00:10:23,200 --> 00:10:25,470 And I'm thinking the '50s, but I'd 190 00:10:25,470 --> 00:10:27,270 have to go back and check the actual dates. 191 00:10:27,270 --> 00:10:27,990 AUDIENCE: OK. 192 00:10:27,990 --> 00:10:29,740 WILLIAM BONVILLIAN: So he kind of launches 193 00:10:29,740 --> 00:10:32,010 that theoretical, highly mathematical framework. 194 00:10:32,010 --> 00:10:36,120 He returns to it in 2004 because, in his view, 195 00:10:36,120 --> 00:10:40,110 the mainstream of economics, which, of course, he created, 196 00:10:40,110 --> 00:10:48,270 has taken a departing path by assuming the continuing 197 00:10:48,270 --> 00:10:52,020 eternal benefits of free trading system 198 00:10:52,020 --> 00:10:54,840 without really analyzing the competitive processes that 199 00:10:54,840 --> 00:10:56,053 are going on here. 200 00:10:56,053 --> 00:10:57,560 AUDIENCE: Yeah. 201 00:10:57,560 --> 00:10:59,920 WILLIAM BONVILLIAN: And just add one more thing, Lilly, 202 00:10:59,920 --> 00:11:03,850 there's an economist at MIT named David Autor who 203 00:11:03,850 --> 00:11:07,630 is doing startling work-- 204 00:11:07,630 --> 00:11:10,870 and I refer to them in some of the other readings 205 00:11:10,870 --> 00:11:14,310 we got into-- but doing startling work on these very 206 00:11:14,310 --> 00:11:15,630 significant trade impacts. 207 00:11:15,630 --> 00:11:19,566 AUDIENCE: Yeah, I listened to some of his interviews. 208 00:11:19,566 --> 00:11:24,000 But I'm kind of wondering what precipitated Samuelson to write 209 00:11:24,000 --> 00:11:26,918 this sort of explosive article. 210 00:11:26,918 --> 00:11:27,960 I'm trying to think back. 211 00:11:27,960 --> 00:11:32,070 And I think Alan Greenspan-- wasn't he the economic advisor 212 00:11:32,070 --> 00:11:33,260 during the Clinton era? 213 00:11:33,260 --> 00:11:33,690 So he would have been-- 214 00:11:33,690 --> 00:11:35,310 WILLIAM BONVILLIAN: No, he was in the Bush-- 215 00:11:35,310 --> 00:11:35,695 AUDIENCE: He was? 216 00:11:35,695 --> 00:11:36,275 WILLIAM BONVILLIAN: --II regime. 217 00:11:36,275 --> 00:11:36,897 AUDIENCE: OK. 218 00:11:36,897 --> 00:11:37,110 WILLIAM BONVILLIAN: Right. 219 00:11:37,110 --> 00:11:38,180 AUDIENCE: OK. 220 00:11:38,180 --> 00:11:42,120 OK, so then NAFTA pre-dated Greenspan. 221 00:11:42,120 --> 00:11:44,700 But yeah, I'm just wondering about the timing 222 00:11:44,700 --> 00:11:47,850 of this article and what really prompted Samuelson to finally 223 00:11:47,850 --> 00:11:52,370 be like, listen, everyone, this is completely wrong. 224 00:11:52,370 --> 00:11:55,160 Yeah, maybe people weren't paying attention 225 00:11:55,160 --> 00:11:59,720 until post-NAFTA or other trade agreements, 226 00:11:59,720 --> 00:12:03,205 and then it started to become really more noticeable? 227 00:12:03,205 --> 00:12:04,580 [AUDIENCE: I mean, we'd discussed 228 00:12:04,580 --> 00:12:08,760 before that the US doesn't really respond until things 229 00:12:08,760 --> 00:12:10,302 start going south, right. 230 00:12:10,302 --> 00:12:11,244 So. 231 00:12:11,244 --> 00:12:12,186 [CHUCKLES] 232 00:12:12,828 --> 00:12:15,370 WILLIAM BONVILLIAN: Yeah, our motto could be "be unprepared." 233 00:12:19,130 --> 00:12:21,880 AUDIENCE: Or I would have loved for Mankiw 234 00:12:21,880 --> 00:12:24,820 to say that quote, like, OK, yeah, tell that 235 00:12:24,820 --> 00:12:27,770 to the losers. (LAUGHING) Like, it's totally fine. 236 00:12:27,770 --> 00:12:28,270 Don't worry. 237 00:12:28,270 --> 00:12:30,580 The winners are going to win higher than the losers are 238 00:12:30,580 --> 00:12:31,663 going to lose, so it's OK. 239 00:12:31,663 --> 00:12:32,747 WILLIAM BONVILLIAN: Right. 240 00:12:32,747 --> 00:12:35,290 And it's not that there haven't been a significant net gains, 241 00:12:35,290 --> 00:12:35,530 right. 242 00:12:35,530 --> 00:12:37,180 Consumers are, no question about it, 243 00:12:37,180 --> 00:12:41,200 significant beneficiaries of the regime. 244 00:12:41,200 --> 00:12:44,100 But there just are dramatic effects, 245 00:12:44,100 --> 00:12:48,130 is what Samuelson is arguing. 246 00:12:48,130 --> 00:12:51,050 AUDIENCE: And I think it sort of assumed in creative destruction 247 00:12:51,050 --> 00:12:54,680 that like, the winners win bigger than the losers are 248 00:12:54,680 --> 00:12:55,750 going to lose. 249 00:12:55,750 --> 00:12:59,398 And then you center the winners-- 250 00:12:59,398 --> 00:12:59,940 I don't know. 251 00:12:59,940 --> 00:13:01,797 Maybe in the US we've just been the winners 252 00:13:01,797 --> 00:13:03,630 for like a lot of these consecutive creative 253 00:13:03,630 --> 00:13:05,230 destruction periods or cycles. 254 00:13:05,230 --> 00:13:07,730 And then we have to deal with sort of competing productivity 255 00:13:07,730 --> 00:13:09,180 rates, I guess, [INAUDIBLE]. 256 00:13:09,180 --> 00:13:11,910 And then now it's probably a little bit more 257 00:13:11,910 --> 00:13:14,010 of an issue in China. 258 00:13:14,010 --> 00:13:17,703 And so the losing end starts expanding 259 00:13:17,703 --> 00:13:19,620 towards Samuelson's sphere of influence, which 260 00:13:19,620 --> 00:13:20,790 is probably inside the US. 261 00:13:20,790 --> 00:13:23,830 And he writes this in, what, in like 2004? 262 00:13:23,830 --> 00:13:26,640 And so China is really becoming sort of the forefront 263 00:13:26,640 --> 00:13:28,340 of what we're considering. 264 00:13:28,340 --> 00:13:30,503 And I guess, I think Greenspan-- 265 00:13:30,503 --> 00:13:32,670 I just looked him up-- he's like chairman of the Fed 266 00:13:32,670 --> 00:13:34,930 at this time, from '87 to 2006. 267 00:13:34,930 --> 00:13:37,860 So he sees all of this, but he's just probably 268 00:13:37,860 --> 00:13:39,540 not in a position to respond. 269 00:13:39,540 --> 00:13:45,600 And he can't really kind of shift everybody's opinion 270 00:13:45,600 --> 00:13:48,520 here, because there's a lot of, I guess, 271 00:13:48,520 --> 00:13:51,750 sort of like gravity in the way that mainstream economics is 272 00:13:51,750 --> 00:13:54,943 thinking that he's just got to follow that, I would say. 273 00:13:54,943 --> 00:13:56,610 And then, while Samuelson doesn't really 274 00:13:56,610 --> 00:13:59,990 have these restrictions or rules [INAUDIBLE].. 275 00:13:59,990 --> 00:14:01,780 He's got the backing of having created 276 00:14:01,780 --> 00:14:04,220 and the legitimacy of having created mainstream economics. 277 00:14:04,220 --> 00:14:07,598 So I think it's pretty OK to disagree with yourself. 278 00:14:07,598 --> 00:14:09,140 But it's probably a little bit harder 279 00:14:09,140 --> 00:14:12,680 to disagree with the massive wave of folks, which 280 00:14:12,680 --> 00:14:15,970 is why it might have taken these other folks a little bit 281 00:14:15,970 --> 00:14:18,880 more time to respond, 282 00:14:18,880 --> 00:14:21,770 AUDIENCE: He always wanted to break the status quo, it seems, 283 00:14:21,770 --> 00:14:24,740 with economics. 284 00:14:24,740 --> 00:14:29,132 Well, regarding the winners-and-losers discussion, 285 00:14:29,132 --> 00:14:33,590 I think people also mentioned that that sort of thought 286 00:14:33,590 --> 00:14:36,270 process might drive a wedge, too, 287 00:14:36,270 --> 00:14:39,405 that could create income inequality. 288 00:14:39,405 --> 00:14:48,900 And the question was, does this model of international trade-- 289 00:14:48,900 --> 00:14:54,070 does free trade inherently create that income inequality? 290 00:14:54,070 --> 00:14:59,840 Or are there other things that contribute to that? 291 00:14:59,840 --> 00:15:00,510 AUDIENCE: Yeah. 292 00:15:00,510 --> 00:15:02,990 But what I would add to that is, so maybe we 293 00:15:02,990 --> 00:15:07,493 do make more money than we lose, right. 294 00:15:07,493 --> 00:15:09,410 But the distribution will be affected, because 295 00:15:09,410 --> 00:15:10,610 most likely it will be-- 296 00:15:10,610 --> 00:15:14,050 I think I made this point last week with one of the Intel 297 00:15:14,050 --> 00:15:17,110 founders, where it was like, you end up making way more money, 298 00:15:17,110 --> 00:15:18,860 but you're not going to spread the wealth, 299 00:15:18,860 --> 00:15:23,450 because those jobs that amass the middle wealth aren't here. 300 00:15:23,450 --> 00:15:24,480 So I think, yeah. 301 00:15:24,480 --> 00:15:26,730 WILLIAM BONVILLIAN: Yeah, that was your quote, Martin, 302 00:15:26,730 --> 00:15:27,820 from Andy Grove of Intel. 303 00:15:27,820 --> 00:15:30,013 It was a great quote. 304 00:15:30,013 --> 00:15:31,930 AUDIENCE: And so I think that's a big problem. 305 00:15:31,930 --> 00:15:34,388 Especially with like, Apple, most of the manufacturing work 306 00:15:34,388 --> 00:15:35,780 is outside the US. 307 00:15:35,780 --> 00:15:38,870 And the other problem, too, that we haven't gotten to is taxes. 308 00:15:38,870 --> 00:15:41,260 A lot of times companies use tax loopholes effectively. 309 00:15:41,260 --> 00:15:43,420 So maybe that money should be coming here. 310 00:15:43,420 --> 00:15:44,840 And I think I made this point when 311 00:15:44,840 --> 00:15:46,340 I was making my notes on this piece, 312 00:15:46,340 --> 00:15:47,930 is there's a lot of hidden variables. 313 00:15:47,930 --> 00:15:50,180 And the author constrained his variables in such a way 314 00:15:50,180 --> 00:15:51,477 to make a certain point. 315 00:15:51,477 --> 00:15:53,060 And there's a lot of variables that he 316 00:15:53,060 --> 00:15:56,360 didn't take into account for how people actually do things. 317 00:15:56,360 --> 00:15:58,070 So theoretically, it might work out. 318 00:15:58,070 --> 00:16:00,770 But in terms of the actual, how it gets done in practice, 319 00:16:00,770 --> 00:16:05,050 I don't think it does. 320 00:16:05,050 --> 00:16:08,395 AUDIENCE: Does Autor take into account, maybe 321 00:16:08,395 --> 00:16:11,210 in his mathematical laws a couple of these tax loopholes 322 00:16:11,210 --> 00:16:14,990 and how people are actually sort of using these systems, 323 00:16:14,990 --> 00:16:19,020 rather than kind of ignoring them as variables to kind 324 00:16:19,020 --> 00:16:20,730 of make their point here? 325 00:16:20,730 --> 00:16:25,110 Because I wonder if Autor is analyzing the way 326 00:16:25,110 --> 00:16:27,690 that people actually and effectively 327 00:16:27,690 --> 00:16:30,740 use these trade laws in this kind of globalized system. 328 00:16:30,740 --> 00:16:32,880 Like, will he arrive at the same result? 329 00:16:32,880 --> 00:16:36,195 Or will we end up getting that income inequality? 330 00:16:36,195 --> 00:16:38,320 AUDIENCE: But like, one of the papers that he wrote 331 00:16:38,320 --> 00:16:42,960 looks at specific communities or areas that were heavily focused 332 00:16:42,960 --> 00:16:44,730 on an industry that's now gone. 333 00:16:44,730 --> 00:16:48,240 So it's looking at real people and how their real incomes have 334 00:16:48,240 --> 00:16:48,740 changed. 335 00:16:48,740 --> 00:16:50,930 So I think it was like furniture in North Carolina 336 00:16:50,930 --> 00:16:52,430 or something like that. 337 00:16:52,430 --> 00:16:55,680 And so you can prove just by looking at that group of people 338 00:16:55,680 --> 00:16:58,388 before and after that there has been income changes 339 00:16:58,388 --> 00:17:00,180 and that the support that they're receiving 340 00:17:00,180 --> 00:17:03,070 from the government hasn't made up for those changes in income 341 00:17:03,070 --> 00:17:04,380 that they're getting. 342 00:17:04,380 --> 00:17:07,250 So if you use that as an example, 343 00:17:07,250 --> 00:17:10,979 that can show that those income inequalities remain. 344 00:17:16,204 --> 00:17:19,069 AUDIENCE: OK, well, I think a lot of the economists who 345 00:17:19,069 --> 00:17:27,410 are mainstream economists who are providing globalization, 346 00:17:27,410 --> 00:17:30,500 when they talk about net gains being made, 347 00:17:30,500 --> 00:17:36,310 they talk about [INAUDIBLE] they almost necessitate 348 00:17:36,310 --> 00:17:38,660 this assumption that they all get spread out. 349 00:17:38,660 --> 00:17:42,410 But we don't necessarily see that for sure. 350 00:17:42,410 --> 00:17:45,680 I do feel like [INAUDIBLE] like it 351 00:17:45,680 --> 00:17:47,398 was a little bit of a contrived example. 352 00:17:47,398 --> 00:17:49,690 But I think that is to the point that what he was doing 353 00:17:49,690 --> 00:17:55,970 was specifically showing that current ideas 354 00:17:55,970 --> 00:17:59,760 about globalization always being good isn't always true. 355 00:17:59,760 --> 00:18:01,860 And he only really needed to provide 356 00:18:01,860 --> 00:18:04,820 a single example there to explain why China 357 00:18:04,820 --> 00:18:08,764 and India were [INAUDIBLE] 358 00:18:12,220 --> 00:18:15,520 AUDIENCE: Just to add, I think that another point was 359 00:18:15,520 --> 00:18:19,215 that a lot of this debate is kind of predicated 360 00:18:19,215 --> 00:18:21,210 on the idea of trickle down. 361 00:18:21,210 --> 00:18:23,740 And I think going back to the question of why now, 362 00:18:23,740 --> 00:18:26,770 or why are we [doing this now, is that you've kind of been 363 00:18:26,770 --> 00:18:29,290 successively proving that trickle down has some 364 00:18:29,290 --> 00:18:31,600 limitations-- has a lot of limitations-- 365 00:18:31,600 --> 00:18:34,030 especially considering developments in other countries 366 00:18:34,030 --> 00:18:37,690 and how the market clearing wage rate of the United States 367 00:18:37,690 --> 00:18:42,940 has just been subject to a natural reduction 368 00:18:42,940 --> 00:18:47,180 due to increased capital and innovation in other countries. 369 00:18:47,180 --> 00:18:51,100 And so the gap between the winners and the losers 370 00:18:51,100 --> 00:18:53,986 kind of has a widened and has made that trickle-down process 371 00:18:53,986 --> 00:18:55,402 even less [INAUDIBLE]. 372 00:18:57,442 --> 00:18:58,900 WILLIAM BONVILLIAN: So why don't we 373 00:18:58,900 --> 00:19:02,830 dive into the next reading, which 374 00:19:02,830 --> 00:19:06,190 was Gary Pisano and Willy Shih. 375 00:19:06,190 --> 00:19:07,990 And that's yours, too, Kevin, right? 376 00:19:07,990 --> 00:19:09,225 OK, great. 377 00:19:09,225 --> 00:19:10,600 I'll just summarize very quickly. 378 00:19:10,600 --> 00:19:12,190 And you can add more. 379 00:19:12,190 --> 00:19:14,140 But this is an article they wrote. 380 00:19:14,140 --> 00:19:19,090 They later turned this into quite a well-known book. 381 00:19:19,090 --> 00:19:22,300 And in this article-- 382 00:19:22,300 --> 00:19:25,510 and they later expand on it-- 383 00:19:25,510 --> 00:19:28,090 they look at a whole set of technology areas. 384 00:19:28,090 --> 00:19:34,270 But they start from the Kindle 2 and point out 385 00:19:34,270 --> 00:19:37,720 that very large portions of that technology 386 00:19:37,720 --> 00:19:40,840 can no longer be produced in the United States. 387 00:19:40,840 --> 00:19:43,690 This is the source for a number of the components, 388 00:19:43,690 --> 00:19:46,960 that it can only be made in various countries abroad. 389 00:19:46,960 --> 00:19:50,020 So they argue that there's an eroding US 390 00:19:50,020 --> 00:19:53,110 ability to create virtually every brand of notebook 391 00:19:53,110 --> 00:19:54,850 computer, except Apple. 392 00:19:54,850 --> 00:19:59,570 And mobile handheld designs are now largely in Asia, as well. 393 00:19:59,570 --> 00:20:03,940 So then they look at a whole series of technology fields, 394 00:20:03,940 --> 00:20:05,860 right, and find that there's been 395 00:20:05,860 --> 00:20:08,500 a lot of erosion in US leadership 396 00:20:08,500 --> 00:20:12,490 in a series of these areas, from advanced materials to computing 397 00:20:12,490 --> 00:20:14,290 and communications. 398 00:20:14,290 --> 00:20:16,150 They identify fields that are gone. 399 00:20:16,150 --> 00:20:20,410 And they identify fields that remain competitive and at risk. 400 00:20:20,410 --> 00:20:24,190 Same story for energy technologies and storage, 401 00:20:24,190 --> 00:20:27,250 for different aspects of semiconductor industry 402 00:20:27,250 --> 00:20:29,680 and for the display sector. 403 00:20:29,680 --> 00:20:32,770 So the erosion of these industrial capabilities, 404 00:20:32,770 --> 00:20:35,620 they essentially portray. 405 00:20:35,620 --> 00:20:38,530 So they help us take the Samuelson theory 406 00:20:38,530 --> 00:20:40,870 and make it much more concrete in terms 407 00:20:40,870 --> 00:20:44,530 of actual affected industry segments that 408 00:20:44,530 --> 00:20:49,300 are no longer present at significant scale in the US. 409 00:20:49,300 --> 00:20:50,710 So let me leave it to you, Kevin. 410 00:20:50,710 --> 00:20:52,312 It's all yours. 411 00:20:52,312 --> 00:20:54,276 AUDIENCE: Well, that's true, yeah. 412 00:20:54,276 --> 00:20:57,713 The, I think, big focus in the paper 413 00:20:57,713 --> 00:21:02,623 was the destructive behavior that outsourcing has caused. 414 00:21:02,623 --> 00:21:03,605 And you're right. 415 00:21:03,605 --> 00:21:07,660 Like you said, it's causing the ability for the US 416 00:21:07,660 --> 00:21:09,644 to create now. 417 00:21:12,370 --> 00:21:16,900 And I think following our previous talks 418 00:21:16,900 --> 00:21:20,030 on how governments should intervene 419 00:21:20,030 --> 00:21:24,110 in these kinds of situations to sort of fix the issue, 420 00:21:24,110 --> 00:21:28,485 what role should government play in intervening 421 00:21:28,485 --> 00:21:34,220 in company decisions that affect their profits when innovation 422 00:21:34,220 --> 00:21:38,890 for the US is the consequence-- 423 00:21:38,890 --> 00:21:45,861 the US being able to influence the consequence 424 00:21:45,861 --> 00:21:47,769 to any [INAUDIBLE]? 425 00:21:47,769 --> 00:21:52,590 AUDIENCE: Well, one answer is, [INAUDIBLE] I was wondering, 426 00:21:52,590 --> 00:21:56,640 does this outsourcing, other than unemployment, 427 00:21:56,640 --> 00:21:59,730 does this really harm the US to that extent? 428 00:21:59,730 --> 00:22:06,650 Because they argue that there's a reduced industrial commons? 429 00:22:06,650 --> 00:22:09,550 And what if this transfer of industrial 430 00:22:09,550 --> 00:22:11,145 commons in other countries-- 431 00:22:17,010 --> 00:22:22,000 does it really affect the US that much? 432 00:22:22,000 --> 00:22:27,470 Why can't the US still benefit from industrial commons 433 00:22:27,470 --> 00:22:30,740 from overseas other than loss of employment? 434 00:22:30,740 --> 00:22:33,230 Do you see what I mean? 435 00:22:33,230 --> 00:22:36,320 AUDIENCE: And I think that's an especially relevant point 436 00:22:36,320 --> 00:22:40,355 in this innovation wave where a global economy is more relevant 437 00:22:40,355 --> 00:22:41,355 than it was in the past. 438 00:22:44,192 --> 00:22:45,900 I don't know the answer to that question. 439 00:22:45,900 --> 00:22:46,840 [LAUGHS] 440 00:22:47,480 --> 00:22:49,740 AUDIENCE: If I had to guess, I'd say that, well, we 441 00:22:49,740 --> 00:22:50,920 can benefit from it. 442 00:22:50,920 --> 00:22:52,400 But the benefits that we would get 443 00:22:52,400 --> 00:22:54,170 would be orders of magnitude less 444 00:22:54,170 --> 00:22:56,264 than the benefits of the country that hosts 445 00:22:56,264 --> 00:22:57,672 this industrial commons, right? 446 00:22:57,672 --> 00:22:58,380 AUDIENCE: Mm-hmm. 447 00:22:58,380 --> 00:23:00,630 AUDIENCE: So it would mean having employment benefits. 448 00:23:00,630 --> 00:23:02,220 They'd get extra tax revenue. 449 00:23:02,220 --> 00:23:06,228 Just, their economy in general-- like 450 00:23:06,228 --> 00:23:08,520 they might be able to even undergo an entire innovation 451 00:23:08,520 --> 00:23:09,900 wave because of this. 452 00:23:09,900 --> 00:23:14,000 So yeah. 453 00:23:14,000 --> 00:23:16,830 It's not so much that we can't benefit, 454 00:23:16,830 --> 00:23:18,980 so much that it is that other people are benefiting 455 00:23:18,980 --> 00:23:22,790 more, which means that they can get ahead 456 00:23:22,790 --> 00:23:24,140 in other technologies. 457 00:23:24,140 --> 00:23:26,310 So if you look at long-term, then that 458 00:23:26,310 --> 00:23:28,230 puts them ahead in a lot of other fields. 459 00:23:28,230 --> 00:23:30,688 And that's just not good for the US interest. 460 00:23:30,688 --> 00:23:33,588 AUDIENCE: So but to that point, yeah, 461 00:23:33,588 --> 00:23:35,880 it might help in the short-term, but then the long-term 462 00:23:35,880 --> 00:23:37,680 what happens is they build up capabilities 463 00:23:37,680 --> 00:23:38,887 that we've just never had. 464 00:23:38,887 --> 00:23:41,220 Like in business, we talk a lot about compound interest. 465 00:23:41,220 --> 00:23:43,430 So a lot of the value will be created in the future. 466 00:23:43,430 --> 00:23:46,320 So the problem is more like 10 years in the future, 467 00:23:46,320 --> 00:23:49,065 they can produce things that we never build up the capability. 468 00:23:49,065 --> 00:23:51,750 And those are things that it's not 469 00:23:51,750 --> 00:23:54,300 like knowing-- it's like actually creating your supply 470 00:23:54,300 --> 00:23:57,880 chain in a certain way and creating the system. 471 00:23:57,880 --> 00:23:59,340 Silicon Valley took like 80 years 472 00:23:59,340 --> 00:24:00,950 to become Silicon Valley because you 473 00:24:00,950 --> 00:24:02,970 need a lot of [INAUDIBLE],, a lot of mentors, 474 00:24:02,970 --> 00:24:05,102 a lot of different expertises. 475 00:24:05,102 --> 00:24:06,810 And so my big worry when I'm reading this 476 00:24:06,810 --> 00:24:10,210 is more that we are very short-term-focused in the US. 477 00:24:10,210 --> 00:24:11,190 We don't really save. 478 00:24:11,190 --> 00:24:12,670 We always assume the future's going to be optimistic. 479 00:24:12,670 --> 00:24:15,230 And this is a point from Peter Thiel, Professor, 480 00:24:15,230 --> 00:24:17,960 since I know you kind of like him. 481 00:24:17,960 --> 00:24:20,030 And like Asian countries tend to be more-- 482 00:24:20,030 --> 00:24:23,930 let's say I think, like 30% to [INAUDIBLE] a long-term focus. 483 00:24:23,930 --> 00:24:27,180 So I think that's really a key point with this piece, 484 00:24:27,180 --> 00:24:28,830 that we're very short-term-focused. 485 00:24:28,830 --> 00:24:31,160 We're trying to find the big win very quickly. 486 00:24:31,160 --> 00:24:33,330 So that's why our industries are kind of like tech-- 487 00:24:33,330 --> 00:24:35,710 technologies that don't matter as much-- 488 00:24:35,710 --> 00:24:38,070 Wall Street, finance, which debateably 489 00:24:38,070 --> 00:24:40,445 doesn't add that much value. 490 00:24:40,445 --> 00:24:43,170 And these other industries take a long time. 491 00:24:43,170 --> 00:24:44,670 But you'll get a lot of capabilities 492 00:24:44,670 --> 00:24:46,035 that you won't be able to get. 493 00:24:46,035 --> 00:24:49,070 AUDIENCE: What was the paper where-- 494 00:24:49,070 --> 00:24:51,470 it was Japan that looked hundreds of years 495 00:24:51,470 --> 00:24:54,620 into the future and have that anecdote about an advisor 496 00:24:54,620 --> 00:24:55,120 or someone. 497 00:24:55,120 --> 00:24:58,090 And he said, oh, yeah, this is my plan for the next 100 years. 498 00:24:58,090 --> 00:25:00,200 And he was criticized for thinking too short-term. 499 00:25:00,200 --> 00:25:01,568 WILLIAM BONVILLIAN: [CHUCKLES] 500 00:25:01,568 --> 00:25:02,480 Right. 501 00:25:02,480 --> 00:25:04,280 AUDIENCE: I think it's interesting also-- 502 00:25:04,280 --> 00:25:07,070 I understand very strongly the point you're making about how 503 00:25:07,070 --> 00:25:09,028 other countries would then benefit when we move 504 00:25:09,028 --> 00:25:11,400 our [INAUDIBLE] overseas-- 505 00:25:11,400 --> 00:25:15,600 but what's the link between maybe moving 506 00:25:15,600 --> 00:25:18,105 those processes overseas and making room for new ideas 507 00:25:18,105 --> 00:25:20,336 to be borne? 508 00:25:20,336 --> 00:25:23,280 And if maybe the US takes on more 509 00:25:23,280 --> 00:25:27,020 of an innovative and purely like the idea-- 510 00:25:27,020 --> 00:25:28,860 like blackboard kind of innovation-- 511 00:25:28,860 --> 00:25:31,290 and then ships the idea to another country where 512 00:25:31,290 --> 00:25:33,147 they can actually produce them? 513 00:25:33,147 --> 00:25:34,980 Does there need to be that separation for us 514 00:25:34,980 --> 00:25:36,647 to be able to have the room to innovate? 515 00:25:36,647 --> 00:25:38,998 Or can we still innovate and keep all of our stuff here? 516 00:25:38,998 --> 00:25:40,415 AUDIENCE: I think we can innovate. 517 00:25:40,415 --> 00:25:43,758 I don't know that the US would like moving 518 00:25:43,758 --> 00:25:45,050 most of their profits overseas. 519 00:25:47,023 --> 00:25:49,440 WILLIAM BONVILLIAN: Let me jump in with a couple of slides 520 00:25:49,440 --> 00:25:50,790 that I was going to use later. 521 00:25:50,790 --> 00:25:55,020 But they're relevant-- very relevant to this discussion. 522 00:25:55,020 --> 00:25:59,960 So this is the share of employment in services 523 00:25:59,960 --> 00:26:01,040 versus manufacturing. 524 00:26:01,040 --> 00:26:02,540 So that's the left-hand chart. 525 00:26:02,540 --> 00:26:06,650 So services in the US, 86%, production, 14%. 526 00:26:06,650 --> 00:26:09,920 It's actually somewhat lower than that. 527 00:26:09,920 --> 00:26:13,190 And then that's the share of earnings in the Standard 528 00:26:13,190 --> 00:26:18,260 & Poor 500 coming from manufacturing versus services, 529 00:26:18,260 --> 00:26:19,370 right. 530 00:26:19,370 --> 00:26:21,630 So one reason why you manufacture 531 00:26:21,630 --> 00:26:23,990 is, that's where the money is, right. 532 00:26:23,990 --> 00:26:25,770 It's not in services. 533 00:26:25,770 --> 00:26:28,670 So if you develop an economy that's overwhelmingly services, 534 00:26:28,670 --> 00:26:31,790 as we have been heading for for a long time, 535 00:26:31,790 --> 00:26:34,130 look at the returns, right. 536 00:26:34,130 --> 00:26:37,700 And then-- I'm really jumping ahead here-- 537 00:26:37,700 --> 00:26:41,540 but let's look at the trade balance 538 00:26:41,540 --> 00:26:45,950 for high technology goods versus all manufactured products. 539 00:26:45,950 --> 00:26:49,340 So the US is running a gigantic trade deficit 540 00:26:49,340 --> 00:26:52,250 in all manufactured products. 541 00:26:52,250 --> 00:26:54,800 But now, we're running a major trade 542 00:26:54,800 --> 00:26:58,280 deficit in advanced manufacturing technologies. 543 00:26:58,280 --> 00:27:01,910 So that goes right to your point, Chloe, right? 544 00:27:01,910 --> 00:27:06,530 Let's cede commodity production and make it up on the high end. 545 00:27:06,530 --> 00:27:09,290 Except we're not doing that, right. 546 00:27:09,290 --> 00:27:12,635 Instead, the whole picture looks bleak. 547 00:27:12,635 --> 00:27:13,560 [LAUGHTER] 548 00:27:14,060 --> 00:27:14,795 Right. 549 00:27:14,795 --> 00:27:16,670 This class is designed to scare you to death. 550 00:27:16,670 --> 00:27:17,253 AUDIENCE: Yup. 551 00:27:17,253 --> 00:27:18,094 [LAUGHTER] 552 00:27:18,594 --> 00:27:21,480 AUDIENCE: [INAUDIBLE] I find that isn't it 553 00:27:21,480 --> 00:27:23,606 counter-intuitive for the US to train so much 554 00:27:23,606 --> 00:27:26,843 international students, and knowing that most of them 555 00:27:26,843 --> 00:27:28,586 will return to their home country 556 00:27:28,586 --> 00:27:30,675 and contribute to the industry commons over there? 557 00:27:30,675 --> 00:27:31,545 AUDIENCE: Well, see, that's fascinating, 558 00:27:31,545 --> 00:27:33,655 because I heard the assumption actually 559 00:27:33,655 --> 00:27:36,025 be that the US keeps the international students, 560 00:27:36,025 --> 00:27:37,370 and that's why. 561 00:27:37,370 --> 00:27:40,296 I mean, we've mentioned it in several classes, right? 562 00:27:40,296 --> 00:27:42,195 Yeah, [INAUDIBLE], right? 563 00:27:42,195 --> 00:27:44,023 AUDIENCE: They might still do. 564 00:27:44,023 --> 00:27:46,190 AUDIENCE: Probably true, but maybe at a lesser rate. 565 00:27:46,190 --> 00:27:48,800 Because I think the opportunities available now 566 00:27:48,800 --> 00:27:51,590 in the US manufacturing sector, just like outside the US-- 567 00:27:51,590 --> 00:27:54,470 for people that come here and do train, 568 00:27:54,470 --> 00:27:56,810 it's now a lot more feasible for me to go back, 569 00:27:56,810 --> 00:27:58,770 whereas previously I would have had to stay. 570 00:27:58,770 --> 00:28:01,522 And so we're seeing sort of a decreasing rate [INAUDIBLE] 571 00:28:01,522 --> 00:28:02,022 to stay. 572 00:28:02,022 --> 00:28:02,674 AUDIENCE: More desirable to stay, right? 573 00:28:02,674 --> 00:28:05,114 It's like the common example we've used in class, 574 00:28:05,114 --> 00:28:06,578 I think maybe two or three times, 575 00:28:06,578 --> 00:28:09,018 is that with every diploma and cap received in the US, 576 00:28:09,018 --> 00:28:11,713 we should staple a visa. 577 00:28:11,713 --> 00:28:13,880 WILLIAM BONVILLIAN: Heck, let's staple a green card. 578 00:28:13,880 --> 00:28:14,857 To heck with the visa. 579 00:28:14,857 --> 00:28:15,095 [LAUGHTER] 580 00:28:15,095 --> 00:28:16,045 AUDIENCE: A green card, sorry. 581 00:28:16,045 --> 00:28:16,837 That's what I mean. 582 00:28:16,837 --> 00:28:19,528 But yeah, so what does the data actually 583 00:28:19,528 --> 00:28:20,912 look like on that bill? 584 00:28:20,912 --> 00:28:22,870 WILLIAM BONVILLIAN: Well, a significant portion 585 00:28:22,870 --> 00:28:25,840 of students from abroad do stay here, right. 586 00:28:25,840 --> 00:28:27,620 But the numbers are in decline. 587 00:28:27,620 --> 00:28:29,620 And more are going back to their home countries. 588 00:28:29,620 --> 00:28:32,050 But does that mean-- you all tell me-- 589 00:28:32,050 --> 00:28:33,550 that the US ought to close its doors 590 00:28:33,550 --> 00:28:34,725 to international students? 591 00:28:34,725 --> 00:28:36,100 Right, is that what we should do? 592 00:28:36,100 --> 00:28:38,980 Right, is that the right economic strategy? 593 00:28:38,980 --> 00:28:42,613 We've got somebody who thinks it is, at the moment. 594 00:28:42,613 --> 00:28:45,030 AUDIENCE: You know yesterday he passed another one, right? 595 00:28:45,030 --> 00:28:45,640 WILLIAM BONVILLIAN: Yeah, I know. 596 00:28:45,640 --> 00:28:46,560 [LAUGHTER] 597 00:28:47,310 --> 00:28:48,110 No. 598 00:28:48,110 --> 00:28:51,490 No, really-- I'm asking in a serious kind of way. 599 00:28:51,490 --> 00:28:53,590 I mean, the US model, historically, 600 00:28:53,590 --> 00:28:55,668 was to have these international universities 601 00:28:55,668 --> 00:28:57,460 and attract talent from all over the place. 602 00:28:57,460 --> 00:29:00,550 Because if you're running an innovation system 603 00:29:00,550 --> 00:29:03,310 that feeds talent for the entire world, what 604 00:29:03,310 --> 00:29:05,680 an incredible competitive advantage, right? 605 00:29:05,680 --> 00:29:08,015 What an incredible competitive opportunity. 606 00:29:08,015 --> 00:29:09,640 But I think the other side of that coin 607 00:29:09,640 --> 00:29:13,430 is that it's a value in itself. 608 00:29:13,430 --> 00:29:17,350 And yeah, you really asked some terrific questions 609 00:29:17,350 --> 00:29:18,480 in your email to me. 610 00:29:18,480 --> 00:29:21,550 And this is one of them. 611 00:29:21,550 --> 00:29:22,880 What are these Americans doing? 612 00:29:22,880 --> 00:29:23,380 Right. 613 00:29:23,380 --> 00:29:26,290 What do they think they're doing here? 614 00:29:26,290 --> 00:29:28,720 But I still think it's of overall value 615 00:29:28,720 --> 00:29:31,570 to have as much talent here, because that's how knowledge 616 00:29:31,570 --> 00:29:33,670 gets sharpened, right. 617 00:29:33,670 --> 00:29:35,440 That's how we get sharper and better. 618 00:29:35,440 --> 00:29:38,170 And so that would be my argument. 619 00:29:38,170 --> 00:29:40,780 But people should feel free to disagree. 620 00:29:40,780 --> 00:29:44,900 AUDIENCE: So in a way that-- 621 00:29:44,900 --> 00:29:46,910 I feel really uncomfortable when people say, 622 00:29:46,910 --> 00:29:48,478 I want to play the devil's advocate. 623 00:29:48,478 --> 00:29:51,020 Because I feel like those people are trying to be incendiary. 624 00:29:51,020 --> 00:29:53,360 But I certainly have had peers in the past that 625 00:29:53,360 --> 00:29:56,060 would have raised the point of this conversation 626 00:29:56,060 --> 00:29:58,970 about whether students who are coming from other countries 627 00:29:58,970 --> 00:30:01,250 might be considered spies, because they 628 00:30:01,250 --> 00:30:05,840 would be then understanding knowledge and the innovation 629 00:30:05,840 --> 00:30:07,910 or sort of innovation paradigm, and then 630 00:30:07,910 --> 00:30:10,010 taking it back to their home countries. 631 00:30:10,010 --> 00:30:12,440 And that also makes me feel uncomfortable, 632 00:30:12,440 --> 00:30:16,430 because I feel like trust sort of precludes cooperation. 633 00:30:16,430 --> 00:30:19,310 And it precludes the United States' ability 634 00:30:19,310 --> 00:30:20,695 to work in a globalized system. 635 00:30:20,695 --> 00:30:22,987 So I was hoping that you could talk about that a little 636 00:30:22,987 --> 00:30:23,487 as well. 637 00:30:28,370 --> 00:30:33,290 WILLIAM BONVILLIAN: In the end, having a world talent base 638 00:30:33,290 --> 00:30:36,563 with common education experiences-- 639 00:30:36,563 --> 00:30:38,480 that's very powerful for the world in general. 640 00:30:38,480 --> 00:30:41,390 I mean, that's a real huge net plus. 641 00:30:41,390 --> 00:30:45,350 And we can't assume that all innovation is 642 00:30:45,350 --> 00:30:46,850 going to happen in the United States 643 00:30:46,850 --> 00:30:48,140 and we can wall ourselves off. 644 00:30:48,140 --> 00:30:50,465 It's important for innovation to occur elsewhere. 645 00:30:53,360 --> 00:31:01,320 There's an old story about small towns and lawyers, right. 646 00:31:01,320 --> 00:31:07,871 So if there's a small town and there's one lawyer, 647 00:31:07,871 --> 00:31:09,946 the lawyer is going to starve. 648 00:31:09,946 --> 00:31:12,940 If there's a small town and two lawyers, 649 00:31:12,940 --> 00:31:15,173 they're both going to get rich, right. 650 00:31:15,173 --> 00:31:17,590 Because their clients will be suing each other constantly, 651 00:31:17,590 --> 00:31:18,090 right. 652 00:31:18,090 --> 00:31:21,370 In other words, they're going to create more net, right. 653 00:31:21,370 --> 00:31:25,210 And if China is doing brilliant things 654 00:31:25,210 --> 00:31:29,920 to bring 300, 400 or more million people 655 00:31:29,920 --> 00:31:33,040 into its middle class, that's a great thing for the world. 656 00:31:33,040 --> 00:31:36,180 That's a great, overall incredible net plus, 657 00:31:36,180 --> 00:31:40,060 to create a massive new middle class. 658 00:31:40,060 --> 00:31:42,880 And if the US can't figure out how to take advantage of that, 659 00:31:42,880 --> 00:31:45,670 then shame on us, right. 660 00:31:45,670 --> 00:31:48,490 Because it's really important that the world do these things, 661 00:31:48,490 --> 00:31:49,120 right. 662 00:31:49,120 --> 00:31:50,140 Same story in India. 663 00:31:50,140 --> 00:31:52,390 Same story and all kinds of other developing countries 664 00:31:52,390 --> 00:31:54,470 that are starting to become emerging economies. 665 00:31:54,470 --> 00:31:56,660 So these things need to happen. 666 00:31:56,660 --> 00:32:00,610 And we're not going to be able to wall them off. 667 00:32:00,610 --> 00:32:02,560 We just have to figure out-- 668 00:32:02,560 --> 00:32:04,480 to develop our own competitive capabilities 669 00:32:04,480 --> 00:32:06,075 to be participating. 670 00:32:06,075 --> 00:32:07,450 That would be what I would argue. 671 00:32:07,450 --> 00:32:10,130 Now, a lot of people see this differently. 672 00:32:10,130 --> 00:32:10,630 Matthew? 673 00:32:10,630 --> 00:32:12,089 AUDIENCE: I think another benefit-- 674 00:32:12,089 --> 00:32:15,004 even if you didn't care about the Chinese middle class 675 00:32:15,004 --> 00:32:18,880 or India's middle class, and if you just cared about the US, 676 00:32:18,880 --> 00:32:20,880 you'd still have to recognize that we don't have 677 00:32:20,880 --> 00:32:22,530 the comparative advantage in everything 678 00:32:22,530 --> 00:32:24,250 such as advanced manufacturing. 679 00:32:24,250 --> 00:32:26,210 By having those international students there, 680 00:32:26,210 --> 00:32:29,750 like say, a Sloan student who was working 681 00:32:29,750 --> 00:32:31,530 in manufacturing in China-- 682 00:32:31,530 --> 00:32:33,360 just as much as they're maybe benefiting 683 00:32:33,360 --> 00:32:36,690 from the US education and that innovation mindset, 684 00:32:36,690 --> 00:32:39,195 they're sharing with their peers their experiences. 685 00:32:39,195 --> 00:32:39,820 AUDIENCE: Yeah. 686 00:32:39,820 --> 00:32:40,862 I think that's important. 687 00:32:40,862 --> 00:32:43,330 And when we consider the educational model 688 00:32:43,330 --> 00:32:46,060 and bringing international people into that, 689 00:32:46,060 --> 00:32:48,850 I think it's important to not adopt the perspective 690 00:32:48,850 --> 00:32:51,430 that we're the only ones who have anything to offer. 691 00:32:51,430 --> 00:32:52,880 WILLIAM BONVILLIAN: You got it. 692 00:32:52,880 --> 00:32:54,880 AUDIENCE: Other people bring other perspectives. 693 00:32:54,880 --> 00:32:55,963 WILLIAM BONVILLIAN: Right. 694 00:32:55,963 --> 00:32:58,390 AUDIENCE: And that's valuable even just for our benefit, 695 00:32:58,390 --> 00:33:01,860 not to mention other countries' benefit, which is good. 696 00:33:01,860 --> 00:33:05,160 WILLIAM BONVILLIAN: So, Luyao have we answered your question? 697 00:33:05,160 --> 00:33:05,783 Yeah? 698 00:33:05,783 --> 00:33:07,950 Are you satisfied with what we've talked about here? 699 00:33:07,950 --> 00:33:08,783 AUDIENCE: [CHUCKLES] 700 00:33:08,783 --> 00:33:11,283 WILLIAM BONVILLIAN: You can critique us. 701 00:33:11,283 --> 00:33:14,040 AUDIENCE: Well, personally I think 702 00:33:14,040 --> 00:33:17,080 it, just for the sake of the world, 703 00:33:17,080 --> 00:33:21,180 is benefiting to have an international base of talents. 704 00:33:21,180 --> 00:33:22,950 And there are countries that see this 705 00:33:22,950 --> 00:33:27,505 as a national strategic move, to attract talents, 706 00:33:27,505 --> 00:33:28,720 like Singapore. 707 00:33:28,720 --> 00:33:31,780 But because they are such a small country and their only 708 00:33:31,780 --> 00:33:34,482 resources-- the human talents-- 709 00:33:34,482 --> 00:33:38,242 then I don't know if the US sees this as something 710 00:33:38,242 --> 00:33:40,220 of national importance. 711 00:33:40,220 --> 00:33:41,660 WILLIAM BONVILLIAN: Right. 712 00:33:41,660 --> 00:33:43,700 Your Singapore example is very astute. 713 00:33:43,700 --> 00:33:44,700 It's really interesting. 714 00:33:44,700 --> 00:33:48,120 Because Singapore, at least until fairly recently, 715 00:33:48,120 --> 00:33:50,520 had a strategy for higher education, 716 00:33:50,520 --> 00:33:52,500 in particular graduate education, 717 00:33:52,500 --> 00:33:55,020 to get its students out into the world, right-- 718 00:33:55,020 --> 00:33:57,240 to send them to the best educational institutions 719 00:33:57,240 --> 00:34:00,660 around the world, so that they would learn other countries 720 00:34:00,660 --> 00:34:02,760 and how they worked and what ideas 721 00:34:02,760 --> 00:34:05,435 could be gained from them-- 722 00:34:05,435 --> 00:34:07,560 and that they would be able to set up relationships 723 00:34:07,560 --> 00:34:08,510 with those countries. 724 00:34:08,510 --> 00:34:10,510 They would be able to have working relationships 725 00:34:10,510 --> 00:34:13,500 with the communities that they learned. 726 00:34:13,500 --> 00:34:20,670 And Singapore-- small island nation-- 727 00:34:20,670 --> 00:34:24,870 city-state, really-- no real resources. 728 00:34:24,870 --> 00:34:26,820 They have to trade to live. 729 00:34:26,820 --> 00:34:31,199 So they organize themselves around becoming intermediaries 730 00:34:31,199 --> 00:34:34,380 in all kinds of trading activities 731 00:34:34,380 --> 00:34:36,900 worldwide, whether it's petroleum 732 00:34:36,900 --> 00:34:40,260 and oil and fossil fuels, or it's 733 00:34:40,260 --> 00:34:43,500 running the world's most efficient port 734 00:34:43,500 --> 00:34:49,093 or running the most efficient cargo transport aircraft 735 00:34:49,093 --> 00:34:50,760 operation in the world, they figured out 736 00:34:50,760 --> 00:34:52,320 these intermediary spots. 737 00:34:52,320 --> 00:34:54,808 And then they used their relationship building 738 00:34:54,808 --> 00:34:56,850 to be able to build the relationships they needed 739 00:34:56,850 --> 00:34:59,670 to play that dramatic intermediary role benefited 740 00:34:59,670 --> 00:35:01,140 by their geography. 741 00:35:01,140 --> 00:35:04,200 So it's a very interesting example, Luyao, 742 00:35:04,200 --> 00:35:09,120 of a country that's adopted kind of a broad look at education 743 00:35:09,120 --> 00:35:11,136 and where to get it. 744 00:35:11,136 --> 00:35:12,780 AUDIENCE: And to add on to that-- 745 00:35:12,780 --> 00:35:13,066 WILLIAM BONVILLIAN: Please. 746 00:35:13,066 --> 00:35:15,690 AUDIENCE: --with that kind of strategy, there are, of course, 747 00:35:15,690 --> 00:35:17,280 social costs. 748 00:35:17,280 --> 00:35:23,030 There are like local hatreds of international laborers. 749 00:35:23,030 --> 00:35:26,840 And the government takes a responsibility 750 00:35:26,840 --> 00:35:30,900 to settle this conflict instead of reducing 751 00:35:30,900 --> 00:35:33,080 international talents, because they 752 00:35:33,080 --> 00:35:35,440 see this as a strategic move. 753 00:35:35,440 --> 00:35:40,640 And so it is the question, like, when we see maybe 754 00:35:40,640 --> 00:35:44,580 there is an outsourcing of manufacturing, 755 00:35:44,580 --> 00:35:49,120 there are loss of talents. 756 00:35:49,120 --> 00:35:52,735 Or do we just stop doing it? 757 00:35:52,735 --> 00:35:55,090 Or should the government take the responsibility 758 00:35:55,090 --> 00:35:58,240 to solve the social costs associated 759 00:35:58,240 --> 00:36:03,982 with this kind of move, together with globalization? 760 00:36:03,982 --> 00:36:05,920 WILLIAM BONVILLIAN: Have at it, team. 761 00:36:05,920 --> 00:36:07,975 What do you think? 762 00:36:07,975 --> 00:36:09,600 AUDIENCE: So on the point of education, 763 00:36:09,600 --> 00:36:12,560 higher education, that's one of the US's important abilities. 764 00:36:12,560 --> 00:36:15,210 So it's a really good thing. 765 00:36:15,210 --> 00:36:16,710 It's dangerous to assume that that's 766 00:36:16,710 --> 00:36:19,015 going to be a core strength for a long period of time. 767 00:36:19,015 --> 00:36:22,150 So people will learn from us and [INAUDIBLE] 768 00:36:22,150 --> 00:36:24,580 There's a couple good universities popping up 769 00:36:24,580 --> 00:36:26,957 in other countries that are doing well. 770 00:36:26,957 --> 00:36:29,290 I think the big danger, though, is the point [INAUDIBLE] 771 00:36:29,290 --> 00:36:34,030 made previously about why should [INAUDIBLE] create more value? 772 00:36:34,030 --> 00:36:37,260 Because ideas don't matter as much as the execution of ideas. 773 00:36:37,260 --> 00:36:38,635 Like, there's a ton of people who 774 00:36:38,635 --> 00:36:39,790 came up with social networks. 775 00:36:39,790 --> 00:36:41,582 Facebook had 15 social networks beforehand. 776 00:36:41,582 --> 00:36:43,988 But it wasn't until one person executed it right. 777 00:36:43,988 --> 00:36:46,030 So the danger is, we could invent something here, 778 00:36:46,030 --> 00:36:48,860 and another company in China has-- he's like, 779 00:36:48,860 --> 00:36:50,340 oh, that's a great idea. 780 00:36:50,340 --> 00:36:51,010 We can do that. 781 00:36:51,010 --> 00:36:51,843 We can do it better. 782 00:36:51,843 --> 00:36:53,240 And we can do it cheaper. 783 00:36:53,240 --> 00:36:55,540 And that's the real kind of thing I would worry about, 784 00:36:55,540 --> 00:36:57,770 is that capability of being able to execute. 785 00:36:57,770 --> 00:37:01,380 And it's something that's hard to understand 786 00:37:01,380 --> 00:37:04,430 until you've see it just happen and gone through it. 787 00:37:04,430 --> 00:37:06,262 But that's the danger. 788 00:37:06,262 --> 00:37:08,220 WILLIAM BONVILLIAN: So Kevin, how about another 789 00:37:08,220 --> 00:37:14,633 question-- a closing question on Gary Pisano and Willy Shih. 790 00:37:14,633 --> 00:37:16,525 AUDIENCE: Throughout this whole discussion-- 791 00:37:16,525 --> 00:37:18,672 this might be beyond the scope of the class-- 792 00:37:18,672 --> 00:37:20,505 there's a question that popped into my head. 793 00:37:20,505 --> 00:37:22,890 If there stands to be so much mutual benefit 794 00:37:22,890 --> 00:37:28,590 from global cooperation, why don't countries prioritize it? 795 00:37:28,590 --> 00:37:31,140 That might be an idealistic view. 796 00:37:31,140 --> 00:37:34,107 But if economies now are so interconnected by trade 797 00:37:34,107 --> 00:37:38,550 and competition and everything, why don't governments 798 00:37:38,550 --> 00:37:43,810 of the world cooperate to sort of prop each other up? 799 00:37:43,810 --> 00:37:45,685 And I'm as cynical as the next person, right. 800 00:37:45,685 --> 00:37:50,130 I understand human greed and the desire for money, right-- 801 00:37:50,130 --> 00:37:51,900 desire to be the best. 802 00:37:51,900 --> 00:37:54,895 But why can't everyone sort of be the best? 803 00:37:54,895 --> 00:37:56,270 AUDIENCE: That's a good question. 804 00:37:56,270 --> 00:37:57,200 AUDIENCE: Yeah. 805 00:37:57,200 --> 00:37:58,130 AUDIENCE: [CHUCKLES] 806 00:37:58,130 --> 00:38:01,790 AUDIENCE: So often the people who 807 00:38:01,790 --> 00:38:06,480 have to make these decisions, they usually 808 00:38:06,480 --> 00:38:10,520 want to put their people first-- like, hey, America first. 809 00:38:10,520 --> 00:38:13,955 So that usually means it's America first 810 00:38:13,955 --> 00:38:16,670 at the cost of anyone else. 811 00:38:16,670 --> 00:38:20,450 So if you have 196 governments, all of which who 812 00:38:20,450 --> 00:38:22,990 are thinking like that, then, well, you kind of 813 00:38:22,990 --> 00:38:24,970 end up where we are today. 814 00:38:24,970 --> 00:38:28,310 And it's short-term, yes. 815 00:38:28,310 --> 00:38:31,893 And I'll try to play a bit of devil's advocate. 816 00:38:31,893 --> 00:38:33,060 I know you hate that, Lilly. 817 00:38:33,060 --> 00:38:33,485 [LAUGHTER] 818 00:38:33,485 --> 00:38:34,335 AUDIENCE: Yeah, I hate it. 819 00:38:34,335 --> 00:38:35,270 AUDIENCE: I love it. 820 00:38:35,270 --> 00:38:37,757 Honestly, I love that phrase. 821 00:38:37,757 --> 00:38:39,340 AUDIENCE: As an intellectual exercise, 822 00:38:39,340 --> 00:38:40,150 I think it's important. 823 00:38:40,150 --> 00:38:40,730 AUDIENCE: Yes. 824 00:38:40,730 --> 00:38:42,580 AUDIENCE: But if you do it from not a place of trying 825 00:38:42,580 --> 00:38:44,620 to find an understanding with other people, 826 00:38:44,620 --> 00:38:47,590 then I think it is irresponsible. 827 00:38:47,590 --> 00:38:48,870 AUDIENCE: So I see the-- 828 00:38:52,983 --> 00:38:53,650 I lost my point. 829 00:38:53,650 --> 00:38:54,880 [LAUGHTER] 830 00:38:55,467 --> 00:38:57,050 AUDIENCE: Global corporate [INAUDIBLE] 831 00:38:57,050 --> 00:38:58,720 AUDIENCE: Thank you. 832 00:38:58,720 --> 00:39:08,920 Yeah, so I see why long-term it would be good to cooperate. 833 00:39:08,920 --> 00:39:12,350 But in the short-term, if somebody, say, 834 00:39:12,350 --> 00:39:15,140 reneges on a deal when you've already 835 00:39:15,140 --> 00:39:17,240 put billions and billions of dollars into it, 836 00:39:17,240 --> 00:39:18,657 that could hurt you significantly. 837 00:39:18,657 --> 00:39:20,455 And then they could get away scot-free. 838 00:39:20,455 --> 00:39:21,830 And then they could realize, hey, 839 00:39:21,830 --> 00:39:23,390 I've damaged this country that-- 840 00:39:23,390 --> 00:39:26,780 I don't know-- for whatever reason, 841 00:39:26,780 --> 00:39:32,030 I wanted to have less economic benefit than what I'm getting. 842 00:39:32,030 --> 00:39:35,860 So basically, it comes down to mistrust. 843 00:39:35,860 --> 00:39:37,660 So like that could happen. 844 00:39:37,660 --> 00:39:39,340 Yes, "we are the world." 845 00:39:39,340 --> 00:39:40,840 I'd love for it to happen. 846 00:39:40,840 --> 00:39:43,680 But I think it's going to take a long time. 847 00:39:43,680 --> 00:39:46,253 AUDIENCE: So to point out, we've definitely 848 00:39:46,253 --> 00:39:48,170 done the whole reneging thing a billion times. 849 00:39:48,170 --> 00:39:48,480 AUDIENCE: Yes. 850 00:39:48,480 --> 00:39:49,688 AUDIENCE: Colonialism exists. 851 00:39:49,688 --> 00:39:50,188 So-- 852 00:39:50,188 --> 00:39:51,030 AUDIENCE: [LAUGHS] 853 00:39:51,030 --> 00:39:52,405 AUDIENCE: --we've definitely gone 854 00:39:52,405 --> 00:39:54,810 to countries and different places around the world, 855 00:39:54,810 --> 00:39:58,400 and really just ravished for resources, 856 00:39:58,400 --> 00:40:00,740 technological abilities, what have you. 857 00:40:00,740 --> 00:40:03,175 And then, I think there's a longstanding history 858 00:40:03,175 --> 00:40:07,640 of us kind of doing that and not doing it right, just because it 859 00:40:07,640 --> 00:40:11,015 is so advantageous for one party to renege or do it wrong 860 00:40:11,015 --> 00:40:13,140 and go in for the wrong reasons in the first place. 861 00:40:13,140 --> 00:40:15,710 And I think that level of trust is 862 00:40:15,710 --> 00:40:17,450 sort of hard to build from that history, 863 00:40:17,450 --> 00:40:19,710 but also, in the case of [INAUDIBLE] 864 00:40:19,710 --> 00:40:23,470 so let's say you build this multi-national cooperation 865 00:40:23,470 --> 00:40:28,780 and somebody does sort of renege on a deal, 866 00:40:28,780 --> 00:40:31,960 I can't see really a conflict mediation 867 00:40:31,960 --> 00:40:36,520 peace or a medium there that doesn't escalate very quickly, 868 00:40:36,520 --> 00:40:40,130 especially when large economic threats are involved-- so maybe 869 00:40:40,130 --> 00:40:42,330 war or something. 870 00:40:42,330 --> 00:40:45,110 War is the extreme example, but like tariffs-- 871 00:40:45,110 --> 00:40:47,713 there could be large trade implications that now-- 872 00:40:47,713 --> 00:40:50,130 whereas previously they would have been isolated to larger 873 00:40:50,130 --> 00:40:51,963 countries, but now that it's multi-national, 874 00:40:51,963 --> 00:40:53,650 it affects sort of everybody. 875 00:40:53,650 --> 00:40:56,317 AUDIENCE: I'm trying to think of a memoir I was reading recently 876 00:40:56,317 --> 00:40:58,420 about a woman named Wangari Maathai in Kenya 877 00:40:58,420 --> 00:41:02,390 about her experiences of growing up right as British colonialism 878 00:41:02,390 --> 00:41:04,060 was taking off in the 1940s. 879 00:41:04,060 --> 00:41:07,550 And she was speaking of the ways in which society 880 00:41:07,550 --> 00:41:09,940 had been structured in her village 881 00:41:09,940 --> 00:41:15,300 and that different ethnic groups had become, I guess, 882 00:41:15,300 --> 00:41:16,975 specialized in certain capacities. 883 00:41:16,975 --> 00:41:19,100 Like, some people were very good at basket weaving. 884 00:41:19,100 --> 00:41:21,720 Other people had become very good at agriculture. 885 00:41:21,720 --> 00:41:23,715 Other people have become very good at medicine. 886 00:41:23,715 --> 00:41:26,215 And each of those communities taught themselves those trades 887 00:41:26,215 --> 00:41:29,800 and perpetuated that sort of, I guess, 888 00:41:29,800 --> 00:41:32,140 capacity within generations. 889 00:41:32,140 --> 00:41:34,270 And then British colonialism came in. 890 00:41:34,270 --> 00:41:39,040 They started exploiting people for agricultural production. 891 00:41:39,040 --> 00:41:43,630 And that entire system imploded, and along with it, [INAUDIBLE] 892 00:41:43,630 --> 00:41:46,125 culture, the knowledge that they had, 893 00:41:46,125 --> 00:41:47,500 the agricultural systems that had 894 00:41:47,500 --> 00:41:50,980 taken them thousands of years to formulate, et cetera. 895 00:41:50,980 --> 00:41:53,680 And I think it's precisely what this woman is talking about-- 896 00:41:53,680 --> 00:41:56,490 why cooperation is so difficult, which is why I brought up game 897 00:41:56,490 --> 00:41:58,210 theory I think two classes ago-- 898 00:41:58,210 --> 00:42:01,350 because cooperation and collaboration are so important, 899 00:42:01,350 --> 00:42:04,420 but they rest so much a sort of fundamental trust. 900 00:42:04,420 --> 00:42:07,030 And that kind of collaboration always 901 00:42:07,030 --> 00:42:08,890 sort of implies a power imbalance 902 00:42:08,890 --> 00:42:11,590 that is negated by that sense of trust. 903 00:42:11,590 --> 00:42:14,230 And it's so difficult on a global scale 904 00:42:14,230 --> 00:42:18,230 to enact trust and collaboration because there 905 00:42:18,230 --> 00:42:20,650 is such a sense of histories and colonialism 906 00:42:20,650 --> 00:42:23,750 of power imbalances-- of domination and hegemony. 907 00:42:23,750 --> 00:42:26,930 And because we have been, for the past 200 908 00:42:26,930 --> 00:42:30,050 years in the United States, such strong actors in that, 909 00:42:30,050 --> 00:42:33,530 we've never had to take this into consideration before. 910 00:42:33,530 --> 00:42:34,910 And I think now, in particular-- 911 00:42:34,910 --> 00:42:37,040 I really wish that we had more students 912 00:42:37,040 --> 00:42:38,630 in this course who were sort of coming 913 00:42:38,630 --> 00:42:40,113 from defense backgrounds. 914 00:42:40,113 --> 00:42:41,780 Because I feel like we don't talk enough 915 00:42:41,780 --> 00:42:45,930 about the implications of war or the implications bioterrorism. 916 00:42:45,930 --> 00:42:47,930 But I do think it's certainly important to think 917 00:42:47,930 --> 00:42:50,000 about collaboration as our ideal. 918 00:42:50,000 --> 00:42:52,660 But as we were talking about last week 919 00:42:52,660 --> 00:42:54,740 in the social organization of organizations, 920 00:42:54,740 --> 00:42:57,560 how is it that we can sort of have a layered approach, where 921 00:42:57,560 --> 00:42:59,930 there is collaboration existing in a system 922 00:42:59,930 --> 00:43:03,460 where we feel that we are respecting 923 00:43:03,460 --> 00:43:05,440 power dynamics, and also the potential 924 00:43:05,440 --> 00:43:07,616 for us to be heard in the short and the long run. 925 00:43:07,616 --> 00:43:09,824 AUDIENCE: Yeah, because when I think of collaboration 926 00:43:09,824 --> 00:43:12,570 between nations, the first example that comes to me 927 00:43:12,570 --> 00:43:13,690 is like World War I-- 928 00:43:13,690 --> 00:43:15,745 Axis versus Allies. 929 00:43:15,745 --> 00:43:17,370 They were in great collaboration teams. 930 00:43:17,370 --> 00:43:19,560 And then that embroiled us into a massive mess 931 00:43:19,560 --> 00:43:22,740 because fights between one and each 932 00:43:22,740 --> 00:43:24,595 let to fights between all of them. 933 00:43:24,595 --> 00:43:27,200 So I think you raise the issue of that occurring. 934 00:43:27,630 --> 00:43:29,380 AUDIENCE: Well, actually to counter that-- 935 00:43:29,380 --> 00:43:34,150 the difference between now and World War I is currently, 936 00:43:34,150 --> 00:43:37,706 as we saw in the last week's readings are our economies 937 00:43:37,706 --> 00:43:40,540 are just so linked, we can't have that again. 938 00:43:40,540 --> 00:43:44,410 Because then, the entire world could just completely collapse. 939 00:43:44,410 --> 00:43:46,000 And honestly, you probably can't even 940 00:43:46,000 --> 00:43:49,570 have the war, because you need the gunpowder produced, 941 00:43:49,570 --> 00:43:50,850 I don't know, in one country. 942 00:43:50,850 --> 00:43:52,392 You'd need the bullet casing produced 943 00:43:52,392 --> 00:43:55,400 in another country, the stock for a rifle built 944 00:43:55,400 --> 00:43:57,430 in a third country. 945 00:43:57,430 --> 00:44:00,100 Everything is so interconnected, as was pointed out, 946 00:44:00,100 --> 00:44:02,165 that, well, we can't even mobilize very well. 947 00:44:02,165 --> 00:44:03,540 AUDIENCE: But what if [INAUDIBLE] 948 00:44:03,540 --> 00:44:05,582 AUDIENCE: If you're just using rifles and sticks. 949 00:44:05,582 --> 00:44:06,290 [LAUGHTER] 950 00:44:06,290 --> 00:44:07,248 AUDIENCE: I don't care. 951 00:44:07,248 --> 00:44:07,748 OK, yeah. 952 00:44:07,748 --> 00:44:08,740 Everyone gets sticks. 953 00:44:08,740 --> 00:44:10,573 WILLIAM BONVILLIAN: I'm going to put us back 954 00:44:10,573 --> 00:44:13,563 into manufacturing and out of war. 955 00:44:13,563 --> 00:44:15,730 AUDIENCE: I mean, look at the opposing view, though. 956 00:44:15,730 --> 00:44:17,320 There's a lot of value in conflict. 957 00:44:17,320 --> 00:44:18,903 Like, in management, we do this a lot, 958 00:44:18,903 --> 00:44:20,692 where it's like you will put out something 959 00:44:20,692 --> 00:44:23,109 to make it seem like you're doing bad when you're actually 960 00:44:23,109 --> 00:44:25,895 doing OK so that people will get to work. 961 00:44:25,895 --> 00:44:28,020 I think a good example was, like in Silicon Valley, 962 00:44:28,020 --> 00:44:29,920 somebody made out a white paper about like, 963 00:44:29,920 --> 00:44:31,977 oh, this is the distribution of diversity. 964 00:44:31,977 --> 00:44:33,810 And a lot of the times, it's very illogical. 965 00:44:33,810 --> 00:44:36,250 But it's actually the person you don't expect, 966 00:44:36,250 --> 00:44:39,980 because they want people to focus on that topic. 967 00:44:39,980 --> 00:44:41,880 So I think there's a lot of value 968 00:44:41,880 --> 00:44:43,300 from creating that conflict. 969 00:44:43,300 --> 00:44:46,065 So I think on the macro, I think we are in a relative peace. 970 00:44:46,065 --> 00:44:47,440 Because is there ever going to be 971 00:44:47,440 --> 00:44:49,870 a time with no conflict at all? 972 00:44:49,870 --> 00:44:52,180 Right, it's too utopian. 973 00:44:52,180 --> 00:44:54,100 So what you do is, it's macro-utopian. 974 00:44:54,100 --> 00:44:57,020 But you create these minor issues that really don't matter 975 00:44:57,020 --> 00:44:57,960 [INAUDIBLE] 976 00:44:59,370 --> 00:45:01,620 WILLIAM BONVILLIAN: Maybe. 977 00:45:01,620 --> 00:45:05,904 Kevin, why don't you give us a closing thought on this piece. 978 00:45:05,904 --> 00:45:13,200 AUDIENCE: Well, to counter all the points, it's hard to tell-- 979 00:45:13,200 --> 00:45:14,790 especially in the long, long term-- 980 00:45:14,790 --> 00:45:17,570 which is more sustainable-- our historical behaviors 981 00:45:17,570 --> 00:45:23,180 or whatever future model we come up with. 982 00:45:23,180 --> 00:45:25,770 But maybe the next big innovation wave for the US 983 00:45:25,770 --> 00:45:29,970 is a global one and not just one leaning to the country. 984 00:45:29,970 --> 00:45:32,350 WILLIAM BONVILLIAN: Interesting. 985 00:45:32,350 --> 00:45:33,250 All right. 986 00:45:33,250 --> 00:45:40,090 We'll now dive into Jonas Nahm and Ed Steinfeld, both of whom 987 00:45:40,090 --> 00:45:41,020 worked in MIT. 988 00:45:41,020 --> 00:45:45,205 So Jonas is now teaching at Johns Hopkins SAIS. 989 00:45:47,980 --> 00:45:51,340 And he's from Germany, fluent Mandarin, spent lots and lots 990 00:45:51,340 --> 00:45:52,070 of time in China. 991 00:45:52,070 --> 00:45:54,760 So he knows both German and Chinese economics 992 00:45:54,760 --> 00:45:57,070 and manufacturing systems, in particular. 993 00:45:57,070 --> 00:46:02,140 Ed Steinfeld has gone on to head the Watson Institute at Brown 994 00:46:02,140 --> 00:46:04,240 from MIT political science department. 995 00:46:04,240 --> 00:46:09,040 Both are terrific scholars of the kind 996 00:46:09,040 --> 00:46:11,260 of manufacturing advances that China 997 00:46:11,260 --> 00:46:14,110 has been able to put together. 998 00:46:14,110 --> 00:46:17,050 So this dramatic thing happens. 999 00:46:17,050 --> 00:46:21,833 China moves from 5.7% of global manufacturing output in 2000 1000 00:46:21,833 --> 00:46:27,100 to almost 20% in 2011, passing the US in output. 1001 00:46:27,100 --> 00:46:31,990 I mean, that is startling, right. 1002 00:46:31,990 --> 00:46:34,540 Those numbers jump off the page. 1003 00:46:34,540 --> 00:46:36,230 How did that happen? 1004 00:46:36,230 --> 00:46:37,400 Right. 1005 00:46:37,400 --> 00:46:39,480 So what happened here? 1006 00:46:39,480 --> 00:46:42,260 So the operating assumption in the US 1007 00:46:42,260 --> 00:46:46,640 has been that China had lower production 1008 00:46:46,640 --> 00:46:51,320 costs due to lower wage costs and lower cost parts. 1009 00:46:51,320 --> 00:46:53,480 That was the operating assumption. 1010 00:46:53,480 --> 00:46:56,300 And then there's been an assumption in the US 1011 00:46:56,300 --> 00:46:59,650 that manufacturing naturally migrates to low-cost producers 1012 00:46:59,650 --> 00:47:02,390 and that the knowledge required for manufacturing processes 1013 00:47:02,390 --> 00:47:05,000 is comparatively trivial. 1014 00:47:05,000 --> 00:47:09,813 And Nahm and Steinfeld argue, neither of those is true. 1015 00:47:09,813 --> 00:47:11,480 The assumption that production knowledge 1016 00:47:11,480 --> 00:47:15,155 flowed via multinationals from outside into China-- 1017 00:47:15,155 --> 00:47:17,030 it's a much more complicated story than that. 1018 00:47:17,030 --> 00:47:20,690 The assumption that the IT revolution enables severing 1019 00:47:20,690 --> 00:47:22,670 of manufacturing from R&D-- 1020 00:47:22,670 --> 00:47:26,120 from production and design-- 1021 00:47:26,120 --> 00:47:30,260 and turns out to be a more complicated story. 1022 00:47:30,260 --> 00:47:36,230 And none of these explanations explain that dramatic rise 1023 00:47:36,230 --> 00:47:40,970 in China's production capability and output. 1024 00:47:40,970 --> 00:47:47,390 Instead, they argue that China has developed 1025 00:47:47,390 --> 00:47:53,660 some remarkable new process innovation and manufacturing 1026 00:47:53,660 --> 00:47:54,410 innovation. 1027 00:47:54,410 --> 00:47:57,980 And that needs to be understood and respected 1028 00:47:57,980 --> 00:48:00,290 as a major innovation advance. 1029 00:48:00,290 --> 00:48:06,860 So China has tended, they argue, to specialize in rapid scale-up 1030 00:48:06,860 --> 00:48:11,900 and cost reduction, in combination. 1031 00:48:11,900 --> 00:48:17,090 And they join really remarkable skills 1032 00:48:17,090 --> 00:48:21,980 in simultaneous management of the tempo of production 1033 00:48:21,980 --> 00:48:26,450 and production volume and controlling cost, 1034 00:48:26,450 --> 00:48:32,990 and that that's a very powerful set of skills and capabilities, 1035 00:48:32,990 --> 00:48:36,860 and that these kinds of factors are much better explanations 1036 00:48:36,860 --> 00:48:42,950 for that remarkable rise than simply a wage differential. 1037 00:48:42,950 --> 00:48:45,950 So they argue that this has enabled China to expand even 1038 00:48:45,950 --> 00:48:48,290 in industries that are highly automated or not 1039 00:48:48,290 --> 00:48:52,280 on governmental priority lists. 1040 00:48:52,280 --> 00:48:54,740 And low costs and government support 1041 00:48:54,740 --> 00:48:58,040 are just not sufficient to explain 1042 00:48:58,040 --> 00:49:00,230 China's remarkable accomplishments 1043 00:49:00,230 --> 00:49:01,350 in manufacturing. 1044 00:49:01,350 --> 00:49:04,340 So let's get more into a little detail here. 1045 00:49:04,340 --> 00:49:08,480 China's developing production processes 1046 00:49:08,480 --> 00:49:10,490 in areas that were previously thought 1047 00:49:10,490 --> 00:49:14,780 fully mature and impervious to additional cost reductions 1048 00:49:14,780 --> 00:49:16,580 or technological improvement. 1049 00:49:16,580 --> 00:49:20,180 China's taken on various sectors and shown that, in fact, you 1050 00:49:20,180 --> 00:49:25,010 can bring innovation to these in process and in cost. 1051 00:49:25,010 --> 00:49:30,770 So the key has been accumulation of firm-specific expertise 1052 00:49:30,770 --> 00:49:34,040 that has enabled what they call "extensive, multidirectional, 1053 00:49:34,040 --> 00:49:35,310 inter-firm learning." 1054 00:49:35,310 --> 00:49:41,210 In other words, they're able to get a community of producers 1055 00:49:41,210 --> 00:49:45,230 to operate together in a unified kind of way that's 1056 00:49:45,230 --> 00:49:47,570 kind of unthinkable in the much more fragmented, 1057 00:49:47,570 --> 00:49:49,985 decentralized US system-- 1058 00:49:49,985 --> 00:49:51,860 to build a level of cooperation, particularly 1059 00:49:51,860 --> 00:49:55,670 in a regional basis, that is able to scale up production 1060 00:49:55,670 --> 00:50:01,990 very quickly in ways that are pretty unprecedented. 1061 00:50:01,990 --> 00:50:05,090 So elements of China's new production model, 1062 00:50:05,090 --> 00:50:08,120 they argue, include backward design capability-- 1063 00:50:08,120 --> 00:50:10,520 in other words, taking an existing product 1064 00:50:10,520 --> 00:50:13,370 and rethinking it, right, so that you 1065 00:50:13,370 --> 00:50:21,120 can create lower cost production systems for those components, 1066 00:50:21,120 --> 00:50:24,870 and therefore be able to sell it into a lower cost, lower 1067 00:50:24,870 --> 00:50:30,960 wage Chinese economy, right, in a creative kind of way here. 1068 00:50:30,960 --> 00:50:33,420 Yes, there's been a partnership of foreign design 1069 00:50:33,420 --> 00:50:34,860 and Chinese manufacturing. 1070 00:50:34,860 --> 00:50:38,010 But that has been multidirectional, they argue. 1071 00:50:38,010 --> 00:50:40,650 Both sides have been informing each other. 1072 00:50:40,650 --> 00:50:43,620 And technology absorption and collaborative development 1073 00:50:43,620 --> 00:50:46,770 across networked production firms has been remarkable. 1074 00:50:46,770 --> 00:50:49,950 That's part of this ability to do rapid scale-up. 1075 00:50:49,950 --> 00:50:55,090 So these are all new elements that we haven't 1076 00:50:55,090 --> 00:50:59,380 seen in production systems, that China's been able, they argue, 1077 00:50:59,380 --> 00:51:01,390 to put together in unique ways. 1078 00:51:01,390 --> 00:51:04,570 So an explanation of Chinese manufacturing as just a wage 1079 00:51:04,570 --> 00:51:07,648 advantage completely understates, they argue, 1080 00:51:07,648 --> 00:51:09,440 what, in fact, China has accomplished here. 1081 00:51:09,440 --> 00:51:11,470 It's a remarkable story. 1082 00:51:11,470 --> 00:51:15,040 So we have to kind of keep this in mind 1083 00:51:15,040 --> 00:51:18,700 as we confront these global competitive issues in the class 1084 00:51:18,700 --> 00:51:19,600 today. 1085 00:51:19,600 --> 00:51:22,250 It's not a simple story of a wage advantage. 1086 00:51:22,250 --> 00:51:24,320 It's a much more complex and interesting and 1087 00:51:24,320 --> 00:51:28,243 innovation-based story. 1088 00:51:28,243 --> 00:51:31,734 AUDIENCE: When we're putting into detail about why China 1089 00:51:31,734 --> 00:51:33,442 was so successful, why it could do things 1090 00:51:33,442 --> 00:51:37,246 in such a short time span, but my question and the question 1091 00:51:37,246 --> 00:51:41,420 some people have as well was, what next, 1092 00:51:41,420 --> 00:51:44,600 in terms of trade relationships between-- 1093 00:51:44,600 --> 00:51:46,230 economic relationships between the US-- 1094 00:51:46,230 --> 00:51:49,286 the United States, especially in this political climate? 1095 00:51:53,390 --> 00:51:58,270 Are they a force to be reckoned with? 1096 00:51:58,270 --> 00:52:01,880 Are we going to learn from them? 1097 00:52:01,880 --> 00:52:03,740 AUDIENCE: So actually part of my thinking 1098 00:52:03,740 --> 00:52:06,420 that maybe they had such a rapid growth 1099 00:52:06,420 --> 00:52:09,930 because, if you think about it, they have a lot of people, 1100 00:52:09,930 --> 00:52:11,870 I think a lot of resources. 1101 00:52:11,870 --> 00:52:13,240 AUDIENCE: Untapped potential. 1102 00:52:13,240 --> 00:52:15,573 AUDIENCE: Yeah, they just haven't tapped their potential 1103 00:52:15,573 --> 00:52:17,094 until relatively recently. 1104 00:52:17,094 --> 00:52:19,094 The fact that they were able to do it so quickly 1105 00:52:19,094 --> 00:52:20,078 is pretty remarkable. 1106 00:52:20,078 --> 00:52:25,730 But beyond that, the fact that they are where they are now 1107 00:52:25,730 --> 00:52:29,710 should not be that surprising. 1108 00:52:29,710 --> 00:52:32,148 Yeah, I feel like they have the expertise to do it. 1109 00:52:32,148 --> 00:52:34,528 And the internet's made information pretty easy to get. 1110 00:52:34,528 --> 00:52:39,060 So I don't know, maybe like all manufacturing [INAUDIBLE] 1111 00:52:39,060 --> 00:52:42,020 you can't easily get, but. 1112 00:52:42,020 --> 00:52:44,520 AUDIENCE: Yeah, I do think, kind of in line with this paper, 1113 00:52:44,520 --> 00:52:47,550 there's this presumption that if we weren't buying manufactured 1114 00:52:47,550 --> 00:52:50,190 goods from China, we could just make them in the US. 1115 00:52:50,190 --> 00:52:53,280 But that's pretty clearly not true, especially as emphasized 1116 00:52:53,280 --> 00:52:54,370 by a lot of these reading. 1117 00:52:54,370 --> 00:52:57,030 Like, we simply can't make them any more. 1118 00:52:57,030 --> 00:53:00,960 So I see that there can be a lot of talk 1119 00:53:00,960 --> 00:53:04,290 about not purchasing as many goods from China. 1120 00:53:04,290 --> 00:53:06,990 But if we want to maintain our lifestyles, 1121 00:53:06,990 --> 00:53:09,750 have Kindles, have these other devices, 1122 00:53:09,750 --> 00:53:12,360 I don't see a realistic way in the short-term for us 1123 00:53:12,360 --> 00:53:14,900 to not have some dependence on China. 1124 00:53:14,900 --> 00:53:17,060 Like, long-term we could change our systems 1125 00:53:17,060 --> 00:53:20,250 and try to gain back some of that footing. 1126 00:53:20,250 --> 00:53:22,950 But I think a lot of it is just talk right now. 1127 00:53:22,950 --> 00:53:26,410 AUDIENCE: And digging into why China has the advantage here, 1128 00:53:26,410 --> 00:53:29,830 I think it's two things-- mostly because work 1129 00:53:29,830 --> 00:53:33,450 and kind of their life has been very integrated. 1130 00:53:33,450 --> 00:53:36,910 For example, at factories, like semiconductor factories, 1131 00:53:36,910 --> 00:53:38,680 you live in dorms. 1132 00:53:38,680 --> 00:53:40,770 And you go to work. 1133 00:53:40,770 --> 00:53:42,970 And there's not that much separation 1134 00:53:42,970 --> 00:53:45,500 between your work and your actual life. 1135 00:53:45,500 --> 00:53:47,500 So there's very much an expectation 1136 00:53:47,500 --> 00:53:50,590 that you are very devoted and dedicated to your work. 1137 00:53:50,590 --> 00:53:53,980 And also, I think in China it's less 1138 00:53:53,980 --> 00:53:58,570 stigmatized to go into like kind of manufacturing and work 1139 00:53:58,570 --> 00:54:01,810 on these really innovation-driven 1140 00:54:01,810 --> 00:54:05,140 from manufacturing, kind of in a reverse process. 1141 00:54:05,140 --> 00:54:07,500 And so that means a lot of the academics 1142 00:54:07,500 --> 00:54:10,180 there aren't afraid to go into these fields, which 1143 00:54:10,180 --> 00:54:13,690 is important because, especially in a field like semiconductors, 1144 00:54:13,690 --> 00:54:15,880 you need a lot of technical expertise 1145 00:54:15,880 --> 00:54:17,843 even though it might just be manufacturing. 1146 00:54:17,843 --> 00:54:19,510 If you want to make those improvements-- 1147 00:54:19,510 --> 00:54:21,910 make them faster, smaller, et cetera-- 1148 00:54:21,910 --> 00:54:25,430 you have to be able to have that background to innovate further. 1149 00:54:25,430 --> 00:54:28,420 And I think that's why a lot of these firms 1150 00:54:28,420 --> 00:54:32,290 have been having success, taking that extra step beyond just 1151 00:54:32,290 --> 00:54:37,230 learning from the innovations posed by other countries. 1152 00:54:37,230 --> 00:54:39,535 And this might be a little bit controversial, 1153 00:54:39,535 --> 00:54:41,410 but I think the government structure in China 1154 00:54:41,410 --> 00:54:44,460 also has had a big role in why they're 1155 00:54:44,460 --> 00:54:46,810 able to make that happen so quickly, 1156 00:54:46,810 --> 00:54:49,063 because they're able to come up with an idea 1157 00:54:49,063 --> 00:54:50,980 and turn it around really quickly because it's 1158 00:54:50,980 --> 00:54:53,890 very integrated and more unilateral, as 1159 00:54:53,890 --> 00:54:55,990 opposed to our structure here. 1160 00:54:55,990 --> 00:54:57,940 So if they have a construction project, 1161 00:54:57,940 --> 00:55:01,800 like they want to make a bridge happen, it'll happen in a year. 1162 00:55:01,800 --> 00:55:03,925 In the US, it would probably take like three years. 1163 00:55:03,925 --> 00:55:04,270 AUDIENCE: At least. 1164 00:55:04,270 --> 00:55:05,725 AUDIENCE: Or yeah, if that. 1165 00:55:05,725 --> 00:55:07,840 And it might not even happen. 1166 00:55:07,840 --> 00:55:09,630 AUDIENCE: Well, that's true. 1167 00:55:09,630 --> 00:55:11,620 The directed focus of a government 1168 00:55:11,620 --> 00:55:12,920 definitely has some advantages. 1169 00:55:12,920 --> 00:55:14,900 Like, if you want something done, it gets done. 1170 00:55:14,900 --> 00:55:17,710 But on the other hand, there are disadvantages too. 1171 00:55:17,710 --> 00:55:20,120 Like, any disagreement, and it might end up 1172 00:55:20,120 --> 00:55:22,800 being a bridge that points upward for no reason. 1173 00:55:22,800 --> 00:55:24,392 So then it's not actually useful, 1174 00:55:24,392 --> 00:55:26,850 even if, oh, yeah, we got it done really quickly and really 1175 00:55:26,850 --> 00:55:29,160 under-budget, it doesn't actually 1176 00:55:29,160 --> 00:55:31,014 solve the problem as well as it could, 1177 00:55:31,014 --> 00:55:33,195 whatever the problem might be. 1178 00:55:33,195 --> 00:55:33,820 AUDIENCE: Yeah. 1179 00:55:33,820 --> 00:55:34,390 WILLIAM BONVILLIAN: Kevin, why don't we 1180 00:55:34,390 --> 00:55:36,310 lead you back into this. 1181 00:55:36,310 --> 00:55:37,990 How are you reacting to these comments? 1182 00:55:37,990 --> 00:55:41,460 AUDIENCE: So not only with the discussion with this paper, 1183 00:55:41,460 --> 00:55:43,580 but with other papers we've been discussing 1184 00:55:43,580 --> 00:55:49,310 short versus long-term in terms of what direction 1185 00:55:49,310 --> 00:55:52,860 the nation might head in, in terms of innovation. 1186 00:55:52,860 --> 00:55:57,760 Speaking of short-term now, what do people 1187 00:55:57,760 --> 00:56:01,430 feel the US's reaction would be? 1188 00:56:01,430 --> 00:56:01,930 [LAUGHS] 1189 00:56:01,930 --> 00:56:02,400 AUDIENCE: [INAUDIBLE] 1190 00:56:02,400 --> 00:56:03,445 AUDIENCE: [INAUDIBLE] 1191 00:56:03,445 --> 00:56:04,070 AUDIENCE: Yeah. 1192 00:56:04,070 --> 00:56:08,760 Can we fast-forward maybe like one slide, two slides? 1193 00:56:08,760 --> 00:56:11,200 Yeah, one more please. 1194 00:56:11,200 --> 00:56:12,176 Mm-hmm. 1195 00:56:12,176 --> 00:56:13,024 [LAUGHTER] 1196 00:56:13,024 --> 00:56:13,524 There we go. 1197 00:56:13,524 --> 00:56:14,230 WILLIAM BONVILLIAN: It's OK. 1198 00:56:14,230 --> 00:56:15,150 AUDIENCE: Yeah. 1199 00:56:15,150 --> 00:56:18,890 So I think there is an opportunity here in this second 1200 00:56:18,890 --> 00:56:22,402 point with this partnership of foreign [INAUDIBLE]---- 1201 00:56:22,402 --> 00:56:24,110 rather than kind of walling ourselves off 1202 00:56:24,110 --> 00:56:26,527 in the short-term, if we can kind of just accept that they 1203 00:56:26,527 --> 00:56:28,813 have this-- 1204 00:56:28,813 --> 00:56:30,980 I don't even want to say like a built-in advantage-- 1205 00:56:30,980 --> 00:56:33,405 but they've actually constructed a system that we've just 1206 00:56:33,405 --> 00:56:35,990 learned is super effective. 1207 00:56:35,990 --> 00:56:38,792 And so rather than kind of copying 1208 00:56:38,792 --> 00:56:40,750 the Chinese model, which will take structurally 1209 00:56:40,750 --> 00:56:43,421 a lot more time and might even be impossible because we're 1210 00:56:43,421 --> 00:56:46,000 so fragmented, or kind of walling ourselves off, 1211 00:56:46,000 --> 00:56:49,260 I think it just might be important to just capture 1212 00:56:49,260 --> 00:56:50,940 on this partnership of foreign design 1213 00:56:50,940 --> 00:56:53,320 and Chinese manufacturing, and facilitate 1214 00:56:53,320 --> 00:56:55,052 that multidirectional learning. 1215 00:56:55,052 --> 00:56:57,010 So hopefully some of the trends will come back. 1216 00:56:57,010 --> 00:56:59,340 But at the end of the day, I think 1217 00:56:59,340 --> 00:57:02,580 if I sprout a mustache and glasses and a tie, 1218 00:57:02,580 --> 00:57:03,556 will I say this is OK? 1219 00:57:03,556 --> 00:57:04,056 [LAUGHTER] 1220 00:57:04,056 --> 00:57:07,490 But you're going to have to just look 1221 00:57:07,490 --> 00:57:10,630 towards what's the next innovation wave 1222 00:57:10,630 --> 00:57:12,458 so that we can kind of capitalize on those. 1223 00:57:12,458 --> 00:57:14,500 And I hope that those that don't all go to China. 1224 00:57:14,500 --> 00:57:16,060 Because I think we've kind of already 1225 00:57:16,060 --> 00:57:18,198 lost the ball on what they've done 1226 00:57:18,198 --> 00:57:20,240 with backward design and these network production 1227 00:57:20,240 --> 00:57:23,100 firms because of structure and how they do things. 1228 00:57:23,100 --> 00:57:24,470 WILLIAM BONVILLIAN: We'll come back to that, Rasheed, 1229 00:57:24,470 --> 00:57:26,230 when we talk about these advanced manufacturing 1230 00:57:26,230 --> 00:57:26,772 partnerships. 1231 00:57:26,772 --> 00:57:30,010 AUDIENCE: I agree only in small part with you 1232 00:57:30,010 --> 00:57:32,080 on that, because I think we need to be really 1233 00:57:32,080 --> 00:57:34,500 careful in the short-term. 1234 00:57:34,500 --> 00:57:38,710 Because we do maintain the capability of-- 1235 00:57:38,710 --> 00:57:42,160 so for example, in this paper, [INAUDIBLE] solar cells. 1236 00:57:42,160 --> 00:57:44,120 We can do that in the United States. 1237 00:57:44,120 --> 00:57:46,550 Problem is, in China, the Chinese government 1238 00:57:46,550 --> 00:57:47,700 is dumping subsidies. 1239 00:57:47,700 --> 00:57:52,230 So yeah, that's marginally legal or even illegal. 1240 00:57:52,230 --> 00:57:55,500 But how long is it going to take us to work that out 1241 00:57:55,500 --> 00:57:56,970 in an international court? 1242 00:57:56,970 --> 00:58:00,624 So we need very much forge ahead with-- 1243 00:58:00,624 --> 00:58:04,680 or protect what we can still do here. 1244 00:58:04,680 --> 00:58:08,337 I agree with you, we need to understand 1245 00:58:08,337 --> 00:58:10,920 that there are some things that China does better-- maybe even 1246 00:58:10,920 --> 00:58:13,240 adopt some of their practices. 1247 00:58:13,240 --> 00:58:18,390 But we need to protect what we can still do, I think. 1248 00:58:18,390 --> 00:58:21,223 Because we don't want to lose the entire solar market. 1249 00:58:21,223 --> 00:58:22,890 And then they take their subsidies away, 1250 00:58:22,890 --> 00:58:24,220 and we could have competed. 1251 00:58:24,220 --> 00:58:25,180 You know what I mean? 1252 00:58:25,180 --> 00:58:28,060 AUDIENCE: Two questions-- or two things I wanted to bring up. 1253 00:58:28,060 --> 00:58:29,470 One, I didn't realize-- 1254 00:58:29,470 --> 00:58:31,587 is it illegal to subsidize your own industry? 1255 00:58:31,587 --> 00:58:33,170 AUDIENCE: In a lot of trade agreements 1256 00:58:33,170 --> 00:58:35,869 there are rules about what you can do. 1257 00:58:35,869 --> 00:58:37,528 AUDIENCE: Yeah. 1258 00:58:37,528 --> 00:58:39,570 WILLIAM BONVILLIAN: There are anti-dumping rules. 1259 00:58:39,570 --> 00:58:42,580 In other words, can you dump on a foreign market 1260 00:58:42,580 --> 00:58:45,840 a good that's produced and sold at less than its cost 1261 00:58:45,840 --> 00:58:46,510 to produce. 1262 00:58:46,510 --> 00:58:47,010 Right. 1263 00:58:47,010 --> 00:58:48,517 So that's where you begin to run into issues. 1264 00:58:48,517 --> 00:58:50,142 AUDIENCE: Because then internationally, 1265 00:58:50,142 --> 00:58:52,706 they're ruining the ability of other countries to produce. 1266 00:58:52,706 --> 00:58:55,628 And then when they take those subsidies away, 1267 00:58:55,628 --> 00:58:58,344 they're no longer cheaper or better. 1268 00:58:58,344 --> 00:59:00,011 AUDIENCE: They're just the only options. 1269 00:59:00,011 --> 00:59:01,480 AUDIENCE: They're just the only [INAUDIBLE] 1270 00:59:01,480 --> 00:59:02,563 WILLIAM BONVILLIAN: Right. 1271 00:59:02,563 --> 00:59:04,230 But remember, too, Lilly, that China 1272 00:59:04,230 --> 00:59:08,520 is selling its solar capability into its own market because 1273 00:59:08,520 --> 00:59:11,880 of its own staggering demand for power resources. 1274 00:59:11,880 --> 00:59:15,150 So this is not entirely an attempt 1275 00:59:15,150 --> 00:59:17,490 to capture world solar markets. 1276 00:59:17,490 --> 00:59:23,640 This is serving a pretty strong need in its own power 1277 00:59:23,640 --> 00:59:27,320 development areas. 1278 00:59:27,320 --> 00:59:29,650 AUDIENCE: Just a [INAUDIBLE] point-- 1279 00:59:29,650 --> 00:59:33,010 from the Chinese market preference perspective, 1280 00:59:33,010 --> 00:59:35,370 there's this mysterious preference 1281 00:59:35,370 --> 00:59:38,640 for foreign goods, especially US-made products 1282 00:59:38,640 --> 00:59:42,160 over our made-in-China goods. 1283 00:59:42,160 --> 00:59:46,570 So I do see the US still has this advantage. 1284 00:59:46,570 --> 00:59:49,640 For example, if there's two medicines for you to choose-- 1285 00:59:49,640 --> 00:59:53,290 there is one made in China, and there is one three times more 1286 00:59:53,290 --> 00:59:55,590 expensive but it's made in the US-- 1287 00:59:55,590 --> 00:59:57,463 people who can afford it, will just buy it, 1288 00:59:57,463 --> 01:00:01,125 like without any reason. 1289 01:00:01,125 --> 01:00:02,750 WILLIAM BONVILLIAN: That's fascinating. 1290 01:00:02,750 --> 01:00:03,463 AUDIENCE: Is it? 1291 01:00:03,463 --> 01:00:05,630 AUDIENCE: My counterpoint is, it's that way for now. 1292 01:00:05,630 --> 01:00:07,470 But there's a thing called the "innovator's dilemma," which is 1293 01:00:07,470 --> 01:00:08,802 a common strategy in business. 1294 01:00:08,802 --> 01:00:11,260 What you do, is you make the product that isn't that great, 1295 01:00:11,260 --> 01:00:12,758 but it's cheaper. 1296 01:00:12,758 --> 01:00:14,800 And then what happens is you do that specifically 1297 01:00:14,800 --> 01:00:16,550 so your competitors don't attack you. 1298 01:00:16,550 --> 01:00:20,040 It's the equivalent of, say you're at a dinner table 1299 01:00:20,040 --> 01:00:21,540 and there's a person who eats a lot. 1300 01:00:21,540 --> 01:00:22,790 Right, he eats like 10 plates. 1301 01:00:22,790 --> 01:00:25,420 And there's somebody who eats like one little appetizer. 1302 01:00:25,420 --> 01:00:26,710 You don't mind that eating the appetizer. 1303 01:00:26,710 --> 01:00:28,293 So they focus on industries or markets 1304 01:00:28,293 --> 01:00:30,130 that the big player can't attack. 1305 01:00:30,130 --> 01:00:32,130 And they slowly grow their advantage. 1306 01:00:32,130 --> 01:00:35,460 There's a strategy that was used by Japanese companies 1307 01:00:35,460 --> 01:00:37,220 with cars. 1308 01:00:37,220 --> 01:00:39,477 They made the cheap car that companies in the US 1309 01:00:39,477 --> 01:00:41,310 wouldn't focus on until they could make cars 1310 01:00:41,310 --> 01:00:42,510 that were much, much better. 1311 01:00:42,510 --> 01:00:44,058 But it's a common strategy. 1312 01:00:47,072 --> 01:00:48,030 WILLIAM BONVILLIAN: OK. 1313 01:00:48,030 --> 01:00:51,280 So a closing thought, Kevin, on this great debate 1314 01:00:51,280 --> 01:00:52,380 you've kicked off here? 1315 01:00:52,380 --> 01:00:53,300 [LAUGHTER] 1316 01:00:53,800 --> 01:00:56,419 AUDIENCE: Well, these next four years 1317 01:00:56,419 --> 01:00:57,586 are going to be interesting. 1318 01:00:57,586 --> 01:00:58,020 WILLIAM BONVILLIAN: Yeah, OK. 1319 01:00:58,020 --> 01:00:58,520 [LAUGHTER] 1320 01:00:58,520 --> 01:01:01,514 It's going to be very interesting. 1321 01:01:01,514 --> 01:01:02,470 AUDIENCE: Oh, sorry. 1322 01:01:02,470 --> 01:01:04,095 I didn't [INAUDIBLE] my second thought. 1323 01:01:04,095 --> 01:01:05,345 WILLIAM BONVILLIAN: Feel free. 1324 01:01:05,345 --> 01:01:07,020 AUDIENCE: Yeah, that happens. 1325 01:01:07,020 --> 01:01:09,760 So I was thinking back to the point 1326 01:01:09,760 --> 01:01:14,047 that Chris had pointed out, that there 1327 01:01:14,047 --> 01:01:15,630 are differences between our government 1328 01:01:15,630 --> 01:01:16,870 and the Chinese government. 1329 01:01:16,870 --> 01:01:18,810 I think one of the differences that comes in-- 1330 01:01:18,810 --> 01:01:20,870 I'm not certain about China's government. 1331 01:01:20,870 --> 01:01:23,090 I don't know-- are there term limits? 1332 01:01:23,090 --> 01:01:26,752 Are there limits built into these governmental permissions 1333 01:01:26,752 --> 01:01:30,468 that, say, force them to be re-elected every so often? 1334 01:01:30,468 --> 01:01:33,810 AUDIENCE: I think probably, but it's longer, right. 1335 01:01:33,810 --> 01:01:35,902 AUDIENCE: It is every four years. 1336 01:01:35,902 --> 01:01:37,110 AUDIENCE: Oh, it's also four? 1337 01:01:37,110 --> 01:01:37,818 AUDIENCE: Really? 1338 01:01:37,818 --> 01:01:38,610 AUDIENCE: Yeah. 1339 01:01:38,610 --> 01:01:39,152 AUDIENCE: OK. 1340 01:01:39,152 --> 01:01:41,380 AUDIENCE: [INAUDIBLE] their policies [INAUDIBLE]?? 1341 01:01:41,380 --> 01:01:42,938 AUDIENCE: Yeah, I don't know much about it at all. 1342 01:01:42,938 --> 01:01:43,234 AUDIENCE: Yeah, me neither. 1343 01:01:43,234 --> 01:01:43,726 AUDIENCE: [INAUDIBLE] 1344 01:01:43,726 --> 01:01:45,202 AUDIENCE: It's not really elected. 1345 01:01:45,202 --> 01:01:46,678 [LAUGHTER] 1346 01:01:46,678 --> 01:01:49,140 [INTERPOSING VOICES] 1347 01:01:49,140 --> 01:01:49,937 AUDIENCE: OK, OK. 1348 01:01:49,937 --> 01:01:50,931 AUDIENCE: It's like [INAUDIBLE] 1349 01:01:50,931 --> 01:01:52,306 AUDIENCE: So it's a dictatorship. 1350 01:01:52,306 --> 01:01:54,407 [INTERPOSING VOICES] 1351 01:01:54,907 --> 01:01:55,910 AUDIENCE: OK. 1352 01:01:55,910 --> 01:01:56,180 WILLIAM BONVILLIAN: All right. 1353 01:01:56,180 --> 01:01:56,930 AUDIENCE: Then that-- 1354 01:01:56,930 --> 01:01:58,138 WILLIAM BONVILLIAN: Go ahead. 1355 01:01:58,138 --> 01:02:00,606 AUDIENCE: --yeah-- my point to that would be that, well, 1356 01:02:00,606 --> 01:02:03,804 then the governmental officials can think a lot more long-term. 1357 01:02:03,804 --> 01:02:10,160 Because the way that our current electoral system is made, 1358 01:02:10,160 --> 01:02:13,197 at least representatives have to think 1359 01:02:13,197 --> 01:02:14,280 like two years in advance. 1360 01:02:14,280 --> 01:02:16,110 And that's basically the most they can think of. 1361 01:02:16,110 --> 01:02:18,443 They need to produce results within that very short time 1362 01:02:18,443 --> 01:02:19,344 period. 1363 01:02:19,344 --> 01:02:21,500 Senators, they have six years. 1364 01:02:21,500 --> 01:02:24,770 A president, if he's lucky, he gets eight. 1365 01:02:24,770 --> 01:02:30,410 So there's just a different emphasis 1366 01:02:30,410 --> 01:02:33,275 on what the governments are able to do 1367 01:02:33,275 --> 01:02:35,450 and what they're incentivized to do. 1368 01:02:35,450 --> 01:02:38,610 So with that, if we were to try to adopt 1369 01:02:38,610 --> 01:02:40,510 that kind of a structure, we'd have 1370 01:02:40,510 --> 01:02:43,760 to make some radical changes to the Constitution 1371 01:02:43,760 --> 01:02:47,660 and a lot of stuff. 1372 01:02:47,660 --> 01:02:49,370 WILLIAM BONVILLIAN: Yeah. 1373 01:02:49,370 --> 01:02:51,620 It's hard for democracies to think longer term. 1374 01:02:51,620 --> 01:02:52,580 AUDIENCE: Yeah. 1375 01:02:52,580 --> 01:02:53,830 WILLIAM BONVILLIAN: All right. 1376 01:02:53,830 --> 01:02:58,250 So we're going to dive into Suzanne Berger's work 1377 01:02:58,250 --> 01:03:00,830 on the "Production in the Innovation Economy" study. 1378 01:03:00,830 --> 01:03:03,530 So we talked last class about her work 1379 01:03:03,530 --> 01:03:05,540 on distributed production. 1380 01:03:05,540 --> 01:03:10,250 And she led this big study at MIT, the "PIE" study-- 1381 01:03:10,250 --> 01:03:12,680 "Production in the Innovation Economy." 1382 01:03:12,680 --> 01:03:16,940 Pulled together a whole faculty group from a variety of fields 1383 01:03:16,940 --> 01:03:23,030 and ended up with this in-depth, two-volume study 1384 01:03:23,030 --> 01:03:25,550 of what had been happening in US production. 1385 01:03:25,550 --> 01:03:29,870 And I think there's some very important stories here. 1386 01:03:29,870 --> 01:03:33,770 I had you read the kind of preliminary report. 1387 01:03:33,770 --> 01:03:37,650 The depth in the two volumes is really quite powerful. 1388 01:03:37,650 --> 01:03:40,370 So if you want to read further in this area, 1389 01:03:40,370 --> 01:03:41,780 this is a great place to start. 1390 01:03:41,780 --> 01:03:46,160 So Suzanne wrote the kind of cover, overall view, 1391 01:03:46,160 --> 01:03:49,130 drawing on chapters that particular faculty members 1392 01:03:49,130 --> 01:03:52,625 and researchers pulled together in different segments. 1393 01:03:52,625 --> 01:03:54,500 And then she did that kind of overview piece. 1394 01:03:54,500 --> 01:03:57,950 The overview piece is one of the most powerful books, 1395 01:03:57,950 --> 01:04:01,610 in my view, that's been written about US manufacturing. 1396 01:04:01,610 --> 01:04:04,670 So well worth thinking about. 1397 01:04:04,670 --> 01:04:07,550 You're just getting a kind of early snapshot, 1398 01:04:07,550 --> 01:04:11,390 frankly, from the preliminary report I had you read. 1399 01:04:11,390 --> 01:04:14,150 But I want to try and pull out, frankly, 1400 01:04:14,150 --> 01:04:16,700 blending the preliminary report with my knowledge 1401 01:04:16,700 --> 01:04:21,830 of the underlying report some stories 1402 01:04:21,830 --> 01:04:26,630 that I think help us understand what's been going on 1403 01:04:26,630 --> 01:04:29,720 in US manufacturing. 1404 01:04:29,720 --> 01:04:34,220 And she tells a series of these in her book. 1405 01:04:34,220 --> 01:04:36,320 One story is that manufacturing turns out 1406 01:04:36,320 --> 01:04:37,910 not to be agriculture. 1407 01:04:37,910 --> 01:04:40,160 And I'll explain what in heaven's name 1408 01:04:40,160 --> 01:04:43,040 I'm talking about in a minute. 1409 01:04:43,040 --> 01:04:46,550 Secondly, that our manufacturing firms are increasingly, 1410 01:04:46,550 --> 01:04:50,660 as she puts it, "home alone," that small, mid-sized, 1411 01:04:50,660 --> 01:04:53,180 and startup firms are having a lot of trouble 1412 01:04:53,180 --> 01:04:56,570 scaling up their production in the US. 1413 01:04:56,570 --> 01:05:01,610 A fourth story is about if you want to keep strong innovation, 1414 01:05:01,610 --> 01:05:03,770 you need to think about the link between innovation 1415 01:05:03,770 --> 01:05:08,900 and production, which this book argues is profound-- 1416 01:05:08,900 --> 01:05:13,250 that there's a real link between innovation and production. 1417 01:05:13,250 --> 01:05:15,860 There's deep workforce training education issues. 1418 01:05:15,860 --> 01:05:17,990 There's important lessons from Germany. 1419 01:05:17,990 --> 01:05:23,030 And then there's some very interesting jobs stories here, 1420 01:05:23,030 --> 01:05:24,053 too. 1421 01:05:24,053 --> 01:05:25,595 So let me try and tell these quickly. 1422 01:05:28,990 --> 01:05:31,100 First, manufacturing is not agriculture. 1423 01:05:31,100 --> 01:05:36,530 For a long time, the economists thought that manufacturing 1424 01:05:36,530 --> 01:05:37,760 was agriculture. 1425 01:05:37,760 --> 01:05:41,480 In other words, in 1900, half the population-- 1426 01:05:41,480 --> 01:05:45,030 not quite-- but half the population was farming. 1427 01:05:45,030 --> 01:05:48,710 And now less than 2% of the population is farming. 1428 01:05:48,710 --> 01:05:51,710 And we're producing much, much more, right. 1429 01:05:51,710 --> 01:05:55,040 So it's a story of staggering productivity gains 1430 01:05:55,040 --> 01:05:56,630 and advances. 1431 01:05:56,630 --> 01:05:59,780 But the MIT report takes that argument apart. 1432 01:05:59,780 --> 01:06:01,400 So economists were saying, oh, this 1433 01:06:01,400 --> 01:06:02,870 is just productivity gains. 1434 01:06:02,870 --> 01:06:05,100 We're just much more efficient in production. 1435 01:06:05,100 --> 01:06:07,610 So what if you lost one third of your manufacturing 1436 01:06:07,610 --> 01:06:10,280 jobs between 2000 and 2010? 1437 01:06:10,280 --> 01:06:11,180 No problem. 1438 01:06:11,180 --> 01:06:13,400 Productivity gains, right. 1439 01:06:13,400 --> 01:06:15,890 But then the story turns out to be much more complicated. 1440 01:06:19,620 --> 01:06:23,850 We thought that manufacturing output was holding firm. 1441 01:06:23,850 --> 01:06:27,780 But it turns out that it wasn't, right. 1442 01:06:27,780 --> 01:06:31,500 So we thought we were producing the same with less labor. 1443 01:06:31,500 --> 01:06:32,800 But it wasn't the case. 1444 01:06:32,800 --> 01:06:39,120 In fact, in 15 of 19 industrial sectors, we had output decline. 1445 01:06:39,120 --> 01:06:42,870 And our official statistics overestimated output 1446 01:06:42,870 --> 01:06:49,890 because we adopted a view of computing and IT technologies 1447 01:06:49,890 --> 01:06:55,030 that assumed the components, for definitional reasons, 1448 01:06:55,030 --> 01:06:56,515 were because the United States. 1449 01:06:56,515 --> 01:06:58,030 But they weren't, right. 1450 01:06:58,030 --> 01:07:02,500 That's the Willy Shih, Gary Pisano story, right. 1451 01:07:02,500 --> 01:07:05,560 So we were completely inflating our numbers. 1452 01:07:05,560 --> 01:07:07,720 And output wasn't what we thought it was. 1453 01:07:10,360 --> 01:07:14,890 So if output, which is obviously half the story of productivity, 1454 01:07:14,890 --> 01:07:18,160 is not what you thought it was, then the productivity numbers 1455 01:07:18,160 --> 01:07:21,070 were considerably lower than mainstream economics 1456 01:07:21,070 --> 01:07:22,063 had been telling us. 1457 01:07:22,063 --> 01:07:23,980 It's not that there weren't productivity gains 1458 01:07:23,980 --> 01:07:25,040 in that period. 1459 01:07:25,040 --> 01:07:26,140 There were. 1460 01:07:26,140 --> 01:07:28,240 But they weren't what we thought they were. 1461 01:07:28,240 --> 01:07:31,810 So instead, the job loss numbers really tells us 1462 01:07:31,810 --> 01:07:38,170 the sector is hollowing out, not getting more productive. 1463 01:07:38,170 --> 01:07:42,070 So a second story-- 1464 01:07:42,070 --> 01:07:45,080 what Suzanne calls the "home alone" story. 1465 01:07:45,080 --> 01:07:49,190 So she tells a story that, for the last several decades, 1466 01:07:49,190 --> 01:07:52,930 we've been thinning out in the US our manufacturing sector. 1467 01:07:52,930 --> 01:07:55,930 We used to have firms and supply chains that 1468 01:07:55,930 --> 01:07:58,070 had to be very vertically integrated. 1469 01:07:58,070 --> 01:08:01,870 This is the story we told last week about LEGOs and model 1470 01:08:01,870 --> 01:08:04,180 airplanes, right. 1471 01:08:04,180 --> 01:08:06,970 We hit on a financial model. 1472 01:08:06,970 --> 01:08:09,280 And Martin, you had been pointing some of this out. 1473 01:08:09,280 --> 01:08:13,300 We hit on a financial model that emphasized quarterly returns, 1474 01:08:13,300 --> 01:08:18,430 which led us to want to reduce interim risk, which led us 1475 01:08:18,430 --> 01:08:21,729 in the financial sector to focus on getting firms 1476 01:08:21,729 --> 01:08:24,819 to nurture their core competency, 1477 01:08:24,819 --> 01:08:27,010 not do a lot of other stuff. 1478 01:08:27,010 --> 01:08:31,850 So therefore, they should go what's called "asset light." 1479 01:08:31,850 --> 01:08:34,840 Strip the firm of assets that are not 1480 01:08:34,840 --> 01:08:36,800 part of its core competency. 1481 01:08:36,800 --> 01:08:37,300 Right. 1482 01:08:37,300 --> 01:08:41,830 So we began to thin out what had been these very vertically 1483 01:08:41,830 --> 01:08:46,149 integrated groups of firms. 1484 01:08:46,149 --> 01:08:52,859 So the companies in the system are now much more "home alone." 1485 01:08:52,859 --> 01:08:55,770 Story number 3 is related. 1486 01:08:55,770 --> 01:08:58,109 This is the scale-up problem. 1487 01:08:58,109 --> 01:09:02,250 So the US is home to a large percentage 1488 01:09:02,250 --> 01:09:04,140 of the world's multinationals. 1489 01:09:04,140 --> 01:09:05,069 They're global. 1490 01:09:05,069 --> 01:09:06,779 They can get production efficiencies 1491 01:09:06,779 --> 01:09:09,540 by producing in lower-cost countries. 1492 01:09:09,540 --> 01:09:11,558 And they need to be in global markets. 1493 01:09:11,558 --> 01:09:12,850 They don't have an option here. 1494 01:09:12,850 --> 01:09:15,990 They need to be worldwide. 1495 01:09:15,990 --> 01:09:18,930 Generally speaking, they're OK. 1496 01:09:18,930 --> 01:09:22,229 They're producing more abroad than they did in the past. 1497 01:09:22,229 --> 01:09:24,870 But there's two much more vulnerable sectors. 1498 01:09:24,870 --> 01:09:28,079 So one of those sectors are what we could call, 1499 01:09:28,079 --> 01:09:31,529 and what the book calls, "Main Street firms." 1500 01:09:31,529 --> 01:09:36,000 So these are the small and mid-sized firms. 1501 01:09:36,000 --> 01:09:40,620 So there are between 250,000 and 300,000-- let's call 1502 01:09:40,620 --> 01:09:42,960 the 250,000 of these small and mid-sized firms 1503 01:09:42,960 --> 01:09:45,569 that employ less than 500 people. 1504 01:09:45,569 --> 01:09:47,760 That is most of the manufacturing sector, that's 1505 01:09:47,760 --> 01:09:51,090 a majority of US production. 1506 01:09:51,090 --> 01:09:54,510 They have trouble getting scale-up funding. 1507 01:09:54,510 --> 01:09:56,970 They are thinly capitalized. 1508 01:09:56,970 --> 01:10:00,330 They have to be risk averse to survive. 1509 01:10:00,330 --> 01:10:06,400 They don't do what we would consider R&D, although they 1510 01:10:06,400 --> 01:10:10,330 can be very innovative in modifying products and changing 1511 01:10:10,330 --> 01:10:11,150 processes. 1512 01:10:11,150 --> 01:10:13,930 But they don't do what we would consider 1513 01:10:13,930 --> 01:10:17,110 innovation-based research. 1514 01:10:17,110 --> 01:10:23,920 So they're kind of outside of the US innovation system. 1515 01:10:23,920 --> 01:10:25,870 And there are a lot of them. 1516 01:10:25,870 --> 01:10:28,000 It's a big part of this. 1517 01:10:28,000 --> 01:10:29,650 For them to innovate, they have to have 1518 01:10:29,650 --> 01:10:33,330 access to ideas, which they don't necessarily have, 1519 01:10:33,330 --> 01:10:35,740 and a thinned-out ecosystem. 1520 01:10:35,740 --> 01:10:39,370 And they've got to have the financing to scale up. 1521 01:10:39,370 --> 01:10:42,430 Part of the Production in the Innovation Economy study 1522 01:10:42,430 --> 01:10:48,100 was led by John Reed, who was head of the MIT Executive 1523 01:10:48,100 --> 01:10:50,360 Committee and former chairman of Citicorp-- 1524 01:10:50,360 --> 01:10:53,620 a brilliant, famous banker, who created 1525 01:10:53,620 --> 01:10:56,830 a lot of the amazing Citicorp model. 1526 01:10:56,830 --> 01:10:59,170 John Reed was part of these deliberations. 1527 01:10:59,170 --> 01:11:05,410 And he said, yes, we ended local banking in the United States. 1528 01:11:05,410 --> 01:11:09,040 That was the historic era where your neighborhood banker would 1529 01:11:09,040 --> 01:11:15,340 know, in your city or town, who the quality producers were 1530 01:11:15,340 --> 01:11:17,380 and know who to lend to. 1531 01:11:17,380 --> 01:11:18,460 That's gone. 1532 01:11:18,460 --> 01:11:23,170 We substituted really national and then 1533 01:11:23,170 --> 01:11:25,330 international financing models. 1534 01:11:25,330 --> 01:11:28,660 And we replaced that face-to-face, kind 1535 01:11:28,660 --> 01:11:34,090 of relationship-based banking to a very significant extent. 1536 01:11:34,090 --> 01:11:35,830 The Main Street firms were dramatically 1537 01:11:35,830 --> 01:11:39,400 affected by their ability to get scale-up money out 1538 01:11:39,400 --> 01:11:40,670 of their banking system. 1539 01:11:40,670 --> 01:11:42,835 Right, it really hit them. 1540 01:11:42,835 --> 01:11:44,710 And there isn't really a substitute for them. 1541 01:11:44,710 --> 01:11:47,085 And then meanwhile-- and we'll talk about this more later 1542 01:11:47,085 --> 01:11:49,240 in class-- 1543 01:11:49,240 --> 01:11:51,010 the other manufacturing community 1544 01:11:51,010 --> 01:11:53,560 is entrepreneurial startups that want 1545 01:11:53,560 --> 01:11:55,930 to make something-- that want to make a hard technology. 1546 01:11:58,710 --> 01:12:01,020 Unfortunately, the venture capital system 1547 01:12:01,020 --> 01:12:04,700 has walked from this territory. 1548 01:12:04,700 --> 01:12:08,360 So venture capital at this point in the US funds predominantly 1549 01:12:08,360 --> 01:12:11,180 software, secondarily biotech, then 1550 01:12:11,180 --> 01:12:13,940 a series of service sectors like media entertainment business 1551 01:12:13,940 --> 01:12:16,490 services. 1552 01:12:16,490 --> 01:12:20,060 They're not funding firms that want to make something, 1553 01:12:20,060 --> 01:12:22,430 that have hard technologies. 1554 01:12:22,430 --> 01:12:26,127 So the implications of this are really quite powerful. 1555 01:12:26,127 --> 01:12:28,460 That's part of the reason why Rafael Reif put The Engine 1556 01:12:28,460 --> 01:12:30,560 together down the street, because a lot 1557 01:12:30,560 --> 01:12:34,900 of MIT-developed hard technology was just not getting out. 1558 01:12:34,900 --> 01:12:37,670 We had to have a different way to stand them up. 1559 01:12:37,670 --> 01:12:40,810 But this is where the next generation of manufacturing 1560 01:12:40,810 --> 01:12:41,540 will come from. 1561 01:12:41,540 --> 01:12:43,790 This is what the next generation of manufactured goods 1562 01:12:43,790 --> 01:12:45,230 will come from. 1563 01:12:45,230 --> 01:12:47,080 And we're not doing it. 1564 01:12:47,080 --> 01:12:47,760 Right. 1565 01:12:47,760 --> 01:12:51,900 Big-time societal implications here. 1566 01:12:51,900 --> 01:12:57,995 So there's a big scale-up problem for these two, right. 1567 01:12:57,995 --> 01:13:00,120 How are you going to scale up innovative production 1568 01:13:00,120 --> 01:13:01,982 and innovative technologies? 1569 01:13:01,982 --> 01:13:03,940 We're in trouble to the extent we rely on them. 1570 01:13:03,940 --> 01:13:06,530 We rely on them a lot. 1571 01:13:06,530 --> 01:13:10,470 This is just a chart that shows who does the R&D. 1572 01:13:10,470 --> 01:13:15,330 So large companies do R&D. Small companies don't. 1573 01:13:15,330 --> 01:13:15,830 Right. 1574 01:13:15,830 --> 01:13:17,288 So the small companies are just not 1575 01:13:17,288 --> 01:13:18,590 part of the innovation system. 1576 01:13:22,260 --> 01:13:25,440 Story 4-- the relationship between innovation 1577 01:13:25,440 --> 01:13:27,330 and production. 1578 01:13:27,330 --> 01:13:31,260 So what's wrong with scaling up abroad? 1579 01:13:35,705 --> 01:13:38,780 The issue is that for most products-- not all products-- 1580 01:13:38,780 --> 01:13:42,050 and it looks like there's a lot of exceptions in the IT area-- 1581 01:13:42,050 --> 01:13:44,180 but for most products, you need your innovation 1582 01:13:44,180 --> 01:13:46,820 pretty closely related, particularly 1583 01:13:46,820 --> 01:13:48,950 to your initial production stage. 1584 01:13:48,950 --> 01:13:53,030 In other words, there's a lot of interchange 1585 01:13:53,030 --> 01:13:54,320 as you design for production. 1586 01:13:54,320 --> 01:13:56,740 You take your idea, and you design it for production. 1587 01:13:56,740 --> 01:13:57,768 Right. 1588 01:13:57,768 --> 01:13:59,060 That's a very creative process. 1589 01:13:59,060 --> 01:14:00,860 Lots of engineering. 1590 01:14:00,860 --> 01:14:04,400 You often have to rethink your basic science. 1591 01:14:04,400 --> 01:14:08,875 So if you're shifting your production capability abroad-- 1592 01:14:08,875 --> 01:14:13,850 and this is the most important conclusion of the PIE study-- 1593 01:14:13,850 --> 01:14:16,280 you're starting to affect your innovation capability. 1594 01:14:16,280 --> 01:14:20,440 So the US has thought that its competitive advantage, really 1595 01:14:20,440 --> 01:14:24,340 since the end of World War II, is in a strong innovation 1596 01:14:24,340 --> 01:14:25,550 system. 1597 01:14:25,550 --> 01:14:27,640 But if it's shifting production-- 1598 01:14:27,640 --> 01:14:30,370 particularly initial production-- 1599 01:14:30,370 --> 01:14:35,470 it's losing that interaction between initial production 1600 01:14:35,470 --> 01:14:39,460 and its innovation capability. 1601 01:14:39,460 --> 01:14:43,570 So a fifth story is, how do you begin 1602 01:14:43,570 --> 01:14:44,890 to wrestle with these issues? 1603 01:14:44,890 --> 01:14:47,480 They looked hard at workforce. 1604 01:14:47,480 --> 01:14:50,470 So there's lots of workforce studies out. 1605 01:14:50,470 --> 01:14:52,240 And they consist of CEOs saying, we 1606 01:14:52,240 --> 01:14:55,310 don't have enough skilled workers. 1607 01:14:55,310 --> 01:15:01,740 And the MIT approach, led by Paul Osterman, a faculty 1608 01:15:01,740 --> 01:15:07,890 member at Sloan, said, look, let's not ask the CEOs, right. 1609 01:15:07,890 --> 01:15:12,670 The CEOs may be saying there's a tremendous shortage 1610 01:15:12,670 --> 01:15:16,030 of $10,000 Cadillacs, right. 1611 01:15:16,030 --> 01:15:18,307 That may be what they're, in effect, saying. 1612 01:15:18,307 --> 01:15:20,140 In other words, what they're prepared to pay 1613 01:15:20,140 --> 01:15:23,995 for skills is not an appropriate compensation for the skills. 1614 01:15:23,995 --> 01:15:25,660 It doesn't match markets. 1615 01:15:25,660 --> 01:15:29,560 So let's actually ask the human resources departments. 1616 01:15:29,560 --> 01:15:32,050 And let's not ask them, are you short of skilled workers? 1617 01:15:32,050 --> 01:15:35,260 Let's ask them, how long did it take 1618 01:15:35,260 --> 01:15:39,430 you to hire for positions that have come up in your firm? 1619 01:15:39,430 --> 01:15:43,660 And what they found was that 75% of the firms studied-- 1620 01:15:43,660 --> 01:15:45,740 and they reached way over 1,000-- 1621 01:15:45,740 --> 01:15:47,530 I think was several thousand-- 1622 01:15:47,530 --> 01:15:51,170 they were able to hire within one month. 1623 01:15:51,170 --> 01:15:52,190 Now, that's logical. 1624 01:15:52,190 --> 01:15:55,400 Because, after all, we just laid off almost 6 million production 1625 01:15:55,400 --> 01:15:57,310 workers, right. 1626 01:15:57,310 --> 01:15:59,830 And they've been largely shunted into the lower end service 1627 01:15:59,830 --> 01:16:01,012 sectors. 1628 01:16:01,012 --> 01:16:02,470 Maybe they would want to come back. 1629 01:16:02,470 --> 01:16:07,150 So presumably, there's a surplus of capability out there. 1630 01:16:07,150 --> 01:16:14,760 But the most interesting part of what they found 1631 01:16:14,760 --> 01:16:18,210 was that for 25% of the firms, they weren't 1632 01:16:18,210 --> 01:16:20,010 able to hire in a month. 1633 01:16:20,010 --> 01:16:21,780 It was taking them a lot longer. 1634 01:16:21,780 --> 01:16:25,620 And interestingly, these tended to be the smaller, 1635 01:16:25,620 --> 01:16:32,550 more innovative, technology-focused firms. 1636 01:16:32,550 --> 01:16:34,710 And they were having a much harder time, actually, 1637 01:16:34,710 --> 01:16:37,530 because they needed a higher skill raft of workers. 1638 01:16:37,530 --> 01:16:41,220 They are having a lot of trouble hiring in a reasonable time 1639 01:16:41,220 --> 01:16:42,180 frame. 1640 01:16:42,180 --> 01:16:45,930 So Paul Osterman would summarize saying, 1641 01:16:45,930 --> 01:16:47,670 there's not an immediate emergency here 1642 01:16:47,670 --> 01:16:49,470 on workforce skills. 1643 01:16:49,470 --> 01:16:51,210 But we're going to have trouble ahead. 1644 01:16:51,210 --> 01:16:56,970 And the signal is the 25% of more innovative firms 1645 01:16:56,970 --> 01:16:59,310 that are having more trouble getting the skill sets 1646 01:16:59,310 --> 01:17:01,170 that they needed. 1647 01:17:01,170 --> 01:17:04,260 And look, we've got a big demographics problem. 1648 01:17:04,260 --> 01:17:08,200 So the manufacturing workforce is an aging workforce. 1649 01:17:08,200 --> 01:17:11,860 And it's going to need replacing. 1650 01:17:11,860 --> 01:17:14,620 Sixth story-- and there's only one more to go after this-- 1651 01:17:14,620 --> 01:17:17,720 what can we learn from Germany? 1652 01:17:17,720 --> 01:17:20,980 So the US has been sitting around for at least a decade-- 1653 01:17:20,980 --> 01:17:22,390 more like 20 years-- 1654 01:17:22,390 --> 01:17:27,650 thinking, oh, we have to lose manufacturing jobs, 1655 01:17:27,650 --> 01:17:29,840 because we're high wage and high cost. 1656 01:17:29,840 --> 01:17:32,330 So we have to lose these jobs. 1657 01:17:32,330 --> 01:17:35,360 Somebody never sent that memo to Germany. 1658 01:17:35,360 --> 01:17:37,820 They failed to get that word, right. 1659 01:17:37,820 --> 01:17:39,983 Because Germany is much higher wage and higher 1660 01:17:39,983 --> 01:17:41,150 cost than the United States. 1661 01:17:41,150 --> 01:17:45,080 Their wages and benefits are 66% higher for their manufacturing 1662 01:17:45,080 --> 01:17:48,050 workers than for US manufacturing workers. 1663 01:17:48,050 --> 01:17:51,950 And they are running staggering trade surpluses with everybody, 1664 01:17:51,950 --> 01:17:54,590 including a major trade surplus with Germany-- 1665 01:17:54,590 --> 01:17:56,960 I mean with China, excuse me. 1666 01:17:56,960 --> 01:17:58,280 What are they doing? 1667 01:17:58,280 --> 01:18:00,140 They're supposed to lose this sector, 1668 01:18:00,140 --> 01:18:01,880 right, according to our thinking. 1669 01:18:01,880 --> 01:18:03,420 But they didn't. 1670 01:18:03,420 --> 01:18:08,000 So the US has about 8% of its workforce in production jobs. 1671 01:18:08,000 --> 01:18:10,860 Germany, 20%. 1672 01:18:10,860 --> 01:18:12,390 What are they doing? 1673 01:18:12,390 --> 01:18:13,230 Right. 1674 01:18:13,230 --> 01:18:17,340 This is an important set of lessons here. 1675 01:18:17,340 --> 01:18:20,640 How has Germany organized its manufacturing sector 1676 01:18:20,640 --> 01:18:25,260 so that it's able to run an extremely successful 1677 01:18:25,260 --> 01:18:26,850 manufacturing sector that continues 1678 01:18:26,850 --> 01:18:29,883 to bring major returns back to its economy, 1679 01:18:29,883 --> 01:18:31,800 even though it's very high wage and high cost? 1680 01:18:31,800 --> 01:18:33,100 What are they doing? 1681 01:18:33,100 --> 01:18:34,230 Right. 1682 01:18:34,230 --> 01:18:40,020 So there may be important lessons for us to learn. 1683 01:18:40,020 --> 01:18:43,680 And the PIE study, in fact, went through a number of these. 1684 01:18:43,680 --> 01:18:48,400 They found that, unlike the US, which was thinning out its 1685 01:18:48,400 --> 01:18:52,470 ecosystem for its manufacturers, that its small and mid-sized 1686 01:18:52,470 --> 01:18:55,110 manufacturers, in particular, were more "home alone," 1687 01:18:55,110 --> 01:18:57,330 Germany was doing the opposite-- 1688 01:18:57,330 --> 01:19:00,190 a much more connected, collaborative system, 1689 01:19:00,190 --> 01:19:04,317 right-- in part through a Fraunhofer network system that, 1690 01:19:04,317 --> 01:19:06,900 starting at the end of World War II and partially, by the way, 1691 01:19:06,900 --> 01:19:10,140 paid for by the Marshall Plan by the US, 1692 01:19:10,140 --> 01:19:13,242 brought large and small and mid-sized firms. 1693 01:19:13,242 --> 01:19:14,950 In Germany, the small and mid-sized firms 1694 01:19:14,950 --> 01:19:16,440 are called Mittelstand. 1695 01:19:16,440 --> 01:19:20,010 And it's a famous German capability, these very talented 1696 01:19:20,010 --> 01:19:22,490 small and mid-sized firms. 1697 01:19:22,490 --> 01:19:24,150 They were able to bring them together 1698 01:19:24,150 --> 01:19:29,460 in collaborations around new innovations in production. 1699 01:19:29,460 --> 01:19:33,480 And they would work together, assisted by German engineering 1700 01:19:33,480 --> 01:19:35,880 academics in the process. 1701 01:19:35,880 --> 01:19:40,170 They have 60 of these Fraunhofer institutes, 1702 01:19:40,170 --> 01:19:44,130 really manufacturing institutes, spread all over the country. 1703 01:19:44,130 --> 01:19:48,450 So they have a way of avoiding the "home alone" problem. 1704 01:19:48,450 --> 01:19:50,220 If anything, they're ever enriching 1705 01:19:50,220 --> 01:19:52,080 the collaboration between their firms 1706 01:19:52,080 --> 01:19:53,205 and the trade-off of ideas. 1707 01:19:55,830 --> 01:20:00,945 They have a whole system for collaborative R&D 1708 01:20:00,945 --> 01:20:03,070 that's shared between the small and mid-sized firms 1709 01:20:03,070 --> 01:20:04,420 and the larger firms. 1710 01:20:04,420 --> 01:20:08,560 Through that system, they have the most famous workforce 1711 01:20:08,560 --> 01:20:10,480 training system in the world, through 1712 01:20:10,480 --> 01:20:12,700 a remarkable apprenticeship system 1713 01:20:12,700 --> 01:20:15,520 that consistently produces incredibly highly 1714 01:20:15,520 --> 01:20:17,980 skilled workers. 1715 01:20:17,980 --> 01:20:19,450 And the apprenticeships will last 1716 01:20:19,450 --> 01:20:21,910 for three or four years, right. 1717 01:20:21,910 --> 01:20:23,437 Really in-depth training. 1718 01:20:23,437 --> 01:20:24,520 We have nothing like that. 1719 01:20:24,520 --> 01:20:26,660 We have highly decentralized labor markets 1720 01:20:26,660 --> 01:20:27,610 in the United States. 1721 01:20:27,610 --> 01:20:30,370 We have nothing close to this. 1722 01:20:30,370 --> 01:20:32,050 So they have a whole shared training 1723 01:20:32,050 --> 01:20:34,540 system for their workforce. 1724 01:20:34,540 --> 01:20:36,850 And they've developed ways through 1725 01:20:36,850 --> 01:20:39,280 these collaborative mechanisms to rapidly scale up 1726 01:20:39,280 --> 01:20:40,630 their production. 1727 01:20:40,630 --> 01:20:47,720 So Germany's workforce in manufacturing is 80% unionized. 1728 01:20:47,720 --> 01:20:50,170 We're not remotely close to that. 1729 01:20:50,170 --> 01:20:51,695 It's a different system. 1730 01:20:51,695 --> 01:20:54,070 It's hard for the US to do an apprenticeship system here. 1731 01:20:54,070 --> 01:20:57,370 It doesn't quite match the way we organize things. 1732 01:20:57,370 --> 01:21:02,260 But there are some ideas that we could learn from. 1733 01:21:02,260 --> 01:21:06,170 And the seventh and last story is about jobs. 1734 01:21:06,170 --> 01:21:12,340 The manufacturing sector affects our services sector. 1735 01:21:15,500 --> 01:21:21,220 And Suzanne Berger and the team tell an interesting story here, 1736 01:21:21,220 --> 01:21:25,470 that the 21st century firm, right, 1737 01:21:25,470 --> 01:21:30,390 is going to increasingly tie a complex hard product 1738 01:21:30,390 --> 01:21:34,650 to a service and link them, and offer customers 1739 01:21:34,650 --> 01:21:38,880 solutions-- not a good or a service, 1740 01:21:38,880 --> 01:21:41,050 but a solution to a problem. 1741 01:21:41,050 --> 01:21:44,310 So your Apple iPhone, in many ways, 1742 01:21:44,310 --> 01:21:49,410 is a combined service delivery hardware technology, right. 1743 01:21:49,410 --> 01:21:52,130 There's lots of service delivery through that Apple iPhone, 1744 01:21:52,130 --> 01:21:53,280 right. 1745 01:21:53,280 --> 01:21:57,630 Things are going to be more like that in the future. 1746 01:21:57,630 --> 01:22:03,660 Now, personal services tend to be face-to-face. 1747 01:22:03,660 --> 01:22:08,020 And they're hard to scale up quickly, right. 1748 01:22:08,020 --> 01:22:10,240 It's their kind of one-to-one relationship building. 1749 01:22:10,240 --> 01:22:12,940 And that process takes a long time. 1750 01:22:12,940 --> 01:22:16,000 Whereas if you're producing a manufactured good, 1751 01:22:16,000 --> 01:22:19,550 you can produce one product on day 1. 1752 01:22:19,550 --> 01:22:22,760 On day 12, you can produce a million products, right. 1753 01:22:22,760 --> 01:22:24,190 You can scale very quickly-- 1754 01:22:24,190 --> 01:22:27,170 much faster than through a personal service operation, 1755 01:22:27,170 --> 01:22:27,670 right. 1756 01:22:27,670 --> 01:22:29,980 So one advantage of manufacturing 1757 01:22:29,980 --> 01:22:33,220 is that it tends to scale up the gains in your economy 1758 01:22:33,220 --> 01:22:34,997 much more quickly. 1759 01:22:34,997 --> 01:22:36,580 Part of the reason why it took so long 1760 01:22:36,580 --> 01:22:40,570 to recover from the 2007, 2008 recession 1761 01:22:40,570 --> 01:22:43,450 is that we had so damaged our manufacturing sector 1762 01:22:43,450 --> 01:22:47,140 that the normal scale-up coming out of a recession just 1763 01:22:47,140 --> 01:22:47,860 wasn't happening. 1764 01:22:47,860 --> 01:22:48,777 It was taking forever. 1765 01:22:52,150 --> 01:22:56,820 But if you're able to combine a tradable good, right, that 1766 01:22:56,820 --> 01:23:03,600 can scale with a service, then the service 1767 01:23:03,600 --> 01:23:07,710 starts to become tradable as well, right-- 1768 01:23:07,710 --> 01:23:09,780 and can scale. 1769 01:23:09,780 --> 01:23:11,850 So that's a whole new capability in services 1770 01:23:11,850 --> 01:23:14,670 that we haven't really spent a lot of time thinking about. 1771 01:23:14,670 --> 01:23:17,950 But it's very interesting, since 86% of our workforce 1772 01:23:17,950 --> 01:23:20,022 is in services. 1773 01:23:20,022 --> 01:23:21,730 Maybe we ought to work on this territory. 1774 01:23:21,730 --> 01:23:24,870 But a prerequisite is having the tradable goods 1775 01:23:24,870 --> 01:23:28,020 that you can tie to a service, right. 1776 01:23:28,020 --> 01:23:32,220 Yet another reason why, in the next generation of firms, 1777 01:23:32,220 --> 01:23:37,300 manufacturing capability is going to be important. 1778 01:23:37,300 --> 01:23:38,800 You saw this chart before. 1779 01:23:38,800 --> 01:23:43,590 This shows you where societal returns come from, right. 1780 01:23:43,590 --> 01:23:46,950 Predominantly from production, not from services. 1781 01:23:46,950 --> 01:23:49,410 So let me just summarize. 1782 01:23:49,410 --> 01:23:53,550 Here's the stories that Suzanne and the PIE study taught us. 1783 01:23:53,550 --> 01:23:55,960 Manufacturing is not agriculture. 1784 01:23:55,960 --> 01:23:57,510 This sector was hollowing out. 1785 01:23:57,510 --> 01:24:01,350 It wasn't enjoying productivity advances to the extent 1786 01:24:01,350 --> 01:24:02,620 we thought possible. 1787 01:24:02,620 --> 01:24:05,190 Our manufacturing firms are increasingly "home alone." 1788 01:24:05,190 --> 01:24:08,160 Their ecosystems of support are thinned out. 1789 01:24:08,160 --> 01:24:12,690 There's less of what Pisano and Shih called a "commons" 1790 01:24:12,690 --> 01:24:14,610 available to support them. 1791 01:24:14,610 --> 01:24:17,895 There's a real scale-up problem for small, mid-sized firms, 1792 01:24:17,895 --> 01:24:20,145 and for startup firms, for somewhat different reasons. 1793 01:24:22,970 --> 01:24:26,640 There's important linkage between innovation 1794 01:24:26,640 --> 01:24:28,120 and production. 1795 01:24:28,120 --> 01:24:30,340 These are very related and tied to each other. 1796 01:24:30,340 --> 01:24:34,680 And if you lose one, it'll affect the other. 1797 01:24:34,680 --> 01:24:38,250 There's interesting lessons about workforce, 1798 01:24:38,250 --> 01:24:40,850 that we've got a problem ahead in up-scaling our workforce. 1799 01:24:40,850 --> 01:24:42,600 It's not an emergency now, but we probably 1800 01:24:42,600 --> 01:24:44,550 have a problem ahead. 1801 01:24:44,550 --> 01:24:46,840 Very important lessons from Germany 1802 01:24:46,840 --> 01:24:50,760 on the societal benefits of a strong production sector. 1803 01:24:50,760 --> 01:24:53,070 And then, in this jobs area, if you're 1804 01:24:53,070 --> 01:24:57,330 able to tie tradable goods to services, 1805 01:24:57,330 --> 01:25:00,780 then the services themselves become tradable and scalable, 1806 01:25:00,780 --> 01:25:02,290 as well. 1807 01:25:02,290 --> 01:25:05,680 And then, there's an underlying question 1808 01:25:05,680 --> 01:25:08,020 about how our manufacturing sector, therefore, 1809 01:25:08,020 --> 01:25:10,700 affects our services sector. 1810 01:25:10,700 --> 01:25:13,263 So let's come back and do some questions about this. 1811 01:25:13,263 --> 01:25:15,430 And then we'll dive into the next round of readings. 1812 01:25:15,430 --> 01:25:17,970 And Steph will lead us in those.