Rivals and Borrowers

 The latest episode of the Ezra Klein podcast from last week was devoted to a somewhat panicky discussion of an allegedly impending "China Shock 2.0." 

As Klein and his guest describe it, China is poised to overtake the rest of the world not only in the manufacturing of cheap consumer goods of the sort we associate with the first "China Shock"—but in the industrial production of just about everything else—including the most important "technologies of the future"—EVs, lithium batteries, solar panels—maybe AI and humanoid robots too, to give the more headline-grabbing examples? 

I'm not well positioned to independently assess a) whether this is true; or b) how big of a deal it would be if it is. 

But I do find it interesting to see how much this debate follows the contours of earlier arguments. The same things that are being said of China today were said of Japan just a few decades ago—before their economy imploded and they entered their notorious "lost decade" from which they have only recently recovered. And the same things were said of Germany before them. 

Indeed, it seems that from the very dawn of the "American century"—as soon as U.S. economic hegemony was established—people were already warning that it was in jeopardy from some threatening competitor. 

The traits ascribed to this Dangerous Rival also seemed to carry over from one era to another—even as the name of the specific country we were worried about changed from Germany to Japan to China. Whereas we are framed as open, individualistic, and entrepreneurial—the Dangerous Rival is always portrayed as a closed, organic, collective state with an ant-like unity of purpose. 

The Dangerous Rival is also cast as more cunning, ruthless, and unscrupulous than we are. While our own economic success is attributed solely to our good qualities—our obvious pluck, innovativeness, and win-win creation of value—theirs is attributed solely to their dark qualities: they bend the rules to their favor; they cheat; they play dirty in order to succeed in zero-sum fashion. 

One is reminded here of that running joke in 1066 And All That—about how England wins every battle in the history books—except when the other side was being "unfair." 

Whereas we operate a system of free trade in good faith, then—in this conceptual scheme—the Dangerous Rival is always accused of running a neo-mercantilist system of industrial policy and "national economy." This was a constant refrain of critiques of the German state in the earlier twentieth century, and it is said of China today—in both cases with some truth. 

But what we don't mention is that our own support for free trade—like that of the British hegemon in the nineteenth century—tends to be strongest in those markets where our exports compete at an advantage. Or that: demanding that other countries open their markets to U.S. crops, say—in many cases devastating local agriculture—has not proved incompatible with insisting upon our sovereign right to subsidize our farm sector year after year so that it can charge sub-market rates. 

The Dangerous Rival narrative seems plausible every time, usually because they do actually have a worse system—judged from the standpoint of liberal democracy. Wilhelmine Germany was actually a pretty stultifying and unfree and militarist society—even if these traits were somewhat exaggerated for purposes of wartime propaganda during World War I. 

Post-war Japan is a less clear-cut case—their economic miracle and elevation to the status of Dangerous Rival coincided with the period, oddly, in which they were also emerging from U.S. military occupation and had adopted many of the aspects of our political system. 

But it's easy for me to say today that the United States has a much better political and economic order than the People's Republic of China. Given the choice between them, I obviously "Choose the West," to echo Dwight Macdonald's phrase. A relatively open and flawed democracy is obviously preferable to an Orwellian authoritarian state—even if Trump is doing his level best every day, it would seem, to reduce the distance between our two systems. 

But the relative unfreedom and repressiveness of the Dangerous Rival toward their domestic population does not in itself necessarily mean they behave more ruthlessly and unscrupulously than we do on the international stage—where, unfortunately, all states are still for the most part in a Hobbesian state of nature of anarchistic competition. 

Of course, people who accuse the Chinese government today of unfair competition have specific charges in mind. They accuse the PRC of "currency manipulation" and of stealing intellectual property. Most recently, Chinese government-linked firms (and all firms in the country, it would seem, are government linked) have been charged with"distilling" their AI models from U.S.-based large language models—essentially another form of IP theft. 

This, too, is a longstanding allegation against the Dangerous Rival. People said the same thing about Germany—namely, that it had no real innovations to its name, but had just taken over and exploited British inventions wholesale. 

Japan in turn was said—in the mid-twentieth century—to have simply appropriated a lot of American ideas and mass produced them more cheaply. 

In his 1976 book The Cultural Contradictions of Capitalism, Daniel Bell warned that Japan might imminently outstrip the United States as the leading economic powerhouse of the globe. And one finds there the same concerns about Japan taking unfair advantage—as a relatively late arriver to the process of modern industrialization—of the technological innovations already achieved by other societies. 

Bell writes: "The main argument was laid out a long time ago by Thorstein Veblen in his book Imperial Germany and the Industrial Revolution (1915). An aggressive country, entering later into the industrialization cycle, is able to take advantage of newer technologies and other countries' experiences in plant layout and design, while countries that industrialized earlier have older and more inefficient plants that are not fully amortized." 

This is essentially the same fear underlying the current warnings about AI "distillation": U.S.-based firms may have done the hard work of building large language models in the first place—but that doesn't mean they will reap the rewards for their own hard work. A country that can simply take over these products ready-made—without the hindrances of older production methods—may actually be better positioned than their creators to exploit them fully and profit thereby. 

This passage of Bell's made me want to go and read Veblen's book about Germany, since it obviously seems pretty central to understanding the evolution of this concept of the Dangerous Rival—as the torch of this role has passed over the last century, relay-style, from Wilhelmine Germany (during the lead-up to World War I) to Japan (from the 1970s to the 1990s) to China today. 

It turns out to be a very odd book—much of it written in Veblen's famously arch and elusive style. The chapter headings of the book lead one to expect a certain logical sequence, but Veblen never really sticks to it. Instead, he wanders over time and space, returning occasionally to his central theme of the role of "good borrowers" in economic history. (And that's not even to mention his interminable "supplementary notes" about Baltic neolithic archaeology and medieval Icelandic poetry.)

It's obvious that people at the time didn't know what to do with the book either. Wilson's censors were apparently of two minds as to whether it helped their crusade against Germany or not. As John Dos Passos writes in his character sketch of Veblen in The Big Money—one of many capsule biographies he includes in his U.S.A. trilogy: "The postoffice was forbidding the mails to Imperial Germany and the Industrial Revolution while propaganda agencies were sending it out to make people hate the Huns."

The wry tone of the book obviously didn't lend itself to the jingoistic impulse of the moment. As Veblen himself confesses in the Preface (as always, with tongue in cheek): "Some apology may seem due for offering at this season so unwarlike a study of what here follows" (the war having broken out while he was in the midst of writing it). 

On the other hand, Veblen is withering in his criticism (much of it justified) of Wilhelmine protectionist policies and censorship and militarism and illiberalism—all of which lent support to the government's exaggerated propagandistic depiction of the bloodthirsty Prussians. 

Yet, still again, Veblen's argument—summarized by Bell above—about the benefits of being a late arriver to the industrialization process does not actually read as a criticism. To the contrary, Veblen praises the virtues of the "good borrower." 

"[T]echnological innovations and creations of an institutional nature have in many cases reached their fullest serviceability only at the hands of other communities and peoples than those to whom these cultural elements owed their origin and initial success," Veblen writes. 

This is because the innovation will have faced more or less constant local opposition in its home country during its initial development—precisely because it upset established ways of doing things—and this results in "institutional inhibitions on efficiency"—of which a later new entrant to the industrial process is relatively free. 

A classic example Veblen provides is the story of railroads in the nineteenth century. British engineers may have led the way initially in the development of rail technology. But by the early twentieth century, it was notorious that British railroads were terribly inefficient, because they were wedded to using a narrower gauge—which would be terribly expensive to replace—whereas later adopters of the technology were never saddled with this problem in the first place. 

Thus, "the borrowed elements of industrial efficiency would be stripped of their fringe of conventional inhibitions and waste, and the borrowing community would be in a position to use them with a freer hand and with a better chance of utilising them to their full capacity," Veblen explains. As he later puts it: this is because "[t]he new expedients come to hand stripped of whatever has only a putative or conventional bearing on their use." 

This leads to what he calls "the advantage of borrowing the technological arts rather than developing them by home growth," and he proceeds to apply the insight to Imperial Germany (and even anticipates its application to Japan as well!):

"Having no obsolescent equipment and no out-of-date trade connections to cloud the issue," he writes, the Germans "were also free to take over the processes of the new industry at their best and highest efficiency, rather than content themselves with compromises between the best equipment known and what used to be the best a few years or a few decades ago."

Veblen would probably see the Chinese "distillation" of American AI models not as some evidence of poor character, then—but as the most natural thing in economic history. They are not being unscrupulous—they are merely being "good borrowers." 

As relatively late adopters of the new technology, they are able to take over its most efficient forms without the crust of inefficiencies which accumulated during its initial development here in the U.S. (though let us pause here to consider than some of those "institutional inhibitions on efficiency" may take the form—in this case—of safety and ethical constraints on AI models that we actually may think are a pretty good idea for the sake of future human survival!)

Even if China's comparative success at adopting U.S.-developed technologies is relatively predictable, though—given what we've seen about the usual advantages of late arrival—that doesn't make it any less frightening. There are a number of reasons to be concerned about the prospect of Chinese technological and economic dominance—some of which reduce to mindless xenophobia, but others of which reflect a rational concern about the PRC's authoritarian political system and its appalling human rights record in Hong Kong, Tibet, Xinjiang, etc. 

But I think our review of the vicissitudes of the "Dangerous Rival" trope in the previous century should perhaps teach us that our degree of alarm about the coming "China Shock 2.0" may be overblown. "If hopes were dupes, fears may be liars," as A.H. Clough once put it. Among the lying fears of the past were the fear that Germany would eclipse U.S. economic production—and later on—that Japan would do the same; and neither of these were ultimately borne out. 

There may well be advantages to being a "good borrower" and a late arriver, then—as Veblen lays out; but that does not mean these advantages are always decisive. As long as there has been an American economic hegemon there has also been a perceived dangerous rival nipping at its heels. The PRC is the latest one—and it may have no more lasting a triumph in the end than its predecessors.