OUR BRAVE NEW WORLD

OUR BRAVE NEW WORLD
OR JUST A GARDEN OF SAND?

Yesterday’s post discussed some of the reasoning in the GaveKal book, “Our Brave New World”. A premise of the book is that Western economies will move to “Platform Companies” that design, market and sell goods and services, and Asian economies will be relegated to the low margin activities of manufacturing the goods or delivering the routine services. The West retains the high margin activities and the East takes the hindmost.

So how will workers in Western counties earn a living? If Wal-mart is one answer, it is a correct one. Wal-mart is a prototypical Platform Company. And it is a direct pipeline to the Chinese factory floor. It markets and sells. It does not make, it does not repair. It takes the customer’s money, keeps its cut, and pays the manufacturers. Wal-mart has some high-knowledge positions at its home office and its regional centers. But most of its hands are low-skilled sales clerks.

CHINESE HARLEY-DAVIDSONS?

Not likely, given the American mythology that infuses the brand. But would Americans buy Chinese Chevys? Or Indian Infinitis? If the Platform Company concept plays out, this will be a logical conclusion. The American, European and Japanese auto companies will design and engineer the vehicles and the lower-cost Asian factories will produce them for export back to the Western markets. The UAW gets cut out of the transaction and autoworkers will be working somewhere else. They can get engineering or marketing degrees and work at the automakers design or marketing facilities, or find work elsewhere. But where is elsewhere?

WILL FLOWERS BLOOM IN A GARDEN OF SAND?

The Platform Company model will eliminate many manufacturing jobs in Western economies. It already has. Those will be $20/hour autoworker jobs and $9/hour injection modeling jobs. Income dispersion is on the rise in the US as higher-paying manufacturing jobs move East and replacement jobs in the service sector pay less well. Although, as GaveKal remind, the will be less wage volatility from this lower salary range, there will be less earnings. And that is an outcome of the Platform Company environment. Lots of people will be working in lower paying service jobs. Over time individuals will retrain and reeducate. Some will move up, some will move down. But move they must. That is the nature of the market. But it does not have to be the nature of a political system. When our political and economic choices disadvantage others, we must be ready to assist people with a hand up. Not a handout, necessarily, but a hand up so they can find their own way out.

YOU GET MORE THAN WHAT YOU SEE

The GaveKal Authors quote the 19th century French economist Frederic Bastiat. Bastiat developed an early version of the “law of unintended (unseen) consequences”. Bastiat’s law states that an economist must take into account “both what is seen and what is not seen.[i]” This rule, in some absurdist reductionist way, should go without saying. But we know what the GaveKal authors are saying about the loss of manufacturing in the West and the growth of manufacturing in the East. We see it, we measure it, and we extrapolate therefrom. We have seen it and measured it for years. And absent more protectionist measures, (and even with them), we cannot stop the move of manufacturing jobs from Michigan to Malaysia, Indiana to India, and Pittsburgh to Shandong Province.

WE WATCH FOR WHAT OTHERS DON’T SEE

Kind of a grand pronouncement, but that is what the Author looks for. What are we missing? What isn’t there but should be. What is there but might look different this time. But that is why the Author writes this blog. If readers want the conventional wisdom there is the Wall Street Journal and CNBC.

The GaveKal Authors present some investment ideas that they believe will succeed in “Our Brave New World”. The Author will share them in another post.

WHAT WAS THAT FAMILY ACT IN THE DESERT OF THE REAL CALLED AGAIN? THE ARISTOCRATS?


[i] http://en.wikipedia.org/wiki/Frederic_Bastiat. Bastiat is often seen as a forerunner of libertarian economic thinking and the Austrian School of Friedrich von Hayek and Milton Friedmann.