“Wherefore,” [Kublai Khan] said, “should I become a Christian? You yourselves must perceive that the Christians of these countries are ignorant, inefficient persons, who do not possess the faculty of performing anything . . . whereas you see that the idolaters can do whatever they will.”
—THE TRAVELS OF MARCO POLO, THE VENETIAN
I would build that dome in air
That sunny dome! Those caves of ice!
And all who heard should see them there,
And all should cry, Beware! Beware!
—SAMUEL TAYLOR COLERIDGE, “KUBLA KHAN, OR, A VISION IN A
DREAM: A FRAGMENT”
Death of a Dream? The Challenge of China
China Is Near
Westerners have discovered and rediscovered China many times since Marco Polo explained the Middle Kingdom to Europeans in a narrative dictated in a Genoese jail in the thirteenth century. Polo may not even have been to China. He certainly did not see all that he described. Nonetheless, although some scoffed at its “million lies,” Europeans copied Polo’s Travels for the next two centuries and passed them around like downloaded music files in the 00s. Christopher Columbus studied a copy in an effort to find his way to Asia. Like Columbus, in the 700 years since Polo dictated his stories, many Westerners convinced themselves that they could grow rich from finding China. Traders, missionaries, soldiers of fortune, and diplomats believed that Westerners could impose their religions, manufacturing output, rule of law, and military power on a vast and impressionable population of Chinese who very much needed these interventions. According to its ethical precepts, Western adventurism has always needed to justify itself.
The Chinese have rarely been empowered to explain themselves to the West. When Secretary of State Henry Kissinger “opened” China to the United States for President Richard Nixon in 1973, he told Chinese Premier Zhou Enlai that China was a “mysterious” country. Zhou responded that after several thousand years of history, the Chinese were not a mystery to themselves. Because Westerners so successfully enriched themselves in the first and second industrial revolutions, they became ever more certain that the comparatively impecunious Chinese were passive, incurious, self-centered, pliable, weak, and serene.
Ignoring the tumult and the horror, Western businesspeople repeatedly discovered gold mines of opportunity in China.
In truth, before the West grew rich, “in the year A.D. 1600, the empire of China was the largest and most sophisticated of all the unified realms on earth.” The Manchu conquest of China in the mid-seventeenth century exceeded in difficulty and scale the European conquest of the New World. In the eighteenth and nineteenth centuries, revolutions shook, and sometimes overturned, kingly rule in the West, but the Taiping Rebellion of 1850–64 dwarfed them all in violence: 20 million died in an anti-Confucian, anti-imperial revolt—an order of magnitude greater than the aggregate casualties of the American, French, and Russian Revolutions. In the twentieth century only the German and Soviet histories compared to the misery and violence of China’s experience.
Ignoring the tumult and the horror, Western businesspeople repeatedly discovered gold mines of opportunity in China. In the eighteenth century, the British imagined the mills of Manchester going “forever” if they could only “add an inch of material to every Chinaman’s shirt tail”—not that anyone knew why shirts might be too short on the other side of the world. In the 1970s, and again in the early 1990s, New York financiers poured hundreds of millions of dollars into the Chinese economy. By and large, the glitter of fool’s gold had lured them. China produced little wealth for itself or others in the nineteenth and twentieth centuries.
Twenty-first-century China, however, struck Westerners as a reincarnation of nineteenth-century America. To Western eyes, the Chinese apparently embraced capitalism rambunctiously, encouraging greed as good. Chinese consumers, now eager to buy not shirts but cell phones, composed the most populous market in the history of consumption. Innumerable Chinese laborers wanted to work prodigiously hard, at dirt-cheap wages, without the intervention of unions or annoying safety and health regulations. Everyone candidly wanted to be rich, and Westerners understood that urge.
Under Mao, the Chinese ruling group aspired to control labor from cradle to grave. They regulated travel, residence, schooling, and procreation. Under Deng, however, the government eased, or lost the ability to impose, these controls. Millions of Chinese began to live outside the law.
Like Marco Polo’s narrative, the new Western perception of China mixed fictions and facts, with the motive of encouraging Asian adventures. The Chinese political rulers think they are, as the proverb put it, riding the back of a tiger. Numbering somewhere between 5 and 500 people at the apex of the 65-million-member Communist Party, this group can barely rule their huge population, even when collaborating with the handful of super-rich Chinese who made their fortunes outside the People’s Republic. Centers of governmental and economic power are emerging in the various regions in rivalry against Beijing, as has repeatedly occurred in Chinese history. New influences threaten not only the existing order but anyone’s ability to exercise order. Perhaps 30 million Chinese can taste the West’s standard of living, and 500 million might hope to enjoy that life in one generation. But a billion are still trapped in desperate poverty. Powerful forces rend the social fabric: international capital, the military strength of the West, an aging population and overwhelming population shifts, the Internet’s disruptive spread of information, the devastating environmental impact of development, massive energy shortages, and the ever-present risk of political instability.
Nor do the Chinese elite believe they have adopted pure capitalism. After Deng Xiaoping cemented control in 1978, in the wake of Mao Zedong’s death two years earlier, the ruling group, under his leadership, began to fuse a welfare state with an integrated business-government sector. The approach resembled the European experiments in statism of the 1930s. Indeed, with its emphasis on nationalism for the masses and wealth aggregation for an elite, it smacked of fascism.
Projecting its preferences as it had done on the less-developed world since the age of discovery, the West became mesmerized by China’s booming consumerism and rush to capitalism.
Under Mao, the Chinese ruling group aspired to control labor from cradle to grave. They regulated travel, residence, schooling, and procreation. Under Deng, however, the government eased, or lost the ability to impose, these controls. Millions of Chinese began to live outside the law. As millions began to seek money and communism’s insistence on equality lost its adherents, the central government struggled to maintain control. After the Tiananmen Square massacre of 1989, the government did succeed in suppressing the growth of civil liberties. Deng and his successor Jiang Zemin channeled the energies of the young into entrepreneurship, and away from political reform. Without a legitimizing political mission, however, the party elite under Jiang and, since 2004, his successor Hu Jintao have been unable to manage the growth of domestic capitalism. They have encouraged foreign direct investment, rigged the currency to expand exports, and pursued more diplomatic engagement with other developing countries, where they have focused on securing access to national resources. However, the elite have shown no significant signs of seeking legitimacy for government by obtaining the consent of the governed. As the historian Jonathan Spence wrote in 1990, “If China was to develop as a modern nation . . . those taking the chances would have to be given some role in the making of political decisions. . . . There would be no truly modern China until the people were given back their voices.”
Nonetheless, projecting its preferences as it had done on the less-developed world since the age of discovery, the West became mesmerized by China’s booming consumerism and rush to capitalism. In the late 1980s and 1990s the Chinese began buying the “Eight Bigs”—“a color television, a refrigerator, a stereo, a camera, a motorcycle, a suite of furniture, a washing machine, and an electric fan.” In the 00s, they added to the list of necessities personal computers and cell phones. Businesses seeking economies of scale identified China as the biggest growth market in the world. Everyone in information technology had to sell there. To do that, they had to put plants and people in China.
In the 1980s and early 1990s, Chinese capitalism was directed about one-third toward meeting domestic demand and two-thirds toward export. In that respect, the Chinese copied some parts of the Japanese challenge to the West of the 1970s and 1980s. Japanese export businesses had perfected new efficiencies in manufacturing. They intended to supplant less efficient American manufacturing facilities. The factories of the United States had produced a very large share of global goods in the time since the Second World War ended with the United States triumphant and the rest of the world in ruins, but from Japan’s perspective that era had ended. Japan’s government and businesses together decided to take market share from Western firms in all global markets, most prominently including the American automobile industry. Japanese manufacturers knew that their own small domestic market could not support economies of scale. They depended on the United States for consumption.
However, unlike China in the 00s, Japan in the 70s and 80s depended on the United States for military protection against the Chinese and Soviet communist threats on the other side of the Sea of Japan. As a result, the Japanese complied when the United States forced Japanese car companies to build facilities and create jobs in the United States. The Japanese government succumbed to the American insistence on revaluing the yen-to-dollar exchange rate so as to reduce Japan’s ability to export. American firms meanwhile overhauled their facilities, broke their unions, fired employees, and became much more productive. In the end, Japan fell into a recession, at least partly induced by the success of the American competitive response to Japan.
The Chinese strategy of the late 90s and early 00s more seriously threatened American firms’ success and American citizens’ standard of living. For all their concerns about domestic order, the Chinese ruling elite had hundreds of millions of new capitalists from the erstwhile Third World to whom their firms could sell. In the 1990s, the Chinese economy began shifting toward a domestic focus. Firms competed vigorously in every market. They used technology to build low-cost manufacturing facilities, and they put their inexhaustible supply of cheap labor to work with breathtaking rapidity. Eventually, the mass of Chinese consumers will define tastes, trends, and technological standards for much of global trade. Meanwhile, unlike the Japanese, the Chinese have no need for a military alliance with the United States. Instead, by the 00s the United States looked for Chinese help in dealing with North Korea.
The table is turning between the West and the East. Westerners wish to manufacture and hire in China. Western firms no longer want to add length to Chinese peasants’ shirts; now they want to increase the length of the Wal-Mart shelf space stocked with Chinese goods. The Chinese no longer struggle for ways to resist Western encroachments on their culture. Now they are bent on enriching themselves by importing Western investment and skills, while learning enough about Western tastes to succeed in exporting to Western markets.
Communist Mercantilism
The Chinese leadership intends in the twenty-first century to create a host of champions not only in industrial sectors like textiles, oil, and chemicals but also in information technology.
The Chinese Communist Party apparently plans to craft a state corporatism that will manage the Chinese economic and political strategies for the next several generations. Entrepreneurs are to be part of political leadership. Political leaders, in their own names and through family members, will take a share of entrepreneurial wealth and portions of the state-owned firms as they slowly convert to private firms. Meanwhile, the government will provide Chinese entrepreneurs with the trade policies, educational resources, transportation, and other public goods that let them take on Western rivals in the commercial battles of the century. The entrepreneurs may see the government as an unwanted partner, or even an agent of corruption. But as long as the country’s economy grows at nearly 10 percent a year, everyone will make enough money for the new business leaders and old government elite both to obtain their shares of the country’s wealth creation.
The Chinese leadership intends in the twenty-first century to create a host of champions not only in industrial sectors like textiles, oil, and chemicals but also in information technology. Edward Tian, in 2003 the president of one of the top four communications firms in China, had been inspired a decade earlier by a speech of Al Gore’s about the information superhighway. He started a business with the plan to “wire China.” By the mid-00s, his vision was far on the way to reality. China was first or second among countries in the number of broadband users, PCs, TVs, and refrigerators. China counted more than 300 million cell phone subscribers. Because fewer than 30 percent of Chinese had cell phones, the industry anticipated adding more than half a billion additional users in the future.
Deng’s one-child policy concentrates parental and grand-parental income behind a single member of the next generation.
The Chinese leadership experienced the disasters of the Great Leap Forward and the Great Cultural Revolution. They understand that most Chinese are very poor in comparison to citizens of Japan, Korea, Taiwan and certainly the United States. To all appearances, China’s history has demonstrated David Ricardo’s “Iron Law of Wages”—that wages will never exceed subsistence level. The Chinese annual income per capita is only about $900, a mere one-thirtieth the American level. However, while the whole country is poor, the current Chinese paradox is that a populous segment is becoming middle class in a hurry. About 100 million Chinese workers earn at least $5,000 a year. That Chinese middle class equals in size, if not wealth, two-thirds of the total American workforce. Their standard of living in some respects approximates the average for Americans. The Chinese in their own country can buy a great deal more with a dollar—when exchanged for “the people’s currency” of the renmimbi yuan—than can Americans in the United States. Shanghai apartment dwellers pay five dollars a month for cable television, and in most cities people pay about the same for telephone service. Lenovo sells PCs for less than $200. The well-off in Beijing hire help to cook, wash, clean, and run errands for between $60 and $90 a month per employee. In addition, urban Chinese, about 30 percent of the population, obtain at very low cost some level of transportation, housing, health care, and education, although many of these public goods are inferior by most Western standards. (The government provides these public goods on a much broader scale than do the U.S. national and local governments.)
Moreover, Deng’s one-child policy concentrates parental and grand-parental income behind a single member of the next generation. Partly for that reason, members of the youngest generation have a better education than their parents. In addition, where Chinese students in the 1960s lost much of their educational opportunities in the ravages of the Great Cultural Revolution, in the next generation the Communist Party embraced education as the path to increasing the national economy. The Chinese government continues in the 00s to encourage one child per family, especially in rural areas. Such governmental intrusion into conception in the United States would leave Americans on both sides of the abortion debate aghast. In China the policy, coupled with economic growth, has helped ensure that from 2004 to 2014 another 200 million will join the Chinese middle class—and in the decade that follows, another 300 million.
In the last quarter of the twentieth century more than 100 million Chinese moved from rural regions to the 100 cities that had a million or more in population. Indeed, the percentage of China’s population in urban areas nearly doubled from 1990 to 2004. The trend continues: About a half billion Chinese will move from farm to factory in the next twenty years. In about 2025, 700 million Chinese in 100 or 200 cities will be consuming the same amount of goods and services as approximately 300 million urban Americans clustered in perhaps 50 cities. Measured by demand, the economies then will be about the same size. In terms of the number of consumers purchasing globally available products, by about 2025 China will rank higher than any other country.
Total Chinese consumption is already about one-third the size of American buying, measured in terms of what is bought as opposed to how much money is spent. According to this purchasing power comparison, the Chinese, Japanese, and Indians together buy about as much as Americans. These consumers, consequently, influence tastes, trends, and technology standards as much as do Americans. By 2025, Chinese consumers alone will have as much influence over supply as American consumers.
Even though Americans increased their spending every year in the early 00s, in those same years China accounted for about 40 percent of the global economy’s growth. Growing markets set trends and technology standards. If Chinese purchasers sharpen the cutting edge of consumption, then the most creative makers, branders, marketers, and shapers of culture might more likely live and work in China than in the United States.
The new middle class is appearing in many regional clusters, formed around industry leaders. The competition among regional governments and businesses has strengthened the diversity and creativity of Chinese businesses. Different regions specialize in different expertises. They create a broader portfolio of national assets than any Soviet centralized plan ever did. China hosts the world’s largest centers for making ties, shirts, and socks. In nearby cities other firms aspire to create the global centers for making telecommunications equipment. Shanghai, 500 miles to the north, attracts foreign investment in finance, semiconductors, and media. Beijing intends to become the location for headquarters for multinational corporations.
The new middle class exercises new freedoms to work, marry, move, choose clothes and music and even the number of children. However, it is not about to become an active electorate in a functioning democracy. From China’s perspective, the factionalism of Western democracy produces inconsistency from one election to the next. The Western system of judicial review, legislative process, and never-ending opinion polls leads to ineffectual and erratic execution of any strategy. China’s leadership will tolerate some local elections to deal with some local matters. That sort of voting, like union hall elections in the United States, can help make small groups cohesive. Beyond that, a multiparty electoral system will serve no purpose sought by China’s political or business leadership. In both Hong Kong and Taiwan, distinctive democracies have developed, but Beijing regards these cases as warnings of what to avoid, not signposts toward the future.
Much elite thinking in America entertains the improbable hope that the path from capitalism to democracy is a slippery slope that China will inevitably slide down. As before in the history of Western assessment of China, that perspective ignores the Chinese view. It projects onto the Chinese screen a vision, unreal as any motion picture, that the West prefers. Chinese entrepreneurship is very different than anything recognized by that term in America.
Entrepreneurship, for that matter, has had different meanings in the West since the word was coined in eighteenth-century France by the Irish-man Richard Cantillon. For him, the term meant someone who started a business. His own start-up activity was financial speculation. He sold out of the South Sea Bubble before it popped. Today he would be described as a founder of a hedge fund. In the next century, French revolutionary and laissez-faire economist Jean-Baptiste Say turned the word into a theory: an entrepreneur combined someone’s land, someone else’s money, and a third party’s labor to make a product sold in the market. The difference between the sale price minus the rent on the land, interest on the money, and wages for labor equaled the entrepreneur’s profit. In modern America, this sort of entrepreneur would be called a venture capitalist.
The Austrian economist Joseph Schumpeter went beyond this approach to label the entrepreneur’s work “creative destruction.” The entrepreneur’s activity, Schumpeter believed, “interrupts the continuity of development . . . because [a phase of] development comes to a stop and a new one starts.” Schumpeter’s disruption describes the battle of an entrepreneur to attack an existing hierarchy of power.
Entrepreneurship in China is a different animal. It fills a vacuum once occupied by the Communist state’s system of production. Lip-Bu Tan, a prominent West Coast venture capitalist, says the principal traits of entrepreneurs in Asia are “humility, patience, willingness to learn, and total commitment to the business.” The picture contrasts with American brashness and pride. Chinese entrepreneurs are often famous risk takers, but for the most part, they are not financiers. They make things. They are the engine of the national growth strategy. They are acquisitive, but they believe their wealth will eliminate poverty in a trickle-down fashion. Their capitalism is “creative construction.” They compete fiercely, but unlike American entrepreneurs, they do not seem to come from outside of society.
Like their American counterparts, entrepreneurs in China have contempt for government bureaucracy, corruption, and kleptocracy. Nevertheless they partner with the state. They accept joint ownership of assets and state presence in firms to a degree unimaginable to Americans. Nor do Chinese entrepreneurs advocate democracy. Some had been in the Tiananmen Square demonstrations as students and had learned to fight for money, not political change. According to one survey, some 78 percent of entrepreneurs had joined the Communist Party; other estimates put membership at about 25 percent. (It is inconceivable that 78 percent of American entrepreneurs regularly vote, and unlikely that even 25 percent consider themselves active members of a political party.)
The central and regional governments provide much support for entrepreneurs. The state built whole cities like Shenzhen or Pudong—replete with roads, electricity, housing, and communications networks—for business purposes. Government does not make firms clean up pollution.
The state does not fund health care or pensions. Government pawns them off on business, as in the United States. Chinese employers pay for these safety-net protections, which amount to as much as 50 percent or 100 percent of wages. However, because Chinese workers make so little, foreign employers are scarcely burdened by the costs. Nor do these protections for workers inhibit Chinese employers from obtaining low-cost labor for production of virtually any good or service. Independent labor unions do not exist, because theoretically the Communist Party is the manifestation of the working class, and it has the power to set terms and conditions of employment.
Chinese entrepreneurs need natural resources to build their businesses, but their government intends to obtain those vital ingredients of economic growth from other countries. China’s exports to the United States generate the dollars used by China to buy commodities from other countries. China accounts for most global growth in commodities. It is bent on buying firms that own oil and natural gas resources. The state intends to ensure that Chinese entrepreneurs will not lack the imports they need to compete with American firms.
. . .
Response Time
The Future Is Now
In response to rising China, some Americans prescribe laws the government should pass. They want, variously, to alter the currency exchange rate, adjust tariffs for affected industries, and establish common technology standards. Others want more education, communications networks, health care, and science research. Business and government leaders, however, do not agree on the theory of the case. No one seems to know whether, in response to China, the United States should have a more proactive government or a less interventionist government, more or less public spending, more or less dependence on big businesses for employment and economic growth.
Contradictions abound. The government favors free trade but protects the textile and sugar industries. Businesses ask for more educated engineers but reduce the number of jobs available for them. American firms have to increase exports, but some politicians stigmatize those American businesses that focus on foreign markets.
For three centuries, the West believed that it could teach China the secrets of progress, but it concluded that the pupil stubbornly refused to learn. In the twenty-first century, the United States should examine how China discovered, out of the darkness of Maoism, a new way to produce widespread, uncontrolled economic growth. The Communist Party did not order Chinese entrepreneurs to challenge American entrepreneurs for market share. Its rule of law is more an absence of law than an effective framework for seeking trust or justice. Its entrepreneurial practices stem not from its schools but, in large part, from the business experiences of Hong Kong, Taiwan, and other overseas Chinese communities. The Internet has not conferred unbeatable advantages on Chinese exporters, but it has lowered barriers to entry in the developed countries. Domestically, the spread of information technology has created a significant base of eager consumers. Chinese business and political leaders, meanwhile, rejected Maoism and celebrated the creation of wealth. They increased the opportunities for profit making, used technology to shape markets, and led the country into supporting the virtue of wealth creation. The combination of these radical changes in law, technology, and leadership has changed Chinese behavior. China has created a culture of entrepreneurship, where only a generation ago a very different culture prevailed.
These three sources of change—law, technology, and leadership—do not themselves constitute culture. Each is an architecture. Each creates some possibilities and limits others in the same way that a door creates an entrance or exit here and not there, a window provides a vantage point in this direction and not in that, a wall creates an inside space for activity and defines other spaces as outside. Individuals and groups choose among the opportunities presented by architectures. The architectures of law, technology, and history support and invite some actions, and thwart others. Individuals act in light of architectures. By attaching meaning to their action, they create a culture.
Meaning lies in distinction. Architectures emphasize distinctions. Actions and meaning together compose culture. A culture is then described in terms of beliefs and values. The government and business elite in China, at least for now, believe in entrepreneurship. Individuals share those beliefs. As entrepreneurship is defined in China, it seems congruent with an amalgam of Confucian emphasis on family and order and Communist Party discipline. It is part of the new Chinese culture.
China demonstrates that the architectures of culture do not remain the same over time. Hardly any big society has rebuilt its architectures as suddenly as China, but cultural change is ongoing everywhere. Every country has engines of change. Law changes when judges apply the law to hard cases. Law changes when factions of society persuade the politically powerful to make changes. In China, dissidents seek the freedom to choose whether to have more than one child. In the United States, the religious right asks the president to appoint Supreme Court justices who will constrain or reverse the constitutional protection of a woman’s right to choose whether to bear a child. In both countries, the legal architecture itself admits of the possibility that it can be changed. In both cultures, scientific discoveries produced new technological architectures that expanded the potential for human action, just as the atomic bomb and the silicon microchip defined the last half of the twentieth century. Finally, in both cultures, individual leaders take actions that alter choices for others. They forge chains of causation that can strengthen or hobble their societies. Deng and Jiang extinguished Marxism and made entrepreneurship the engine of growth. The American administration fought a war of choice and jeopardized America’s standing in the world. The acts of leaders have effects. These outcomes constitute an architecture of opportunities closed and opened.
Although the definition of culture is so broad as to create chronic ambiguity, everyone agrees on its importance. Culture accounts for the success or failure of careers, organizations, and governments. Law cannot mandate, technology cannot enable, and leaders cannot inspire the behavior of individuals to a fraction of the degree that culture does. Culture is a “control mechanism” that shapes people like clay.
As societies alter their architectures, they remake their culture. They reweave continuously the web of meaning that ties their members into a sense of belonging to a society. Anyone who seeks to change the behavior of a society must seek to change culture. In order to affect culture, reform must change some or all of the architecture of law, technology, and the conduct of leaders. Successful and enduring reform changes the web of meaning. It changes how members of a society act. If reform does not alter the actions and thinking of a society’s members, it remains only an unpersuasive idea, or an unachieved program.
China has experienced reform. Its law, technology, and acts of leadership have reassembled ancient structures to create a new web of meaning. The new architectures of China have shaped both action and the meaning of action. They have given form and substance to a new culture. That culture breeds new firms that challenge the American Dream.
No single law, technology, or act of leadership can ordain that America renew its commitment to entrepreneurship.
For the United States to respond effectively to the challenge from China, Americans need to change their culture. They need to recapture the spirit of the 1990s. They have to revitalize in their society a culture of entrepreneurship. That culture must expand in scale and scope. It has to alter the way people make choices for themselves and for the organizations in which they participate. If the United States witnessed half a million new businesses starting every year in the Golden 90s, that number needs to be much higher in the future. If its firms have always led in information technology, in the future they need also to become global winners in biological, chemical, and even manufacturing markets. If the economy registered 25 million new jobs in the 1990s, it needs to create many more in the next decade. If the top 20 percent enjoy rising incomes, in the future 100 percent need to be on the upswing.
China can provoke Americans to reform the legal, technological, and leadership architecture of the society. The reformed Chinese culture can stimulate Americans to believe in reform. Just a glance at China should persuade any American to fight fire with fire. The purpose of reform in the United States needs to be the renewal of the American cultural commitment to entrepreneurship.
No single law, technology, or act of leadership can ordain that America renew its commitment to entrepreneurship. However, these architectures certainly will change. The nature of these changes will save or doom the American future. No one knows the outcome, but if Asia falls like night on the West’s long summer day, it will look like this: Chinese and other Eastern firms will make almost everything for nearly everybody in the world, and nobody else will be able to say or do much about it. After that, the new rulers of the planet’s productive capacity will decide whether to tolerate democracy, individual freedom, economic growth, or entrepreneurship in other societies. That will be up to them.
Some Past Will Be Prologue
America’s Historic Culture of Entrepreneurship
Since at least the eighteenth century, American culture supported entrepreneurship with a special passion. By the Second Industrial Revolution of the nineteenth century, the American culture surpassed every other nation in the depth and extent of its support for business creation. When Europeans scorned Americans’ lack of couth, the citizens of the United States had the last laugh that usually accrues to those with money and power.
Culture is the crucial element of competitive survival for any individual business, for a national economy, and certainly for the slice of any market occupied by entrepreneurs. Americans did not have to pay much attention to the viability of their culture from the victory of the Second World War until the rise of China. In the twentieth century, the fact that Americans had a superior culture for business purposes was self-evident. In the twenty-first century, however, the American culture is no longer obviously the best possible culture for entrepreneurship. Not remembering well, or perhaps not having understood, the ingredients of the entrepreneurial culture of the 90s, in the 00s American business and political leaders do not share a comprehensive vision for renewing that culture on the terms necessary to compete with rising China. Particularly uncommon is the awareness that the essential traits of successful American competitiveness in the future include increased risk taking for firms, greater turnover of industry leaders in all markets, and more instability for individual firms.
These characteristics mark entrepreneurship in rich and broadly developed economies. They are less important in the relatively undeveloped Chinese economy, where both government and business leaders want to create new industry structures. In America, entrepreneurs are supposed to disrupt order; in China, they are supposed to perpetuate it. Tearing down is different from building; in that respect the American situation is more daunting for entrepreneurs than the opportunities presented in China. In the United States, most markets are led by longstanding, well-run, cash-flow rich, and politically powerful firms. These companies have the purpose and means to destroy new entrants, crush rivals, and maintain the status quo. The high rate of technological change, the rapidity of the growth of a new medium, and the easy access to risk capital made the 1990s an exceptional decade for American entrepreneurship. The more general paradigm is that entrepreneurs expect greater obstacles to creating successful new businesses in well-developed, existing markets such as those in the United States.
Of course, start-up and established American firms can count on the culture’s longstanding commitment to entrepreneurship, access to sophisticated financial and skilled human capital, and widespread technological invention. Nevertheless, to respond to the Chinese challenge, Americans need to renew, on new terms, their culture of entrepreneurship. If entrepreneurial activity intensifies in all markets, three results can be expected. First, more new, surprisingly successful firms will spring into global leadership. Second, even entrepreneurial failures will contribute through their competitive pressure to creating more productive microeconomies in all markets. Finally, more Americans will work in productivity-growing companies and so will enjoy rising wages.
Americans have to begin by changing the architectures of their culture. The first architecture, law, includes statutes and regulations that create rights and obligations, spend and tax, create incentives and punishments. It creates choices, and makes some easier or more rewarding than others.
As an example, in the 1990s, the American legal architecture made a great contribution to entrepreneurship by encouraging the cheap, broad, and rapid growth of the Internet. American government spending created a network of communications links among universities. However, the Internet escaped from a tiny academic community into the general populace in large part because American law freed it. The U.S. government precluded telephone companies from charging people extra to use their telephone lines to connect to the Internet. It required telephone companies to pay money to Internet access providers. It gave Internet access companies the right to buy high-speed connections to data centers at favorable prices. It declared that anyone could go into the business of selling Internet access without needing a license. It took billions of dollars from telephone users and gave that money to schools so that they could purchase Internet access for every teacher in every classroom. It refused to tax commerce done over the Internet.
The American cultural proclivity for sharing information found new expression in the Internet medium. By the end of the Golden 90s, more than 75 percent of all Americans used the Internet at home or at work and nearly 90 percent of all students had access to the Internet in elementary classrooms and computer rooms. Rapid adoption among a large number of users meant that the Internet became an American creation. Because Americans embraced the Internet in vast numbers before any other society did, English became the lingua franca of the Net. Rapid adoption of the Internet also caused the medium to become the language of entrepreneurship. To start a business in the 1990s, everyone began by acquiring a URL; in previous decades, entrepreneurship commenced with a phone line and a mailing address.
By contrast, in the 00s, Asian law did much more than American law to spread the new broadband Internet. Asian governments wanted higher-speed networks, sending pictures and sound as fast as narrowband sent text, to become a new medium and a new way to challenge the American cultural claim on the first generation of the Internet. They succeeded. Meanwhile, the U.S. government abandoned its stimulus of the Net, and the country fell behind in high-speed connectivity. The United States ranked sixteenth in broadband penetration by April 2005. Congress in 2005 agreed to spend nearly $290 billion over five years on roads and highways, but not a penny on broadband. The preference for cars instead of computers will no doubt affect American entrepreneurship for years to come. An architecture of law opens up or closes off possibilities.
Not just the legal architecture of the Net but also its technological architecture affected choices and opportunities in the 1990s. Specifically, the technological architecture was open, collaborative, flexible, and expansive. Therefore, it stimulated entrepreneurship.
A technological architecture includes scientific discovery, engineering design, and language. The most important technology of the late twentieth century is the computer. It combines many areas of scientific knowledge—electromagnetism, quantum mechanics, chemistry, and the logic of Boolean algebra. Computer design finds its origin in 1945, when John Von Neumann proposed to line up instructions in sequence, storing them in memory. His design approach made computers reprogrammable, flexible in their purposes, and therefore very useful in practical terms. The design made the computer a valuable technology, as opposed to an interesting scientific discovery.
The language of computer architecture used two common states of electrical circuits, carrying electricity and not carrying it, on and off, to represent numbers and characters in binary form of 1’s and 0’s. Boolean logic employed the two choices—1’s and 0’s—to depict all information and express all logic. (By contrast, if the language used the three states of molecular structure—gas, liquid, and solid—then computers would have required a trinary system of logic.)
With Boolean algebra, any question can be broken down into a long series of questions that can be answered with a yes or a no. For example, what is two plus two? Is it five? No. Is it three? No. Is it four? Yes. So if every circuit can produce a pathway toward a yes or a no, then the electron’s path can be mapped as a series of answers of yes or no to every question. Software code consists of instructions for the opening or closing of circuits so as to produce the right answer to the question of two plus two, and to every other imaginable question.
In general, everyone in the world can learn the science, design, and language of computers. That knowledge is open. Learning it can lead an entrepreneur to create great value. It makes those who embrace computer technology more wealthy than those who do not. The wealth stems from the technology’s gift of the power to manage ever-increasing amounts of information reduced to the form of 1’s and 0’s. A culture that values the science, design, and language of computers will create a more wealthy and powerful society than one that shuns this technology.
The Internet’s architecture could have been closed, unrevealed, secret, and proprietary. To a degree, the software of computers was not open. The famous Microsoft litigations of the 90s and 00s focused on whether Microsoft had to allow rival applications-software makers to use its operating-system software to compete against Microsoft. Microsoft licensed others to use its architecture, but the litigation concerned, among other things, the fairness of the conditions of the licenses. Similarly, telephone companies and consumer electronics companies did not create open technological architectures. Not surprisingly, hardly anyone introduces new goods or services that use telephone company networks or consumer electronics devices as integrated components of their systems. For example, consumers cannot easily plug a telephone line or a camera into a television set, even if they wanted to see who was calling.
Tim Berners-Lee, Marc Andreessen, and other early shapers of the Internet took the opposite approach. The academic origins of the Internet created a bias toward openness in its early architects. The Internet’s founders designed their creation so that it would encourage an open architectural approach in related markets such as operating-system software. The open software called Linux, Microsoft’s current rival, was therefore a natural descendant of the open design of the Internet.
Leadership, the third architecture, is the pattern of historical actions in a society—events that have consequences over time. People can change culture by persuading others to follow their advice, direction, behavior. Leaders are those who succeed in such persuasion. Leaders from above use the power of position to persuade; leaders from below depend more on the power of rhetoric and the association of many followers into like-minded groups. Some dictate outcomes; others mobilize to achieve outcomes. Both use the power of leadership to alter culture by opening some possibilities and closing others.
Myriad academic, professional, and lay writers churn out books and articles on leadership. Everyone looks for it, decries its absence, mistakes or finds it in actions famous and unnoticed. As with culture, few agree on its definition, but everyone acknowledges its criticality. The architecture of leadership for a society comprises the stream of events and beliefs that result from individual leaders in that society.
Leaders’ actions may include decisions to make war, to invest, to create and express ideas. By such deeds, leaders produce changes in the behavior and thinking of others. When leaders change the conduct and opinions of others, they change culture.
Otto von Bismarck reportedly said that “political genius consists of hearing the distant hoofbeat of the horse of history and then leaping to catch the passing horseman by the coattails.” The flow of events, he meant in his Hegelian way, had a force of its own greater than any one person could overcome. In any culture, history, like a river, is more likely to follow existing channels than to carve out new directions. Yet rivers change course on occasion. Leaders can make those changes happen. Bismarck’s own actions created the balance of power that, when disrupted, led to two world wars. He led; he had followers. His decisions had effects. Similarly, no invisible horses pulled America into the Golden 90s. Instead, individuals made good laws, started great firms, invented great technologies, and talked others into the cultural changes that produced a golden age of entrepreneurship. Individuals are controlled by culture, but to greater or lesser extent cultures transmit freedom of action to individuals who are part of such cultures.
So, although culture shapes possibilities for everyone, people tinker constantly at the architectures of culture. They want the cultural machine to produce outcomes, measured by both action and belief. Toward the goals of altering how others behave and think, individuals, acting alone and together, change law, invent technology, and exercise leadership.
Perhaps leaders know, more than do lawmakers or technologists, that their principal achievements must lie in cultural change. Leaders make war, cut taxes, encourage oil refining, take a stance on global warming, and in each act they should know that in the long run their conduct will be judged for its effect on what people do and think. Leaders, technologists, and lawmakers usually have a view about the short-term effects of their actions. The long-term changes in culture that they cause are far less predictable. Nevertheless, guessing about the future and searching for meaning, people in societies rebuild, support, renovate, and alter these three architectures, and hence change the culture of their societies.
The three architectures do not much overlap, but they do have impact on each other. Former Intel CEO Andy Grove called “Grove’s Law” his postulate that “technology will always win.” For example, the U.S. government cannot curtail stem cell research; even if others do the research, sooner or later it will be read and applied in the United States. On the other hand, law, for example, can speed or slow the effects of technology. Similarly, by its own terms law can thwart leadership, as the Jim Crow regime stifled and re-directed many African-American leaders for a century. Nevertheless, leaders can change a culture even against the force of law, as Rosa Parks did by refusing to give up her seat on a bus.
The three architectures, like all discourses of power in a society, converse with each other. Technology creates issues and choices for law. No matter how law decides any particular matter, technology will continue to ask questions. Technology asks whether people want to alter purposefully their genes. It invents an atomic bomb and asks a president whether to use it. It creates thousands of nuclear weapons, but government leaders have to decide whether to corral them. Individuals make those choices, guided by culture and unable to depend on technology for their decisions. Finally, leaders muster support for or opposition to changes in law, pursuits of technology. Collectively, leaders, technology, and law provide structures on which people spin the web of beliefs, values, motives, and objectives that govern the behavior and beliefs of people in society. That web is the culture of the society.
The three architectures can each stimulate or suppress a cultural belief in entrepreneurship. In American culture, entrepreneurship stems directly from a belief in the virtue of individual liberty—including in particular freedom of expression and association. When the culture favors disruption, American entrepreneurs are strengthened in their numbers, the range of their activities, and their likelihood of success. Anyone in any country might open a shop. However, because the American culture values risk, challenge, competition, ambition, and independence, disruptive, Schumpeterian entrepreneurs have historically found more support and reward in the United States than in other countries.
For centuries, the American culture—characterized by enthusiasm, crankiness, materialism, and belief in individual and societal progress—drew millions of immigrants who arrived with a hunger for work and a willingness to believe the culture. The Americans who became the first Internet users re-created that American culture in a virtual world. They made an Internet that emphasized individual action and expression, willingness to experiment, rejection of hierarchy, rambunctious pursuit of profit. America the physical country and America the Web country became the homeland of the start-up. That this occurred in the 1990s was no accident.
The Halcyon Era
As the baby boom generation emerged from its collegiate chrysalis in the late 1960s, the American economy began a twenty-five-year decline. The belief that only big firms could achieve economies of scale led to the formation of huge conglomerates and a library of literature decrying the organization man that large firms seemed to require. Yet the large-scale firms failed to generate either productivity or wage gains. By 1970, the country was sliding on a downward slope of what looked like a Kondratiev wave. At the nadir, in the late 1970s, investors focused on purchasing established businesses through leveraged buyouts that reaped fortunes for financiers but produced little for employees or the overall economy.
By the late 1980s many elite opinion shapers concluded that American firms could not compete in world markets, and that government had to remedy the situation. Bill Clinton based his 1992 presidential campaign’s famous focus—“it’s the economy, stupid”—on this imperative. His agenda aimed to enhance the competitiveness of American firms in globally traded markets. The actions included lowering interest rates by reducing “crowding out” from government debt, balancing the government budget, expanding research and development funding, and introducing competition in previously consolidated or regulated industries.
Meanwhile, after a half century of cold war, the United States and its Western allies emerged victorious over the communist bloc. The Soviet Union dissolved. Led by the German reunification, Eastern European countries migrated into the European common market. All the world, in a flashback to nineteenth-century liberalism, suddenly and dazzlingly opened up to the export of Western goods and culture.
However, the most scintillating prospects turned out to exist in America itself. The world’s money decided that it belonged in American equities and American debt. The country operated under a reliable, if complicated, rule of law. Its workers produced more per hour and dollar of capital investment than those of any other big country in the world, more than justifying their high wages. It had high employment and a constant stream of immigrants to fill both menial and sophisticated technical jobs. Particularly in information technologies, its firms led in all world markets. Its consumers spent prodigiously, saving little but always demanding more new products. Thanks to the convergence of communications and computing, technology showered those consumers with new goods and services.
Interest rates dropped, so that investment in equities rather than bonds appealed to global money. Firms translated that investment into new productivity-gaining processes. Corporate income soared, especially in the technology sector. Even hysteria helped: the far-fetched possibility that old software would break when the clocks turned from the 1900s to the 2000s catalyzed a surge in corporate purchases of information technology.
At the macroeconomic level, the rule of law shifted favorably toward more wealth creation and income increases for middle and lower income classes, a strong dollar, and free trade. Purchases and sales of stock by American households during the bubble years resulted in a net gain of more than $2 trillion from equity markets. That cash went into real estate, in-creased consumption, and various investment vehicles. In the subsequent bust, long-term investors (such as pension fund managers) and those owning names that defrauded the market lost the most. However, even when the declining stock market hit bottom in 2002, the average household had much more money than it would have had but for the boom.
At the microeconomic level, changes in the rule of law encouraged vigorous competition in communications markets, the expansion of the Internet, rapid replacement of old capital stock with new and more efficient assets, increased debt financing, and investment in start-up firms. In the 1990s, firms introduced innumerable goods and services into new and old markets. Michael Porter taught that the “home nation influences the ability of its firms to succeed in particular industries.” The “competitiveness” arguments of the 1980s had encouraged Americans to adopt a rule of law that promoted entrepreneurship. The architecture of the Net, however, stimulated a host of information technologies—operating systems and application software, microprocessor and memory chips, routers, servers, data centers, access and transport networks, radios, baseband and signaling processors. Start-ups invented components; incumbents raced to keep up. The component firms sold to start-up firms assembling systems; incumbents hurried to keep up. The systems firms sold to network start-ups; incumbents increased capital expenditures to match their new rivals. Networks spread across the land; everyone went online.
Each successful category created advantages for Americans in foreign markets. AOL entered the business of Internet access in Germany. Yahoo! led in broadband access in Japan. Qualcomm became a world leader in intellectual property embedded in handheld devices: hundreds of millions of cell phones generated royalty payments for a start-up founded by San Diego engineers.
During the 1990s American technology firms in general went from selling almost entirely to American end users to selling about 70 percent of their components and systems to users and assemblers outside the United States, and by the early 00s the fastest growing markets for their products were in Southeast Asia. As Porter wrote in 1990, “A nation’s firms are likely to gain competitive advantage in global segments that represent a large or highly visible share of home demand but account for a less significant share in other nations.” When the American culture created the information economy of the Golden 90s in its country, it also opened the door for American firms to export that culture and their goods and services to the rest of the world.
New communications networks generated and transmitted much more information at much lower cost. Almost everyone benefited as the cost of communications approached zero. With ever cheaper access to information and new competition from entrepreneurs, firms made goods and provided services at much lower cost. Productivity soared. Those productivity gains created new wealth. The direct winners included (1) the owners of the productive firms, because the increased return on investment made richer the shareholders and employees given shares in the form of options, and (2) the employees who negotiated higher pay per hour, because their skilled use of machines and information produced more output per hour. Capital and labor negotiated the division of the wealth, but productivity gains made the booty bigger. So in the 1990s employees reversed the negative trends of the previous quarter century, and for all income classes earnings went up.
As businesses made more goods and services per dollar invested, they provided more for consumers to purchase. Producers and consumers always negotiate the allocation of the “more”—what economists call “welfare gains.” Producers of computer software and hardware got much of the welfare gains that their technologies created. That was one reason why Microsoft’s margins were high and its stock went from a market capitalization of $37 billion in 1992 to almost $300 billion in 2004. By contrast, in long-distance service consumers won the greater share of the welfare gains, one reason why AT&T’s market capitalization went from $34 billion in 1989 to $12 billion in 2004.
That summery American decade of value creation had its epicenter in Sunnyvale, California, forty-two miles down Highway 101 from the central location of 1967’s Summer of Love, the Haight neighborhood of San Francisco. Sunnyvale, an eponymous name, was the municipality that contained the headquarters of Jupiter, AMD, Palm, Yahoo!, San Disk, and many other technology companies. By the late 1990s it and the hamlets composing Silicon Valley attracted legions of gifted, educable, and ambitious youths. To bring people in from other countries, Silicon Valley employers persuaded Congress to expand the visa program known as H1-B. McKinsey & Company, the strategic management consulting company, explained to clients that there was a “global war for talent.” Technology firms scoured engineering graduate schools, business schools, and even law schools for new hires. Consultants, law firms, public relations firms, financial advisers, and other professional outfits serving information technology firms shoveled in new employees to keep up with demand. This demand helped cause workers’ share of national income to increase from 64 percent to nearly 67 percent between 1997 and 2001. Although academics do not credit the existence of Kondratiev waves, nevertheless after the quarter century of decline starting around 1968, an up-swing began in the mid-1990s. In that era, investors looked for small, creative, disruptive firms. Small firms catalyzed the growth of the information economy. In the 1990s most must have agreed with Marc Andreessen’s explanation: “What is Silicon Valley really about? It’s about a culture of risk taking, a culture of entrepreneurialism, a culture of new company formation.” To some, big firms appeared structurally incapable of advancing Schumpeter’s creative destruction as quickly or extensively. Moreover, the start-ups could return ten times an investment in a few years, or flame out in the effort. Netscape’s initial public offering (IPO) in 1995 had magnetic and paradigmatic power: the firm invented a browser, and although almost no one had heard much if anything about it only months before, the stock was purchased with such eagerness that, in the first day of trading, its price went from $28 to $75 per share and John Doerr’s venture capital firm’s investment went from $5 million to $148 million.
Whereas in the 1980s private equity expected to earn perhaps 30 percent return per year on virtually every investment, venture capital in the Golden 90s expected to create two or three big new goods or services out of ten investments and to earn ten to one hundred times their money on the winning investment. They called it “swinging for home runs.” Never was so much money invested at so high a risk with so much reward. Total venture capital investment in the United States rose from just under $7 billion in early 1999 to more than $28 billion at the peak of the boom in the year 2000.
Venture investing belied the psychological propensity of human beings to avoid risk. It undercut the hierarchies of professional advancement. It implied that creativity trumped station. It reaffirmed the American Dream. Anyone could be Bill Gates, Larry Ellison, Henry Ford, Andrew Carnegie, at least in the respect that none obtained a college degree before rolling the career dice. Indeed, the refusal to accept the natural order of advancement, the zeal to remake hierarchies according to one’s personal vision, seemed crucial to success. In the 1990s, the culture of disruptive entrepreneurship reached an apogee.
In an Uncertain Future
The Golden 90s ended with a stock market crash, and worsened into increasing income inequality and a loss of Americans’ confidence in the future. The economy overall grew in the 00s, but most workers were worse off in the new century. Members of households worked more hours in 2004 than the year before but for the fifth straight year could not increase household income (in real terms, meaning adjusting for inflation). The government could not untangle the Gordian knot of inefficiencies in health care. As a result, virtually everyone paid more for health care, and more companies refused to pay those expenses for employees.
The slight recession of late 2000 and early 2001, along with the relative canniness of the Republican campaign and the failure to count all the votes in Florida, denied the presidency to Al Gore, one of the authors of the government policies that encouraged the entrepreneurial successes of the 1990s. In response to the recession, the Bush administration lowered interest rates and cut taxes. These stimuli lifted the stock market and caused a boom in housing prices. Because median and average wages did not rise, income inequality reached record levels. For those not in the ranks of property owners, the housing-price boom built a great wall between them and the traditional promise of a home of one’s own. Meanwhile, more than a fifth of the population of New York, the global center of finance, lived in poverty in 2004.
The probability that any family would suffer economic reversal rose. Immigration into the United States from 1870 to 1910 reduced wages by an amount ranging between 11 percent and 14 percent from what they would have been. In the twenty-first century, instead of nearly 60 million workers coming from labor-abundant Europe to labor-scarce North and South America, jobs will head from the United States into Asia, and offshore employees will compete for work in America without moving across an ocean. While massage parlors and restaurants will keep hiring in America, cheap real-time connections and computerized processes mean that any work embodied in words or pictures can be done offshore.
In the 00s, all American engineers will face, sooner or later, the possibility of salary cuts or job loss because of global competition. As many as half could see their jobs sent offshore within a decade. McKinsey Global Institute estimated in 2005 that by 2008, over one-tenth of service jobs globally could be offshored. As much as a third of accounting and financing jobs may be sent offshore by 2008. Unless something changes, the result, as in the late nineteenth century, will be less labor scarcity in the United States, which will reduce wages from what American workers otherwise would earn. Unless America responds wisely, economic calamities will lead, in all likelihood, to more social problems such as divorce and personal problems such as depression.
Popular writers like Tom Friedman told their many American readers that the Chinese and other Asians wanted their jobs. Lou Dobbs used CNN as a platform for launching jeremiads against offshoring and outsourcing. Yet academic economists, business leaders, and business-friendly journalists asserted that free trade—including offshoring—benefited all Americans more than it hurt some. They proved with the precision of Euclidean geometry that buying cheap Chinese goods at Wal-Mart produced more gains for American consumers than the total of lost wages attributed to offshoring.
Rising above this debate, economists Ralph Gomory and William Baumol explained in 2000 that American citizens would be better off if their American employers continued to make a disproportionately large share of the world’s high-value goods and services. That meant generally that Americans should want their information technology firms to have about 70 percent of global market share, as they had by the end of the Golden 90s. Americans will be best off if the rising Asian countries earn their economic growth from firms in lower-value markets like textiles or agriculture. Chinese information technologists can take up to about 30 percent global share in their high-value markets. That would benefit Americans as well as Chinese by expanding the size of the global consumption market. But if Chinese-hiring entrepreneurs take market share beyond that point from American-employing firms, Americans will be worse off.
Paul Samuelson made similar points in a controversial article in 2004. Nevertheless, many academic economists prefer to avoid this all-important topic. They have a (well-grounded) despair that their government audience would not understand the complexity of the situation and might oppose free trade in a wrong-headed response to the competitive situation.
However, most Americans understand, if not the mathematics of the economic models, the home truths presented to them in their daily lives. Since the Second World War, they looked to their business employers and the government to create a system that produced income gains for everyone at all levels, save perhaps the very poor and the disabled. The culture worked to everyone’s advantage in the 1950s and 1960s, not so much in the 1970s and 1980s, and well again in the 1990s. In the early 00s it broke down. The overall economy grew, but somehow the big grew bigger, corporate profits increased, and the rich grew both more numerous and richer. Everyone else had a harder time finding a path to success.
Americans looked for leadership in these years of uncertainty. In the Golden 90s, business executives embodied the idea of progress for all Americans. They captured imagination and justly became heroes, Time magazine Persons of the Year, inspirational figures for the next generation. In the 00s, however, American business leaders have a very different focus. Whether they can lead Americans to an era of broader and deeper entrepreneurship—which aimed to disrupt market hierarchies—is far from clear. The problem, in part, is that the leaders of big American firms are no longer overwhelmingly concerned with the future of the United States.
Excerpted from In China’s Shadow: The Crisis of American Entrepreneurship by Reed Hundt, published by Yale University Press. Copyright © 2006 by Reed Hundt. Reprinted by permission.
Subscribe to The American
