IP, IP, Betray

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Ken Bui: Revitalizing America through Industrial Policy

This week’s “Securities” column is written by our Lux summer associate Ken Bui. Ken is a rising senior at Stanford, an alumnus of Ohlone College and a former Air Force ROTC cadet.

The United States is a post-industrial economy that desperately needs an industrial policy to revitalize it. That requires us to rebuild our collective memory around past successful government interventions, rebuild the wealth engine in our intellectual culture, and move past the short-term rent-seeking of vulture capitalism to long-term and broad wealth creation. Or as I am dubbing it today: Industrial Policy (IP), Intellectual Property (IP), and the Betrayal of the Instant Pot (IP).

Long live Industrial Policy

Free market ideology is dying. Long live industrial policy.

From the left-leaning Roosevelt Institute to the conservative American Compass, industrial policy has cemented itself as the talk of Washington. And rightly so, as it bears massive implications for the nation’s welfare and foreign policy. Last year’s passage of the CHIPS and Science Act is a realization of years of once-taboo discussions that have finally triumphed over free-market fundamentalism. It’s the closest this country has come to a bipartisan consensus.

We covered industrial policy before in “Commerce’s CHIPS contortions,” but in short, it means building industries from the ground up, not just picking and funding winners. A successful semiconductor industry needs far more than a fab, it also needs engineers who have gone through postgraduate training as well as skilled construction workers, plus the right utility, energy, and transportation infrastructure. Then there needs to be sufficient political will to effectively coordinate all of these disparate actions together and channel them into a plausible industry.

Even as we cling to the Western ideals of free markets that we believe triumphed over the restrictive Gosplans and Comecons of the Soviet bloc, we must not eat our own propaganda.

As the Cold War slips from our collective memories, we lose the experience of how proper government intervention coupled with the forceful will of the American people pushed our country to greater and greater heights, from the dustbowls of the Great Depression to the dusty craters of the Moon. If we want to avoid stagnation, we can’t be ideologues of an imagined past, where unfettered free markets were the answer to all of the nation’s challenges.

In an age where the future will be determined by who has the industrial capacity to come close to autarky, industrial policy is an essential tool in the national strategy of the United States. I harped on the idea of the Zero Interest Rate Policy Phenomenon (ZIRP) last week, and I believe that the Washington Consensus and all that flowed from it was the United States’ own ZIRP. We squandered a golden opportunity following the fall of the Soviet Union, and our unipolar moment was spent navel gazing and propping up vaporware while outsourcing as many parts of the economy we found unpleasant as possible.

The saying goes, we were promised the future, and all we got were 240 characters. I say, fuck the promises. Let’s build our own future.

From Intellectual Property to Intellectual Prosperity

The innovation economy remains one of America’s fundamental strengths. We issue hundreds of thousands of patents every year, but our ethos is often described aptly by the words stenciled on every Apple box: “Designed by Apple in California. Assembled in China.” Intellectual Property is discovered here, and then we export that invention elsewhere for manufacture.

While the patents themselves get most of the attention, I want to talk about a different type of intellectual property — the intellectuals themselves. In his famous lecture “The Two Cultures and the Scientific Revolution,” British novelist and chemist C.P. Snow laments the “gulf of mutual incomprehension” between scientists and literary scholars that had turned into an academic schism. Our social scientists, economists, philosophers, engineers, writers, chemists, physicians, poets, and physicists alike should be able to communicate and coordinate not merely in siloed pursuits, but also for the common good. That is also industrial policy!

Perhaps it’s crass to deem intellectuals property, but they are America’s most important intellectual property (a notion Danny Crichton glanced on in “Brainwash Departures”). The West, and the United States in particular, are massively attractive to foreign talent. We benefit heavily from brain gain, yet we continue to fumble the bag (especially so in the semiconductor industry).

We need to do much more to help our intellectuals create prosperity. Snow was eerily prescient for his time, identifying Britain’s then coming malaise that Danny described earlier this month in C’anterbury Tales. The United Kingdom eschewed the pioneering science of Isaac Newton and Alan Turing for a leadership pipeline of Oxbridge PPE (Philosophy, Politics and Economics) grads to professions like finance and consulting.

As Palladium’s Samuel McIlhagga wrote in “Britain is Dead”:

Because of its status as an initially advantaged first mover, the UK now has a fortified elite content to live on the rents of bygone ages. Its social order is constituted by the cultural legacy of the old aristocracy, underwritten by London financial brokers, and serviced by a shrinking middle class. Its administrative and political classes developed a culture of amateurism, uninterested in either the business of classically informed generalism or that of deep technical specialism. The modern result is a system that incentivizes speculative, consultative, and financial service work over manufacturing, research, and production.

To the extent that the UK is governed by a partnership between the aristocracy and the bourgeoisie, it is an aristocracy that is not aristocratic and a bourgeoisie that is not productive.

Such issues of elite intellectual formation are hardly distant from American shores. Also in Palladium, Saffron Huang reflects on how the culture at elite institutions like Harvard lean towards conformity and risk-minimization — a trend towards mediocrity rather than greatness:

The Pavlovian response of racking up points at the margin sets students up perfectly for careers as mid-level managers looking for small wins, laser-focused on keeping the books balanced. Not only does marginal thinking mean that the American elite trained this way don’t have their eye on the bigger picture, but it makes them more risk-averse and conservative. We learn to bias towards leveraging what we have done in the past, instead of creating a new and better future. Risk aversion feeds back into the system—the managers go on to exclusively recruit Ivy League seniors as provably safe hires, coming back to the same job fairs that defined their own fate. Nobody gets fired for hiring from Harvard.

This is symptomatic of a larger problem in American culture. We have grown accustomed to making no tradeoffs, managing assets that are not ours, and minimizing risk while being content to coast, that we have slowly committed economic suicide as a nation.

The oft-repeated aphorism is that no one wants to work anymore. Honestly, it’s because no one actually thinks their work is doing any genuine good. If we want a productive economy that doesn’t just consist of rent-seeking, we need a national strategy to restructure, reorient, and revitalize our economy, eliminating David Graeber’s “Bullshit Jobs” in the process. A new intellectual strategy for the United States means creating the incentive structures for these productive jobs to flourish.

Instant Pot Profits

The Instant Pot (IP). Beloved by many since its invention roughly a decade ago, its premise is simple. You buy one IP, and you are set for life, barring any serious accidents — it’s a consumer’s dream! If you want a tortured metaphor, the IP is representative of the wider American economy since 1990. You put in a few ingredients, leave it alone, and when you come back, you get a delicious result. That’s the free market at work!

But the IP’s popularity was not good enough for Cornell Capital, which acquired the product’s owner Instant Brands in 2019 by merging it into Corelle Brands, which owns Pyrex and other kitchen products. Over four years, Instant Brands was saddled with $500,000,000 worth of debt. Cornell then, following the logic of its previous acquisitions, forced the company to grow against the headwinds of the economic doldrums following Covid-19, while also branching out into different markets, initiatives that failed. From a reported peak valuation of $2 billion, Instant Brands last month announced its bankruptcy.

Private equity sucks the good out of American products and businesses. Leveraged buyouts are the worst offenders — killing everything from popular restaurant chains to actual beloved pets. It loses sight of what makes capitalism effective — its ability to invest resources and capital into productive areas of the economy and respond to what people want. Instead, it is a rent-seeking force that moves assets around — typically, in a very one-directional manner. Call it whatever: corporate raiding, asset stripping, vulture capitalism, it is a drain on the productive economy and benefits no one except the few privileged enough to handle capital to begin with.

We need to be long-term thinkers. Instant profits, while perhaps good temporarily for a balance sheet, are terrible for the long-term health of any industry or economy. As Gucci Mane once said, a man without the sauce is lost — but the same man can get lost in the sauce.

America has the productivity and knowledge to forge its own future. But we can’t get there without setting up a competent industrial policy, rebuilding our intellectual culture, and stopping the sort of capitalist betrayals that undermine the national economy.

How America builds the most expensive factories in the world

Lux partner Shahin Farshchi.
Lux partner Shahin Farshchi.

Chip fabs have become a flashpoint for competition between the United States and nations across the world. Once a world leader in the market, America pulled back from fabrication the past few decades, and now political leaders want to reverse the trend. But chip fabs are some of the most expensive factories in the world — and it takes a legion of construction workers and process engineers to make these wonders of the modern world come to life and produce leading-edge chips at competitive scale.

As part of our “Will America Make It?” series, I explore the challenges of reshoring chip manufacturing to America, talking with our own Lux Capital partner Shahin Farshchi, who recently testified to Congress, as well as Chris Miller, the author of “Chip Wars”. We look at what happened to America’s chip industry, and how new laws like the CHIPS and Science Act are attempting to rebalance the playing field for the domestic industry long term.

🎬 Watch the Video on YouTube

Lux Recommends

  • Talking about chips (it truly is on everyone’s minds these days), Peter Hébert highlights Alex W. Palmer’s feature in The New York Times Magazine, “‘An Act of War’: Inside America’s Silicon Blockade Against China.”
  • Ken highlights two pieces from War on the Rocks. The first is by Kurt Scherer and Fatih Ozmen on "Maintaining The U.S. Defense Sector’s Competitive Edge.” The second by a trio of authors is “The Future Of Algorithmic Warfare: Fragmented Development.” “No amount of technology can substitute for an unwillingness to experiment and adapt legacy force design to take advantage of new information technology, including AI/ML. New gadgets die in the iron cage of outdated bureaucracy.”
  • Talking about defense and security, I eminently enjoyed this incredible story from The Financial Times on "Typo leaks millions of US military emails to Mali web operator.” “Despite repeated warnings over a decade, a steady flow of email traffic continues to the .ML domain, the country identifier for Mali, as a result of people mistyping .MIL, the suffix to all US military email addresses.”
  • Outside the Pentagon, security remains just as vital. Our summer associate Yadin Arnon enjoyed this report from Kaspersky on "How cybercrime is impacting SMBs in 2023.”
  • Our scientist-in-residence Sam Arbesman recommends Adrienne Bernhard’s piece in The Long Now Foundation’s blog on "Shining a Light on the Digital Dark Age.” “Another option is to store data in Earth’s most remote places. GitHub created an Arctic Code Vault, a data repository preserved in the Arctic World Archive (AWA), a very-long-term archival facility 250 meters deep in the permafrost of an Arctic mountain. Such cold storage is meant to last at least 1,000 years and shield data from the outside world’s effects.”
  • Finally, our summer associate Reha Mathur notes an interesting application of large-language models (LLMs) to archaeology with this new paper on "Translating Akkadian to English with neural machine translation.” Cuneiform is back in style.

That’s it, folks. Have questions, comments, or ideas? This newsletter is sent from my email, so you can just click reply.