Wednesday, September 26, 2012

What Chinese Want: Culture, Communism and the Modern Chinese Consumer by Tom Doctoroff

In this unabashedly pop business book, Tom Doctoroff, head of the J. Walter Thompson advertising firm in China, tells us What Chinese Want. Yet the implicit question is complex: what do the Chinese want for themselves? For their children? For China? And to answer the question coherently involves considerable psychological framework. Doctoroff is an ad guy -- so the question that lies squarely within his expertise might be: what does the Chinese consumer want to consume? And this question he begins to answer. He is less certain -- and less convincing -- when applying the insights he draws from Chinese consumption habits to the more mysterious nature of Chinese culture, politics and foreign policy.

I suppose we can learn something meaningful about the Chinese from studying their patterns of material consumption -- even using the tools of an advertising executive. In some sense, Doctoroff's inquiry is an exercise in applied cultural anthropology -- though his ends are more instrumental than scientific. So which firms are doing well in China -- and what do their successful adaptations suggest?

Starbucks, Doctoroff tells us, has configured larger stores in China which serve as group meeting places. The Chinese consumer would not pay the equivalent for $4.00 for a cup of coffee for private consumption (this may reveal the inherent cross-elasticity of Starbucks coffee and ubiquitous hot tea). The consumer will do so, however, when observed by others; the Starbucks customer's extravagant expenditure for a latte is justified by a gain in social standing. And so by facilitating the prospect of mutual observation -- by providing large, welcoming meeting spaces -- Starbucks sells coffee in China.

The Starbucks example typifies a more general tendency Doctoroff observes: a uniquely Chinese form of conspicuous consumption. Luxury goods are avidly purchased by Chinese consumers -- from Starbucks coffee to Cartier watches -- if their consumption is observable. But when consumption is hidden -- in the home for example -- the Chinese eschew unneeded expense, preferring cheaper products that are weakly branded and of domestic origin. Doctoroff would likely predict tough going in China for an importer of high thread-count sheets.

So the Chinese are, says Doctoroff, and so they will remain. For one of the keys to Doctoroff's presentation of the Chinese is his sense of their sense of timelessness. The Chinese remain the way they are; new experiences, through consumerism, exposure to technology and increased contact with the outside, will not change them.

Doctoroff has lived in a China for many years. Indeed, he tells us of moving into a picturesque and resolutely Chinese neighborhood in Shanghai -- admirably, he does live in post-colonial isolation. And so, no doubt, there is a significant stock of observation behind his construction of Chinese character. But I remain suspicious of Doctoroff's generalizations. Perhaps this is precisely what an advertising professional is tasked to accomplish -- form generalizations that can serve to inform marketing plans. Yet there is little distance between broad cultural generalizations and misleading stereotypes. I wonder whether this book will embarrass Doctoroff's grandchildren 50 years from now.

Doctoroff teaches us that the Chinese have a notion of 'face' that may not be offended. That they are intrinsically pragmatic. That order is the paramount value. That the Chinese are ambitious in a perversely contained way. That their sense of cyclical history leads them to be fatalistic, yet assured of China's return to glory.

Chinese society is built from the foundation of the family, and not from the individual, Doctoroff observes. As such, it is the social that is essential. Larger and larger social units are built outward from the family -- extending from clan to all China -- with attenuating yet meaningful identification and allegiance. The state, however, is distrusted. The Party's legitimacy depends on a fragile bargain -- its continued exercise of power depends on the maintenance of order and rising material conditions.

Doctoroff argues that the Chinese are afflicted with a weak civil society. This leads to a general insecurity. The Chinese are uncertain about preserving what wealth they may acquire, they fear dependency (beyond the family) and they are haunted by possible breakdown of social order. Doctoroff sources Chinese defensiveness to these anxieties. And he includes, as a characteristic manifestation of Chinese defensiveness, its reactive national alarms to challenges to its sovereign territory. Doctoroff's 'foreign policy' prescriptions are fairly simple. China is not to be feared, as it is not aggressive. But neither is China to be threatened, for it will defend itself.

Doctoroff may be right about all this, but if so, it may be his intuition that correctly guides him and not his deep knowledge of Chinese consumerism.

What Chinese Want is longlisted for the 2012 Financial Times and Goldman Sachs Business Book of the Year Award.

Monday, September 17, 2012

A Capitalism for the People: Recapturing the Lost Genius of American Prosperity by Luigi Zingales

In the preface to A Capitalism for the People, Luigi Zingales recounts his departure from an Italian university for the wonderland of American academia. Here merit, neither contacts nor obsequious devotion to one's supervisor, is the key to success and Zingales' triumphs. He becomes an admired professor at the University of Chicago business school, a place he praises for its openness, its devotion to excellence and its rejection of status-based primacy (pity the poor dean, newly arrived from Stanford, who is devastated by the slashing comments of a junior colleague).

But the broader America he sees around him does not match -- in aim or reach -- what Zingales finds at Chicago. Zingales returns to the theme developed in his earlier writing: the United States is burdened with crony capitalism, the same social disease he sought to escape in emigrating from Italy. American business -- and American politics -- is dominated by corrupt elites who prefer protection and status quo to competition and innovation. Zingales introduces a neat distinction -- America remains pro-business, but it is no longer pro-market. And so Zingales seeks to reintroduce and reinvigorate competition in American economic and political life.

Zingales invites us to revive American populism -- and by this he intends the trust-busting populism of Theodore Roosevelt and not the proto-fascism of Huey Long nor the toxic nativism of the KKK. The focus is returning prosperity to the common American, and not further enriching Wall Street, Pharma, agriculture, government contractors, and the greater bulk of big business. Yet his populism is capitalist at heart. If the ties between government and business can be broken, new and vital businesses will thrive. Political life will improve as well, if the distortions and distractions introduced by lobbyists can be pruned back.

Zingales devotes considerable attention to the pernicious effects of lobbyists. He estimates the total spoils available from agricultural subsidies to be $11 billion. He then estimates payments to lobbyists and campaign contributions at $6 billion, and marvels that we do not experience even more K Street activity that we do. A public interest has little chance in such a climate. But enhanced regulation of influence peddling is no solution -- as the very prophylactic measures are themselves certain to be captured. Rather we need to cultivate stronger public morality -- what Zingales calls 'civic capital.' This may be deployed by virtuous lobbyists - or by emergent academic muckrakers.

Zingales clearly loves the academy -- but the American academy does not escape his critique. Here too he sees insidious signs of capture. Among the most compromised are his fellow economists, who are even more likely to pursue unrestrained self-interest. There exists of course easily identified opportunists, who provide congenial research results for their corporate masters. More insidious of course are the subtle and indirect influences exerted on less cynical, though more vulnerable academics. Academics are a large part of the problem -- but are also, for Zingales, a potential solution. A public-regarding academic (of the muckraking sort) could (perhaps) countervail the work of the lobbyists. And of course Zingales offers himself -- and this book -- as an example.

He examines the familiar terrain of the recent financial crisis -- and finds unrestrained 'crony finance' before, during and after. It was the Wall Street/Washington nexus that created the crisis -- through its aggressive embrace of risk, encouragement of irresponsible lending, and unbalanced housing policy. And it is the same nexus that designed the response: bailouts that left that structure intact.

In his quest for a new American populism, Zingales seeks to harness the anger underlying both the Occupy and Tea Party movements, yet better direct it toward meaningful reform. Zingales' stick is the possibility of shaming -- a technique that is occasionally successful in reeling in corporate excesses. His carrot is greater American prosperity -- which is certainly an attractive end to many, but by no means all. Zingales sees little advantage in the pursuit of redistribution. While he explores the new economy of superstars, he seems to accept winner-take-all as the natural order of things. In this, he is perhaps more Tea Party than Occupy, but that may be unfair. He is clearly more nuanced.

He has a host of policy fixes to sell: new models for corporate governance, a new Glass-Steagall for finance, tax reform. While he cloaks these proposals with the central arguments of the book, they seem little more than one policy-maker's clever reform ideas among many. His broader challenge -- to discover a viable roadmap to detach the American economy from rent seeking -- is less easily solved. More than the exuberant idealism of a Chicago professor will be needed.

A Capitalism for the People is longlisted for the 2012 Financial Times and Goldman Sachs Business Book of the Year Award.

Monday, September 10, 2012

Why Nations Fail - The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James Robinson

Acemoglu and Robinson's Why Nations Fail is a thrilling read. It proposes answers to grand questions: Why are some nations rich? Why are others poor? Why are there such great disparities? Their theory is seductive -- yet it ultimately fails to give much guidance as to what can be done.

The key to prosperity, in the authors' view, can be found in a nation's political and economic institutions. The operative distinction is whether these institutions are extractive or inclusive. The most successful countries will have inclusive political and economic institutions; the most desperate will be afflicted with extractive institutions. Prescriptions seem tantalizingly accessible at first: simply replace extractive institutions with inclusive ones. But this is not so easy, Acemoglu and Robinson caution.

Labeling the 'bad' institutions extractive (as opposed to the more symmetrical 'exclusive') is a nice turn of phrase. Economists use the term extractive to describe economies that exploit endowments of valued natural resources, such as oil, gold or Mr. Kurtz's ivory, that are literally extracted. But the authors intend to characterize the relationship between the elites and the masses; elites 'extract' power and wealth from human resources through oppressive political and economic institutions.

In proposing an institutional account of prosperity, Acemoglu and Robinson reject cultural and geographic explanations. There is nothing peculiar about Northern European Protestantism (despite Weber's assertion) that suits it to the accumulation of wealth -- and folks living in temperate climes are not more industrious (or if they are -- they are not more likely to be successful). Technology is also non-determinative -- as opportunities for technological progress are frequently rejected by extractive states. Inclusive states -- the authors argue -- tend to be more receptive to new technologies, and hence enjoy the welfare gains innovation throws off.

It is a nation's institutions that matter. But despite the focus on institutions, institutions themselves (of the excellent inclusive variety) cannot assure prosperity unless a nation also possesses an adequate degree of 'centralization.' Acemoglu and Robinson do not clearly develop the notion of centralization -- and there seems to be some lingering tension between inclusivity (which diffuses power) and centralization (which focuses it). Centralization does seem to be a prior-in-time characteristic to the development of inclusive institutions in the examples explored in the book -- there exists a centralized nation that precedes the evolution of an inclusive, and so perhaps wealthy, nation.

The authors document the presence of extractive institutions in poor nations and inclusive institutions in rich ones. They describe vicious and virtuous cycles, respectively. These cycles describe both the reinforcement of tendencies between political and economic institutions, as well as a nation's trajectory over time. Of course, there should be more to the theory that this -- or we would find most nations tending toward one or the other pole (depending on the character of their historic institutions), with rare reversals of national fortunes.

In fact, the authors acknowledge, there are mixed cases -- and the most important one is today's China, which displays stunning recent growth that is restricted by extractive political and economic institutions. The authors are sanguine about China's emergence as a superpower; rather they predict that China has or will soon reach inclusivity limits imposed by its elites in order to maintain extractive conditions. In the long run, the authors believe, authoritarian regimes will falter -- and they cite the Soviet Union as the prime example. Of course, China may change institutional course, unleashing a process of creative destruction (and reallocating wealth and power within Chinese society) that might keep China growing. But in the absence of institutional change, they view a Chinese slowdown as an inevitability. We'll see.

In many other examples, where the historical record is more complete, the authors make more persuasive cases. They offer illustrations where former European colonies retain the extractive institutional legacies of their former masters. Far too frequently newly independent states have been captured by indigenous elites that prefer to maintain their holds on power by permitting an opening of civic life that would bring both greater wealth and more dynamic politics.

The authors are quite modest as to claims of their theory's predictive power -- there are many contingencies that could push China (or any other state) toward or away from wealth-inducing inclusive institutions. Yet the authors are quite confident of the power of their theory in accounting for many historic cases of wealthy and impoverished nations. To admit the theory cannot predict is to concede that it fails to fully capture the causes of wealth; at best it can serve to identify necessary elements. But without knowing more of how these elements (inclusive institutions) interplay with other, yet unidentified factors, leaves the reader with some doubts as to how complete a theory this really is.

Why Nations Fail is longlisted for the 2012 Financial Times and Goldman Sachs Business Book of the Year Award.

Tuesday, September 4, 2012

What Money Can't Buy: The Moral Limits of Markets by Michael J. Sandel

In What Money Can't Buy, Michael Sandel decries the emergence of markets that displace older norms, "commodifying" earlier forms of social organization that better correspond to our (or Sandel's) ethical intuitions. Sandel is bothered by fast track lanes, priority boarding, sales of organs or surrogate mothering services, paying for grades, and what he describes as the "skyboxification" of American society. While there remain some things money cannot buy, many things can be bought today that in prior times were allocated using non-market norms.

Sandel views with alarm the increasing hegemony of markets -- where markets are the go-to policy prescription for every social want. If we wish to boost the performance of inner-city school children, we should pay them for academic achievement -- according to a market-line of thinking. There's a cost, argues Sandel, to the application of market notions to novel domains, as markets operate (through "incentives," a neologism that Sandel mocks) to displace other values, such as inculcating a love of learning, devoting oneself to one's children and savoring a sense of community. Markets intrude on moral domains and limit the scope for moral discourse -- and this loss is under-appreciated.

All true enough -- but in at least some cases non-market values have displaced markets. For much of its history, the draft had market features. One could buy one's way out of Lincoln's draft -- or find a replacement to serve. And during most of the Vietnam era, the wealthy could avoid the draft by remaining in school. The draft, of course, has been suspended for several decades, but it is hard to imagine its return in any form with buy-outs. There may be other examples where the relevant institutional shift is away from markets: it was much easier to buy one's way into an Ivy League school a generation ago than it is now (Sandel concedes that even now it may be possible for some to do so).

Sandel fails to give a consistent account -- across his varied and many examples -- of precisely where and when markets exceed moral limits. He writes of "corruption" or "degradation" as if there were discernible moral content to these notions, but they are but baskets for a variety of values. Now I am as horrified as Sandel is at the thought of a hunter killing a black rhino (or even more cruelly, a defenseless walrus) -- and instituting fees for the privilege and then putting the collected funds to good use fails to appease me. But I admit (as certainly Sandel would) that others might not share my moral objections. That is, his and my valuation of an animal's life might not be broadly shared. In a softer version of his thesis, I suppose Sandel would assert that the permission-conceding effect of resorting to markets forecloses moral discourse -- though I'm not sure that foreclosure always follows.

At times, his instincts seem to reflect a certain squeamishness. I simply am not bothered by the idea that my employer might take out an insurance policy on my life, and hence have cause to root for my demise (so long as it does not act on its interests -- a point Sandel recognizes). I do not see how this leads to a coarsening of our general regard for life.

Sandel does demonstrate (by several examples) the possible errors of market-thinking in domains where strong norms operate. He recalls Richard Titmuss's famous 1970 comparative study of blood collection, The Gift Relationship. In the United Kingdom, blood is given by unpaid donors who act from civic motives. In contrast, the United States largely (though not exclusively) relies on blood banks, where donors are paid. This leads to the commodification of blood donations, with the result that the blood supply in the United States is more expensive, more risky and less secure.

Better is Sandel's "skyboxification" argument, in which newly created markets function to separate us from one another. We have long used status symbols to mark our position in the social hierarchy, and reside in highly (economically) segregated communities. As our society drifts farther and farther away from an egalitarian ideal, we have new opportunities -- such as the skybox -- to enforce class separation at what had been fundamentally a communal event. But that abandonment of the public schools in this country seems to be a far more serious concern -- and threat to our sense of community -- than tolerating the wealthy (and often bored) to isolate themselves from the fans during athletic events. Here, the existence of markets undercuts our democratic opportunities, yet private schools are a given.

There are certainly many domains where markets are kept at bay. You cannot buy an "A" at Loyola Law School -- as least I do not believe you can.

What Money Can't Buy is longlisted for the 2012 Financial Times and Goldman Sachs Business Book of the Year Award.