No Need to Feel Threatened

A Chinese worker hauls materials last month on a construction site in a Shanghai business district near the Oriental Pearl Tower.
A Chinese worker hauls materials last month on a construction site in a Shanghai business district near the Oriental Pearl Tower. (By Kevin Lee -- Bloomberg News)
By Sebastian Mallaby
Monday, April 17, 2006

This week's visit from Chinese President Hu Jintao will inflame two kinds of economic pessimism. The first holds that China is forcing a race to the bottom: Its legions of poor workers are driving down U.S. wages. The second claims that China is racing to the top: It's spending ever more on science and engineering. Both sorts of pessimism are only half right. Both miss the real source of U.S. economic dynamism.

It's true that American wages are stagnant and that they cry out for progressive tax and social policies. But it's crazy to argue that stagnant wages are the main explanation for the success of American business. Just because Detroit's carmakers are fighting to cut union benefits, it doesn't follow that constraining pay is the top issue for most companies.

Consider a firm such as Wal-Mart, an alleged front-runner in the race to the bottom. Wal-Mart's employees get market wages, otherwise they wouldn't stay there. But even if its army of 1 million-plus hourly workers got a 20 percent raise, that extra cost would wipe out only about a third of Wal-Mart's 2005 profit. The retailer's success lies in something other than low wages.

Likewise, it's true that China is striving to catch up in science, hiring Western professors and pressing its researchers to publish in international journals. But there is no straight-line connection between scientific progress and economic advance. What matters is how companies deploy technology. Americans are good at that.

Again, consider Wal-Mart. Its real genius lies in analyzing consumers and foreseeing what they'll want; it can predict how many yellow crew-neck T-shirts will sell in each region of the country, so it doesn't waste gasoline delivering stocks to outlets that won't sell them. Wal-Mart achieves this with the help of a data warehouse that stores more information than all the fixed pages on the Internet combined. It's rolling out a new generation of miniature devices that attach to its goods, enabling it to computerize and track inventory.

What's true for Wal-Mart is also true for other companies: The most striking business successes have little to do with low wages or pure science. Google wouldn't be worth anything if it had only perfected search technology; its business genius is that it's become an ad agency. Mattel wouldn't be worth anything if it merely manufactured Barbies using cheap Chinese workers; its triumph lies in design, advertising, packaging -- and in those insidious deals that put Barbie on your daughter's bike helmet. Or take an example that has almost no connection whatsoever to technology or low pay. Starbucks has created one of the world's least probable brands, turning a commodity crop into a high-margin business.

Now consider the instructive case of DreamWorks. To create movies such as "Shrek 2" and "Madagascar," DreamWorks brings together artists and storytellers with software writers and even anatomy experts -- and manages this cauldron of talent so well that it's created a new benchmark for the industry. Innovation often springs from this interdisciplinary fusion. It depends on neither low wages nor science. It's not about a lone inventor in a lab. It's really about teamwork.

For one reason or another, American business excels at this. Our much-maligned education system seems to encourage people to think across categories and take risks. Our freewheeling and undeferential culture is good for interdisciplinary cooperation. And then there is the role played by U.S. business schools, which increasingly focus on the skills that make this teamwork possible.

The Harvard MBA curriculum used to teach the nuts and bolts of management, with an emphasis on accounting and financial skills. Now its faculty aspires to teach "leadership." At Dartmouth's Tuck School of Business, about half the grades are handed out for work that's done in teams; members of each team provide one another with anonymous feedback, and the school has hired counselors to help students absorb the lessons from this criticism. "In the past, you could go through business school and nobody would say you were coming across as a jerk," says Paul Danos, dean of the Tuck School. "But that might have been the most important factor in your future success as a manager."

China's spectacular rise causes understandable alarm, and it probably has harmed pay for low-skilled U.S. workers. But the right answers to stagnant wages include Head Start, school choice and a fix for the regressive payroll tax; they should not include a national descent into xenophobic paranoia. American business is in a golden phase right now because its imaginative culture fits the challenges of the post-industrial age. A low-wage economy that crams on science is not going to take that away from us.

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