Seeking Truth From Facts: Alf & Steve Hsu — #68
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Welcome to Manifold. Today's episode is a co-release with a new UK podcast called Seeking Truth from Facts. Seeking Truth from Facts will focus on geostrategy, international relations, the decline of the US empire, and related issues. We have a very interesting conversation and I think you'll enjoy this episode. Thanks for joining us. Music

Hello, everyone. Today, we have a fantastic podcast lined up with Steve Hsu. We've got a lot of things to discuss, mainly focusing on geopolitics, including Russia, China, and a lot of issues relating to geopolitics. So if you could introduce yourself, Steve. Alf, it's great to be on your podcast. My name is Steve Hsu. People probably know me as a professor of theoretical physics and a guy who does

Also does research in things like AI and computational genomics and has founded a few deep companies around these technologies. Perfect. And you've also, especially in recent times, you've commented a fair amount on geopolitical matters, particularly as it relates to China.

Yeah. So I have a fair bit of expertise about China because I have been traveling there for some time for scientific and business collaboration. So I understand the science and technology ecosystem there. I've, uh,

Long background in defense and intelligence related stuff, which is not entirely public, but some of it is. The CI Venture Fund was an investor in my first startup, which is an encryption startup. And we developed technologies to defeat the firewall, which was being built in the early 2000s in China. So I have a fair bit of expertise about this stuff, but I'm not broadly known for it. Okay. Yeah, yeah.

I guess one of the first things I wanted to discuss concerns something which I saw you comment on recently, and your comments on it gained some traction on TwitterX. Some prominent people were retweeting it and reposting your clips of you talking about it, which is where you discussed the failure of US chip sanctions on China. And I also remember what Kishore Mabubani went on your podcast, Manifold,

And he and in both in both these instances, you discussed the US's shift away from free trade and more towards a kind of geostrategically oriented protectionism. And obviously, this came after more than a quarter century of the US positioning itself as the global champion of free trade and globalization.

With the overwhelming consensus among economists, both then and now, the free trade was more beneficial to economic well-being. So what is it particularly about the US and the US's reaction to China's rise, which prompted this dramatic shift?

Yeah, so I could give more than one theory of this case for completeness. So the cynical view is that when the U.S. was the completely dominant hegemon in the wake of World War II, it was the only advanced economy that hadn't been devastated by the war. Yeah. And under those circumstances, the U.S. wanted retrade. They wanted to set up a system for world trade and finance, which they could dominate. Once a challenger arises,

arose that could really compete well with them. They sort of switched gears and have moved to a system where

They're willing to violate free trade agreements. So, for example, they've totally mobilized the WTO. I don't think most people realize that. But the U.S. has more or less deliberately frozen the WTO from action on trade matters. So that's the cynical view, which is just great powers do what is in their best interest. And now it's in the best interest of the U.S. or at least the hawkish people in Washington would say this.

to, you know, limit China's rise as much as possible. And they even say this, they even, I think most of the US government would say this explicitly that they're actually trying to contain China. So that's the realist view, I guess. Yeah, that's the realist view. I think the US apologist

statement would be, oh, these Chinese don't play fair because they, you know, they, there's a lot of, you know, it's a sort of mixed state-led slash free market economy in China. And so there's a lot of government investment in capacity and in developing companies. And so it's not fair for Western companies to have to compete against that system. And plus their military technology is getting better and better. So we just, we're just, we're just behaving differently.

As enlightened people, but as enlightened people that have their protectors. Yeah. Which of those perspectives do you think more aligns with reality based on what? I think it's, well, I lean more toward the former than the latter. Yeah. But, you know, I think there, yeah, no system is completely monolithic. No. You know, Stalin's government wasn't monolithic. Mao's government wasn't monolithic. Yeah. And the US system is. Definitely. So.

There are plenty of Americans who lean more to the back end, who, you know, really, and I guess maybe I put myself in that group. I would say that probably we're not going to be able to contain China short of a World War III, which would be, you know, devastating for both countries or the whole world.

And given that the best outcome is to be realistic and say they are going to have more influence geopolitically and they are going to capture more market shares, more market share globally. But that doesn't mean the U.S. can't remain extremely prosperous. Exactly. Yeah.

Trade. So, but of course, like there's this thing called the acidities trap where the rising power, the existing hegemon always reacts, sort of overreacts versus the rising power and you end up in a hot war or something like that. And we do seem to be trending in that direction. I guess this is sort of zero sum fallacy that arises that if China's doing well, it must be at the expense of America.

Yeah. A lot of this comes from, you know, it sounds very trite to say it this way, but a lot of it really does result from, well, one could say even actually racism or even or maybe more mildly just sort of ignorance about the other. Yeah. And so it's very easy for American politicians, whether you're on the left or the right, to conjure up the worst case scenario.

in a world where China, say, surpasses the U.S. in economic or military power. And so we would just naturally assume, as Americans who don't know that much about China, that, oh, it's going to be the worst possible thing, right? Yeah. They're going to try to enslave us and, you know, whatever. And, you know, I think in defense of hawkish war planners, right?

that's their job. Like some of them, their job is to imagine the worst case scenario and then sound the alarm that, hey, there's now some significant tail risk of this worst case scenario arising. And I need to make you aware of that. And I think there's nothing wrong with that. That's very reasonable. But when the system tilts a little bit too much in that direction, then you can have a real problem. And I guess the difference is a big difference comes when the media starts really beating the drama

They're coming, they're coming, you know? Yeah, well, I think if you watch carefully Western media, because of concentration of power, market power and control over the media, the sort of corporate mainstream media and also state-controlled media like BBC or PBS or Deutsche Welle in Germany,

They're all singing from the same playbook, and it's very easy to get them stampeded on what later turns out to be nonsense. If you look at what they wrote about the 2016 election and things like Russian interference and whether Trump was actually spied upon by the U.S. intelligence services, everything the corporate media wrote about that, if you look carefully, looking backwards in time, you can see they were just totally wrong.

about everything they said, but almost all the elites more or less accepted what they were saying. Yeah, we had a similar thing here in Britain, I'm sure you know, to do with Brexit in 2016 as well, and to do with, I know Dominic Cummings was a big target of that with Carol Cadwallader, I think. Yeah, if your listeners are predominantly in the UK, I'll give them a treat and say that Dom and I have been close friends for...

I don't know, 15 years, something like that. And and so I I know very well about how Dom literally broke Carolyn Codwaller's brain. Yeah. And she's never been the same since. Yeah. And everything she wrote and that The Guardian wrote and other papers wrote about the vote leave campaign and the role of Cambridge Analytica.

And stuff like that is all wrong. It's completely wrong. It's just made up. Yeah, it's made up. And I actually know the guys who did the data science work.

for Dom and I know what they did and it wasn't Cambridge Analytica and it wasn't anything like what Ed Wallader imagines but that stands in the minds of most Britons yeah and then she brought in like all this theory about Steve Bannon being involved and Russia being involved yeah believe me Dom doesn't really know Steve Bannon at all and certainly never was influenced by Steve Bannon yeah yeah

I suppose another, like when returning to China, another thing we've been hearing a lot about recently is that China is apparently in the midst of some like really deep economic crisis. That's something that we're hearing being shouted from the roof. Yes. From corporate media. Yeah. I,

To go deeper into that subject, I recommend a podcast that I just released within the last couple of weeks called China Myths and Realities. Oh, perfect. I think maybe it's maybe episode 65 of Manifold. And I'm talking to a guy who was a tech founder and ran his company in Beijing for seven years at odds. And we're talking about these issues, these topics. And in fact, the chip war thing that you were discussing is an excerpt from.

that episode. So listeners might be interested to go. Brilliant. I'll definitely say go check that out. The way I would characterize the current economic situation in China is that

They had a monstrous property bubble, probably the biggest property bubble of all time. And so people for the last more than a decade have been commenting that the Chinese government is going to have to act to pop this property bubble. Basically, what happened there is that they went from a very poor country to a very developed country in about 30 years. But the stock market there is not as developed yet.

As the United States and the number of ways that people can invest their money is relatively limited there. At this moment in time, it's no longer limited. But over time, you know, say 10 years ago, 15, 20 years ago, basically everybody who had excess money to invest was investing it in real estate and property.

And so you had this crazy bubble where apartments were just completely unaffordable in China and especially the tier one cities. And so what happened is that the government basically just said, we don't want our economic growth to be built on real estate. Right. Developing, building more buildings and stuff. And of course, some of that infrastructure was necessary because, as I said, it was a very poor economy.

country and it needed to build all that infrastructure. So a lot of it was necessary and some people would even argue that over time you'll see that the stuff built during this bubble will get used. But it's a little uncertain exactly how much inefficiency or waste there was in the bubble, but

In any case, the government acted to pop that bubble in the last few years. And so what's happened is, you know, if you remember the 2008, your listeners are old enough. If you remember what happened when the U.S. real estate bubble popped, it crippled the U.S. economy for years. And took most of the world with it. Yeah.

Yeah. And if it weren't for huge amounts of quantitative easing, which China isn't actually doing, we would have been in an even worse situation. So you have to, anybody who wants to analyze something as complicated as like the rise of China has to be able to

maintain multiple factors. So one picture is, yes, indeed, they have this headwind against economic growth because of their having topped this property bubble. And the economy is sort of adapting to this. And Xi Jinping's very explicitly stated planning in the government is

they are going to de-emphasize that kind of infrastructure investment because they've already gotten enough of it. And they're going to focus on what they call high quality growth

which means, you know, R&D, advanced manufacturing, you know, moving up the value chain in manufacturing, AI, stuff like that. So they have very explicit plans to do that. But of course, in the interim, which could easily last a few years or five years, you're going to be able to easily find examples of young people who are discouraged. They can't find a job that they want, people that are out of work, construction workers. You know, there are all kinds of negative consequences. Yeah.

It's really a structural shift is what we're seeing in China. Yeah. So one factor is, yes, one factor is they're in the middle of a structural shift. Another factor, though, is that they more or less closed almost all technological gaps with the rest of the world. Right. So you can almost not find a vertical where...

In that particular technology or manufacturing, it could build in China. Like, say, advanced machine tools. For a while, the Germans were still ahead of the Chinese, but that gap is gone now. Or electric vehicles or cars. They're not the number one exporter of cars, surpassing Japan. So for people that are carefully studying all the factors of economic development,

It seems like actually they're in pretty strong position. Like, in other words, you would ignore them at your peril. Like, there's shipbuilding industry dwarfs the Korean shipbuilding industry, which then dwarfs, like, the rest of the world's shipbuilding industry. Right? And so if you're going to fight a naval war with them, you better think about that ahead of time. And I guess another thing people did...

people should really focus on is, as you said, the comparison between the way that China has handled its speculative real estate bubble and the way that both America handled it in the 2000s and how the Japanese government, for instance, handled theirs in the 80s. It's a much more proactive approach where they don't let the bubble get too big to fail. They step in or pit the ball.

In fact, if you look at research by academic economists, there's kind of a lively debate. I mean, you know, the people that are kind of far right

Pro-market people wouldn't agree with this, but among many economists, there's this question of should central banks have bubbles? And this was asked during the real estate bubble. It was asked during the tech bubble. And so the question is, if you're the central bank and you suspect there is a bubble brewing in the stock market, should you raise interest rates to up the bubble?

And, you know, so like it's actually something even in quote free countries like the United States or England, you know, academics debate whether the government should do stuff like this. Now in China, where the state is stronger, it's a more autocratic system for sure. Yeah. The government's going to occasionally just move, just say like, okay, this industry, coal plants, we're done with that. Everything is going to be solar now. And, and, and that, you

That, you know, they could make huge mistakes, huge blenders, but they could also like, you know, they can also traverse valleys where, you know, markets isn't going to have trouble like making this like big shift.

Because incentives maybe are wrong locally, although in a global sense, we definitely know we have to switch to renewable energies. But the local incentives are kind of wrong. But the government, if it's powerful enough, can just basically force the Chinese are willing to do stuff like that. Yeah, yeah. And I guess some of the more free market types might say that that's central planning. But I would argue maybe not because they're doing it based on market signals, right? That's their source of information. Yeah.

I think if you, again, if you carefully study how the Chinese system works, number one, it is still predominantly a free market system. So in other words, like whatever it is the government's trying to do, solar panels or

semiconductors, the actual people executing on the plan are people who are incentivized by things like stock options. And so at the grassroots level where stuff is really being done, the businesses are being built. It's a market system. Yeah, it's a market system.

I was just in Frankfurt for a meeting of oligarchs. And, you know, one of the oligarchs said to me, hey, who is German and a former physicist. He said, you know, in Germany, for the first time now, we've surpassed. We have more government workers than free market. In other words, 50 percent of all people employed in Germany are.

are employed by the government. Right, okay. And he was decrying this as really terrible and that Germany is finished because of stuff like this. And it's like, he might be right, but I don't think China is at that point. I think China is actually more free market by that measure than Germany, for example. So, yeah. One thing I wanted to ask you about is there's this chart that I've been seeing float around and I've seen people like Noah Smith post it. It's basically China's nominal GDP as a percentage of America's.

And it appears to show that since around 2021, China has been shrinking for the first time since the economic miracle began in the 80s. I mean, does this chart show, as it's been claimed, that China is now on track to remain stuck behind the US, that China's model is failing, or that the Trump and Biden administration's protectionist policies have been effective? And if not, what's the truth behind it? Right. So the root question here is, how do you compare China

Yeah. Two economies, which could be qualitatively different. How do you compare them in terms of size and quality? Right. And in this case, maybe they're more focused on size. And the question of like, well, how do I monitor activity in country one and compare it to activity in country two? And then what's the unit of measurement that I use? Yeah. And if you use nominal exchange rates, I mean.

On the same day, Noah, who might know pretty well, he might say, yeah, look at this graph, China's finish. And then later in the day, he might say, yeah, they're definitely managing their exchange rate and underpricing the RMB because they want to keep their exports strong, right? So he could utter the same two. But what do those two sentences mean? It means that maybe the nominal exchange rate is off by 20%.

Exactly. If you're measuring by normal, the statistic of nominal GDP is very vulnerable to changing exchange rates. Yeah. So I think a more like reasonable, like, so, you know, kind of ill-defined question, like whose economy is bigger, right? Because in no way were you ever going to like literally sell everything in one economy to the other economy, right? So the marginal...

exchange rate is not necessarily the right conversion factor. And I guess let me make two points. This is getting a little bit in the weeds of econometrics. But number one, the way that both governments report GDP in their own currencies is radically different. So the way U.S. accounts for services, there's something called owner-imputed rent. There's stuff like, oh, the property of my house in the United States, if I chose to rent it out, what

that would be a contribution to GDP. There's all kinds of things which the Americans do that the Chinese don't do in their actual GDP statistics. So first of all, you have to be careful about that. And then the second point is that if you just look at like actual numbers

non, you know, things that cannot be distorted, like actual physical quantities that, you know, characterize the two economies, like, oh, how much electricity is produced to consume? How many tons of steel? You know, when you look at stuff like that, the Chinese economy is qualitatively larger than the US economy. It's almost like two acts. Definitely. Yeah. Yeah. So it's like, which one do you like better? Like, for services, McKinsey? Yeah.

consultants and realtors who get 5% of every transaction in the US or 6% of every transaction. So does that actually make the whole economy of the US bigger and stronger than that of China? Or literally, are we going to be more worried about who can produce more ammunition and planes and tanks or even more advanced manufactured goods that the rest of the world wants? So

I think you just have to be very careful in comparing what's going on here.

What way in which in what way were they done, which made them successful and made China the world leader? Yep. So so there was a thing which really, you know, set the alarm bells ringing in Washington. And it was it was a policy document from China called, I think, China 2025. Right. I made it in 2025, was it?

Yeah. And that was a set of basically directives. The way the government works there is in central government, it is actually even the government aspect. I'm not talking about the free market aspect. The government aspect in China is very decentralized. So it's not that every dollar flows through like the treasury or something like that. What actually happens is that the central government sets policy and direction.

The individuals who are the mayor of a city of 20 million people or the governor of a province of 100 million people, i.e. larger than Germany, you know, those people are vying to advance in the political system. So they are trying to follow the directives that are issued

by the central government, but they have a lot of latitude in how they do it. So if in the city of Shenzhen, they say, hey, we understand what China made in China 2025 is really focused on, you know, we need to improve the quality of our jet engines. We're going to lure some R&D center to Shenzhen by giving them free land and building them a building and apartments for the researchers. And we're basically going to subsidize that particular goal.

in the central government's plan, but we're going to do it based on our own local strategy.

The mayor or the governor of that region will then point to that years later and say, yes, and we're the ones, it's our company, Shenyang Aeronautical Industries, that built the first competitive high bypass jet engine now that brings us to parity with the West. And that guy will get promoted based on that. But it's an decentralized system. It's almost like a venture capital system where individual regional political bosses are

are making bets and they're subsidizing industries locally to make those bets. And if they win, if DJI, which is located in Shenzhen, becomes by far the dominant drone manufacturer in the world, the guy who subsidized DJI was guest promoted. Right.

Yeah, DJI was actually a spin-out of Hong Kong University Science and Technology, a different region than Shenzhen. But Shenzhen makes it really, really attractive for companies like that to relocate there. So I'm sure whoever was in charge of luring DJI there and helping them grow is, whenever he's in Beijing pimping, DJI is a huge success of Shenzhen. This is how their political system works. It's totally different from the caricature people here have of like, no, it's like guys in

Mao suits and Joseph Stalin and they're nervous that they say the wrong thing. Like a golf plan. Yeah. Yeah. They think it's like, oh, so they say the wrong thing. Then she gets a red button and then some guy, you know, his chair falls into the piranha, piranha pool or something. It's not like that at all. It's like local guys have their budgets. They're trying to generally conform with what they think.

The bosses above want, but they have a lot of latitude in how they, which particular things they invest in. Now, the downside of this is that they have

There are more EV companies because many different regional governments decided to basically try to subsidize or, you know, produce EV car makers in their regions. And so there is overcapacity. There's going to be a dog-eat-dog, you know, consolidation where maybe half the different EV companies in China are going to go out of business and the winners are going to take over their manufacturing capabilities. So it does lead to that kind of

You could call it waste, but it is a kind of Darwinian competition also.

Yeah, and I guess, and it's true, I think I've read that the subsidies that are given to strategic industries in China are different from in some of the Western countries where it's almost, it's pretty much corporate welfare. Whereas in China, I know they're very much conditional based on certain targets. Is that correct? Yes. Yeah. So, you know, you still could have a situation where

The governor of some northeastern province where, you know, coal mining is still a big deal for them doesn't want his unemployment numbers to go through the roof. And so he might be subsidizing some money losing, you know, old economy industries or coal mining companies. You know, there is a decline approach, I guess.

Yeah, but which, you know, a lot of people who are a little bit left of center, you know, in the US or Scandinavia would say like, well, this is totally reasonable, right? Yeah. But I think the most productive stuff, the most kind of like really impactful stuff is what we said. It's like they basically will, if they're told quantum computing, you know, the government said, hey, quantum computing is one of our priority semiconductor manufacturing.

The local guy is going to be like, oh, shit, let me talk to all the venture capitalists in my city and all the professors and all this, and let's see if we can put together something in Chongqing that can be competitive in the semiconductor space. And they'll run their own local, they'll have the equivalent of like McKinsey type people running their own local study of, okay, which part should we bet on? Should we bet on the wafer production part? Should we bet on the lithography part? Should we bet on the quality control technologies or design software? Yeah.

They'll try to figure out where they have strengths from their universities and their existing companies and such, and then they'll invest. So that's actually how it works. Right, okay. And I know just moving on to a discussion of China's political system, I know you've been a critic of the

And we've discussed it earlier just now. I'm critic of the common Western characterization of China as just like a dictatorship. Yes. And obviously it's more, probably more accurate to describe it as a political meritocracy. So, so...

I would say it is, it has very, so this, and this is a deep cultural thing in China. So the idea that state officials are supposed to be meritorious people. So they're supposed to be people who succeeded on the imperial exams. And not only that, in Confucianism, public officials are supposed to model behavior for the rest of the people.

So there's a very like kind of straitjacket on the way leaders are in traditional Chinese culture, the way leaders are supposed to behave. You're not supposed to be a flamboyant playboy like JFK. That isn't the way Confucian culture actually teaches you, you know, that leaders in your society should behave, right? So there's this old cultural component, which is thousands of years old of Confucianism, which values meritocracy and it has very prescribed ethos.

even rituals for how leaders are supposed to behave these are the common people so that's one piece of it now it is true that it is more autocratic because it does have still many aspects which are really communist you know left over from you know leninist communist you know systems and yeah so that she does have much more power you know personally than any one western leader right and

in their country. So, so it has, it has lots of differences from the Western system. Some of which, you know, I, I think are good. And some of which I think are bad. Um, I don't particularly like the autocratic nature of the system, but it is what it is. And I, you know, it does let them do things sometimes that if she has the right idea, it can, it can get things very far in the right direction. If he has the wrong idea, he can move things very far in the wrong direction.

But I obviously, I guess what I'm trying to say is it's not autocratic in the way somewhere like Turkmenistan is. No, I think it's very different from any of those countries. And it may actually be compared. This is, again, things that most Westerners don't understand is that all of the successful Asian tigers like Korea or Taiwan, even Singapore. Yeah.

Singapore went through an autocratic strongman stage of development before they became democracies. Most of these countries like Korea and Taiwan, for example, have only been democracies for a very short amount of time within my living memory. So before that, they had a kind of autocratic system. In South Korea, it was part Chunhee and Chundaekwon, wasn't it?

Yeah, exactly. And if you look into the stuff they did, it was pretty nasty, right? They had to shut down labor unions and do all kinds of stuff. And in Taiwan, when the KMT took over the country, they killed a lot of the local Taiwanese intellectuals. Yeah, so it's a more complicated history. And the question, the economic development question is, is it possible that a country that's playing catch up with modernity

needs to go through a period of more autocratic rules so they can just get stuff done. And then once they reach a certain level of general education, health, nutrition, well, in the country, they can transition to a more liberal system, right? That's actually the pattern in Northeast Asia. Okay. And I guess following on from that, because I've heard you talk about this before to do with China potentially shifting to a more liberal democratic system in the future. So if you went to...

If you went to China 15 years ago and you talk to highly placed people, they were all anticipating more liberalization to come. So it was actually a shock to people when she took over. So people were shocked, like very senior people in the government and business that I knew just openly predicted that, you know, things would continue liberalizing. There's no way they would ever get rid of. They actually put in a kind of term limit rule. They did.

Yeah, but then she kind of got rid of it. Right. But 15 years ago, people would have bet their house that, oh, that rule is for good. They learned from Mao's excesses and people still remember that. So this rule is going to stick for at least another generation. They turned out to be wrong. But

It doesn't mean intrinsically that, okay, after Xi dies, you couldn't have like a liberalizing period where like with Hu Jintao and these other guys, there was kind of like multiple people who were kind of at the top and they were kind of sharing power and everything was very laissez-faire in that period. For the Chinese and the communist mentality, that period, you know, there were a lot of negative things about that period, which like people who like

Occupy Wall Street would agree with because some people got very rich in China. You know, there was crazy like prostitution and all kinds of bribery. And there was a lot of corruption. Yeah, tons of corruption. And so she actually came in saying, I'm going to I got to this is all got a tone. This all has to be put under control. Otherwise, this party is going to lose authority. It's going to lose respect.

among the people. And so he came in to do that, right? But it doesn't mean that 20 years from now they couldn't be going through another big liberalizing phase after Xi is gone. Okay, and I suppose my question is,

What do we mean when we talk about liberalization? Are we talking about like what South Korea did where it went essentially to a fully liberal democratic system? Or are we looking at maybe something more like Singapore where it's kind of a combination of liberal democracy and with meritocratic elements? So if you remember, there were widespread experiments with local voting 15 years ago in China. So they would actually let the local villages and maybe not province level, but county level

officials be elected by the people. So you could start with stuff like that, where there's really direct democracy at some level. But then the people then who then staff, say, the top 2,000 people in the Communist Party, they then are representatives. They elect.

the next Xi or something, right? So, you know, it could look something like that. In fact, if you talk to a lot of Chinese people, they'll actually, you know, when you do these surveys, like Harvard will go and do these surveys in different countries and they'll say like, okay, how democratic do you think your country is? A lot of people already think China is democratic because the average people think that

their Communist Party representatives are more or less doing what they want. And those representatives are then electing the more senior, like central committee members. So there is an ascension in which it's a very much more representative democracy than not direct democracy, but it is democracy. And a lot of... I'm not saying I agree with this view, but a lot of Chinese people actually think of themselves as a democratic country because they actually don't take the worst view of...

the internal workings of the Communist Party. They take a more positive view of it. And if you take the positive interpretation, it is a system of aggregating preferences of the ordinary people. So it does faithfully represent the wishes of 80% of the time or whatever. It faithfully represents the wishes of the average people. Whereas one could argue in the U.S. that that isn't even true.

The average people here, their preferences are not actually reflected in the final policy. I guess one of the things I was asking is, do you think that China will attain many of the meritocratic elements that have helped it succeed? And I think that another country that's done something similar to that is Singapore, right? Singapore has a kind of hybrid system of meritocracy with liberal democratic elements. Could you see that

Kind of something similar to that emerging in China? Or are you thinking something more like South Korea, where it's a more fully liberal system? So I think people who are trying to understand countries in the greater Sinosphere, I think which Singapore and Taiwan, even you could say Korea and such, there's a deep layer of civilization and cultural heritage with really Confucianism.

And that is where the meritocratic tendencies come from. And I don't think they'll soon jettison that. So I think that's going to be more stable.

The communist or not communist aspect of things is more shallow and it can go away eventually. Right. So, you know, which is why you could have a system like, you know, it's literally the same people kind of like in running the Singapore government or running the Taiwan government or running the Beijing government. Right. So the communist versus not communist aspect. Right.

By now is a little bit baked in because the communists can claim credit for modernizing China, bringing China back into the forefront among nations. So they have some social capital to spend and they won't just go away. Like, I don't think it's brittle like tomorrow. We'd have a color revolution and the system is I don't think that's at all likely to happen. But over longer periods of time. Yes, absolutely. You I think you could end up with a much more Singapore like system in China than that. And let me just add one more thing.

If you read the writing of Deng Xiaoping and the writing of Lee Kuan Yew, those people were in contact with each other. And it was actually Deng Xiaoping's visits to Singapore and Japan that caused the opening up of China. And so even today, I was just in Singapore earlier this summer meeting with a bunch of government officials, mostly about AI and such. But of course, we talked about other things like geopolitics and

They regularly still to this day receive high level delegations of Chinese communist leaders who come to Singapore and meet with them to discuss, like, what can we learn from Singapore? What can the Singaporeans learn from the Chinese? That still happens to this day. And lots of interesting insights that I received from those Singaporean officials came from

you know, extended contacts they've had with their counterparts, not just like one year visit, but they've known the same official now for 10, 15 years. Maybe they've even visited, you know, visited them, their families, maybe even know each other. So, so, okay.

These are very deep level. Yeah. So like for for the American guy, like, you know, Josh Hawley of Alabama or whatever, like, does that go these communists in their weird looking mouth suits? They don't really understand the West. Well, like Josh Hawley maybe has never been to Singapore, but the communist guy may have spent an integrated like 10 weeks in Singapore.

like learning from the Singaporean government, right? So there's just such a disconnect with reality among, say, Washington elites. Yeah, because I'd read about the

Deng's visits to Singapore and I'd read about the ties between the CPC and the PAP in Singapore, but I didn't realize it ran that deep. Yeah, and continues to this day. Yeah, and I guess another thing I wanted to talk about on the economy point to do with China is I've seen a lot of the more free market types and a lot of who often overlap with the US hawks basically say that

China's prosperity has very little to do with government policy. It's just to do with global market forces and the Chinese government letting them do their thing. It's all because they joined the World Trade Organization. Obviously, that's an element of the fact that China's moved from essentially planned economy to a market economy, played a massive role in there, in the miracle. But what role did government policy actually play?

Yeah, so government policy played a role in improving the education system and the university system so that they're now world-class, building high-speed rail, building lot infrastructure, and also deepening the core technology prowess of the Chinese economy. That isn't necessarily going to be done by companies. Companies have a, you know, at one extreme, a short-range focus, which is like one quarter, or maybe like...

In an exceptional case, you could have a company that has a five year time horizon or three year time. But the government did things like invest in new technologies being developed over 10 years. Right. So 20 years. So that and I think like people who really understand science and technological innovation, even in the U.S.,

would say like that is a huge, huge part of the American success. And we're very focused. I used to be the vice president for research at my university. People like me were very, very focused on the fact that basic research in the United States used to be above 1% of GDP and it's been declining. It's well below 1% of GDP. And that, that is the kind of stuff that delivers the most long-term ROI of anything.

And so just having a country that's like just more optimistic about doing that rather than like letting it erode is a huge delta over 10, 20 year timescales. Yeah. And it's definitely because I know another thing that China, the Chinese government has played a critical role in is basically making sure that because obviously companies, especially in an emerging market, have the incentive. The incentive is for short term, often speculative investment. Right.

Whereas China, obviously through targeted and conditional subsidies to manufacturing and to research and development, really steered, didn't plan in place of the market, but steered the market towards a more long-term success, a more successful and conducive for development in the long term. Yeah. Now, I would say to get to where it is now,

China needed both, like huge amount of market liberalization, you know, foreign capital, at least in the past they needed foreign capital. Now they don't need the foreign capital. They run a trillion dollar gold surplus. So, but they also needed this infrastructure buildup, human capital investment, all that other stuff, which really only government can do. Now, I think the most, I think, positive thing I can say about the sort of far right free market people and the way they analyze the Chinese economy is

they could still benefit from shrinking the state-owned enterprises. So the state-owned enterprises for them, just like in Scandinavia or other places, are a way to park stuff. Like, oh, we don't want the employment rate to go up, or we don't want a bunch of people thrown out of work. Well, we'll just make sure the state-owned enterprises are still a big chunk of the economy, and they don't let people off, and they don't have to make profits. So it's like you have two parts of the economy, one which is growing at a free market rate, and the other one which is

sclerotic and not growing as fast because it's a state-owned enterprise sector. And I would say, like, if one could wave a magic wand and decrease somewhat the size of a state-owned enterprise sector in China, that might be very beneficial to them. But it's not something that as a single factor is going to be catastrophic for them. Yeah. Yeah. Yeah. That's very interesting. And I guess even with the private sector, you look at the private sector, that's

Obviously through, particularly at the moment, support for research and development and technology, a massive amount of government involvement.

And yeah, I guess, I mean, you said earlier through one area where the government has been very influential is through investment in technology. Is the way they've done that investment through the, I guess, performance conditional subsidies? Is that the way it's been done? Yeah, it's so funny because the best analog of what the governments do in these local regions, provinces and cities is,

is venture capital. They're giving money to companies, but they might stop giving you money if you're not performing. And they're very numbers-driven, KPI-driven type things. If it works, it's actually a very good model. If it doesn't work, it's corrupt stuff and betting on the wrong things and et cetera. I actually kind of feel like because the US system

has become so kind of hollowed out and it's just dominated by grifters that most of what, when, like I'm for, if you say like just directionally, are you for rebuilding American manufacturing and infrastructure and all these things? Of course I'm for that. I feel very enthusiastically for that. But when you ask me like, what are the odds the Americans can actually execute on it once the money is allocated? I would say low. I would say low. It's got to just be grifting and special interests and a lot of Americans don't want to work that hard.

So I'm not optimistic that we can execute on things like this. I guess broadening to the wider geopolitical situation, do you think that China's rise in high-tech manufacturing has been aided by essentially the U.S. instigating a decline in Germany's high-tech manufacturing sector with the Russia sanctions?

Yeah, well, I think that particular aspect of, okay, Russia sanctions and blowing up of their pipeline. You know, you have sky high energy prices in Germany. You crippled large portions of their manufacturing industry. Again, elite companies.

consensus in the United States doesn't understand this point, but I think the Germans, at least the Germans I was with in Frankfurt, understand this point, right? So the German companies are all deciding, oh, am I going to relocate to America or to China? Because they need to go somewhere, right? And, you know,

The U.S. will actually benefit. It's a little bit like as the empire declines, we start sucking the resources back into the core. So America will actually benefit from some of these German companies moving their manufacturing, you know, or the chemical companies moving their production to the U.S. But some of it's also already moved to China, like BASF. So, yeah, I mean, it was not a smart move. I mean, we're basically crippling Europe. Europeans are more or less politically enslaved by us, so they can't really fight it. Yeah.

Yeah. But it is beneficial both to America and the Chinese. Yeah, I can I can attest to the fact that Europe's being economically credible because I live here, even though I'm not. I'll tell you a funny story. I was talking to one of my this guy was a Ph.D. student of mine. And then we co-founded a tech company 20 years ago and we keep in touch and he he speaks German.

Okay. He's German on his mother's side and he's traveled extensively in Germany over the years. In fact, he happened to be there when the wall fell. Right. Okay. But so anyway, we were talking about Germany and

We're talking about the cost of living and how much money people in Germany actually make. And if you actually look like in The Economist or something, you'll see like Germans are about as rich. They're slightly less rich than people in Mississippi in the United States. Yeah. If Germany was a state in the United States, it would be below Mississippi in terms of its, you know, income per capita, etc.

And if you send this to a proud German, they get really mad and they'll say, yeah, but I don't have to pay for college here, you know, and are my health care, blah, blah, blah. But most people in even in rich cities like Munich or Frankfurt, they're living on 2000 euros net, maybe 3000 euros net per month. That's that's actually a reasonable income for them. And if you think about that in American terms, it's not very much money. And these are like professional educated people, not not like working class people. Right. So so.

Europe, in some ways compared to America, you're starting to realize it is poor. I have friends in London who joke that the UK is going to become the best outsourcing country.

destination for English language work because the English is very good. Yeah. OG English, but the costs are pretty low compared to what you have to pay an American worker. So it's unfortunate. And I've heard the UK described, because obviously that's where I am. I've heard it described perhaps hyperbolically as London with a Bulgaria staple to it.

Basically that. That captures it. And I guess, yeah, staying on the topic of, because we touched on Russia and Ukraine, and returning to China, I mean, do you observe a

a Sino-Russian alliance to be building? Or do you think that would be an oversimplification of the relations between the two countries? I think there's definitely an alliance building. And again, like people I would consider pretty midwit geostrategists would say, oh, it's going to fall apart because... And then they say things like, oh, they're going to fight about Central Asia, these Central Asian republics that used to be part of the Soviet Union, and China wants to take them over or something. Yeah.

And or they'll say like, oh, no, they have this huge border and China is going to try to take out Siberia. Yeah. When, in fact, like China has these terrible demographic problems where they can't even get Chinese people to live in the northeast of China because. Yeah. Yes. But look, how many of them, how many Chinese people are going to be able to get to move to Vladivostok? Right. So. So.

I just don't see in the short run. Now, in the long run, there could be a situation where Russia weakens a lot and China does actually take back some of that territory. But I would say that's probably generations away or at least one generation. But in the in the 10 year timescale, 20 year timescale, I see them as tight allies because, yeah, if you're Russian.

And, you know, you're watching Russian TV and you're like, oh, yeah, a bunch of people in Kursk were just killed by NATO weapon systems. Yes, right. And, you know, like we're fighting for a lot, like, oh, a battleship, you know, a frigate was just sunk in the Black Sea by a missile that was shipped to, you know, the Ukrainians from Germany or from the UK, right? Yeah, yeah. Really? Are you going to forget that? Like maybe your cousin was on that ship. Exactly. Yeah, yeah.

And I don't believe the casualty figures that NATO midwits bandy about in this conflict for Russia. But still, probably a lot of Russians have been killed. Oh, yeah, definitely. Certainly as many as Americans were killed in the Vietnam War. Okay? Like 50,000, maybe? Easily? And so they're not going to forget. It's crazy. Yeah.

anti-Russian kind of racism to say like, oh, they're just going to forget that we imposed that many casualties on their young men. Exactly. Because they think that...

They'll just Russians think about like their people in terms of a horde or whatever. That's like that. They generally think that's how Russians think. Yeah, definitely not. And they're not going to pivot and they're not going to suddenly pivot and say, oh, now we want to be part of NATO and Western Europe and system, you know, after you cause so many of our people. And they actually, I think, feel bad about the Ukrainians that died, even though we don't feel bad about the Ukrainians that died. Russians actually probably do, to some extent, feel bad.

And so, because they view them as their kind of brothers. Yeah, yeah, yeah. So there's just a total misunderstanding of the geopolitical situation here. So anyway, you're basically integrating Russia into the Sinosphere right now. Right, yeah, yeah. The Chinese economy, like all the, you know, advanced manufactured goods that they have in Russia are now coming to them from China. The sanctions are working well, Stu. Yeah, yeah. Yeah.

Yeah, I think it's just ridiculous to see these, as you say, like NATO, like midwet.

commentators just always predicting the worst possible outcome for Russia and China and always predicting the best possible outcome for the US and its bloc. What's bizarre is that even when these guys are actually military guys, I don't think they've ever counted how many actual operable tanks and

jet fighters does NATO have? Exactly, yeah. Or could Britain field one division on the continent? The answers to all those things are like no. No, yeah. They're like a little chihuahua barking like crazy. Only thing they have really good for them is nuclear weapons. Yeah, so if it wasn't for nuclear weapons, they would be as helpless as Argentina or something, right? Yeah.

And I know another thing that's going on in America at the moment is that they're essentially forgetting how to build certain things, certain defense technologies. Yes, absolutely. Yeah, that's going to be a big problem for them going forward. So I think on that note, we'll wrap up this podcast.

It's been brilliant talking to you, Steve. Some fantastic insights about China, about geopolitics generally. And thank you so much for coming on the show. It was my pleasure. And, you know, I thank you for really asking the right questions. I think we went into more depth

into a lot of these in a lot of these topics than I normally can go because normally I'm assuming my interlocutor or the audience isn't really that sophisticated but in your case I think you're you're you pretty are you are pretty sophisticated about this matter we could have a much better conversation perfect and yeah I hope to have you on the podcast again relatively soon fantastic I'd love to come back