Invest Like the Best with Patrick O'Shaughnessy
· Dan Wang
[00:00:00] S1: I think the Chinese are excellent students of history. There are maybe several countries that they really study. First and foremost, it is the Soviet Union. They diagnosed the problem of the Soviet Union to have been in the late ’80s, when Gorbachev tried to achieve both economic reform and political reform at the same time. The story of the Soviet Union is one in which the political system imploded, and then nobody picked up the pieces to get the system back up again. That’s the first thing they try to avoid. They also really try to avoid the fate of Japan, which suffered an economic implosion by the late ’80s and never quite recovered. So I think the first reason to believe that China will not suffer a political collapse like the Soviet Union or an economic collapse like Japan is that there’s history here to suggest a better path forward for them—they want to avoid these mistakes. Whether they can actually avoid them is a different question. Maybe they’ll come up with some whole new, novel, interesting mistake that creates some sort of collapse in either scenario. But I think history will not repeat in exactly the same way. China is a Leninist system like the Soviet Union, but it has a thriving, substantial consumer economy that’s doing superbly well in creating all sorts of products the Soviet Union never made. The Soviets focused on heavy industry—it produced a lot of steel and chemicals, but very few goods for its people. China is not like Japan in a variety of ways. But one that’s quite pertinent to me is that if we look at Japanese exports throughout the ’70s and ’80s, a product from Nintendo, Mitsubishi, or Toyota was almost entirely Japanese value-add. These were Japanese companies making Japanese products. Part of the complaint of the Reagan administration was that Japan was too closed and needed to open up. By contrast, China has been much more open than Japan. China is most famously known for building Apple’s iPhones and Tesla’s vehicles. And the communist system recognized that it was so far behind technological leaders that it mostly threw open the doors—with some restrictions—to Western companies to produce in China and then previously make mostly foreign goods, only assembling these different components. At this point, a great deal of Apple’s supply chain is made up of Chinese components as well.
· Dan Wang, Patrick O'Shaughnessy
Well, it’s not quite the Soviet Union, it’s not quite Japan, and I think there’s this ineffable Chinese characteristic also thrown in. The Chinese people, I think, are highly entrepreneurial—much like the Americans. They’re highly dynamic, they take shortcuts. There are a million and one hucksters trying to make a dime, trying to profit, and trying to found companies. Maybe we can say that China right now has some of the control paranoia of the Soviet Union, some of the manufacturing excellence of Japan, and some of the American entrepreneurial hustle. Combine all of that, and I think that is part of the reason that China is going to be a pretty formidable power going forward. [00:00:00] S0: I think it was our friend Eugene that first gave me the Seeing Like a State book by James C. Scott. What do you think of just the very abstract idea that top-down systems just don’t work as well over the very long term as bottom-up ones do? That in the near term they actually can work faster and better, but the roots aren’t as deep and as natural, and therefore they’re just more fragile—top-down systems—than bottom-up ones. Do you think that holds credence in this argument between the U.S., an arguably more bottom-up society and organization, and China?
· Dan Wang
[00:00:00] S1: I do. I love the work of James C. Scott, former Yale political scientist and anthropologist, who very sadly passed away about a year ago. I’ve read pretty much all of Scott’s works, and if I can throw in another Scott work for listeners, it is The Art of Not Being Governed, which is about Highland Southeast Asia—these very mountainous parts of essentially southwestern China. This region, about as big as Europe, includes southwestern China as well as Vietnam, Laos, Cambodia, and northern Thailand, in which various peoples have decided to run away from the state—whether that’s the Burmese state, the Tibetan state, or especially the Han Chinese state. They were wary of conscription, wary of taxation, and they didn’t really like assessors coming over to look at their grain all the time—sometimes bearing disease. Scott was really remarkable for having spent quite a lot of time in these zones, talking to people who have oral histories, which gives them more malleable ethnic identities, and they can run away much more effectively. I think about this a lot because I’ve spoken to a lot of Chinese who have decided to run away exactly into these highlands. Again, my family origins are in Yunnan Province. This is exactly the part of Zomia—Highland Southeast Asia—that James C. Scott has written about. I feel like people from where I’m from, Yunnan Province, have some of the more libertarian attitudes in China. They really don’t like the state looking over their shoulder. Many of them practice agriculture up in the mountains, which makes it much more difficult for the state to come over and assess success. And I think part of the problem of the engineering state is that many people have decided to retreat to these different corners of the world. In 2023, I went on this walk and talk with Kevin Kelly around Chiang Mai. We walked from one of the highest mountains in Thailand down to the city of Chiang Mai. Afterwards, my wife and I spent a lot of time with mostly young Chinese—people in their 20s or early 30s—who ran away from China, deciding that the censorious nature of the overbearing state was more than they could bear. They decided to make art, dabble in crypto, and smoke dope in the mountains around Chiang Mai.
· Dan Wang
I thought it was really strange that Xi Jinping is trying to achieve something he calls “the Great Rejuvenation of the Chinese people,” and there are a lot of young people saying, “No thanks, we’ll give that a pass.” There are also a lot of millionaires—by one count, 14,000 millionaires departed from China in 2023—to move to Singapore, Japan, the U.K., and the U.S., in part because the Communist Party has smashed many of their businesses. There are also many people who are not so creative or not necessarily very wealthy who decided to hop on a plane to Ecuador, where they don’t need a visa, and walk across the Darién Gap into the United States. At its peak in 2024, there were several months in which U.S. CBP was apprehending something like 30 to 40,000 Chinese nationals at the Texas border. That, to me, is really striking—that so many people are willing to do this dangerous trek essentially to escape from China. I think that China will not become anything like a cultural superpower, in part because the engineers are so censorious. They’re so thin-skinned, and they censor everything they can’t understand—which is a lot. If you take a look at many aspects of cultural production—books, novels, films—in China, that has become much more constricted over the past 12 years of Xi’s rule. I also think China will not become a big financial superpower, in part because the control tendencies of the engineers lead them to impose a lot of capital controls, which makes it much more difficult for foreigners to want to hold RMB. Last I checked, RMB still made up only about 4% of global trade volumes. I want to make this narrow case that the engineering state is really good at building stuff. They have the manufacturing workforce, the entrepreneurial enthusiasm, and the government support to keep getting better and better at advanced manufacturing industries. But even if China pisses off a lot of its own people, its neighbors, and the broader set of nations, the very fact that it can make manufacturing products better and better is a pretty significant threat to the United States. There’s a chance, I think, that they will do really well in artificial intelligence as well. But even if they just get much better at making vehicles, I don’t want to see the U.S. further deindustrialized. Right now, there are 12 million manufacturing workers in the U.S.
· Dan Wang, Patrick O'Shaughnessy
I don’t want to get into a scenario where a decade from now we have only 6 million—that’s going to hurt the economy and introduce greater political dysfunction. Even if the engineering state does very well in the short run—for James C. Scott reasons—and even if in the longer run it does not do so well, in part because people want to leave and in part because of demographic problems, the future is made up of a series of short runs. If China is really able to do super well in the next five to fifteen years, it might be enough to subdue America in pretty substantial ways later on. [00:00:00] S0: That’s an incredible answer, Dan. I’m so glad I asked. One of the things that jumps out is the sensitivity of the Chinese model to the person in charge and the people aligned with him. If we had had this conversation when Deng Xiaoping was running China—or was so important in China—maybe the trajectory we would have projected would be very different than it’s ended up being. I’m curious what you think about the three, four, or five people that have been the most important since Mao, and how they’ve changed the trajectory of China. How likely is it that the next person is more like Deng Xiaoping, with more liberal or pluralist leanings, or not? It’s such an interesting aspect of this whole trajectory.
· Dan Wang
[00:00:00] S1: Yeah, I would bet not. Because first, I agree with you that the Chinese system is really under the sway of a single leader—and that is almost by design. I mean, authority in China is meant to vest in the Politburo Standing Committee, which is made up of seven to nine people. But it is also possible, as we’ve seen in the case of Xi Jinping, to really dominate the entire system. And what Xi says more or less goes. The part that I would hesitate to fully imagine when Xi Jinping goes away—that the system will be different—is that even if we have a Deng Xiaoping-like figure, China might still have a lot of dysfunctions. I would say that Deng Xiaoping introduced a lot of the dysfunctions that carry over to Xi Jinping. So I think Deng Xiaoping, broadly speaking, ought to be best known for being the architect of reform and opening, which liberalized the economy. And that is a tremendous good—perhaps the most tremendous economic good ever in the history of humanity—because about 1.4 billion people were lifted out of poverty. A few hundred million of those are living very comfortable lives, and a few million are living lives on par with some of the best in the United States. That is an extraordinary achievement. On the other hand, Deng Xiaoping was also very autocratic himself. In the words of one historian who was quite senior in the Party, he was “half a Mao.” He was someone who was really, really ruthless toward his political enemies. He was never quite able to figure out succession planning. He fired two of his hand-picked successors and almost fired his third one, Jiang Zemin, who ended up running the country. He was also really famous for ordering tanks into Beijing. For a while throughout the 1990s, people labeled him, as well as a few other Communist Party members, “the butchers of Beijing,” because they ordered in the tanks during Tiananmen. Deng Xiaoping did not permit substantial political reform. He promoted tremendous economic reform, but he did not figure out the problem of succession. We can maybe situate Xi Jinping as a direct analog of Deng Xiaoping because he is also grappling with questions of succession—what comes after him. He has been pretty ruthless toward people he has purged. This is where I’m skeptical that there are deep pluralist genes in China.