Wednesday, March 18, 2009

The Migration of Capital and Human Talent
March 18, 2009

Capital, both financial and human, migrates to opportunity and away from lopsided risk/return ratios. Those entities--state and private--which understand this will prosper while those who overburden capital will find it migrating away, leaving them doubly impoverished.

Correspondent Kevin M. submitted this thought-provoking response to yesterday's entry on the "return of Big Government":

Read from afar, The Return of Big Government and the (de facto) Welfare State (March 17, 2009) describes the onset of conditions here in the U.S which are decidedly third world in nature. Should that be a reality in our future, a reinforcing trend would likely develop complicating everything you and other correspondents describe.

For centuries we've been accustomed to the one way flow of migration into the United States; should conditions deteriorate to the levels indicated in your essay--which is hardly beyond reasonable imagination--the flow would most likely shift in the other direction. We're already getting reports of a reverse population shift back into Mexico as recent arrivals from that country return home after encountering poor economic conditions north of the border.
Mistakenly, many people think this is a positive development, and one which ultimately will improve our situation.

But the out-migration I'm referring to would be that of an exodus of the productive class, a population shift that will have a far more profound affect on conditions than most of us can imagine. So if the government does move to a system of semi-permanent/permanent welfare for the masses, the environment will become less hospitable for those who are successful tradesman, entrepreneurs, professionals or well monied investors.

We're more vulnerable to this than we can imagine, not the least of which since an increasing percentage of the American productive class do in fact have roots in Mexico, China, India, the Middle East and other developing countries, or are no more than a generation removed, and would have less reservation about heading back should conditions here get really ugly. Eventually, self described "real Americans" may follow suit; Jim Rogers (moved to Singapore with his wife and three daughters) is a prominent example of this.

There's a double-edged motivation for the productive class to leave the country too. Not only will they be expected to largely foot the bill for expanded mega systems here at home, but they are also the very people who would be most welcome in foreign countries, as well as most likely to survive and thrive as new (or reverse) immigrants. Punish-the-rich platforms, which are highly popular in economic downturns, would only hasten and expand the departure.

In the end, it may be far easier for a prosperous person to resettle in a traditionally poor country--which over the generations and through social norms has also found a way to cope with it's diminished prospects in a peaceful way--than to try to wait out an ongoing and increasingly violent devolution in a traditionally richer location.

The potential for an exodus of the prosperous would not only exacerbate our problems, but also reduce options for workable solutions. The result of such an outflow would be a permanently poorer country. 16th century Spain, then the richest country in the world, is a perfect example of this.

The outflow of U.S. productive capacity to developing countries under the banner of globalization is an indication that the trend is already underway. As businesses leave, their most productive and creative employees will eventually choose to go with them. That hasn't happened yet because the money is still in the U.S., but eventually it will always flow to the places where real production is taking place.

Few are aware that England retained it's status as the global financial leader for several generations after America surpassed it as the most productive economy, but eventually the money did follow production--into the United States. Our situation today is looking like a perfect reversal!

There's a saying, "capital is the greatest of all cowards"; what's also overlooked is the fact that a huge, unheralded component of what we call capital, is human capital. What ever ideological repulsion anyone may have toward the concept, the fact is that wealth--capital represented in the form of both money and productive people--follows production. Why anyone in power thinks we can improve our lot simply by propping up the banks should remove any confidence we might have in the leadership.

Regrettably, I have to agree with your projections with a pronounced shift into a full blown welfare state since it is the most expedient course of action from a political standpoint. However we will not succeed in solving any of our problems until we initiate a serious move toward returning this country to that of a producer nation, what ever the short term costs. The geniuses in Washington had better invest some intellectual and political capital into figuring out how they plan to make this happen. To date however, we have no indication what ever that such a course is even being considered.

Thank you, Kevin, for raising these critical issues. One of the most relevant texts on this topic (IMO) is John Kenneth Galbraith's The Nature of Mass Poverty (1979) in which Galbraith identifies a number of causes for sustained mass poverty. (This links to a new edition; you can also find used copies online or borrow it from your library, if they own a copy.)

While I hesitate to summarize this short book, two key points relate directly to poverty and the migration of talent/human capital:

1. Galbraith observed that people accommodate to poverty as it is easier to endure it than to pull up stakes and move elsewhere. It is a trusim of human nature that we adapt rather quickly to conditions, even wretched ones like prison camps and war. Thus it is no stretch to recognize that the vast majority of humanity wakes up thinking "this is the way it is" and goes about their routine without pondering the possibilities offered elsewhere.

2. Galbraith concluded that the only way residents of endemically poor areas can better themselves is to move to a place with better opportunities. This is a rather harsh rejection of "development projects" in underdeveloped areas; mass poverty has roots in culture, climate and so much else which cannot be leveraged by an application of "know-how" and investment.

Everyone who has ever immigrated to the U.S. or other relatively open economies reached the same conclusion and voted with their feet. And indeed, as Kevin pointed out, the news is now full of stories of highly educated and experienced Indian and Chinese immigrants leaving the U.S. and returning to their homelands to pursue better opportunities.

These concepts will be familiar to readers of Jared Diamond's Guns, Germs, and Steel: The Fates of Human Societies which explained how mass poverty is related to a lack of harbors, poor soils, a geography which limits communication and trade, etc.

One key point which is often overlooked is the value created by an open culture. Though I have lived only in Hawaii and California, I have visited a number of European and Asian countries for extended stays, and we have been blessed with friendships with talented people from dozens of nations, from Turkey to Thailand. These enduring friendships have opened windows onto cultures which a mere tourist visit can never open.

Thus it is from my own experience that I can say that the culture in L.A. and Northern California (Silicon Valley and San Francisco) is quite different from anywhere else in the world that I know of or have heard of directly. Many places aspire to be "the next Silicon Valley" but they aren't and will never be because they lack what can only be described as a culture unfettered by the past and the chains of traditional typecasting.

Google started in Silicon Valley because it had to. Put another way, there was no other place on the planet with the necessary combination of ingredients. I know this flies in the face of all the hopeful "we're gonna be the next Silicon Valley" projects around the world, but it isn't that easy to get the mix right. It's like throwing a bunch of amino acids in a jar with some other common elements; in one jar life springs up and in the rest you have mud.

Here's the thing: nobody cares where you come from or what credentials you have (unless you're applying to Stanford or UC Berkeley). And I mean this literally: nobody cares. What matters is: what fire you have inside, what you're trying to do, what ideas you have which inspire others, etc. Your religion, gender, ethnicity--yes, these matter because humans care about these things, but in L.A. and the Valley they matter much less.

In many other places in the world, your caste or your class or your accent or your education or your religion typecast you instantly and forever. This is simply not the case in places which attract talent and capital.

I am a resident of the San Francisco Bay Area, and so I have to be careful not to sound like some local booster. But I have been involved in a technology startup based in Virginia in the go-go years of the late 90s, and the founder eventually gave up trying to raise capital and make connections on the East Coast and reluctantly traveled to Silicon Valley. In a way, resistance was futile.

Residents of Austin and Charlotte and other high-tech centers in the U.S. and Canada have much to be proud of and they've built great things. They have learned that it's the openness of the culture which ultimately acts as a magnet to talent and capital, not a fancy business park or tax credits. Yes, you need an open network of government grants and protection of intellectual property, a robust university research system and private venture capital: but you also need that magic liberty to act as a free individual, too.

I have read stories of Indian-Americans returning to India to live in gated suburbs with maids and swimming pools, communities that look like they were airlifted from California or Texas or Arizona or Florida. Similar compounds can be found ringing Shanghai and Beijing. But you can't airlift in an open culture, a respect for intellectual property rights, a culture where you don't need to bribe an endless line of officials to get something done, etc.

We in the U.S. have to be careful not to load the scales of risk and return such that all the natural advantages we offer in the way of openness, access to education, capital and other talent are outweighed by burdensome taxes and junk fees and absurd, essentially meaningless regulations imposed by overlapping state jurisdictions, each anxious to expand their fiefdoms.

This over-reach by the state (meaning all levels of government) can surely kill prosperity and opportunity by strangling it at every turn with more junk fees, more taxes and more misguided regulations.

It's not news that California, L.A. and Silicon Valley included, are in deep fiscal trouble. These difficulties, if handled incompetently, could destroy the very culture which spawns wealth and innovation by attracting talent and capital.

I am afraid the political leaders of California, and perhaps the U.S. as a whole, foolishly believe they can over-tax and over-regulate the economy to health; they have it exactly backward, and all of us will suffer the impoverishment created by their slavery to special interests fattened by taxes and their blatant ignorance and stupidity.

They all claim to be acting to "save the poor" with every tax increase and every new layer of costly regulation, but the net result of their over-reach will be to create an enduring poverty.

What's for dinner at your house? has been updated with a new recipe: Eggplant Parmesan . This a mouthwatering photo-illustrated PDF from longtime contributor Bill Murath.

NOTE: The serialization of my new ebook "Survival +" starts March 21.

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