Process knowledge is crucial to economic development

The message of Dan Wang's new book.

Dan Wang’s new book, Breakneck: China’s Quest to Engineer the Future, came out last week. I’m not going to pretend that I’m unbiased: Dan is a friend, and I’ve been waiting impatiently for this book to begin to make its way in the world. I do, emphatically, recommend it. Breakneck is a book that is driven by curiosity in a way that very few big nonfiction books are, suffused with a warm and lively intelligence. It’s impossible for me to read it and not to hear Dan’s voice in my head, but I feel as if even if you’ve never met him you’ll somehow still hear it. Dan is genuinely and deeply interested in things, in people, and in societies, and that comes through. Despite its sometimes grim subject matter, it is a joyful read.

The title notwithstanding, Breakneck is about America nearly as much as it is about China. The book is fascinated with how America and China resemble each other, their sharp differences, and how both help fuel their mutual incomprehension. I imagine that most responses* will focus on two big questions: how America’s misunderstanding of China fuels geopolitical confrontation, and how America’s misunderstanding of itself leads it to miss out on material abundance.

However, the best reading of the book, in my biased opinion, starts not with these questions, but the alternative perspective that lies behind Dan’s answers. The biggest lesson I took from Breakneck was not about China, or the U.S., but the importance of “process knowledge.” That is not a concept that features much in the existing debates about trans-Pacific geopolitics, nor discussions about what America ought do to revitalize its economy. Dan makes a very strong case that it should.

As I’ve said twice, I’m biased. I’m fascinated by process knowledge and manufacturing because I spent a chunk of the late 1990s talking to manufacturers in Bologna and Baden-Wurttemberg for my Ph.D. dissertation.

I was carrying out research in the twilight of a long period of interest in so-called “industrial districts,” small localized regions with lots of small firms engaged in a particular sector of the economy. Paul Krugman’s Geography and Trade (maybe my favorite of his books) talks about some of the economic theory behind this form of concentrated production: economic sociologists and economic geographers had their own arguments. Economists, sociologists and geographers all emphasized the crucial importance of local diffuse knowledge about how to do things in making these economies successful. Such knowledge was in part the product of market interactions, but it wasn’t itself a commodity that could be bought and sold. It was more often tacit: a sense of how to do things, and who best to talk to, which could not easily be articulated. The sociologists were particularly interested in the informal institutions, norms and social practices that held this together. They identified different patterns of local institutional development, which the Communist party in Emilia-Romagna and Tuscany, and the Christian Democrats in the Veneto and Marche, had built on to foster vibrant local economies.

I was interested in Bologna because it had a heavy concentration of small manufacturers of packaging machinery, which could be compared, if you squinted a little, with the bigger and more famous cluster of engineering firms around Stuttgart in Germany. There were myriads of small companies in the unlovely industrial outskirts of Bologna, each with its own particular line of products. Most of these companies had been founded by people who had apprenticed and worked for someone else, spotted their own opportunity to iterate on their knowhow, and gone independent.

I spent a lot of time on workshop floors, listening to small-scale founders talking about their lives. I’ll never forget a particular conversation with a manufacturer of teabag-packing machines** about the technical ingenuity required to figure out how to reliably staple on the threads attached to some fancy tea bags, which allow you to pull the teabag out without either scalding your fingers or rummaging around for a spoon. The machinery for accomplishing this apparently simple task was quite complex and fantastical: it was a surprisingly difficult engineering problem. I decided then and there that if I ever became an eccentric billionaire, I would have a teabag-packing line installed in the basement of my vast mansion, like the Gothic machineries in Edward Scissorhands.

Bologna’s “Packaging Valley” is still going reasonably well, but some of what Alfred Marshall would have called the “industrial atmosphere” has dissipated. Firms have gotten bigger and some of the manufacturing has moved to other places. Even in the late 1990s, there were signs of decay: entrepreneurs complained that it was difficult to get young people to apprentice. Instead, they wanted to do some university course in media relations.

In the United States, apprenticeship barely exists, and many manufacturing sectors have been completely hollowed out. That last, as Dan says, is a problem. In Shenzhen, as in Bologna, process knowledge travels from company to company in people’s heads, but at a much bigger scale.

someone might work at an iPhone plant one year, for a rival phone maker the next, and then start a drone company. If an engineer in Shenzhen has an idea for a new product, it’s easy to tap into an eager network of investors. Shenzhen is a community of engineering practice where factory owners, skilled engineers, entrepreneurs, investors, and researchers mix with the world’s most experienced workforce at producing high-end electronics.

This sounds like the Bay Area - but with a difference. As Dan says:

Silicon Valley used to be like this too, but now it lacks a critical link in the chain - the manufacturing workforce. The value of these communities of engineering practice is greater than any single company or engineer. Rather, they have to be understood as ecosystems of technology. The American imagination has been too focused on the creation of tooling and blueprints of products. … [government] agencies [looking to emulate China] misunderstood the point of Shenzhen. They were still more interested in individual inventors rather than understanding it as a community of engineering practice.

Dan is skeptical about American financial investors’ enthusiasm to “invest in capital-light businesses: digital platforms like social media and search engines or chip companies that focus on design rather than cumbersome fabrication facilities.” You could weld this worry together with Catherine Bracy’s argument about venture capital’s obsession with scale: manufacturing simply can’t scale as easily as virtual products.

But Dan puts most of the blame for America’s deficits on policy-makers’ lack of understanding of “the importance of process knowledge.” China - through some mixture of luck and adept policy making - has been able to turn low wage industries into cornucopiae of process knowledge, where, for example, phone companies figure out how to use their know-how to build cheap EVs. The US, in contrast, maintains an advantage in complex industries where fundamental research and basic science can translate readily into commercial dominance, but finds itself increasingly outdistanced in slightly less complicated industries, where iterative improvements are important. Chinese firms are great at solving teabag-string-attachment type issues, and it turns out that this is a large and important class of problems.

A lack of appreciation for physical process knowledge helps explain why America is in trouble. Breakneck criticizes the first Trump and Biden administration’s belief that they could strangle China through export controls, riling up Chinese companies to “break free of American restrictions.” However, Dan’s criticisms go way further. It isn’t just that America focuses so much of its “entrepreneurial dynamism” on stuff that doesn’t necessarily do much good, and may plausibly do significant harm to American society: crypto, the metaverse and perhaps AI. It’s that for decades, American policy makers sat back as manufacturing moved overseas, not understanding what the long term consequences for process knowledge might be.

If Dan is right, you need deep connections into the physical economy to make proper use of the virtual economy that America is over-specialized in. If you don’t understand and work in the real world, you won’t have the kind of feedback loops that enable you to see how the economy works. My interpretation - which may or may not map well onto Dan’s own - is that the value of algorithms come from their practical application in contexts where much of the information cannot be captured by the algorithm itself. There are many important things that simply cannot be represented well by quantitative data. That is one of the main reasons why process knowledge is important. It captures aspects of economic and social context that automated optimization feedback loops cannot.

And failure to pay proper attention to the physical world might have sharp geopolitical consequences. If the U.S. and China ever did end up in a real confrontation, which would you prefer to dominate in: software like the U.S, or hardware like China? Dan’s answer is that algorithms on their own “don’t win battles.” I suspect that many people in national security would agree.

This has implications for the Abundance movement too. One of the things that is rarely remarked about Abundance is that key strands, including the Klein/Thompson perspective, have a quite explicit vision of the good life, which is not plug-and-play-consumerism, but a deeper notion of material security, based on housing and community. That includes many of the left variants, and likely a few of the conservative variants too. Making that work will require the development of process knowledge.

But it is very hard to get from where the US is now to an economy that is actually capable of building and sustaining process knowledge. The current approach of the United States government is more focused on ripping out America’s existing knowledge advantages in cutting edge research and innovation without any very coherent plan for creating new ones. Rhetoric about factory labor is no substitute for figuring out how to bolster the knowledge economy that makes it useful.

I don’t think that the US can get there simply by regaining the ambition to build big again. That can create outside incentives for accumulating process knowledge, but it won’t provide the institutions and social norms that will sustain it. There may be lessons that can be learned from the places that have built up manufacturing process knowledge without a full-on engineering state. These include the first version of Silicon Valley (as per the work of AnnaLee Saxenian), the industrial districts of Italy (which combined intense localism with political party-fueled developmentalism), and the state/employer-association collaborations on training and technological research that helped build up German manufacturing. Equally, none of those systems is still working as it used to. The German apprenticeship system is on the rails. Finally, as my colleague Jonas Nahm explains, the industries of the past differ from those of the future, and national institutions constrain the choices that are available.

But if Dan is right, we need to understand how to build up and maintain process knowledge, as an essential element of economic development, and even the good society. China has done pretty well at this, without necessarily planning to, but as Dan suggests in passing, it is less certain in its capacity to maintain it. The United States used to have it, but has shifted its focus to other things. Both societies are organized around large scale abstractions - the Leninist engineering state, and the formalizations of administrative law. Creating and maintaining process knowledge requires us to foster different kinds of institutions and interactions, which we’ve barely begun to think about in the changed context of the mid-21st century.

* In America: I won’t even begin to speculate about what Chinese people who get to read it will think.

** a real thing, not a salacious euphemism.