19:   On the Atomic Bomb of Exponential Growth

William Krehm

Our universities are undergoing a round of self-searching to make ends meet. That is particularly the case with economics departments that are increasingly verging on business schools in their curricula and personnel. I was going to say "soul-searching" rather than self-searching, because "soul" seems the main victim of the process. It has to do with narrowing budgets, the sting of growth and the lack of funds to even properly pay the staff for those ever grander bits of real estate in which they are coming to be housed.

Were I to have a voice in the proposed "enrichment" of the curricula, and indeed for all curricula on social subjects, my suggestion would be a brief mathematics course for freshmen on the implications of the exponential curve. This, almost sixty years after Hiroshima, is still being used by otherwise literate people as a synonym for "huge," "egregious", "monstrous." But that is to trivialize the notion of exponential growth. It is a very special function designed so that as its value increases, its rate of growth (known as the first derivative) keeps pace with that value, as does the rate of growth of the rate of growth (a.k.a. the acceleration), and as a result so do all successive higher rates of growth (or derivatives) to infinity. It is the mathematics of the atomic bomb. And anyone who adopts it as a model for economic policy is without conscience, or victim of mental sloth.

To fill in the picture, we must note that the mathematics of exponential function are closely related to the mathematics of equilibrium economics, that assumes a "pure and perfect market" defined so that all actors are of such infinitesimal size that nothing they do individually or leave undone can possibly affect prices. In this way equilibrium points are guaranteed to exist so that the first derivative that we have met in the previous paragraph returns to zero to create a path that retraces its steps and gets us back to where we came from. A further detail is that the fatal array of rates of growth to ever higher powers has been applied in the world of high finance where attention is shifted from products useful for human existence, to the their prices, and then to the increase of their prices and then the rate of change of an aspect of the value of the company, and then of the financial holding company that issues the securities, and then to the change in the currency of the security and its market value, and so forth to every high rating of the rate of growth of an ever more abstract aspects of a financial item. Hedging and trading in these "derivatives" is known as risk management. But where is the risk of such gambles expected to go? Rocketed to another planet? Clearly it can only be unloaded on innocents or rogues still on the planet earth. Eventually it must share the fate of anything connected with exponential growth.

China’s Exponential Industrial Sucesses

All this is adds up to rather seismic reflections on reading an article on China (The Wall Street Journal, 13/11, "Behind China’s Export Boom, Heated Battle Among Factories") by Peter Wonacott):

"Shajing, China – Under the corrugated-metal roof of China Hai Electric Works Co., hundreds of workers toil in six plants to meet orders for millions of small appliances. Inside one factory, ex-farmers bend over a clanging converter belt where they turn squid-shaped hunks of steel and wiring into electric fans. The fans cost about $4 wholesale and eventually will retail in the US for $15 to $40 through such online stores as

"This is the kind of picture US politicians might conjure up when tapping the hot-button issue of American jobs lost to the flood of Chinese exports. But China’s smaller manufacturers themselves face brutal new competition right at home.

"China, one of the world’s busiest factory floors, increasingly suffers from a production glut, and the big overseas retailers such as Wal-Mart Stores Inc. that soak up China’s exports have been quick to capitalize. They’re demanding rock-bottom prices and forcing factory bosses to cut costs any way they can to remain in contention for export orders. The average wholesale price for Ching Hai’s fans has tumbled to $4 from $7 a decade ago, according to company executives.

"At Ching Hai, manager David Liu has cut his labor force in half, to 1,500 workers, even while maintaining the same level of orders. The company’s starting salary of about $20 a month is some 40% less than the local minimum wage. Many workers put in 18-hour days with minimal training and constant pressure to boost output. Ching Hai, which has a high rate of accidents involving fingers severed by machinery, has been investigated by the local labor bureau for possible violations.

"The lure of low costs has been attracting new plants to China from around Asia for the past decade. Easy credit and expanding know-how has caused the number of local manufacturing operations to mushroom. The trade liberalization undertaken since China’s entry into the World Trade Organization two years ago drew another raft of foreign manufacturers. Shajing alone, a city of 600,000, boasts about 1,200 factories.

"Buyers are moving aggressively to play one factor against another. ‘As things get more competitive, the pressure that comes along with that, yeah, we try to take advantage of it,’ says Gary Meyers, a vice president in global procurement at Wal-Mart.

Two Giants in Confrontation: China and Wal-Mart

"A decade ago, Chairman Ji Maosong, 64, saw that Ching Hai, then based in Taiwan, wouldn’t survive paying Taiwanese workers $15 a day to assemble fans in competition with labor costs as low as $1 a day in China. He shifted much of his manufacturing to China and asked Mr. Liu to serve as general manager for a no-frills electric-fan factory the company built for $10 million in Shajing, outside the southeastern city of Shenzhen.

"At first, Chin Hai was successful, enjoying a 20% profit margin on exported fans. But then scores of factories, mostly from Taiwan, Hong Kong and South Korea rushed in to take advantage of China’s cheap labor. Migrant workers from other provinces would come to outnumber town residents 10-to-1.

"Multinationals were buying from China in bulk. While impressed by the size of Wal-Mart’s huge order for electric fans, Mr. Liu recalls being distressed by the low price demanded. Other encounters with big-name retailers rang alarm bells at Ching Hai. They saw Chinese competitors accepting astonishingly low bids.

"Small savings in materials couldn’t offset the slide of product prices. Profit margins have narrowed to 5% currently from 20% a decade ago.

"Though the city’s minimum wage is about $56 a month, Ching Hai starts recruits at the $32 level and promises subsidies for food and lodging.

"As abuses come to light, many multinationals are enforcing codes of conduct for supplies. [They read well in the US.] Wal-Mart’s Standards for Suppliers demands that factories comply with local laws for wages and work hours. Wal-Mart also forbids forced labor and child labor, and promotes proper training, safety, and clean restrooms. But Chinese labor experts say enforcing standards would increase costs, deter investment and undermine local development. "

William Krehm

— from Economic Reform, December 2003