The Answer Is Transaction Costs

The 5G Revolution, Huawei Controversy, and Global Trade Dynamics

• Michael Munger

Share episode

Send us a text

TAITC tries to navigate the complex world of 5G, Huawei, and the telecom revolution with special guest John Pelson, author of the thought-provoking book, Wireless Wars. With Pelson's unique insights from his time as a corporate executive in the wireless tech industry, we explore the pivotal role of rapid, reliable communication in promoting cooperation and exchange. We'll take up some of the intricacies of switching technology, capacity increases, and how institutions and transaction costs influence the wireless business competition. 

Our journey won't stop at revealing the inner workings of the telecom industry. We'll also shed light on the transformative impact of 5G technology on society. Beyond simply being a faster version of 4G, we'll discuss how 5G acts as a conduit connecting things to things, with the potential to bring radical changes to multiple industries. Discover why it's not too late to jump on the 5G bandwagon and how its full potential is yet to be realized.

Some background info and links:



Books'o'da'Month!
•Wireless Wars, Jon Pelson
•The Capitalist Manifesto, Johan Norberg (I said Jonah, but of course it's Johan!!!)
•The Hand Behind the Invisible Hand, Karl Mittermaier

If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !


You can follow Mike Munger on Twitter at @mungowitz


Michael Munger:

This is Mike Munger of Duke University, the knower of important things 5G, huawei and the telecom revolution. Human operators become switches, clever ways to increase capacity in the face of artificial frequency constraints and the problem of handoffs. So what's the problem? My interview with John Pelson, master of the duck and author of the book Wireless Wars. Mr Pelson is chief commercial officer of Rampart Communications and has worked as an executive leader for British Telecom and Lucent. Four new twej-es plus this month's letters and more Straight out of Creedmore this is Tidy C.

Michael Munger:

I've known John Pelson since 1985 when he took my economics class at Dartmouth College. His book Wireless Wars has been a must read up and down the halls of the US Cyber Security Establishment and we're lucky to have him here for the monthly interview. John, welcome to. The answer is transaction costs. Let me ask if you can introduce yourself and say a little bit about how you came to be interested in technology and communication.

Jon Pelson:

Well, mike, it's really great to finally be on your podcast. I've been listening to it since you got it started early this year. I have, after a career in communications and actually started out on Wall Street. I've spent most of my career more than 25 years in the wireless technology business, so working on generally cutting edge products, not as an engineer but as a product manager, a marketer, strategist and general corporate executive with some of the big companies like Lucent, which included Bell Labs, and with British Telecom, nextel, and I decided a few years ago that I would write a book that was supposed to be a business book, about how Lucent and Nortel Motorola lost a business battle to Huawei and the implications for 5G.

Jon Pelson:

And very early on in my research I, through really dumb luck, met a counter Intel officer for the FBI who had stood up and ran the Huawei team at the FBI, which I was surprised they had one and what he shared with me made it clear that this was not so much a business battle at the West and other companies in Asia had lost to Huawei and ZTE. It was actually a geopolitical struggle that was just being waged in the business front. And when I called the book wireless wars, it wasn't, because these wireless business competitions were almost as fierce as a war. Really, what I was saying is this is a war with China that is being fought in a non-kinetic theater, and they're using this to destroy and dominate their opponents and their rivals around the world, just as surely as countries do when they build out military assets.

Michael Munger:

Well, thanks, that's a terrific introduction because it foreshadows. So let's go back to the beginning here. This podcast is called the answers transaction cost. One of the premises is that people will find ways to cooperate if the costs of doing that are not too high. So all over the world stuff is in the wrong place and if I value it less than you and I can sell it to you or I can exchange it in some way to you, will both be better off. So moving things towards higher valued uses is the key, and the three problems that we face are triangulation, transfer and trust. Triangulation is we have to be able to find each other and exchange information about the product. Transfer is we have to deliver the product and receive payment. Trust is we have to believe that you can assure me, and I can assure you, that what we've promised will actually happen. All of those things rely on fast, reliable communication. Now I think we can establish.

Michael Munger:

I am old AF, I was born in the 1950s, and I distinctly remember we lived way out in the country, in rural central Florida. We had what was called a party line, and this was a telephone that was connected permanently to the wall and you could walk around a little bit because it had a curly cord. But sometimes you'd pick up the phone and there would be somebody else on it, because there were five different families that used this one phone line and we had a distinctive ring and I remember it it was ring ring, pause, ring ring. Some of the other families would have one long ring or a long and a short, and so the phone rang pretty often because people were communicating. These five different families were receiving calls from all sorts of different people. Now, in that setting it's actually fairly complicated and expensive to communicate. Furthermore, if I wanted to make what was called a long distance call, I had to wait till after 11 pm, so that it would be cheaper, and so often I would set my alarm for 11 pm so I could get up. If I needed to make a long distance call to move from that setting to now, a bunch of things had to be accomplished. So if I wanted to make a long distance call, I had to dial zero, which got me to an operator, a human being, and I would read out the number that I wanted. She would then and it was usually she would connect me to the long distance number.

Michael Munger:

There was no way the switches didn't work because they were. There was a switch, but it was a human being. So one important thing has been the development of switching technology and one of the things that 5G technology, following 4G and the later movements by Ameritech and Bell Labs. I remember in the early days I would make a telephone call and you could hear click, click. The switches were not mechanical, they were electronic, but still they were. It was as if a clunk when you, when you connected to a different network. And so I think it's important to establish that, first of all, the ability to have switches that operate basically instantly and seamlessly is really important. Second capacity the fact that we five people shared this one line meant that it was difficult for us sometimes to be able to participate in the larger communication network.

Michael Munger:

Now, the beginning of what are called cell phones was a way of conserving on the availability of frequency. So if you only have eight or nine frequencies because the Federal Communications Commission is not willing to let you use many of those, a lot of frequencies, but no, we've got to conserve this. It's an artificial solution in a way, because if you have these local cell towers, and they're basically hexagons, you've got, if two adjacent cell towers are not transmitting on the same frequency, then you can have there's no interference, and so the minimum number of frequency you need to have cells which have six sides, none of the. If you have eight or nine different frequencies, you can actually propagate that across the entire country and then no two adjacent cells and the signals fairly weak. No two adjacent cells use the same frequency and so eight or nine frequencies can be used across the entire country. So that means that the cell phones were a solution to this problem of capacity because of an artificial but still a restriction on frequency availability. So that was the solution to capacity and in some ways we're still there's a path dependence to the way technology works. We're still in some ways thinking in terms of cells, but 5G is going to change that and so I hope you can talk about that a little bit.

Michael Munger:

The third thing is the handoff problem. Handoff problem is kind of a switching problem, but if I'm moving across cells then I'm moving across different towers, and 5G, because it's more decentralized, means that I may have to switch more often because the millimeter frequencies at which 5G operates is likely to. It requires a lot more system density. So we have these transmitters much closer together and we can have what are called side links, that is, two of these communication devices may be able to communicate with each other. So 5G is the reason it's called G.

Michael Munger:

I've actually had people ask me this. It just means generation. There's a generation of technology and the differences are pretty important. One and two G were mostly telephones. Three G is the first time it was possible to have something remotely like a smartphone, because you could also communicate data that a phone could read. Four G is more or less fully operational. It's not really a phone anymore, it's a communication device.

Michael Munger:

5g is something different, so that's a long setup, but I wanted to provide some background about why it is. We should care about this and why 5G is a big solution to the problem of triangulation, transfer and trust, because it enables the Internet of Things. It enables us to have not just phones that communicate with each other, but we have all sorts of devices in our home, in our work lives, that communicate with each other in a way that's so fast that you don't even realize that it's communicating. So 5G is something different. It is going to change the problem of transaction costs in ways that will enable new ways of cooperating that at this point it's actually hard even to predict. So can you say something about what I've gotten wrong or I haven't said enough about, about why 5G is important and what is the argument for why we should be spending so much resources on developing 5G networks and the Internet of Things?

Jon Pelson:

Well, so, mike, for a non-technologist you got it pretty much right there, so I'll give you a credit on that. And let me take you back. Think about your experience with the party line in rural Midwestern America in the say in the 60s. Fast forward a generation to the early 80s, where in China you'd still had either hand cranked phones that you would. You know generally from from, you see, from the old movies they would crank a phone on the side of it to get the attention of the operator, and a lot of calls require the use of a bicycle because you would have to ride into the post office in town, given that in 1980, there was one phone for every 500 households.

Michael Munger:

And it's literally a party line then a communist party line.

Jon Pelson:

Exactly, that's the real party lines and they, you know this was a time 1980,. Keep in mind also that the per capita GDP in China was about $190. So about $190 per person, which was less than Sudan and the US was in different ways accounting it, but about 11,000. China was about a little over 1% of our GDP. So they knew that. Cut their own transaction costs. They needed phone network and China did an awful lot to get wired phones deployed.

Jon Pelson:

But, like a lot of countries with poor phone service, they basically leapfrogged upgrading their wired network to just going straight to wireless. It was cheaper, faster, easier. Just to put up one tower and you could serve you know 20 square miles instead of running thousands of feet or you know hundreds of miles of wire. But you talk about the success of generations now as each of these one G, the analog cellular phone system that Gordon Gekko had, his big brick phone that he would carry around. That was a one G phone short battery life, limited capacity on the network and all you really had was voice and it wasn't very good to. G was digital but all that really did is add capacity and there was some texting you could do. And at your age, in my age, mike remember texting. It's just repeatedly hitting the numbers on a keypad to get the right letter to appear. The reason there was a limit is that texting was actually created as just a signaling message for phone technicians when they're doing repairs was not expected that individuals would use it.

Jon Pelson:

But 2G had that digital element. 3g allowed some data. 4g is what most people really use today. We had good broadband video. So what really is 5G and why does it matter? The current chairwoman of the FCC, jessica Rosenwursel, said at one point a few years ago that if we get 5G right, the least interesting thing will be what happens with your handset. That won't even be a key element because 5G is not faster for G. Part of the confusion there is that the service providers like Verizon, t-mobile run the barrage you with commercials about how 5G is super fast 4G. I don't know anyone that's ever been on their phone with a solid connection getting 40 megabits per second download and say, damn, if only can do 140. I could really want to know what you could do, because you can have multiple high definition video screens running at once with a 4G connection.

Jon Pelson:

The real trick is that 5G is not about that. 5g is about connecting things to things. So the best 4G network if you go into, say, a factory, which today is probably connected with wired sensors everywhere, because that helps with process control, temperature, movement, quality video this is used with wire because Wi-Fi doesn't really have the stability and the quality you need to do it. But factors are becoming more dynamic. They're becoming flexible. Where you change the take down lines and reassemble them in different ways, you shut down lines entirely. If you've got everything wired, there may be thousands, five, ten thousand sensors in a big factory. A major part of the cost becomes these sensors and deploying them. If you could put tiny wireless sensors with reliability and security and low latency so there's not a pause between a signal being received and getting sent to the central point, then you can really transform the way your industry works.

Jon Pelson:

5g is built to enable that. If a 4G network can handle in an area 500 connections at once, 5g can maybe handle 10,000. And so this is important for industrial uses, for ports, where you have ships being offloaded Every container has sensors saying where they are and you have farms where they're using soil sensors and geolocation sensors. Moving this all to 5G is not about cool phone calls and fast video. It really is a societal productivity tool that can't be delivered with 4G.

Jon Pelson:

I will add that, as far as the timing goes, I'd give a briefing to the Department of Commerce two years ago now and they said is it too late on 5G in our battle against China, should we just look at 6G? And I said 5G is not even going to be a thing until about 2026. And they said what are you talking about? It's already done. I said they haven't even decided on some of the standards yet and, as you can see, if you look around, 5g has been a gut punch to the service providers. No one bought it, or at least no one's using it in any special way, because there's no use case.

Michael Munger:

Yet this factory description I gave you these farms, the applications aren't really rolled out yet, they're just being invented, but they will reduce the transactions cost of cooperating in ways that are actually pretty hard even to predict. And the point that you make about latency you might not notice latency in a lot of the uses that you have on 4G because we might be talking about a quarter of a second, but if you're talking about real-time adjustments in a manufacturing process, that makes an enormous difference. So going from a quarter of a second to negligible for latency already that's a big difference. If you're trying to guide a laser, that's cutting metal. So there's all sorts of processes that we won't begin to understand until it is rolled out. I'm a little surprised that somebody would say it's too late for 5G, but let us turn in that direction.

Michael Munger:

A few years ago you and I had a conversation where I made the standard argument it is a pretty standard argument In some cases. I believe it that it makes no sense for me, if I'm a firm, to say I have to make everything myself. Every firm has a make or buy decision and so I can either make it myself or I can buy it from another provider, and if they can provide it more cheaply then I can make it myself. It's actually a profit losing proposition, and so I do not grow the wheat that we use to make the bread for the sandwiches in the employee cafeteria. I'm going to outsource that to people who have a better comparative advantage.

Michael Munger:

And so the argument goes what makes sense for a firm makes sense for a nation. Why would a nation insist on making something for itself if you can buy it more cheaply from abroad? Because, by definition, it means that your workers are able to produce things, other things that you have a comparative advantage in, and so we will buy these products from other countries. So the argument for buying technology from other countries if they can make it cheaper and better than we can should be something along the same lines as not growing the wheat for the employee cafeteria. You have argued that sure that makes sense as far as it goes, and I think it is fair to say your bias is in favor of free trade on most things. However, in this case, the epiphany that you had about talking to the one security analyst turned into you writing a book that was very different from the book that you originally intended. So can you say something about that switch and the logic that you have that this is not commerce, it's war?

Jon Pelson:

Yeah, this is where everything that you taught me in my economics class I don't know 10, 20, how many years ago was that, mike?

Michael Munger:

40.

Jon Pelson:

Yeah, 10 or 20 or 40 were around there. Now, free trade, voluntary trade between willing partners, creates value for everybody and in a liberal worldview, that trade, the success of the trade, the assessment of it is unilateral. If you come out ahead, you don't care really what happened to the other guy. He came out ahead, he came out behind. You wouldn't have done the deal, you presume, if you didn't come out ahead also. But you don't really care because you got better off from doing the trade. But in war the metric is relative. You don't say that long as I come out ahead, really. In fact, what you're saying is, I may come out behind, I'm going to be worse off after this war exchange, but the other guy compared to me will be even worse off.

Jon Pelson:

And what the revelation was, this was not trade we were engaging in with China. This really was warfare by another means and the investment that China made. You talk about MakerBuy. We can buy a system from Huawei for cheaper than an American company can provide it. Now, for that matter, the American company should just turn it all over to China and outsource it and white label it and sell Huawei gear as its own if they want to.

Jon Pelson:

But the problem is that China is subsidizing this, and you've also taught me, and I learned, this lesson that's their problem. They want to subsidize equipment and sell it to us. That's a tax on Chinese subjects. Should I call them citizens, subjects? Wherever the word is, they're subject to the rule of the CCP. It's a tax on them and a gift to America. Why would you? Hey, that's their problem.

Jon Pelson:

And people argued to me well, they're going to put us out of business and jack up the prices. Not really an option, because if you spent 20 years going tens of billions of dollars a year into subsidizing your business, at the end of that period you can't jack up your prices enough to ever make that money back. Substitutes will come into the market and it's the time. Value of money says that that's a lost investment. And what clicked with me is that China was looking at its subsidized telecom equipment as an investment, the same way America looks at building an aircraft carrier. What's the financial return? What's the rate of return on an aircraft carrier? Well, $10 billion out. You will never get it nickel back, but it may be well spent. And given that China spent $75 billion or more subsidizing Huawei, you say well, how could that make sense. They'll never make that back. Well, they did.

Jon Pelson:

They infiltrated countries all over the world with systems that those countries are now reliant on, and even in the US, mike, where Huawei deployed I talk about this in wireless wars. Huawei deployed its cell tower equipment to small, mom and pop owned cellular companies all around America's nuclear missile bases and special operations command, and we discovered that well, we knew it all along when it came public. You know, shortly after the book came out, congress really started doing something about this and they funded a rip and replace program. But you may not know this, mike, most people know it's still there. It's Huawei gear.

Jon Pelson:

Looking down on our nuke bases, there's only a couple that have been replaced. Malmstrom, I think, is one of them. So each telecom decided OK, we're ripping out Huawei. And just very quietly, about a week ago, the murmurs were OK, you know what? We're in a budget crunch, we'll do that somewhere down the road. We're sticking with Huawei. So they've ingratiated themselves, infiltrated all these countries that they see as rivals or subjects to their own neocolonialism, and the investment is like our $800 billion year military investment in the US.

Michael Munger:

So you made two points. Let's separate them and get you to elaborate a little bit on the second. First, the standard claim is the argument for free trade is unilateral, which means that if I can buy something more cheaply, the fact that it's cheaper, if the reason it's cheaper is the other government is subsidizing their production, that's fine, knock yourself out. If somebody wanted to give me a free car, I wouldn't say, well, that's not right, because you're undercutting the prices of American producers. I'd say I want that car that's cheaper than I can get it somewhere else.

Michael Munger:

Now the national security considerations might be maybe this industry has we need to maintain this industry in order to provide national security, but in the case of phone switches and particularly local community Huawei equipment, it's not obvious why that's national security.

Michael Munger:

Now, the second thing is this is different because there are vulnerabilities, and there's at least two vulnerabilities that I think change the whole equation.

Michael Munger:

One is the possibility of cyber espionage and the ability for the fact that you've got a peripheral network of basically radio contact and then you've got a core network. It's not clear that that core network is not communicating with China, and the ability to collect, decentralized collect and sort of decentralized information means that you're, in effect, you're buying a bunch of bugs of the sort of things that used to be in movies. The Russians are putting this in the US embassy, except it's literally everywhere. The second thing is it's not hard to imagine that there is a switch that you could just turn off, and if all of our infrastructure is dependent, if everything is devoted to saying we communicate all of our business and personal lives through these switches and that it can be shut down it doesn't have to communicate information back, it can just be shut down then it means that a lot of the US could just go dark. So are those two vectors of vulnerability? Is that plausible, and is there any evidence that Huawei has done or is doing those things?

Jon Pelson:

Yeah, there's what I would call proof of it, and I'll point out that, while Huawei denies all of this, of course they deny all of it the way the Communist Party in China denies that they've rounded up Uyghurs into reeducation camps and that they're harvesting their organs for party officials who need kidneys or other transplants. But there are the two risks of eavesdropping and of a kill switch. First, china can easily drop on a Nokia network. State operators are very good and when they try to do it, you put in your countermeasures, you try to find them and knock them out. But the way I look at that is like if you're trying to secure your apartment from burglars, you can put in really good locks Doesn't mean that you're invulnerable, because every measure has a countermeasure. But the problem is, if you have your landlord put in the best quality lock anyone makes, that reduces your risk of being subject to an attack. But if it's the landlord you're worried about, well then it doesn't matter what he puts in. He's in, he's not the key. And by buying a Chinese designed and operated network, you have handed the key to your rival and there are no countermeasures to that because they're in. So at least with a network that's built by someone else, even if it's, by the way, made in China. If the oversight is Ericsson or Nokia, samsung, you have someone motivated to keep the bad guys out and at least you're in the fight.

Jon Pelson:

When you talk about the other end of that, which is a kill switch, it's important that people understand when you build a network. If Huawei puts the cellular gear or the core network gear into an AT&T network or Deutsche Telecom network, they don't hand over the keys and walk away. They are always in the network. They have to be. They're doing software patches, they're doing performance monitoring, and so their hands are always on it. They don't need a hidden kill switch. I mean you can put one in, but they have the ignition on their end also and they can turn it off.

Jon Pelson:

And not only would it shut down communication network. You have to picture like imagine some pandemic in the future and once again American industry leaps in action, comes up with a vaccine that's super effective and the factories start cranking it out and they're all using their 5G sensors throughout the factories and all of a sudden the sensors stop working. We literally lose our ability not to communicate but to medicate, to vaccinate, and you can imagine the conversation with the Chinese government saying will you turn it back on? They say, well, first let's have that chat about your freedom of navigation flotillas in the South China Sea and about Taiwan, because we think we can get a technician out there next Tuesday and get Pfizer turned back on again. That's what you got to worry about, because those aren't possibilities, those are virtual certainties. If you don't have trust in your vendor, you're turning it over to them and saying you can turn off and turn on our farms, our factories, our ports, our cities, our traffic lights everything will be controlled by wireless networks.

Michael Munger:

There's a I mean it sounds like science fiction, but a book that described a negotiation process over just this question the China Sea being a Chinese lake, or is it partly owned by the other countries where it's within their international boundaries? So a US diplomat is on the phone to a Chinese diplomat. Chinese diplomat becomes angry and says stand up, go look out the window. And five seconds later all of the stoplights in Washington DC stop functioning. And then the Chinese diplomat says three, two, one, and they all come back on and says now tell me more about your carrier group. It's, if I mean, that's obviously science fiction, but you, bless your heart, raised the point that I was actually going to try to go to.

Michael Munger:

There's three aspects of transaction costs. The reason that we are arguing in favor of 5G networks and we want to implement them as cheaply as possible is that it will improve our ability to communicate and to cooperate with each other. Now the way to improve that is to reduce the transaction cost of us being able to perform three functions triangulation, transfer and trust. And the trust problem here is just overwhelming. The problem is that, to the consumer, all costs are transaction costs. It's not just the price, it's the sum of the price and those three transaction costs triangulation, transfer and trust so the cost of Huawei technology is gigantic because of the trust problem. The fact that the money price is cheaper is not enough to make the argument in favor of it. When you add the trust problem, we need to get out of the Huawei buying business and you can say that it is too expensive in monetary terms to do the rip and replace, but if you add the trust problem, it's too expensive not to do it. So the reason that I had wanted to talk to you was that it seems to me that there is a transaction cost argument for doing a surprising thing, and that is paying a higher monetary cost for systems. That and I believe there's no question correct me. But in purely technological performance terms, huawei is excellent. They actually do a really good job with this. In some ways it's better than some Western technology, but it is too expensive in terms of the trust problem.

Michael Munger:

Where do we go from here? What actual literal steps might we take in the next couple of years? Because it sounds like we have a little bit of window as this is being implemented, but how can we move to the point where US or other firms can rely on the increase in demand that is likely coming, but not necessarily. It's easy for me to say my skin is not in this game. We're asking for a huge investment by a bunch of other companies. They have to believe that Huawei is going to be excluded, and if Huawei is not excluded, then they have no hope of competing. What should we do?

Jon Pelson:

Yeah, this is talk about the trust issues. One of my best laugh lines when I'm giving a speech is when I say the world trusts America. And there's always a tittering from that line and I say, okay, look, I get it. But think about this. Talk is cheap. Where do people put their money when they're buying bonds? Are they buying Rimbimbi? Are they putting their money into Chinese currency? Are they betting in the Chinese stock markets? Are they counting on Chinese medical companies to take care of them? They may resent America.

Jon Pelson:

There may be a frenemy view towards this country, but relative to the rest of the world, we are trusted more, despite ourselves, as much as we could screw it up, and so the trust factor becomes one of the biggest hurdles. People. I listened to a talk yesterday about how China is going to replace us as the world currency and, as the you know, the can't see it, because the transaction cost of counting on Beijing to do the right thing and give transparency and honesty and follow through and not use things to their advantage when they can, and it becomes a non-starter and the world knows that, whether they stated explicitly Now, sometimes the best way to win a race against a faster rival, as China is is for them to just fall down on their own failures. But if you've got a mouth full of dirt, then maybe you're not doing so great either, for tripping just as bad. So now I look at it with Russia and this is getting out of my bailiwick. But my understanding is we see Russian financial assets in this country because of their invasion of Ukraine. Now this is a really tough decision. It's a terrible thing they've done. It's an aggressive, violent act against a country that was not provoking them. But if we start saying, hey, all the money you've got in our, in our reserves, we're going to seize it, you start to violate that trust thing on our side too. Now I don't know what the right answer is, because saying, russia, you can come and go with your money, but we're going to try and kill your people on the ground with our equipment. That's a tough one, but we have to maintain that trust as part of that trend lowering of the transaction cost of working with us. And. But if you look more onto the network side, if you've deployed a Huawei network, germany goes with it and their, their markets are trading over a Huawei system.

Jon Pelson:

There's something called a man in the middle attack where you get in between the sender and the receiver and you start injecting information that appears to be trusted but is not, because you're not who you appear to be. Think about the impact on financial trading markets on all communications. Everything now has to be verified. So here's a trade. We're going to have to have a side channel to validate the trade, verify it. Then you have to make sure that that validation is legit. You can grind your efficiency to a halt because of the transaction cost of doing any exchange and China. This is not news to them. What I'm describing to you is part of the plan. It's very carefully thought out. It's not impervious to response. It's not like you know. We've lost, although China's done a. The Chinese Communist Party has done a great job in compromising their, their global rivals, for power. As they see us, we've always seen them as a trading partner. We're finally waking up that they're a rival, not a partner.

Michael Munger:

Well, you raise another question actually that I was going to raise as an objection, if you said, really, what we should do is rip and replace pretty seriously and continue to block, because I had said what is it we specifically should do?

Michael Munger:

And in a way, we already have blocked Huawei and we're promising at least to rip and replace a lot of these things, a lot of this technology.

Michael Munger:

China owns a very large amount of US debt, and if they were to unwind their debt position now, they would take a huge loss if they did this.

Michael Munger:

So maybe it's not a credible threat, but if you think of it as a war and they sell a bunch of their debt, then that means that the price of that debt is going to go through the floor, because a lot of US treasuries on the market all at one time means the price goes down, and the problem with those kind of financial instruments is that the price and the required interest rate for new issues move inversely, and so they could drive up the interest rate that the US is required to pay on new treasury issues, and, given the size of our deficit, that actually is a pretty significant threat If interest rates on treasury bonds on new issues go to four or five percent, we're screwed. And so there's a number of dimensions on which the United States has to be at least aware of the power that has been acquired by China by treating them as a trading partner rather than an opponent in a long-term war by unconventional means.

Jon Pelson:

Well, first of all, we've done a pretty good job of driving up the cost of our nationally issued debt on our own. I mean, that's another example of how the enemy can get us. But we can get ourselves pretty good, and that's a major consequence tens of billions of incremental costs per year in just servicing federal bonds because of what interest rates have done, because of inflation. But you also have the fact that, as you point out, there's this mutual assured destruction. If China stopped buying our debt, we'd be screwed, and I guess they put their money, went into rubles. I'm not sure which market they would look to. They can't put it back into their own currency. It doesn't.

Michael Munger:

But in war you may be able to pay those costs. That's the thing, Because it would be irrational for them to do that. I as an economist, you as someone who studied economics, we both know it would be irrational for China to do that if they were trying to maximize value.

Jon Pelson:

Well, that's where the worry becomes, that Chairman Xi is one of a handful of rulers I don't want to call them leaders, but rulers in the world who would gladly see their entire country become poorer, and indefinitely poorer, to gain geopolitical power over others. Just about any leader in the world thinks, you know, america wants power. Of course we want influence and power in the world. We want it. So we're richer, houses are bigger, the children are healthier, mortality is lower. All that stuff comes from wealth and independence from, you know, kind of safety against others. So so it's understood that countries do this, but very few of them would say we're going to be poorer, you're going to be sicker, your food is going to be less, but the world will live with, under China, socialism with Chinese characteristics, cuba, china, iran, perhaps Russia, it's a small number of North Korea countries that are willing to be poorer if that's what it takes to be powerful, and that that's a worry because maybe they would take that huge hit.

Jon Pelson:

But you know, my view is that the real battle against China, even if there is a kinetic conflict, the real mutual assured destruction, is not nuclear. It's the fact that if they, for example, invaded Taiwan militarily and we cut off trade, we truly decoupled. Us, I think, would look like we did during the Great Depression We'd have 20% unemployment. China would look like they did around then, where you had 400 million people starving to death. And so if, as long as there is not an echo chamber of people telling Xi that it's okay, we'll win, everyone will be. We'll fall in line and continue trading as long as they don't tell them that and then hopefully that's not even true. That's the deterrence against the ultimate Chinese aggression and that's all we have to count on.

Michael Munger:

Well, those are the topics that I was looking for. Are there? Is there anything else that you would like to say? Maybe to take back or to extend, in a way, the? I think we have to make a distinction between a concern about the Chinese in quotation marks and the Chinese government, and you just took a step in that direction. The interest of the Chinese people clearly are to participate in trade and, to the extent that it is possible, to. Well, the Chinese people may suffer from the fact that having Huawei cut off from a lot of these large markets and the inability to acquire the chips that they need at the in the scale that they need it Already. China seems to have. The rate of acceleration, at least in Chinese growth has gone down and in some ways, it looks like China is looking at economic problems.

Jon Pelson:

Yeah, china is going to have serious economic problems. And, by the way, I do want to address your point. You know, when people have said sorry, you anti China, say that the people I worked with to write wireless wars a lot of them were Chinese. And you look, who am I defending Taiwan? Not only is that Chinese. In my opinion, china certainly thinks it's Chinese. The people of Hong Kong, the Uighurs, the protesters in Tiananmen Square, and then Chinese surrounding rivals, korea, indonesia, philippines, japan these are the people that I'm advocating for, against the Chinese Communist Party's hegemony, their effort to put down not not just other countries but their own people. So I'm pro China, I'm anti CCP.

Jon Pelson:

And just talking about what China can do to recover here, there's been talk with the restrictions of chips and other technology to Huawei and others. Well, china now has their, their phone out with a advanced seven nanometer chip. I believe specifically it's transaction costs that will keep that from being real. I don't believe it is real and when I saw this announcement, I went straight to the inside baseball analysts who confirmed that this was more showboating than technology, technology development. The whole point of the kind of the payoff of my book is that trust is what you can't fake. Trust is what China doesn't have, and trusted global ecosystems are what delivers advanced microchips.

Jon Pelson:

America, the most advanced, complex, heterogeneous economy in the world, can't make advanced chips on our own. We need blanks from Germany, we need the machines lithograph machines from the Netherlands. We need Korean elements, we need American software. That all comes together freely and in a trust based environment. That's why Taiwan has pulled this off. The day China took the TSMC plant, it stops being TSMC plant as people turn over their software and say TSMC, don't share it, don't steal it, and they know they won't. China making this chip. My understanding is that they basically banged out a thousand chips using an archaic method and found the ones that worked and slapped them into some phones not even all of them and said to the world stop your ban, we can do it without you and you're just going to accelerate it for us and I don't believe that's true for a second they don't have the ability without these partners. The transaction costs of smuggling in equipment, of stealing IP, is so high that they're not going to be able to compete.

Michael Munger:

Particularly in a setting where they have to be trusted in order to sell it. That's a great point to end on. John Pelson, author of wireless wars. Thanks for being on the answers. Transaction cost. I appreciate it.

Jon Pelson:

Great being here with you, mike.

Michael Munger:

Whoa. That sound means it's time for the twej. I should change it to to tmej, I suppose, because it stands for this week's economics joke and I'm doing this month's economics joke. But I have four economics jokes. They're still sort of weekly. I know you're thinking weekly is right. They certainly aren't, strongly. And no, I am not ever going to get tired of that joke.

Michael Munger:

I have two jokes from Colin Wallace, an economics professor at Georgia College and State University. First, how do we know? Santa isn't an economist because he leaves presents, not cash. Second, the Tooth Fairy might be an economist because it leaves cash and not presents. So both of those refer to the fact that economists would claim that if you give the amount of cash that a present would cost, the person is always at least as well off, because if they wanted to buy the present, they could go buy it, and if they wanted something else, now they have the cash to do it. Of course, that ignores transaction costs. If I have the present, then I don't have to go out and spend it. Furthermore, generally we value presents precisely because there is something that we would not buy for ourselves if we had the cash. Still, professor Wallace is quite right Santa Claus is not an economist, but the Tooth Fairy might be.

Michael Munger:

The third twej is from MK. An SQL query walks into a bar. It sees three full tables of the same size, walks up to them and asks hey mind if I join. You See, the joke is that the SQL query is addressed to a relational database. Since the tables are all full and the same size, you can just join them. If they had different numbers of elements, you'd have to left join or right join the matching process. COUNT RUGEN, FROM PRINCESS BRIDE: "I think that's the worst thing I've ever heard. How marvelous. Fourth, I asked ChatGPT to tell me a Huawei joke. Here's the joke it came up with what do you call a dog that's small and seems harmless, but spies on people? It's a chihuahua. That's actually not bad Way to go, chatgpt. Time. Now for this month's letters. The beginning of letter one.

Michael Munger:

I was listening to a recent episode of the Minds Almost Meeting podcast. The topic was preferences versus motivation. In that discussion, agnes Callard points out the idea of a motivationally inert preference, where you might choose an option if it were right in front of you, but not have the option to go out and actively fulfill that preference. For example, you might opt to eat a cookie as an after lunch snack, but not care so much that you'd be willing to walk to the kitchen to get it. Now, in both cases the cookie costs the same amount monetarily, but they're different willingness to pay transaction costs. So this sounds like transaction costs might raise a question to describe motivation. If you're motivated precisely when you're willing to overcome high transaction costs to fulfill a preference. Are there other aspects of motivation that this omits?

Michael Munger:

A second question that this peaked for me was whether transaction costs could be observed and used to construct a cardinal utility function. I wonder if the idea of motivation is a quantifiable transaction cost could be used to induce cardinal preferences somehow. In the Minds Almost Meeting discussion, agnes points out you can imagine two people with the exact same set of pairwise preferences but where one person would have almost zero motivation to fulfill them, whereas another person might be incredibly motivated to do so. Could we make a judgment that the second person does indeed experience more enjoyment? Reid has more cardinal utility from their choices, given that they're willing to go further to fulfill them. Could we create a reasonable cardinal utility function from this Best D? End of letter. Well, my answer would be we have to remember to the consumer.

Michael Munger:

All costs are transaction costs. That means the costs of having a cookie are the sum of the monetary costs of buying it plus the inconvenience cost of walking, waiting and so on. Now people come up with some common valuation in their mind, but those two elements are different. Two people with the same willingness to pay money might have sharply different willingness to pay time and inconvenience. But still, d your example is a good one because it highlights the role of transaction costs. The point is people do not have the same preferences because the same pairwise preference in a zero transaction cost world is not enough. They might behave differently depending on the transaction cost and they might have different preferences, or what economists call budget spaces for paying inconvenience.

Michael Munger:

Now I've copied the epigraph to this whole podcast from the main website and it comes from Adam Smith the real price of everything is the toil and trouble of acquiring it. So if one person has more income, they might be willing to pay a higher money price. If one person the other person has more time, they might be more willing to wait or to walk or pay costs of inconvenience. So I don't think it's a way to get at cardinal preferences, but rather it's an indication that people have different preferences on money and convenience. Some of it's budget, but some of it may just be a preference. Thanks for your question.

Michael Munger:

Letter two, the beginning of the letter what are your thoughts on the challenges posed by the decreasing transaction cost associated with video and audio manipulation facilitated by AI? In the past it was challenging to manipulate video and audio content, but AI has made this process more accessible. For instance, consider the scenario of sharing a video where a politician appears to say something that in fact, they never actually said. It's just a deep fake. This video is circulated among individuals who now hold a negative opinion of the politician, so they share it with others who share their sentiment. Consequently, misinformation spreads widely. A lie can now be shared around the world before the truth can even get uploaded. M end of letter. Well, thanks M.

Michael Munger:

My next book and the problem of the printing press are about this sort of informational Gresham's law. Now, gresham's law says that bad money drives out good. That is, if there is some currency that is worthless or counterfeit or not reliable, we'll try to exchange that money and hold on to the good money. Information has some of the same problem. So my next book on antitrust and the problem of giantism actually goes back to the origins of the printing press and anonymous pamphlets. There was close to a century where people could not rely on information that came from this new, really cheap, anonymous source of and I'm making air quotes information. So the printing press created a lot of the same problem. Institutions had to be created that solved the problems of triangulation, transfer and trust.

Michael Munger:

It's true that lies can now propagate, but they have no authority. People don't believe anything. I remember back when I was in Cuba in 2001,. The Cuban bartender was saying how you couldn't believe anything that the Cuban government said he had been reading the newspaper and laughed and said, in fact, I was reading this stupid thing that said that the US had bombed some civilians in Afghanistan. And I said, well, actually, that's true, that really did happen. And he didn't believe me because, since it had been in the Cuban newspaper, he just assumed that it was false. That raises the question of how we know anything and since it is useful to know something, that is a profit opportunity for entrepreneurs who can figure out the problem of how do we overcome the difficulties of triangulation, transfer and trust in the dissemination of valid, reliable news. But you're quite right, it is not a problem that we have solved yet. So thanks for your letter.

Michael Munger:

Well, it's time for book at a month. I couldn't narrow it down, so there's three this time. The first was the one that was written by our guest this week, john Pelson. The book is Wireless Wars, and it's really a terrific read. Second, the Capitalist Manifesto by Jonah Norberg just came out a few months ago and I recommend it highly.

Michael Munger:

Third, a book that is undeservedly obscure and one that I'm trying to get more attention for the Hand Behind the Invisible Hand was written years ago by Carl Mittermayer and recently, after Mittermayer's death, was published, and my friend Dan Klein at George Mason University had a hand in making sure that it saw the light of day. I actually have an article about how Carl Mittermayer is one of the most underrated economists, so I'll post that in the show notes, but his book, the Hand Behind the Invisible Hand, is certainly worth reading. Well, the next episode will be released on Tuesday, january 30th. We're going back to the last Tuesday of the month. We'll talk about distributed electrical consumption and generation and have another book of the month. Plus, we'll have four more hilarious twedges and more next month on Tidy C.