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Global Crisis Blog

The Revenge of John Maynard Keynes:  Yes, Virginia, There IS a Liquidity Trap

By Shlomo Maital

 The theories of John Maynard Keynes, enunciated in his 1936 book The General Theory of Employment, Interest and Money, were fashionable for many years, and were used to guide practical policies.  Then they fell out of fashion, displaced by palpably ridiculous theories such as “rational expectations” (economic actors fully and accurately incorporate all economic data into their price expectations), theories that won proponents Nobel Prizes.  

    Well, friends, Keynes is back big-time.  For example, Keynes’ theory of the “liquidity trap” –the idea that monetary policy (credit expansion or interest rate reduction) can no longer stimulate economic activity, because interest rates may be at rock bottom or zero (they are today, in the U.S.) and because credit expansion has no palpable impact (banks absorb Fed-supplied liquidity, but do not pass it on, instead keep the money to shore up leaky balance sheets).  

    Federal Reserve Bank of Chicago President Charles Evans believes the U.S. is at present in a liquidity trap, as does Nobelist Paul Krugman and many other leading economists.  Yet Fed Chair Ben Bernanke continues to push a policy of QE – quantitative easing, buying bonds to pump more and more liquidity into the system. This angers China and Asia as a whole, which believes America is spilling too many dollars into the world markets and thus endangering Asian stability. 

    When monetary policy no longer works, why not try fiscal policy?  Great idea – except America is now working to reduce its budget deficits,  because the American people have come to believe (rightly) that much of the deficit spending was wasted on inappropriate ineffective bailouts of banks and financial institutions.   

    With the U.S. economy still very weak and with very little new job creation occurring, with monetary policy spent, and with fiscal policy no longer an option,  what are the options?  Don’t bother to ask the economists – they have no clue.

    The situation recalls Woody Allen’s joke about choosing between alternatives.  The world faces the choice between nuclear holocaust, or environmental catastrophe, he observed.

    May we choose wisely. 



Innovation Blog

Meet Tsai Ming-kai, Mediatek Innovator:  How to Innovate Business Designs

 By Shlomo Maital


 Tsai Ming-kai

 Today’s (Oct. 18) Financial Times has an excellent profile of Tsai Ming-kai, reclusive head of the Taiwanese chipmaker Mediatek.  Mediatek is the biggest supplier of mobile phone chips to China.   Innovators can learn much from him, even though he is rarely interviewed (the FT interview is the first in three years).

  Tsai is an electrical engineer who never studied business – except for a one-week course at Stanford, where he learned about Harvard Business School Professor Clayten Christensen’s theory of “disruptive technology”.  Tsai first joined United Microelectronics, a large Taiwanese chipmaker.  When it spun off Mediatek, Tsai became its head.  Christensen teaches that vertically-integrated industries tend to mature and then split into horizontal segments, with each segment specializing in a key part of the value chain.  This creates huge opportunities for innovators who get there first. 

      Tsai realized Mediatek could thrive by doing just one thing very well – and doing it very cheaply.  That one thing was making CD drives for computers, which then became making chips for DVD players.  By 2000 Mediatek was big, but Tsai looked for new opportunities.  He saw them in mobile phones.  While the big mobile phone chip designers like Qualcomm and Texas Instruments focused on 3G chips, Tsai saw opportunity in improving 2G chips to service the “newcomers” in China that he foresaw would one day defeat the industry leaders.     

        “There was still room for technological improvement in 2G phone chips,” he observes.  There is a very important principle here.  Innovators often look to cutting-edge breakthrough technologies and products.  That leaves much room for improving existing far-less-dramatic technologies, by raising performance and cutting cost.  Tsai offered not chips but also a “business model” – “reference designs” that came with the chip and enabled new phone makers to break into the business.  It was this business model that brought down barriers to entry into the mobile phone market dramatically.  So even while Western phonemakers shunned Tsai’s basic “primitive” chips, Chinese firms leaped at the chance, and quickly grabbed 20 percent of world mobile phone markets, to the disgust of Nokia and Samsung.   

    The inexpensive Chinese phones became known as “shanzai”, or bandit phones – this is an injustice, Tsai says, because the enabled low-income people in emerging markets to have mobile phones just like the rich.

  Tsai’s simple business model for innovation? “By relentlessly improving existing technology to reduce costs, this serves a population that is a much bigger proportion of the world.”  It reminds one of the late C.K. Prahalad’s “fortunes at the bottom of the pyramid”.  Tsai found a fortune there – and has made a fortune for himself and for his shareholders.   Tsai’s next frontier is ‘reverse innovation’ – taking goods (chips) designed for low-cost emerging markets and repositioning them for low-cost producers making products for Western consumers.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
October 2010
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