Knowledge Capital Writedown: Wind Turbines

On the front page of the NYT this morning, Keith Bradsher gives a perfect example of a knowledge capital writedown, in his story about wind turbine technology being transferred to China by a Spanish company, Gamesha:

Nearly all the components that Gamesa assembles into million-dollar turbines here, for example, are made by local suppliers — companies Gamesa trained to meet onerous local content requirements. And these same suppliers undermine Gamesa by selling parts to its Chinese competitors — wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.

But in the five years since, the upstarts have grabbed more than 85 percent of the wind turbine market, aided by low-interest loans and cheap land from the government, as well as preferential contracts from the state-owned power companies that are the main buyers of the equipment. Gamesa’s market share now is only 3 percent.

With their government-bestowed blessings, Chinese companies have flourished and now control almost half of the $45 billion global market for wind turbines. The biggest of those players are now taking aim at foreign markets, particularly the United States, where General Electric has long been the leader.

The story of Gamesa in China follows an industrial arc traced in other businesses, like desktop computers and solar panels. Chinese companies acquire the latest Western technology by various means and then take advantage of government policies to become the world’s dominant, low-cost suppliers.

It is a pattern that many economists say could be repeated in other fields, like high-speed trains and nuclear reactors, unless China changes the way it plays the technology development game — or is forced to by its global trading partners.

Because of Gamesha’s transfer of knowledge capital to China, GE’s knowledge capital has become less valuable, which eventually will affect wages and employment.   Gamesha’s knowledge capital has been less valuable as well, which affects the Spanish standard of living.

The correct policy prescription is for the U.S. to dramatically up our investment in knowledge capital and physical capital.  Dramatically. That may require less support for consumption now so that our children can be better off in the future.

Having written that sentence, I need to make a caution: The current categories of consumption and investment in the national income accounts are simply wrong, and giving us misleading policy advice. Education spending and public support for R&D are both  counted as consumption, which is wrong.  New homes are counted as investment, which is wrong as well.  And healthcare, which is currently completely counted as consumption, should be partly counted as investment as well in the workforce.

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