Chasing Wealth
Reading China Daily recently, I saw a full-page article headed ‘Knowledge, innovation key to quality growth’[i]. The authors were Jeffrey Liang and Amy Leung, respectively the principal economist and director general of the Asian Development Bank’s East Asia Department: heavyweights like these two experts deserved serious attention. Time for serious reading.
Their argument was as follows: innovation can leapfrog a country’s development journey; economic openness is the main channel for innovation and knowledge transfer for developing nations; however, home grown innovation is important, requiring an innovative culture; tacit knowledge sharing is important; an open and competitive learning environment is essential at the country level; China’s ‘two track’ system has successfully allowed both a planned economy and a social market economy to run side by side; and China’s current innovation drive is ushering in a new top down combined with bottom up approach to encourage local innovation. It took a whole page of the paper and a lot of words to say very little. To summarize, domestic innovation is important for growth, to complement borrowing ideas from abroad: I’ve got it!
There was a problem with all this. It wasn’t just the repetitive wordiness of bureaucrats. Once again, the word ‘innovation’ was being used loosely, sliding over idea generation, research and development, and entrepreneurship (and much more!). Time and time again I read various people ranging from Xi Jinping to local commentators urging innovation. They all seem to forget that innovation is easy, if you mean by innovation coming up with new or improved ideas. Give me twenty moderately intelligent people for a morning, and we can generate 200 new ideas; give me 20 people from a company and we’ll have 50 really promising business innovations.
Innovative ideas are easy. The catch comes with translating them into practice, delivering successful products, services, or social policies. That is the business of entrepreneurs (both commercial and social entrepreneurs). They have the key skills needed to take a promising suggestion and turn it into reality. Fortunately for China, it has a culture of entrepreneurship: for centuries, people have found ways to get businesses off the ground. However, much of what has been done is entrepreneurship at the ‘bootstrapping’ level, individuals pulling together a few resources to get themselves started. Some people have been hugely successful, of course, but for every Jack Ma there are thousands of small, even tiny businesses set up by individuals who are happy to make a living for themselves and their families, and nothing more than that.
As I see it, China’s challenge is not innovation and an innovative culture, but rather how to support and enable entrepreneurs. Entrepreneurship is about risk: we know that entrepreneurs fail more than they succeed, and that the majority of new businesses collapse before two years have passed. To build a vibrant economy and to build a caring and effective community requires accepting that there will be many failures along the way
How do we deal with the risk of failure? There seem to be two paths. One is to rely on governments and big banks to invest in what they see as ‘winners’. This is the path we have seen adopted in many countries, where millions of dollars from taxes and deposits are poured into proposals that a bunch of bureaucrats see as worth pursuing. Many of these big bets fail, what a surprise! Then governments and banks get shy, unwilling to invest, and the support for entrepreneurs dwindles. This, I fear, will be the path in China: it has a very strong research and development framework, with centers of expertise, business and university clusters, and outstanding academic groups. But the first part of that two-track model still informs the country’s approach, with the planned economy driving development. Entrepreneurs don’t thrive in a government managed world.
The other approach is to foster an entrepreneurial culture, let experiments and attempts flourish (let a thousand flowers bloom?), and live with risk, failure and disappointment. For every Apple or Amazon there have been a hundred similar start-ups that never made it. You might think that the US offers a good example of this approach, and it did. But today, entrepreneurship is under threat. Come up with an interesting idea, and launch your start-up; unbeknownst to you, the big companies are watching, and they make a bet on how your idea will be turned into practice. They tend to use one of three responses. First, copy. Teams of engineers in the big IT companies are told to come up with a way to take a start-up’s approach, and do exactly the same thing (perhaps with slight modifications if, unusually, they are worried about a challenge over IP). Or second, buy it. Do that quickly so the price is good, and the entrepreneur covers his or her costs and makes a small profit. Or third, kill it. Crush it with marketing which explains what your company does is so much better than this new unproven approach! Today the entrepreneurial culture that thrived in the US is under threat from big predatory companies.
It is often claimed that entrepreneurs are interested in becoming wealthy and nothing else. For some, that is undoubtedly true, but certainly not all. But in America today, we see a different problem arising. The wealthy want to be even wealthier, and they will step in and grab the potential rewards from a start-up for themselves. The wealthy pursue wealth with few constraints. It seems all’s fair in love and war – and in chasing wealth.
I think about this when exploring commercialisation with a group of students, and listen to them talking about their aspirations to be successful, I am tempted to tell them “if you want to be wealthy, you need to be wealthy already”! Instead, I talk about risk, better planning, and the likelihood of things going wrong. However, I am also tempted to point out that there are other ways to become wealthy than through building a business. There’s crime, and as far as I can tell, crime still pays (it might be as risky as being an entrepreneur, but I doubt it!!): no, I don’t recommend that as an alternative. And then there’s gambling, which I also don’t promote, but mention of gambling and leads me to talk about Macau, which is where I am typing today.
My hotel is close to the casinos of this strange little island. China has two Special Administrative Regions, Hong Kong and Macau. Hong Kong was the concession port for the British, a gateway to the Pearl River. Macau played a similar role for the Portuguese. Concession port rather understates the situation: after the First Opium War of 1839-42 both the British and the Portuguese grabbed territories which they had occupied for over two hundred years, but now these were permanently ceded to them (Hong Kong earlier than Macau). The British were greedy, and leased more land in 1897, which extended the size of the so-called New Territories. It was that lease, for a hundred years, that led to the date for handover, the last tiny part of the British Empire to be ‘lost’. Macau, like Hong Kong, found itself being abandoned. That started in 1974 when, following the overthrow of a dictatorship, the Portuguese government decided to relinquish all its overseas colonies. Negotiations began in the 1980s, and on 20 December 1999, the transfer back to China was accomplished.
What is Macau like today? It is one third the area of Hong Kong, with a population of 650,000 (It has a population density of 21,000 per square kilometer, more than three times that of Hong Kong). Despite its size, it has a GDP on $US50bn with gaming accounting for half its economic activity, the government receiving 85% of its income from a gambling tax on casinos (not on players’ winnings). Macau is dominated by casinos; most of the 33m visitors a year come for the chance to become wealthy. Did I say most? Almost all the visitors are in Macau to gamble!
A favorite topic for journalists looking at Macau is to compare it to Las Vegas. Boosters for Macau point out that its annual revenue from gambling is now more than $US28bn, compared to a little over $US11bn for Las Vegas. While there is a lot more money spent on gambling here in Macau compared to Nevada, the two places are far from similar in most other respects. Macau has fewer casinos (they’re bigger than those in Las Vegas), far fewer hotel rooms, and much shorter visits by tourists as there is nothing much else to offer beyond the casino tables. Las Vegas is a resort town; Macau is a gambling town. Despite the differences, the big US companies in Macau are busily trying to increase the attractions, and encourage longer visits. I went into the MGM resort, next door to my hotel, and it is packed full of restaurants, spacious courtyards, play areas for children, and hundreds of (tacky) artworks.
Is Macau doomed to become more and more like Las Vegas in the foreseeable future? The heavy hand of China rests over the Special Administrative Region, keeping an eye on what happens. When the mainland government became exercised about the huge volumes of illegally acquired money being washed through the Macau launderette a few years ago, there was a sudden drop in the number of mainland gamblers and the amount of money being staked. Now, as the Chinese become richer, more and more visitors are back here to try their hands at baccarat or any of the other games in town, but today with (mainly?) legal money. Will the PRC slap on more controls at some point? Quite possibly, but it would also love to see increased tourism from other countries.
Macau has a clear plan to build a more balanced economy. A recent report explained that it might soon be a major player in manufacturing specialised microchips. Supported by the mainland government, Macau hosts a number of leading-edge hi-tech laboratories, with a particular focus on developing microchips to allow smartphones to recharge batteries in other devices, especially another smartphone (the other area of government supported innovation is traditional Chinese medicine). Gambling with casino chips and with hi-tech microchips!
People place bets to win, of course, and trying to improve the odds has been a fascination for gamblers for years. Not just gamblers. I have read several books over the years about ways to win at blackjack or roulette, and I have to admit they fascinated me. Is it possible to come up with a winning system? Yes, it is, but it also has some associated problems – like getting into trouble with casinos. Just before I left for Macau, I read the story of one who succeeded, Bill (William) Benter [ii].
Benter grew up in Pittsburgh, and while at school had read Edward Thorp’s book ‘Beat the dealer’, which explained how it was possible to beat the odds in blackjack by counting the cards. The strategy was based on fairly simple mathematics, and had inspired many gamblers to adopt the approach. At the age of 22, Benter left university and went to Las Vegas to play cards. As he quickly saw, he wasn’t the only one using Thorp’s approach. He met up with Alan Woods, the Australian leader of a card-counting team, and soon joined the group (spreading the risk across a team was a good way to reduce runs of bad luck).
For five years, he was earning about $US80,000 a year. However, in 1984, now 27, he was caught, blacklisted, and unable to play in Las Vegas. Looking around for what to do next (he never finished his university course) he decided to tackle horse-racing – in Hong Kong, where the HK Jockey Club’s betting pool seemed an ideal target. At the time, the total of bets placed there each year was close to $US10bn. After looking into the situation, Benter realised that if he was going to be successful, he had to develop a system that would bring in more than 17% in profits (as taxes and the Jockey club’s charity took 17% cut from winnings).
With Woods, he began to work on a system that would improve their assessment of odds on a horse winning a race compared to the published odds that result from the accumulated guesses of the gambling public. I won’t bore you with the details: essentially, he built a model that took account of some 20 factors, ranging from wind speed to the horse’s breakfast! He later added temperature on race day, and then further improved his system by retrospectively analyzing data from thousands of previous winners. Woods and Benter initially lost money as they developed their system, and fell out. Benter went back to the US to run a team of gamblers in Atlantic City to make enough money to return to Hong Kong and work on his system.
The approach worked. In the article, there is an account of a race in Hong Kong in November of 2001. Benter, who now worked with Paul Coladonato, was betting on the Triple Trio, which requires successfully picking the first three horses in three races, in the correct order! The payout was estimated to be at least $US13m. His system placed just over 50,000 bets; of those 36 had correctly picked the first three horses in two races, and one had picked all nine horses. The payout was $US16m. An amazing success, but they decided not to collect, feeling it would be unsporting!! Having proved what they could do, they went back to winning race by race.
Today, the approach developed by Woods and Benter, and then improved by Benter is used by gambling syndicates all over the world. Rather than fight them, organisations like the Hong Kong Jockey Club now publish reams of data, and publicly release, second by second, how bets are shifting to help people see what the syndicates are choosing. No one knows how much Benter made out of his system, but it was certainly in the hundreds of millions of dollars. He is now living back in Pittsburgh, still does some betting, but has put a lot of money into his foundation: the Benter Foundation funds health, education and the arts. He gives talks on his approach, and the underlying mathematics, to universities and to others who are interested. He even published an academic paper on his system.
There are several ways to become wealthy. If wealthy is about how much money you have, you can try the risky game of being an entrepreneur. Alternatively, you can try the equally risky game of trying to battle your way up the corporate ladder. You can gamble. You can commit crimes. Every one of those approaches is hazardous: your start-up may fail (most do), you may be stabbed in the back by a competitor for a position in your company before you managed to do the same; the casino takes your money (they usually do); or you get caught robbing banks!
There are other kinds of wealth, however. Here in Macau, wisdom is being pursued by some people, including many among those focused on traditional Chinese medicine. Wisdom, like wealth, requires hard work, patience and persistence; unlike wealth, however, you can acquire wisdom at no cost to anyone else. If you acquire the wealth of wisdom you discover the more you understand, the more you can give back. There may be more: Lao Tzu observed “knowing others is wisdom, knowing yourself is enlightenment”. Chasing wisdom trumps chasing wealth!
[i] China Daily, 12 June 2018.
[ii] South China Morning Post, Magazine 17 June, pages 20-26
