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News Clips

A Capitalist’s Dilemma

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We need more empowering innovations. Many great technology firms ruined by executives who only care about ROI. In order to revive empowering innovations, we need executives with visions.

by Clayton Christensen, November 3, 2012, New York Times

In many ways, the answer won’t depend on who wins on Tuesday. Anyone who says otherwise is overstating the power of the American president. But if the president doesn’t have the power to fix things, who does?

It’s not the Federal Reserve. The Fed has been injecting more and more capital into the economy because — at least in theory — capital fuels capitalism. And yet cash hoards in the billions are sitting unused on the pristine balance sheets of Fortune 500 corporations. Billions in capital is also sitting inert and uninvested at private equity funds.

Capitalists seem almost uninterested in capitalism, even as entrepreneurs eager to start companies find that they can’t get financing. Businesses and investors sound like the Ancient Mariner, who complained of “Water, water everywhere — nor any drop to drink.”

It’s a paradox, and at its nexus is what I’ll call the Doctrine of New Finance, which is taught with increasingly religious zeal by economists, and at times even by business professors like me who have failed to challenge it. This doctrine embraces measures of profitability that guide capitalists away from investments that can create real economic growth.

Executives and investors might finance three types of innovations with their capital. I’ll call the first type “empowering” innovations. These transform complicated and costly products available to a few into simpler, cheaper products available to the many.

The Ford Model T was an empowering innovation, as was the Sony transistor radio. So were the personal computers of I.B.M. and Compaq and online trading at Schwab. A more recent example is cloud computing. It transformed information technology that was previously accessible only to big companies into something that even small companies could afford.

Empowering innovations create jobs, because they require more and more people who can build, distribute, sell and service these products. Empowering investments also use capital — to expand capacity and to finance receivables and inventory.

The second type are “sustaining” innovations. These replace old products with new models. For example, the Toyota Prius hybrid is a marvelous product. But it’s not as if every time Toyota sells a Prius, the same customer also buys a Camry. There is a zero-sum aspect to sustaining innovations: They replace yesterday’s products with today’s products and create few jobs. They keep our economy vibrant — and, in dollars, they account for the most innovation. But they have a neutral effect on economic activity and on capital.

The third type are “efficiency” innovations. These reduce the cost of making and distributing existing products and services. Examples are minimills in steel and Geico in online insurance underwriting. Taken together in an industry, such innovations almost always reduce the net number of jobs, because they streamline processes. But they also preserve many of the remaining jobs — because without them entire companies and industries would disappear in competition against companies abroad that have innovated more efficiently.

Efficiency innovations also emancipate capital. Without them, much of an economy’s capital is held captive on balance sheets, with no way to redeploy it as fuel for new, empowering innovations. For example, Toyota’s just-in-time production system is an efficiency innovation, letting manufacturers operate with much less capital invested in inventory.

INDUSTRIES typically transition through these three types of innovations. By illustration, the early mainframe computers were so expensive and complicated that only big companies could own and use them. But personal computers were simple and affordable, empowering many more people.

Companies like I.B.M. and Hewlett-Packard had to hire hundreds of thousands of people to make and sell PC’s. These companies then designed and made better computers — sustaining innovations — that inspired us to keep buying newer and better products. Finally, companies like Dell made the industry much more efficient. This reduced net employment within the industry, but freed capital that had been used in the supply chain.

Ideally, the three innovations operate in a recurring circle. Empowering innovations are essential for growth because they create new consumption. As long as empowering innovations create more jobs than efficiency innovations eliminate, and as long as the capital that efficiency innovations liberate is invested back into empowering innovations, we keep recessions at bay. The dials on these three innovations are sensitive. But when they are set correctly, the economy is a magnificent machine.

For significant periods in the last 150 years, America’s economy has operated this way. In the seven recoveries from recession between 1948 and 1981, according to the McKinsey Global Institute, the economy returned to its prerecession employment peak in about six months, like clockwork — as if a spray of economic WD-40 had reset the balance on the three types of innovation, prompting a recovery.

In the last three recoveries, however, America’s economic engine has emitted sounds we’d never heard before. The 1990 recovery took 15 months, not the typical six, to reach the prerecession peaks of economic performance. After the 2001 recession, it took 39 months to get out of the valley. And now our machine has been grinding for 60 months, trying to hit its prerecession levels — and it’s not clear whether, when or how we’re going to get there. The economic machine is out of balance and losing its horsepower. But why?

The answer is that efficiency innovations are liberating capital, and in the United States this capital is being reinvested into still more efficiency innovations. In contrast, America is generating many fewer empowering innovations than in the past. We need to reset the balance between empowering and efficiency innovations.

The Doctrine of New Finance helped create this situation. The Republican intellectual George F. Gilder taught us that we should husband resources that are scarce and costly, but can waste resources that are abundant and cheap. When the doctrine emerged in stages between the 1930s and the ‘50s, capital was relatively scarce in our economy. So we taught our students how to magnify every dollar put into a company, to get the most revenue and profit per dollar of capital deployed. To measure the efficiency of doing this, we redefined profit not as dollars, yen or renminbi, but as ratios like RONA (return on net assets), ROCE (return on capital employed) and I.R.R. (internal rate of return).

Before these new measures, executives and investors used crude concepts like “tons of cash” to describe profitability. The new measures are fractions and give executives more options: They can innovate to add to the numerator of the RONA ratio, but they can also drive down the denominator by driving assets off the balance sheet — through outsourcing. Both routes drive up RONA and ROCE.

Similarly, I.R.R. gives investors more options. It goes up when the time horizon is short. So instead of investing in empowering innovations that pay off in five to eight years, investors can find higher internal rates of return by investing exclusively in quick wins in sustaining and efficiency innovations.

In a way, this mirrors the microeconomic paradox explored in my book “The Innovator’s Dilemma,” which shows how successful companies can fail by making the “right” decisions in the wrong situations. America today is in a macroeconomic paradox that we might call the capitalist’s dilemma. Executives, investors and analysts are doing what is right, from their perspective and according to what they’ve been taught. Those doctrines were appropriate to the circumstances when first articulated — when capital was scarce.

But we’ve never taught our apprentices that when capital is abundant and certain new skills are scarce, the same rules are the wrong rules. Continuing to measure the efficiency of capital prevents investment in empowering innovations that would create the new growth we need because it would drive down their RONA, ROCE and I.R.R.

It’s as if our leaders in Washington, all highly credentialed, are standing on a beach holding their fire hoses full open, pouring more capital into an ocean of capital. We are trying to solve the wrong problem.

Our approach to higher education is exacerbating our problems. Efficiency innovations often add workers with yesterday’s skills to the ranks of the unemployed. Empowering innovations, in turn, often change the nature of jobs — creating jobs that can’t be filled.

Today, the educational skills necessary to start companies that focus on empowering innovations are scarce. Yet our leaders are wasting education by shoveling out billions in Pell Grants and subsidized loans to students who graduate with skills and majors that employers cannot use.

Is there a solution? It’s complicated, but I offer three ideas to seed a productive discussion:

CHANGE THE METRICS
We can use capital with abandon now, because it’s abundant and cheap. But we can no longer waste education, subsidizing it in fields that offer few jobs. Optimizing return on capital will generate less growth than optimizing return on education.

CHANGE CAPITAL-GAINS TAX RATES
Today, tax rates on personal income are progressive — they climb as we make more money. In contrast, there are only two tax rates on investment income. Income from investments that we hold for less than a year is taxed like personal income. But if we hold an investment for one day longer than 365, it is generally taxed at no more than 15 percent.

We should instead make capital gains regressive over time, based upon how long the capital is invested in a company. Taxes on short-term investments should continue to be taxed at personal income rates. But the rate should be reduced the longer the investment is held — so that, for example, tax rates on investments held for five years might be zero — and rates on investments held for eight years might be negative.

Federal tax receipts from capital gains comprise only a tiny percentage of all United States tax revenue. So the near-term impact on the budget will be minimal. But over the longer term, this policy change should have a positive impact on the federal deficit, from taxes paid by companies and their employees that make empowering innovations.

CHANGE THE POLITICS
The major political parties are both wrong when it comes to taxing and distributing to the middle class the capital of the wealthiest 1 percent. It’s true that some of the richest Americans have been making money with money — investing in efficiency innovations rather than investing to create jobs. They are doing what their professors taught them to do, but times have changed.

If the I.R.S. taxes their wealth away and distributes it to everyone else, it still won’t help the economy. Without empowering products and services in our economy, most of this redistribution will be spent buying sustaining innovations — replacing consumption with consumption. We must give the wealthiest an incentive to invest for the long term. This can create growth.

Granted, mine is a simple model, and we face complicated problems. But I hope it helps us and our leaders understand that policies that were once right are now wrong, and that counterintuitive measures might actually work to turn our economy around.

Clayton M. Christensen is a business professor at Harvard and a co-author of “How Will You Measure Your Life?”

News Clips

A Nerd’s Perspective on Software Patents

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Software patent cost more harm than good to the society allowing companies patent obvious common things. We should have a patent system that penalize those “fake” patent by imposing a heavity fine if a patent is later shown to be invalid. Part of the fine should award to the person present evidence to over turn the “fake” patent. It lessen the burden of the patent office by outsourcing the validation of patent to the crowd and it will keep those who file patents honest.

by John Larson

As a programmer doing reasonably smart stuff on the web, I’m made a bit uneasy by software patents, namely because the possibility exists that I be sued for infringing upon them.

It’s not that I do anything nasty like meticulously reverse engineering the complex works of another for my own benefit, it’s that I build websites and web applications at all. I haven’t done the boatloads of research to know precisely how much I’m infringing, but, for example, most projects I do contain some sort of menu, and this technically violates Microsoft’s patent on ‘system and method for providing and displaying a Web page having an embedded menu’, which they have already demonstrated willingness to sue another company for. I do stuff that’s WAY more complicated than a bunch of navigation links of at the top of the screen, so I can only imagine how many other toes I’m stepping on when building systems that feature both ubiquitous and niche features.

So this characterizes the implication of patent law upon me personally. Now then, if you scale that up to a community of hundreds of thousands of programmers similarly impacted, and throw in the rising prominence of large companies suing one another over intellectual property[1], you will then have a sense of what the fuss over software patents covers. These are broad strokes, but they convey the gist.

Accordingly, protest has risen and lengthy debates have raged on about how to fix the “software patent problem”. Some of it goes on and on about legal precedent, objective tests for what’s patentable, the so-called “transformation test”, and other things that apt to make the eyes of a more casual reader glaze over (mine included).

What I want to explore is if it makes sense and is defensible to take a completely different tack: the pragmatic view of the average, motivated nerd.

Let us eschew, for a while, all the legal mumbo jumbo of definitions, specificity, precedent and so forth as they are usually applied to the debate of “is X patentable?”, and see if we can’t go closer to the root concepts in an effort to sidestep the whole tangled mess. I want to look through the lens of the reasons and motivations of why have a patent system at all.
The Essence of the Patent System

I’m not saying anything new or profound here, just summarizing to set the stage. The patent system is a societal construct: we all, as a society, agree to abide by certain constraints (namely not infringe upon anothers patented ideas for a fixed period of time), we willingly do this in order to reap benefits as a society, and there are consequences for an individual who breaks this agreement. (The whole thing is not unlike how we all, as a society, agree not to kill one another: we all more or less enjoy the overall benefit and are willing to give up that particular freedom, and there are consequences for an individual who breaks that agreement).

There are two really great benefits we reap as a society for having and honoring the patent system.

The first is that it encourages people to come up with new great things. The protection offered by patents effectively says “Hey, nice job coming up with that great new thing! Listen, we know you put a lot of hard work and investment into doing so, and for being the one who did all that we’ll give you a window of time in which you can be the only one who gets to reap the reward of that effort, without having some copy cat come along and bootstrap off of your blood and sweat.” An innovator, knowing that benefit lies on the other side is encouraged to invest time/effort/money up front. The rest of society gets to enjoy the fruits of that work, and for it pays the price of allowing a temporary monopoly.

The second benefit is that it encourages disclosure of really smart work. In this sense, the patent system effectively says “Wow, that’s something really smart that you did! Listen, we’re thinking long term for the expansion of the fabric of human knowledge, and so we’d love to know how you did that rather than see you take those secrets to the grave, or have your heirs forever keep it under lock and key. If you teach us how that works, we’ll get to expand as a civilization and in return we’ll make sure you have a window of time in which to benefit from your novel creation. Thanks for bettering the rest of us for the long haul.” Again, a nice benefit to society: it speeds up the proliferation of ingenuity and all the fruits that come with it, gained at the cost of allowing a temporary monopoly.
Evaluating Patents as a Cost/Benefit Proposition

From a clear understanding of the trade-off made when a patent is given, one can view it as a transaction willingly entered into by two parties. A patent application can be viewed as a business proposal that a society might freely choose to enter into (or politely decline) according to its interests and values, much like any business deal between two free-willed entities.

I propose that the debate no longer center around IF a given idea is patentable, but instead whether or not we WANT to grant a patent for a given idea: in other words, transform the debate to a value judgment as to whether we as a society care to pay the price of issuing a patent for the expected benefit, or would rather pass on the opportunity altogether. When it comes to software, I believe the best choice, as a culture, is to say “thanks but no thanks” to the opportunity of issuing patents, and it takes a look into the nature of software and the nerd culture that surrounds it to see clearly why.
Nerd Culture and Innovation

I love creating cool and interesting stuff with technology, and there are 100,000 others like me. There is no shortage of things out there in software that could be (or are) patented that a smart nerd with a little bit of gumption could look at and recreate without trouble. And by “look at” I mean simply get the view as an end user, not trolling through source code or employing sophisticated tools of reverse engineering.

Consider, for example, Amazon’s patent on one click ordering. When a customer is logged in, and has items in their cart, with one click they can place a completed order for those items. Kinda nifty, but anyone who’s done e-commerce programming can immediately work out how to implement such a feature using a customer’s information on file. I say society got a raw deal for issuing this patent: Amazon shared nothing of value with the rest of the world, and effectively earned the right squat on a generally useful idea because they ponied up some cash for lawyers and got some paperwork in first.

I would categorize ideas like that as “inevitable disclosure”: an idea that, by its very existence in user-facing software, reveals everything needed to reproduce it. The benefit of having information about how a such an idea was implemented in software disclosed is moot: one look and (or even sometimes hearing of the idea) is all a smart nerd needs to work out the rest. Apple’s patented “slide to unlock” widget is another example of an inevitable disclosure idea. So are rollover images:

We smart nerds are always thinking of and building new stuff to razzle-dazzle, be it for the pure fun of it, personal pride and reputation, or a great portfolio piece by which to impress the next prospective client for a contracting gig. And nerd culture, with its drive to innovate and share runs much deeper than small projects. Volunteer, collaborative open source projects have created top notch, large scale innovation in all realms of software, such as full-fledged operating systems, open web standards, content management platforms, e-commerce packages, audio and video compression schemes, office productivity suites, and more.

I point this all out to demonstrate a simple observation: innovation [in software] isn’t going to dry up if the incentive of patent protections were to disappear tomorrow. More than most (all?) industries, software grants much more space for hobbyists and enthusiasts to get involved. The overhead to major achievement is much smaller. We are numerous, we are smart, and we are hungry to create brilliant things for both personal and altruistic reasons.
Secrets in Software

The world of software won’t turn into the wild west of pillaging and stealing ideas in the absence of software patents, because things that are genuinely hard to do and which represent painstaking work and novel innovation can be kept a secret[2].

Come to think of it, the desire to file a patent to protect a software innovation may be a sign of admittance on the part of the applicant that the idea itself will be easy to replicate by a community of smart people (or even maybe your average nerd), which is a sure good reason to be disinterested in issuing a patent at all. “Thanks but no thanks”, I would rather we collectively say as a society: “keep it to yourself because the larger world will figure out how to execute and enjoy this idea sooner or later, and get there sooner without paying the price.”

Notes:

[1] Which breaks my heart, because as a casual observer it appears as though legal strong-arming is becoming a passable substitute for actual marketplace competitiveness.

[2] Google’s proprietary index and ranking algorithms that power their web search are presumably breathtakingly brilliant. They constitute a large portion of the secret sauce which gives Google its competitive edge, and they reap the rewards of that not because they came first and get to squat on medium-obvious ideas, but because they do it better than your average smart person can figure out on their own. Contrast this against Apple’s slider thingee.
John Larson

News Clips

Is Math Still Relevant?

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Is math still relevant? That depends on your metaphysical view of the world. If the reality is indeed appearance of mathematics as some metaphysics theories suggest and we are living in endless possibility of equations, then maths is the only way to understand the Truth.

By Robert W. Lucky, IEEE Spectrum, March 2012
The queen of the sciences may someday lose its royal status

Long ago, when I was a freshman in ­engineering school, there was a required course in mechanical drawing. “You had better learn this skill,” the instructor said, “because all engineers start their careers at the ­drafting table.”

This was an ominous beginning to my education, but as it turned out, he was wrong. Neither I nor, I suspect, any of my classmates began our careers at the drafting table.

These days, engineers aren’t routinely taught drawing, but they spend a lot of time learning another skill that may be similarly unnecessary: mathematics. I confess this thought hadn’t occurred to me until recently, when a friend who teaches at a leading university made an off-hand comment. “Is it ­possible,” he suggested, “that the era of math­ematics in electrical ­engineering is coming to an end?”

When I asked him about this disturbing idea, he said that he had only been ­trying to be provocative and that his graduate students were now writing theses that were more mathematical than ever. I felt reassured that the mathematical basis of engineering is strong. But still, I wonder to what extent—and for how long—today’s under­graduate engineering students will be using classical ­mathematics as their careers unfold.

There are several trends that might suggest a diminishing role for mathematics in engineering work. First, there is the rise of software engineering as a separate discipline. It just doesn’t take as much math to write an operating system as it does to design a printed circuit board. Programming is rigidly structured and, at the same time, an evolving art form—neither of which is especially amenable to mathematical analysis.

Another trend veering us away from classical math is the increasing dependence on programs such as Matlab and Maple. The pencil-and-paper calculations with which we evaluated the relative performance of variations in design are now more easily made by simulation software packages—which, with their vast libraries of pre­packaged functions and data, are often more powerful. A purist might ask: Is using Matlab doing math? And of course, the answer is that sometimes it is, and sometimes it isn’t.

A third trend is the growing importance of a class of problems termed “wicked,” which involve social, political, economic, and un­defined or unknown issues that make the application of mathematics very difficult. The world is seemingly full of such frus­trating but important problems.

These trends notwithstanding, we should recognize the role of mathematics in the discovery of fundamental properties and truth. Maxwell’s equations—which are inscribed in marble in the foyer of the National Academy of Engineering—foretold the possibility of radio. It took about half a ­century for those radios to reach Shannon’s limit—described by his equation for channel ­capacity—but at least we knew where we were headed.

Theoretical physicists have explained through math the workings of the universe and even predicted the existence of previously unknown fundamental particles. The iconic image I carry in my mind is of Einstein at a blackboard that’s covered with tensor-filled equations. It is remarkable that one person scribbling math can uncover such secrets. It is as if the universe itself understands and obeys the mathematics that we humans invented.

There have been many philosophical discussions through the years about this wonderful power of math. In a famous 1960 paper en­titled “The Unreasonable Effectiveness of Mathematics in the Natural Sciences,” the physicist Eugene Wigner wrote, “The miracle of the appropriateness of the language of mathematics for the formulation of the laws of physics is a wonderful gift [that] we neither understand nor deserve.” In a 1980 paper with a similar title, the computer science pioneer Richard Hamming tried to answer the question, “How can it be that simple mathematics suffices to predict so much?”

This “unreasonable effectiveness” of mathematics will continue to be at the heart of engineering, but perhaps the way we use math will change. Still, it’s hard to imagine Einstein running simulations on his laptop.

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Whales are people, too

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I strongly against animal right because they are not human. However, my ethical theory is based on self reflective intelligent beings and Kantian rational moral contract. According to my ethical theory, since cetacean has near human intelligent, human should grant cetaceans individual right that close to human rights. On the other hand, other non-intelligent animals should only have species right. As long as the species are not going to extinct, human can use the animals as resources to server human.

A declaration of the rights of cetaceans
Feb 25th 2012, the Economist

THE “Declaration of the Rights of Man” was a crucial step in the French revolution. The document, drafted by the Marquis de Lafayette, marked a break with the political past by proposing that everyone, however humble his birth, had certain inalienable civil rights. These were liberty, property, security and resistance to oppression. Merely being a man conferred them.

These days, such rights extend to women as well. But what if you are not human? A session on cetaceans at the AAAS meeting discussed a proposal that whales and dolphins, too, should have rights. The suggestion of the speakers was that the protections these species are afforded by human laws should be extended and recognised not as an indulgence of the human aristocracy towards the bestial peasantry, but as a right as natural as those which humans now afford, in the more civilised parts of the world, to themselves.

The proposition that whales have rights is founded on the idea that they have a high degree of intelligence, and also have self-awareness of the sort that humans do. That is a controversial suggestion, but there is evidence to support it. Lori Marino of Emory University, in Atlanta, Georgia, reviewed this evidence.

One pertinent observation is that dolphins, whales and their kind have brains as anatomically complex as those of humans, and that these brains contain a particular type of nerve cell, known as a spindle cell, that in humans is associated with higher cognitive functions such as abstract reasoning. Cetacean brains are also, scaled appropriately for body size, almost as big as those of humans and significantly bigger than those of great apes, which are usually thought of as humanity’s closest intellectual cousins.

Whales and dolphins have complex cultures, too, which vary from group to group within a species. The way they hunt, the repertoire of vocal signals and even their use of tools differs from pod to pod. They also seem to have an awareness of themselves as individuals. At least some can, for example, recognise themselves in a mirror—a trick that humans, great apes and elephants can manage, but most other species cannot.

Thomas White, of Loyola Marymount University, in Los Angeles, then discussed the ethical implications of what Dr Marino had said. Dr White is a philosopher, and he sought to establish the idea that a person need not be human. In philosophy, he told the meeting, a person is a being with special characteristics who deserves special treatment as a result of those characteristics. In principle, other species can qualify. For the reasons outlined by Dr Marino, he claimed, cetaceans do indeed count as persons and therefore have moral rights—though ones appropriate to their species, which may therefore differ from those that would be accorded a human (for example, the right not to be removed from their natural environment).

Chris Butler-Stroud, of the Whale and Dolphin Conservation Society, in Britain, and Kari Koski of the Whale Museum in San Juan Island, Washington state, then charted some of the hesitant steps already being taken in the direction of establishing cetacean rights. Mr Butler-Stroud showed how the language used by international bodies concerned with these animals is changing. The term “stocks”, for example, with its implication that whales and dolphins are a resource suitable for exploitation, is being overtaken by “populations”, a word that is also applied to people.

Ms Koski gave an even more intriguing example. She told of how a group of killer whales that lives near Vancouver, passing between waters controlled (from a human point of view) by Canada and the United States, have acquired legal protection even though the species as a whole is not endangered. After a battle in the American courts these particular whales have been defined by their culture, and that culture is deemed endangered.

The idea of rights for whales is certainly a provocative one, and is reminiscent of the Australian philosopher Peter Singer’s proposal that human rights be extended to the great apes—chimpanzees, bonobos, gorillas and orang-utans. Like Dr Singer’s suggestion, though, it does ignore one nagging technicality. The full title of the French revolutionary document was “Declaration of the Rights of Man and Citizen”. No one has yet argued for votes for whales and dolphins. But considering some of the politicians who manage to get themselves chosen by human electorates, maybe it would not be such a bad idea.

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Hong Kong Was Better Under the British

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Maybe it is politically incorrect, but this article simply state the fact. If there is a referendum in Hong Kong today, asking the people whether they want to rejoin the UK or stay with China, I am pretty sure people will pick UK over China. If people are allow to migrate from one country to another, why can’t a whole city migrate too?

by Hugo Restall, WSJ, Feb 23 2012

The slow-motion implosion of Henry Tang, Beijing’s pick to be Hong Kong’s next chief executive, brings to mind a speech given shortly before the 1997 handover by former Far Eastern Economic Review Editor Derek Davies. Entitled “Two Cheers for Colonialism,” it attempted to explain why the city flourished under the British. Fifteen years later, the Chinese officials who are having trouble running Hong Kong might want to give it a read.

The Brits created a relatively incorrupt and competent civil service to run the city day-to-day. Mr. Davies’ countrymen might not appreciate his description of them: “They take enormous satisfaction in minutes, protocol, proper channels, precedents, even in the red tape that binds up their files inside the neat cubby holes within their registries.” But at least slavish adherence to bureaucratic procedure helped to create respect for the rule of law and prevented abuses of power.

Above the civil servants sat the career-grade officials appointed from London. These nabobs were often arrogant, affecting a contempt for journalists and other “unhelpful” critics. But they did respond to public opinion as transmitted through the newspapers and other channels.

Part of the reason was that Hong Kong officials were accountable to a democratically elected government in Britain sensitive to accusations of mismanaging a colony. But local officials often disobeyed London when it was in the local interest—for this reason frustrated Colonial Office mandarins sometimes dubbed the city “The Republic of Hong Kong.” For many decades it boasted a higher standard of governance than the mother country.

Mr. Davies nailed the real reason Hong Kong officials were so driven to excel: “Precisely because they were aware of their own anachronism, the questionable legitimacy of an alien, non-elected government they strove not to alienate the population. Their nervousness made them sensitive.”

The communists claim that the European powers stripped their colonies of natural resources and used them as captive markets for their manufacturers. But Hong Kong, devoid of resources other than refugees from communism, attracted investment and built up light industry to export back to Britain. And as for taking back the profits, Mr. Davies noted, “No British company here would have been mad enough to have repatriated its profits back to heavily-taxed, regularly devaluing Britain.”

Most expatriate officials retired to Blighty, so they were less tempted to do favors for the local business elite. The government rewarded them with pensions and OBEs. A Lands Department bureaucrat didn’t have to worry whether his child would be able to find employment in Hong Kong if a decision went against the largest property developer.

Contrast all this with Hong Kong post-handover. The government is still not democratic, but now it is accountable only to a highly corrupt and abusive single-party state. The first chief executive, Tung Chee Hwa, and Beijing’s favorite to take the post next month, Henry Tang, are both members of the Shanghainese business elite that moved to the city after 1949. The civil service is localized.

Many consequences flow from these changes, several of which involve land, which is all leased from the government. Real estate development and appreciation is the biggest source of wealth in Hong Kong, a major source of public revenue and also the source of most discontent.

In recent years, the Lands Department has made “mistakes” in negotiating leases that have allowed developers to make billions of Hong Kong dollars in extra profit. Several high-level officials have also left to work for the developers. This has bred public cynicism that Hong Kong is sinking into crony capitalism.

This helps explain why the public is so upset with Mr. Tang for illegally adding 2,400 square feet of extra floor space to his house. Likewise Michael Suen, now the secretary for education, failed to heed a 2006 order from the Lands Department to dismantle an illegal addition to his home. His offense was arguably worse, since he was secretary for housing, planning and lands at the time.

In both cases the issue is not just a matter of zoning and safety; illegal additions cheat the government out of revenue. But it’s unlikely Mr. Tang will face prosecution because nobody above or below him is independent enough to demand accountability. So now there is one set of rules for the public and another for the business and political elites.

Under the British, Hong Kong had the best of both worlds, the protections of democracy and the efficiency of all-powerful but nervous administrators imported from London. Now it has the worst of both worlds, an increasingly corrupt and feckless local ruling class backstopped by an authoritarian regime. The only good news is that the media remains free to expose scandals, but one has to wonder for how much longer.

Hong Kong’s Chinese rulers have been slow to realize that, to paraphrase Lampedusa, the only way to keep Hong Kong the same is to accept change. It is no longer a city of refugees happy to accept rule by outsiders. And democracy is the only system that can match the hybrid form of political accountability enjoyed under the British.

Mr. Davies ended his appraisal of colonialism’s faults and virtues thus: “I only hope and trust that a local Chinese will never draw a future British visitor aside and whisper to him that Hong Kong was better ruled by the foreign devils.” Fifteen years later, that sentiment is becoming common.