Meet the Visionary Venture Capitalist Inspired by Marx and Keynes
Continued from previous page
LP: How does a neoclassical economic framework hold back innovation and prevent us from understanding how it works?
WJ: It is an assertion of my book that trying to understand the dynamics of the innovation economy through the lens of neoclassical economics is difficult if not dangerous. The reason is this: At the core of neoclassical economics is the notion that competitive markets will generate an optimal allocation of resources over time, looking forward.
But the future cannot be fully projected from the current state, precisely because of innovations that not only produce a marginally better iPhone from one year to the next, but once in a while result in the construction of a network of railroads on top of which the innovation of mail order, of Montgomery Ward/Sears Roebuck, transformed the market economy to create a national marketplace with national brands and destroyed, in the Schumpeterian manner, established producers, lines of logistics, and patterns of consumption while enabling new ones to emerge. How is it possible prior to the railroad revolution to imagine what the optimal investment in railroads should be when you have no idea whatsoever of the economic returns from the speculative investments, which, by the way, always go to excess?
We built five trunk railroads between New York and Chicago in the course of thirty years in order to ensure that none of them would ever make any money. Similarly, with the Internet economy, how would it have been possible, through competitive markets, to mobilize the capital to deploy far too much for what was needed in the 1990s and also to fund the birth of the hundreds and hundreds of “hopeful monsters” (to use a Darwinian metaphor), to explore the new economic space being created by the Internet?
LP: You mention the Great Depression as the catalyst for the transition from small-state capitalism to big state capitalism. What has that change meant for innovation?
WJ: First, it’s not just the Great Depression, it’s also the Second World War. The historical fact is that at the time of the last global financial crisis (1931), the public sector as a proportion of the national economy was on the order, outside the Soviet Union, of about 10 percent. In the U.S., in 1929, the public sector was only 7 percent. Only 2 percent was in the federal government; the rest were state and local expenditures. Consequently, it was simply not possible for the public sector to offset the collapse of the private sector until there was a transcendent, politically legitimate mission on the basis of which the scale of the public sector would become substantially greater.
The first impulse was Social Security. But the second impulse, and the one that ended the Great Depression, of course, was mobilization for total war –which, by the way, is the most inefficient investment governments can make in narrow economic terms. We emerged from WWII in the U.S. with a limited welfare state (in Europe a much larger one). In the U.S., after the Korean War, we emerged with a hugely enlarged military - a warfare state (in Europe, much smaller). But collectively, even in the U.S., by the time we reached the most recent global financial crisis, the public sector was on the order of 35-50 percent of the national economy. You don’t need to know much more than that to understand why the last global financial crisis led to 25 to 35 percent unemployment and politics spilling into the streets, whereas in this crisis in the core countries – only the core from Germany to the U.S. -- unemployment was limited to “only” about 8 -10 percent. By the way, that can also explain the much less extreme regulatory response to the global financial crisis.