Meet the Visionary Venture Capitalist Inspired by Marx and Keynes
Continued from previous page
With respect to the effect on the innovation economy, I’ve said that efficiency, as defined in neoclassical economics, is the enemy of innovation. By insisting that government investments be measured and be justified on the same criteria as those of a well-managed business, even with substantial unemployment, those who pursue efficiency undermine the toleration of the necessary waste of the supply-side of the economy – of investing in potentially innovative science, technology. But that way of thinking does something else: it restrains and limits the government’s ability to respond to market failure and financial crises and encourages the toleration of the unnecessary waste on the demand side: unemployment.
Here’s the real nut of it: There’s an interaction between the two. The greater the degree of demand-side waste, what I call “Keynesian waste” or unemployment, the less investment there will be in innovating on the supply side. The process of creative destruction in a high-employment, high-growth economy, is going to be more creative and less destructive.
LP: Why does the innovation economy depend on sources of funding that aren’t connected to economic returns?
WJ: Remember, we’re investing in ignorance. We’re investing without possibly knowing the value of returns. If we only invest where we can estimate them, we’re not going to invest in the highest risk but potentially highest return –and we’re certainly not going to invest in the upstream science and the sort of skill that can create the kind of platform on which I dance.
There’s a long literature on market failure – on the failure of a competitive market economy to provide enough public goods, like lighthouses, and to compensate for the bad externalities like pollution. Nothing new there, and in fact, one of the failures that has been identified and explored is the failure to invest enough in research and development.
But my point is that in reading the political history, the history of our political economy, the argument to correct market failure has never proved adequate. What it needed is a larger politically legitimate mission. Once upon a time, there was national development. Hamilton’s Report on Manufactures, the Erie Canal, which transformed the economy in the northeast and the old northwest of the young American republic. The funding of the Erie Canal was guaranteed by DeWitt Clinton and the government of the state of New York. Without the New York state guarantee, the Erie Canal would not have been built. I’d roll that all the way forward. In overbuilding the railroads, in the name of national development, and initially, to bind the state of California to the Union during the Civil War, we took 9 percent of the landmass of the Continental United States and gave it to a gang of corrupt promoters, whose investments, in fact, did create a new economy. That’s the role of the state. Those investments could never have been made by green eye shades pursuing the accounting rigor of investment calculation.
Downstream, we’ve been dependent --again and again – on financial speculation. Wherever there are markets in which assets are freely traded --before the Industrial Revolution, the tulips bulbs, the South Sea Bubble, right on through the credit bubble of the late 2000s—wherever there are liquid markets and assets there will be bubbles. Most of the time, on the one hand, the object of speculation is some asset which is not going to change our lives for the better. It’s not going to radically improve productivity and living standards. It may be tulip bulbs, it may be gold mines, it may be the debt of nations newly introduced by the collapse of past empires, it may be beach houses in Nevada. On the other hand, every once in a while, it’s the canals, the railroads, electric power utilities, aviation and radio in the 1920s, and obviously, computers -- the Internet and all who sail on the Internet sea.