The Practitioner’s Tale

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To begin near the end of the story, William Janeway, the author of Doing Capitalism in the Innovation Economy: Markets, Speculation, and the State, is today a very rich man.  It was not always so (though presumably he was never less than comfortable). The valedictorian of his Princeton class (1965) and a Marshall Scholar, Janeway obtained a PhD in economics from Cambridge University, in a department then nearing the end of a long decline. When his literary (rather than mathematical) dissertation on Labor Government policies in the UK 1929-31 produced possibilities of employment in departments of government or history but apparently not economics, he went instead to Wall Street. There, after a suitable number of twists and turns, he made a fortune in a venture capital firm.

Now he has returned to his first love, economics, and for a compact overview of the sources of growth in the years since 1760, the opening paragraph of Doing Capitalism is, to my mind, superb:

The Innovation Economy begins with discovery and culminates with speculation. Over some 250 years, economic growth has been driven by successive processes of trial and error and error and error: upstream exercises in research and invention, downstream experiments in exploiting the new economic space opened by innovation. Each of these activities necessarily generates much waste along the way: dead-end research programs, useless inventions and failed commercial ventures. In between, the innovations that have repeatedly transformed the architecture of the market economy, from canals to the Internet, have required massive investments to construct networks whose value in use could not be imagined at the outset of deployment. And so at each stage the Innovation Economy depends on sources of funding that are decoupled from concern for economic return.

It is the last sentence that is the rub.

The book itself consists of three parts.  The first is autobiographical. The second  describes in some detail what Janeway calls the Three-Player Game, among political interests, those pursuing ordinary economic incentives, and financiers; the necessity of periodic bubbles; and the role of the state. Finally there is a coda, concerned with public policy in the present day.

The war stories are vivid and edifying. Janeway goes to work for an old family friend, Ferdinand Eberstadt, a veteran of the Weimar inflation and victim of the Great Depression who is determined never again to be all but wiped out by a banking crash. He learns the ropes as the first tremors of deregulation – Mayday, 1975 — transform Wall Street from a zoo full of comfortable cages to a jungle free-for-all. He discovers computers and the violent mood swings to which technological development is prone.  He collaborates in venture lending with the legendary Fred Adler. He discerns the secret of Wall Street’s institutional revolution: get a piece of the deal.

Eberstadt is sold in 1985 and Janeway is relegated by contract to corporate finance. He runs marathons and meets Hyman Minsky, of Washington University, whom he deems the successor to John Maynard Keynes  (both Janeway and Minsky were directors of the Mark Twain Bank in Missouri; Minsky taught in St. Louis at Washington University). After three years he joins Warburg Pincus, a pioneering venture capital firm.. And there, after several instructive smaller-scale deals, he strikes paydirt with BEA Systems, a vendor of networking “middleware” assembled from several key acquisitions. BEA goes public at the beginning of the boom, and, by the time the bubble bursts, Warburg Pincus has sold off 85 percent of its holdings – a cumulative $6.5 billion return on its original cash investment of $54 million. (Oracle finally buys the firm itself, in 2008, for $8.5 billion, barely five times its annual revenue.) Janeway’s analysis of how the opportunity arose – the Defense Advanced Research Projects Agency (DARPA) funding, the Justice Department’s break-up of AT&T’s  telephone monopoly, and a fleeting institutional paralysis of IBM Corp. – illustrates perfectly, he says, the complicated dynamics of his Three Player Game.

The second half of the book is about economic theory – how he learned the broad outlines of what he put to use from reading economic historian Fernand Braudel, Marx, Schumpeter and Keynes and, of course, Minsky, whose “financial instability hypothesis” imagined the “super bubble” of 1982-2007 before it happened. (He died in 1996.) And indeed, Minsky’s schema of displacement (some unanticipated development, usually a discovery or invention), boom, credit expansion, euphoria, distress and crisis looks pretty compelling in retrospect, especially as fleshed out in Charles P. Kindleberger’s classic Manias, Panics, and Crashes. So do the distinctions Minsky made among different motivations for undertaking debt: to hedge, to speculate, or simply in hopes of finding a greater fool. Janeway explains it all quite clearly, interleaving with his own speculations on the inevitability of  bubbles and the necessity of Schumpeterian “waste” (the detritus of creative destruction). His argument is underscored by a table from technology guru Carlota Perez containing capsule descriptions of five technological revolutions – water, steam, electricity, oil and digital.

Then comes the Coda. It is less persuasive. It turns out a new technological revolution is at hand, one involving batteries, fuel cells, solar panels, windmills and the like, rendered incipient by the specter of climate change.   But market fundamentalism blocks the way to state initiatives, the patient money unconcerned with economic return that is necessary to bridge the gap from basic science to commercial application. Janeway wants the economic equivalent of a war on energy. Without it, he says, leadership in the innovation economy is lost; with it, jobs and income growth.

But very little evidence is marshaled here:  present spending categorized, sums not spent on promising projects described, analysis presented of the consequences of the abundance of shale gas.  For a skilled practitioner of finance to have so little curiosity about the store of expertise on the government-funding side of things is suspect. After all, when Janeway first called for a war on energy, back in the 1970s, the Defense Department was working on the Internet.  Who knows with confidence what will pan out among the things the planners are working on today? No one doubts, I think, that continued high levels of government spending on basic research are required – at least no one outside the Tea Party.  But is there any evidence that simply doubling the research budget will produce good results?

Janeway’s book, vast in its learning, with an extensive apparatus of footnotes, published by Cambridge University Press, comes garlanded with plugs from John Seeley Brown, Tim O’Reilly, Marc Andreessen, Soros himself, all technologists who have been highly successful in their own fields. All are self-taught when it comes to economics. People who have mastered the intricacies of their own business are often blind to those of others. The late John H. Marburger,  science adviser to President George W. Bush (and the longest serving presidential science adviser in US history),  asked a telling question in a 2005 editorial in Science magazine:  “Does demand for funding by potential science performers imply a shortage of funding or a surfeit of performers?”  To know the answer, he concluded, a new “science of science policy” would be required.