Posted on Wednesday 17 October 2012 by Ulster Business
Dr William Janeway believes that state investment and financial speculation are both needed to create economic progress, a theory he has developed in his new book, Doing Capitalism in the Innovation Economy.
Janeway, who will give a lecture at the Belfast Festival at Queen's, received a PhD in Economics from Cambridge, where he was a Marshall Scholar, and has been an active venture capital investor for more than 40 years.
His book jacket biography describes him as a man who, as leader of the Warburg Pincus Technology Investment team in New York, had a "front row seat at the development of information technology".
During that time his team provided financial backing to a series of companies that made critical contributions to the internet economy, including BEA Systems, Veritas Software and Nuance Communications.
He told me that the principal themes he will explore in his lecture revolve around the uncertainty that infects all economic and financial decisions, especially when concerned with new technology and new applications of that technology.
"Over the course of 30 years I've evolved into a venture capitalist working quite close to the frontier of the computing revolution from the 70s through to the new millennium. I learned along the way that historically the development of the world of digital computing and the internet was the result of two major institutional forces that operate beyond the scope of most economic and financial thinking," he explained.
"The first was the critical role of government, and particularly the US government, in funding the basic science and the technological development of silicon to software, beginning in the 1950s and 60s. They did so not because markets had failed, but in pursuit of national objectives that were politically supported and then transcended in a calculation of economic value.
"The second force was the much maligned financial speculators who similarly were putting money out not because they had a clear sense of the economic value of what they were investing in, but because they wound up in a bubble. They funded the infrastructure before it was possible to make any coherent judgement about what it was going to be worth, as well as these countless experiments, some of which had turned into Amazon, eBay and Google, but most of which failed," Janeway added.
His belief is that the innovation economy – the development upstream of investment in scientific research and technological invention, and downstream the deployment of the new infrastructure, from canals and railroads right through to the internet – is a function of these two sources of funding that are not justified by a narrow calculation of profit and loss.
"What follows from that is that over the last generation, the effort on both sides of the Atlantic to deny any positive economic role for the state takes away one of the fundamental pillars.
"Venture capitalists have no business funding science and only corporations with a really secure monopoly position – like once upon a time the telephone companies had – are likely to invest in fundamental science, they can't afford to. So there's a strategic role for the state," he said.
Dr. Janeway, who remains a senior advisor at Warburg Pincus and is a lecturer at both Princeton and Cambridge universities, is quick to note that there is a flipside to that argument, where Governments have got involved in counterproductive policies of selecting national champions or 'picking winners' – for example the disastrous British computing company ICL.
But the professor believes the state role is essential if the science on which major commercial breakthroughs are based is to be developed.
"I talk about how the innovation economy depends on the ability to tolerate waste on the supply side – the trial and error discovery of what works and what generates real economic and commercial value," he said.
"My concern about the role of conventional economics is that the pursuit of efficiency as the ultimate virtue not only undermines the toleration of the good waste – the discovery and application – but it also encourages toleration of the bad waste – the waste of unemployed resources. If the government could put people to work by financing projects that would be financed by the private sector but they aren't doing it – which is the case across the Western world – you undermine conditions for economic growth and for innovation. That is my real concern about the re-emergence as austerity as the policy of Governments in response to unemployment and low growth. There is a real role here for sponsoring full employment and the long term conditions for growth."
Janeway's doctoral study on the formulation of economic policy following the Great Crash of 1929 was overseen by Richard Kahn, the leading student of John Maynard Keynes. As such he is well aware of the counter arguments to the Keynsian view of the necessity of state intervention – that market forces and the private sector should be what drives the development of an economy.
But he notes that while venture capitalists are essential to the growth of innovative companies, it is no accident that VC activity has declined in recent years in line with the financial markets and the sharp drop off in the number of companies going to initial public offering. He also points out that a very small number of VC firms have been responsible for all the superior performance for investors compared above just investing in the public markets.
"When you look at the data on where venture capitalists have invested, in the US it is extremely striking. Two sectors consistently account for 80% of all the dollars invested by venture capitalists over the last 30 years. IT and biotechnology / biomedicine. It just so happens those were the two sectors where the government invested so much money to build the platform on which venture capitalists and entrepreneurs could dance," he said.
"There are other sectors where we need breakthroughs going forward – engineered plastics, nanotechnology, batteries and solar cells – but there hasn't been anywhere near the same scale of investment. The VCs who've invested in these areas have had minimal success because they have gone in prematurely," he added.
"There needs to be the same kind of collaboration for investing in, for example, new energy technology. Before it will be ready for the VCs and early stage companies to exploit, the science has to be materially advanced from where it is today, and that's not going to come from venture capitalists or purely from the big companies."
When I explain the state of play in Northern Ireland's still fledgling venture capital market, Janeway says the involvement of a state-sponsored agency like Invest NI in venture capital provision sounds logical.
"Making capital available to small businesses on a commercial basis when the banks are failing to do so makes a great deal of sense. But it is unlikely to lead to breakthrough innovation – the best thing to do is investing in the science and research base," he said.
"I don't think there's any substitute for upstream investment in science and innovation. Northern Ireland has an opportunity there. There is some interesting work being done in the US to understand how one city, like Pittsburgh, which was a great city in the first half of the 20th century and then virtually collapsed, has come back not as the home of the US steel industry but as a centre for biomedical research and technology. That was the result of major collaboration between the universities, hospitals and local leaders. Because they have a very low cost base they have been able to sponsor new companies to start up there, using empty factories. They are not trying to hold on to what was but are using the physical and intellectual infrastructure to create an environment in which new industry can grow up. That is something Belfast and Northern Ireland can do," he added.
"It does take a community and building an innovation community like they have in Silicon Valley doesn't happen overnight. It takes decades so there needs to be a long term focus, not just the hope for a quick hit."
Professor Janeway will deliver his lecture on Monday 22nd October at 8.00pm in The Great Hall at Queen's University. Ulster Business has five sets of tickets to give away. To claim some send an email to firstname.lastname@example.org.