William "Bill" Janeway makes a point during his public lecture at CIGI (Lisa Malleck/CIGI).
William "Bill" Janeway makes a point during his public lecture at CIGI (Lisa Malleck/CIGI).

To err is human, but it might also be our best mode of economic development.

Economist and venture capitalist William “Bill” Janeway began his public lecture at CIGI by outlining the set of processes that have defined the last 250 years of economic development or what he calls the “innovation economy.”

Drawing from his 2012 book, Doing Capitalism in  the Innovation Economy, Janeway classified these as “upstream” processes — scientific discovery and technical experimentation — and “downstream” process — the exploration of new economic spaces, replete with the “hopeful monsters” that spring up with most new technological advancements.

“Both of these processes proceed by trial and error…and error and error,” Janeway said. As this occurs, he said the technologies that reconfigure the architecture of the market economy become embedded in “transformational networks of infrastructure — networks whose value and use cannot be known at the outset of deployment.”

By way of example from each major technological era, Janeway cited the canals and railways of the first industrial revolution, the electricity grids and highways of the second great wave of technological change, and the Internet.

“All three of these phases depend on funding, necessarily, sources of funding that are decoupled from an immediate concern for economic value,” he said.

“Two such sources or reservoirs of capital available for these kinds of investment: financial speculation — “bubbles”— and a mission-driven, politically legitimate state,” Janeway said, but cautioned that it’s not an either-or scenario, “despite the heroic myths of Silicon Valley.” He documented how, from 1980 to 2010, more than 80 percent of the investments by the individual members of the US National Venture Capital Association were in only two industrial sectors: information and communications technology (“the digital sector”) and biotechnology or life sciences.

“Those happen to be the two sectors where, over the previous generation, the federal government had invested, literally, hundreds of billions of dollars, constructing platforms on which entrepreneurs and the venture capitalists who back them could dance,” he said.

Janeway highlighted how the venture capital industry thrived during “the greatest bull market in the history of capitalism,” from 1982 to the end of the dotcom bubble in 2000. But he was quick to illustrate that venture capital performance was not significantly better than that of public equity markets over the same period.

“In fact, venture capital returns are very closely co-related with the performance of the public equity markets,” he noted. “They are not an independent asset class.”

Drawing on history, as he did throughout his presentation, Janeway offered a summary of the UK’s transformation to an open, liberal, political economy throughout the 19th century. He said that the study of whether political openness preceded or was driven by unprecedented economic expansion has some parallels to the current juncture for the global economy.

“It’s the story that we are clearly going to have the opportunity to observe, as to how it unfolds in China over the next generation,” Janeway said.

On the global financial crisis, Janeway said its only “unequivocally positive” impact was to encourage the reintegration of the academic disciplines of economics and finance, “a divorce  that had tragic consequences in 2008.”

“Economics has shifted, from celebrating the efficient, optimal allocation of resources through time, to recognizing that (it’s) really the study of the coordination of failures,” he said.

With a nod to John Milton Keynes’ The General Theory, Janeway concluded on an optimistic note: “The ideas of economists are in process of becoming substantially more dangerous for good than they have been for a long generation.”

For more information on William H. Janeway or Doing Capitalism in  the Innovation Economy, visit http://www.billjaneway.com/

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“In fact, venture capital returns are very closely co-related with the performance of the public equity markets. They are not an independent asset class.”
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