Episode 74: Bill Janeway
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The Innovation Economy: Concepts Shaping Financial Markets
The innovation economy begins with discovery and culminates in speculation. For the last 250 years, economic growth has been driven by a consistent process of trial and error. Drawing on his theorist-practitioner experience, Bill Janeway provides an accessible platform to discuss the dynamics of the innovation economy.
In this episode, he shares some of his personal reflections from his forty years in venture capital, laying out what he calls the “Three-Player Game” concept, saying this is necessary to fuel innovation: the state, financial capitalism, and the market economy. Find out how the three-player concept is shaping financial innovations. Listen as he discusses his book Doing Capitalism In The Innovation Economy.
Episode Quotes:
Thoughts on how people make decisions in financial markets beyond correlation
“I think economics is going through a generation long. Pretty fundamental reconsideration that goes with two things. One, a major observable shift from theoretical to empirical work. Second, the existence and the learning by doing of how to deal with data at the scale, the pervasiveness, the scope, of what's now available. I think one of the most interesting things is something that economists can now not as imperialists of the rational choice theoretic. But as practitioners of data analysis with the other social sciences that are also inundated with data, the movement toward causal explanation, getting beyond correlation, recognizing that the more data you have, the greater the propensity to generate false correlation.”
Is the thought of financial markets being separate from the real market a completely implausible idea?
“You can ignore the financial markets if you do two things. One, you think of money as a veil, which simply is a kind of numéraire for indexing real transactions. Second, you assume that the market always prices financial assets in line with real economic fundamentals. The net present value of their future cash flows, and that the real-world economy’s investment decisions and real assets reflect exactly that same calculation. If you do that, make that gigantic, in my view, a self-destructive and absurd leap of faith, then you can say the financial markets don't matter. The body of empirical evidence against either of those propositions is so overwhelming.”
Why do the amounts invested in venture capital gets bigger and bigger even if the returns are not as big, especially even after the dot com bubble?
“The world of the bubble of the late 1990s was unique. People made tons of money from investing in things that had no plausible business model, no path towards positive cash flow from operations, we can come back to that mantra. You then had this ten year death of venture capital, where the buyout boom took off again. But, whereas the buyout boom which had shown the same kind of both, skew and persistence of returns. Persistence has disappeared over the last 20 years because all buyout deals are run through auctions, Winner's curse dominated. But remember that first statistical stylized fact that venture capital enormous skew in returns, it goes with persistence.”
How do current situations and the role of the government in investing in the next generation of entrepreneurs will shape innovation?
“The great thing about climate change is that it offers the potential for effective political entrepreneurs to fashion a legitimizing mission for massive investment in the next generation, the next revolutions for infrastructure jobs.“
Thoughts on creative destruction prompting the original growth model
“At the macro level, unused resources because of austerity, because of paralysis of the state in responding to inadequate aggregate demand is utter waste, with no redeeming feature, which actually feeds back to reduce productivity.“
Time Code Guide:
00:02:52: How academic economics is far removed from reality and the concept of three players
00:10:03: The main distinction between the kind of economics of Keynes Bill Janeway learned compared to Keynesian economics that everyone learned in school for the past 50 years
00:15:13: Ontological uncertainty, behavioral economics, and behavioral finance
00:22:42: What it means when transactional efficiency was increased, but at the expense
of informational efficiency?
00:34:09: How come venture capital took so long to take off, when the economics of financing innovation, the limited partnership model, has been around for centuries?
00:47:31: Why do the amounts invested in venture capital gets bigger and bigger even if the returns are not as big, especially even after the dot com bubble?
01:01:27: Modigliani and Miller misinterpreting coasts theorem
Show Links:
Guest's Profile:
Professional Profile on Warburg Pincus as Special Limited Partner
Faculty Profile at the University of Cambridge
Faculty Profile at Pembroke College
Research and Expert Profile at Institute for New Economic Thinking
His Work: