Doing Capitalism in the Innovation Economy: A book review.

Lone Wolf's picture
Rank: Gorilla | 688

If you have ever wondered what the interplay of government, bubbles and venture capital have to do with innovation, this is the book for you. Written by Bill Janeway, it covers the rich history of innovation, financing, the role of speculative bubbles and deep government commitment to innovation over the centuries. Janeway was part of the high technology team at Warburg Pincus and remains an advisor there.

With his knowledge forged in the study of the 1929-31 period that has shaped his investment philosophy, he draws from nearly 40 years of investment banking and venture capital experience to offer a unique point of view on venture capital. Doing Capitalism is an expression of his life's work in the fields of venture capital, technology and economics. It is part philosophy, part history and steeped in wisdom throughout.

Janeway's investment philosophy is based on the development of the Innovation economy which is fostered by the interplay of the "Three Player Game. This game is defined by a fluid relationship between "political interests, economic incentives and financial speculation".

The three player game is one theme that is described and elucidated throughout as he looks at instances throughout history in a variety of nations. He looks carefully at places where the government played an instrumental role in the development of innovation and did so without the knowledge of the success of these ventures nor economic outcomes that may lay ahead. Waste is a prominent theme in this dynamic, in that it is a necessary part of the discovery process and the advancement of economic interests.

In the world of innovation waste is a natural byproduct of the process. In other words rather than being a negative, it is a good and necessary part of discovery and advancement.

His overarching concern as an investor is with the concept of cash and control, that being having the cash to weather a crisis or problem rather than be forced to liquidate (usually an illiquid asset) and sufficient control in any circumstance in which you are invested so that you can achieve an optimal outcome.

These two themes were explained extensively with numerous examples and stories.

Throughout the book he draws from Schumpeter, Keynes and Minsky amongst many others. He frequently contrasts these points against the rational expectations of the neoclassical school. The work is scholarly in its detail but easy to read.

Janeway provides a unique point of view as he describes the interplay between these various forces. Government has been intimately involved with innovation through some or all of its creation, financing and being the biggest proponent and adopter of innovative tech that is subsequently developed by private companies. This is done without a rational expectation of a given return on investment by the government, but done in the pursuit of discovery. This was an important theme during the WW2 era and the decades that followed.

The government utilized grand themes in order to foster these developments including national defense, health and national security.

Venture capital has thrived in the environment provided by the government in the post war period as the development of numerous technological advances were sponsored, created and heavily utilized by the government. He notes several instances, with pertinent examples of policy changes by the government also provided numerous opportunities for profit and development by private interests as well.

The time spent describing biotech is instructive. Even though there have been few successful biotech companies and few if any ever make any money in the end (as I interpreted his writing), he demonstrates how the interplay of the government, market and venture capital have advanced discovery and science while allowing for both waste and profit. It is through his eloquent explanation of this paradigm, that this apparent and necessary contradiction can be fully appreciated.

The market plays an important role in this process. Bubbles, far from being necessarily bad or catastrophic are described as being essential for the innovation economy and its development. The market allows a place for people to express an opinion, or correct a mistake by being a seller. Most venture capital has a poor secondary market or none at all for a portion of the life of its investment. As a result mistakes are eaten wholly rather than dispensed.

The existence of a healthy secondary market characterized by periodic speculative bubbles allows investors to monetize otherwise illiquid assets and distribute them thereby earning a return on their investment. He provides several examples of how this works.

Lest you wonder how he is able to justify our most recent financial debacle, he doesn't. At one point he carefully defines the difference between a good bubble and a bad one. A good bubble has tremendous waste and losses, but leaves the economy largely unscathed with numerous assets available for the development of a new economic renaissance. The railroad booms in several countries as well as the internet boom of the late 90's are two examples.

The 2007-2009 period is a credit driven event that does the opposite of these things. It causes a material failure of the economy as a whole and few productive assets are the product of this type of bubble which he calls quite simply a bad one.

Janeway spends a great deal of time throughout the book talking about waste, and how innovation demands a significant amount of it in its development. Many professionals are focused on the notion of efficiency and rationality where Janeway highlights the corrective nature of mistakes, and the concept of waste being experimentation; and failure being a constructive corrective activity as proposed in different ways by Schumpeter, Minsky and Keynes.

Towards the end of the book he looks at how the role of government with regards to science has been changing. How the decisions made have influenced the way in which R & D has been conducted and subsequently rewarded. He provides some suggestions as to how the government might adjust policy and make changes to further foster innovation as it has so successfully in the past.

You will also find periodic references to the rich histories of Wall Street, the government and venture capital demonstrating their development, evolution and fluctuating relationship. I have read numerous books on these subjects but nonetheless found his presentation informative.

This book has so many interesting points that it is impossible to put it all into a brief review.

I found Janeway's book highly readable, and had trouble putting it down. It is also a good companion to books like George Gilder's Knowledge and Power, and Clayton Christensen's The Innovators Dilemma.

Doing Capitalism in the Innovation economy is rich in historical references and stories, wise in its philosophy, deep in its evaluation and observation; and a tribute to the life's work of an important investor and constructive thinker.

This book is outstanding and deserves your time.

Comments (3)

Jun 3, 2014

Really detailed review. Thanks!

Jun 4, 2014

Thanks, will add this to my list! Look forward to your next reviews

Jun 5, 2014