the message of what I learned by doing capitalism as a venture capitalist and
then reflecting on it from the academic side what I'd learned was that at the
frontier innovation first of all it's a process you make progress by trial and
error and error in error it's not just cash in control hedging against
uncertainty you're operating under conditions of radical uncertainty and
historically not just the digital revolution but the small number of great
transformational technological revolutions from from the railways
through electrification automobiles and highways and on to computing in the
internet these have required sources of funding that are not concerned that are
not focused on immediately visible economic value and there have been - -
such sources over the last 250 years over the emergence of the modern economy
in Britain in the United States around the world one government the state the
mission-driven state liberated by a mission whether it's national
development whether it's national security to mobilize resources to
tolerate failure to tolerate waste to escape from the shackles of of focusing
on the efficient use of the resources when what matters is effectiveness and
again and again it has been the state that has both funded the upstream
research but also really played a critical role in the deployment of the
transformational technology as networks we subsidized the building of the
railways with land grants the electricity generating and distribution
required in this case at the state level monopoly grants to private corporations
so that they could afford to make the investments and be insulated from
destructive competition and then of course the interstate highway system and
the internet were are deployed by the federal government
directly in turn the federal government and this is in the post-world War two
ERA was not just the research funder it was also the first customer from silicon
to software before these new technologies were cheap and reliable
enough for the commercial market the Defense Department was the first
customer it pulled the Intel's of the world the IBM's of the world down the
learning curve to low-cost reliable production so that was one lesson the
role of the state we have to take that seriously and not tell sort of
wisecracks about oh it's good enough for government work without the government
we'd be stuck back in the 1770s living an economy of that sort but there was
another source of funding that applied just as well to the railways to
electrification to aviation to the automobile industry in its early days at
lord knows to information technology and the digital technologies in the 1990s
and that's financial speculation so I've spent a lot of time in the history and
the theory of how the financial markets again and again move into what are
usually referred to as bubbles and the first law of bubbles is that they're
ubiquitous they're everywhere wherever you have a market in assets you're gonna
find investors hurting together chasing the hot thing whether it's a tulip bulb
or a Bitcoin or I guess a marijuana stock nowadays but occasionally what
they chase is one of these new technologies whether it's railways
electricity after Lindbergh flew the Atlantic the aviation curtiss-wright
went up ten times and computers and those taking advantage of computers so
they mobilize these bubbles occasionally turn out to be productive now the second
thing to remember about bubbles it's what matters is both what's the focus
what are the assets being overpaid overpriced but also where is it taking
place if it's limited to the stock market and the bond market to the public
capital markets the leverage the borrowing against these assets is very
limited the bubbles always burst but when a burst in the stock market as it
did in 2000 2001 and in the bond market the economic damage was very limited
when it infects the banking system the credit system where the leverage is 30
40 50 to 1 then when the assets crash in value you can freeze the whole system
you can produce the kind of economic catastrophe that we were looking at in
the winter of 2008 2009 so one of my message is is there is such a thing as a
productive bubble that it shouldn't be suppressed if it's limited to the stock
market and the junk bond market and you can't know in advance you can have a
pretty good idea whether the assets being funded are actually going to be
productive but you've got to take some time to find out whether it's just a
fly-by-night whether it's a transient and this is of course is what's going on
with Bitcoin and blockchain today and let it run it's not going to do that
much damage when a person people are gonna lose money few people who got
carried away probably lose their jobs but it's not going to wreck economic
havoc so that was kind of a central message of the first version of my book
back in 2012 and it really was a kind of celebration of this extraordinarily
constructive configuration of what I called the three player game the mission
driven state financial speculators and the market economy the world in which we
work and live and spend the ordinary market economy which gets transformed as
these two sources of CAP combine to produce a technological
revolution
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