Good afternoon, everyone.
It's four o'clock, so we should
get started, keep on time.
Some of you know me.
I don't usually do
written commentary,
but in this occasion
I'm going to do so.
And you'll figure
out why in a moment.
Welcome to this re-launch
event for the William R. Rhodes
Center for International
Economics and Finance
here at the Watson Institute
for International and Public
Affairs.
In other words, they've given me
the job of running this thing.
The Rhodes Center, made
possible by a generous gift
from William R.
Rhodes, class of 1957,
is an institute dedicated to
bringing issues of significance
in the broad areas of
international economics
and finance to the greater
Brown University community.
For that to happen it has
to be an interdisciplinary
conversation, one that seeks
to include perspectives
from multiple
intellectual traditions
so that these critical
areas that affect all of us
can be adequately understood.
At a time when the
international is under fire
by the national and finance
sits in much [INAUDIBLE]
after the 2008 crash, talking
sense about these areas
has never been more needed.
But to do that, multiple
and different voices
need to be engaged.
Given this and my role
as center director,
I've begun to reach
out to different parts
of the university
to pool together
the intellectual capital
necessary to make the Rhodes
Center fulfill its potential.
For example, this fall I'm
pleased to bring to campus not
only today's speaker, Bill--
more on whom in a moment--
but leading
economists, historians,
and international policymakers.
In the spring we'll welcome to
campus, economic sociologists,
political economists, and
financial journalists,
as well as hosting a series
of workshops and conferences.
All of this is available
on our website, which
will be regularly updated.
And most importantly, we're also
going to do a podcast series.
And we're planning
to-- in fact, we
will be doing, with
Brandan Greeley
over there, who works
for the Financial Times,
hence why you have
free newspapers.
Yes, exactly.
We're going to be working with
the FT on a joint project,
in terms of podcasting.
So given all that,
I'm pretty excited.
I also have-- despite the fact
that I haven't done it yet--
a bit of a cough and cold.
I'm loaded up on meds.
You can probably
hear it in my throat.
So I didn't get to do
the inaugural podcast,
unfortunately.
I had to hand it
all over to Brendan.
And I will also not be doing
much of the talking today.
Here it comes.
But nonetheless, I'm
pretty excited to get
this conversation started.
To get us started, Bill Janeway
immediately springs to mind.
Like Bill Rhodes, the
benefactor of the Rhodes Center,
he's a bit of an unusual person.
He's someone who combines
deep private sector
experience with equally
deep connections
to the public sector,
and also to universities
and to intellectuals in general.
Specifically, Bill has a PhD
in economics from Cambridge
and is one of the founders of
the Institute for New Economic
Thinking.
He was a partner at Warburg
Pincus, where he built and led
the technology
investment team, who
basically built large
chunks of the internet
as we know it today.
And a common theme in his
work is that Keynes was right,
but not for the
reasons you generally
think, that ideas matter
much more than you think,
and if you think that the
state is always and everywhere
a bad idea, you really
need to read Keynes,
but not for the reasons
you might think.
I've invited Brendan
Greeley from the FT
to come and be his interlocutor
today, partly because
of my wheezing and
incessant coughing,
but more seriously
because, given
that we're going
to be podcasting,
I thought you should
get used to his voice.
So with that, I will
pass it over to Bill.
[APPLAUSE]
Thank you, Mark.
And let me begin by noting
that this is actually
a kind of homecoming for me.
Almost six years ago I produced
a first edition of a book
called, Doing Capitalism
in the Innovation Economy.
And the first talk, sort of
the launch talk for that book
was here at Brown,
sponsored by Mark Blyth.
Now, I also have to
say that Mark's--
how shall I put it?
His generosity in coming down
with a serious cold and cough
is such a gift to
somebody speaking,
because trying to follow
Mark when he's on--
give me a break.
It's impossible.
But let me, then
as my second point,
ask myself the first
question the Brendan's
going to ask me in
about 20 minutes
or so, which is, having
published a book back in 2012,
why six years
later did I go back
and as they say in
Britain, set out
to chew the cabbage over
again one more time?
So what motivated me to address
once more the innovation
economy?
What happens at the frontier
of scientific discovery
and technological
invention as it spills over
into the market economy?
Why do I want to address
that one more time?
Well, in that first book I
provided a kind of framing
structure, which I call
the three-player game,
the three-player game
between the market economy--
those who participate in the
real economy of employment
and consumption and investment
and spending and saving
and unemployment and bankruptcy,
the financial sector--
the financial speculators, and
the state as an economic actor.
What motivated me was
that, first of all,
I developed this
concept as I looked back
and reflected on
the 40 years I'd
spent as an active working
venture capitalist,
principally in the world
of information technology,
of computing, and to some
extent in the world of the life
sciences, biotechnology,
and I realized
that I, the entrepreneurs I
backed, my peers in the venture
world, and the entrepreneurs
that they back,
we were all dancing
on a platform.
We were dancing
on a platform that
had been constructed by the
United States government
in the decades beginning
with World War II
through Korea and
Sputnik and the Cold
War, largely constructed by
the Department of Defense.
And just as in the life
science biotech world
that platform had been
constructed by the National
Institutes of Health.
And then all of this work all
of this pain and suffering,
this grief that comes with
investing in start-ups,
all of a sudden got incredibly
amplified by the wave
of speculative mania that,
during the course of the 1990s,
accelerated and
amplified computing
into the digital revolution.
So I realized that there
were two sources of capital,
two sources of funding
at scale for projects,
the economic value of
which could not be known
at the time of investment.
One, the mission-driven state--
win the war, whether it's
the war against the Soviets,
whether it's a shooting
war against Hitler,
the Cold War against the
Soviet, or the amorphous war
against cancer.
The language of war
liberates government
from cost-benefit
analysis, from the shackles
of prospective
cost-benefit analysis.
And on the other hand, the
periodic, banal repetition
of speculative bubbles
in the financial markets
that most of the
time are focused
on assets that offered
no prospect of increasing
the production possibilities
or the life standards of people
and of economies, whether
it's tulip bulbs or bitcoins,
but occasionally have focused
on the kinds of technologies
that when deployed
at scale actually
do create a new economy--
railroads, electrification,
automobiles, computing,
the internet.
So this convergence of
these state investments
that, as they spill over,
as they reach maturity,
as they become available
for commercial exploitation,
attract speculative
capital, this I
saw as a three-player game.
And what I experienced
was that game
played at the most
productive configuration.
You think of the
three-player game--
of course I'm talking
about something
like the three-body
body problem in physics.
Right.
There are an infinite number of
configurations, none of which
represent a stable equilibrium.
So when I looked for
historical examples,
I found them in the railroads
and electrification.
I realized that, of course,
these configurations
are unstable.
And if you really want to
build something to last,
build a new business to last--
I had the fellow I don't
refer to in the book,
but I do sometimes informally
when we're not being taped,
as my psychotic mentor--
perfectly brilliant analytical
mind, applied to venture
capital, who had a mantra, which
is that corporate happiness is
positive cash flow.
What that means is
that you're delivering
to customers goods
or services, goods
and or services that
they're actually
prepared to pay more for than
it costs to deliver to them.
So you're both
getting validation
that what you're doing is
economically worthwhile,
but you're also being liberated
from the transient support
of the financial
markets, always,
how shall I put it,
promiscuous in their attention
and continuity.
So the first motivation
for going back and chewing
the cabbage again was the
fact that these unicorns,
these phenomenal new
digital service companies
were demonstrating that worrying
about positive cash flow,
well that was sort of
a temporary constraint
on the limitless
potential for growth
when you had an infinite
supply of speculative risk
capital coming at you.
So what the hell
was going on here?
And then this was overlaid
with the phenomenon
of the cryptomania, the
Bitcoin blockchain phenomenon.
And what I realized
was that these
were just two expressions.
Two expressions that
the digital revolution
had reached such maturity
that it had taken off.
It had a life of its own.
Not only did it
no longer require
any sort of support or
subsidy from the state,
it was actually
feeding back to attack
the authority of the American
state that had spawned it
and other states around the
world at multiple levels,
and in multiple
dimensions, generating
new digital platforms,
disrupting ecosystem
after ecosystem in
the market economy.
So the digital revolution--
and this is a principal
theme of this new version,
both of my book and of
the three-player game--
is transforming the market
economy, directly of course,
once again, through
the automation of work,
and then at one remove
through the radical reduction
of technological frictions
that in turn vastly
increase the integration of
international supply chains
for goods and services,
especially labor services.
In particular that means
while Silicon Valley,
San Francisco can
celebrate the gig economy
as liberating for those who
want to work when they choose
to work, for whomever
they choose to work,
for others, the algorithmic
management of work
offers the threat--
maybe the reality
in some sectors--
of recreating Marx's
reserve army of labor.
And then the same
digital technologies
applied to the
financial markets serve
to integrate at a global scale,
while also operationalizing
modern finance theory
into an infinite array
of financial derivatives--
Buffett's weapons
of mass destruction
and created the doomsday
machine that exploded almost
exactly 10 years ago--
nine years and 358 days ago.
So across the mundane
markets, the literally mundane
daily markets of
the real economy
and the social and
political geographies
where their participants
live and work,
the digital revolution--
and this is the shift
in the configuration
of the three-player
game, has challenged
the capacity of the state
to buffer its constituents
from the economic consequences
of that revolution which it
was responsible for generating.
And of course in
2016 this recognition
was hammered home by
the Brexit referendum
first and then by
the Trump election.
Accompanied by
further demonstration
at a deeper level
of the consequences
of the digital revolution,
the social media,
the digital social media
with their unique capacity
for narrow casting and
friction-free response
and amplification,
even without deliberate
manipulation by
malevolent states,
goes one step further to
assault the underlying integrity
of the political process on
which ultimately the authority
of the state rests.
So if the first motivation
for going back and producing
this new addition was seeing
the digital revolution explode
into this full realization,
the second motivation
was the renewed
de-legitimization of the state,
specifically the American
state as an economic actor
following so fast on
the transiently response
to the global financial
crisis and the onset
of the Great Recession when,
as Adam Tooze exhaustively
demonstrates in his
extraordinary history
of the sources and consequences
of the financial history--
a book with a very
simple title, Crashed.
I urge it on everyone.
It's one not to carry
around with you.
It's about that big.
But nowhere has this been more
evident than in the United
States, which served,
as Tooze demonstrated,
the unique role of saving the
world from the most extreme
consequences of the
financial crisis
in putting a floor under
the global economy,
but emerged with its
role as an economic actor
under massive
assault, and in fact
under assault across
the political spectrum.
So in the US, two
specific examples.
One, the rabid opposition to
the only policy initiative
directly responsive to
the digital revolution.
That's the Health Care Act.
The Health Care Act,
for the first time,
promised to decouple access
to health care from employment
at a time when employment was
being radically disrupted.
The fact that this became
the target of the Tea Party,
and of course in
the classic phrase,
don't let the
government take away
my Medicare by using it
to subsidize Obamacare.
This incoherence is
the first example.
And the second, of
course in the aftermath,
in the heart of the global
continuing shortfall
in economic growth and
in the extreme inequality
that emerged, the renewed
determination in America
of continuing the
process of redistributing
income and wealth from
the poor to the rich.
Now, the abdication of the
American state under the Trump
administration from any
positive role in constructing
the next new green economy means
that state failure in the US
is forward as well
as backward-looking.
This is so even while it
is not possible to imagine
a deeper and broader
job-creating,
profit-generating program of
public-private collaboration
than reconstructing the physical
infrastructure of the United
States to reduce carbon
production and consumption
and deploying the needed
complementary digital
infrastructure to manage it.
But for financial speculation
to shift its focus
towards funding
development and deployment
of green technologies will
require first, upstream state
investment in the science and
technology of energy storage
in particular, at a scale
that is off the table,
and second the imposition
of fiscal and regulatory
incentives that
are simply not part
of any discussion
in this country,
and barely on the
table in Europe.
Instead, the evident return
of financial speculation
in the past five
years is represented
by the unicorn bubble in
digital service ventures
and the cryptocurrency
blockchain mania that
has been funding further
disruptive applications
of the digital revolution not
launching the Green Revolution.
So these last two processes--
the attack of the
digital revolution
on the authority of the state,
and the state's inability
to buffer and balance
the economic consequences
of the digital
revolution, let alone
to lead the charge
for the next Green
Revolution mean that the
three-player game has
changed fundamentally.
The first edition of
my book could well
be read as a celebration of the
configuration of the game that
constructed the
platform on which I
and a generation of
entrepreneurs and venture
capitalists dance.
But the new configuration
represents itself
in an apparent paradox
observable in the market
economy of the US.
The radical
disruptions generated
by the digital
superstar firms, whose
literally unprecedented
levels of productivity
are the basis for
differential compensation
that actually shows up in
the aggregate income data,
as David Autor at MIT and
his team have demonstrated--
that's occurring
even as a broad range
of measures of economic
dynamism are declining.
Concentration across both
services and manufacturing
have been broadly increasing,
and with concentration
so have profit margins
been increasing.
Short-termism among
public market investors,
whose survival increasingly
turns on tracking the index,
has been translated
into short-termism
in corporate strategy
by the medium
of equity-based
executive compensation.
So free cash flow is devoted
to stock buybacks and dividends
at previously unknown
levels, rather than tangible
and intangible investment.
Fewer firms in the
United States are now
being founded than are closing.
The net balance
had been negative
for at least five years.
Economic mobility
by various measures
has declined substantially.
Existing regulatory frames
responsive both to financial
and environmental abuses
are being dismantled.
And of course, inequality of
income and wealth and wellness
has risen to levels not
seen since the Gilded
Age and its echo in
the roaring '20s.
This is what I call the dark
side of the three-player game.
To round out the story,
over the past five years,
it's become clear that there is
one nation with a politically
legitimate mission that
is aggressively sponsoring
research at the frontier,
especially research oriented
towards response
to climate change,
while it manages the emergence
of financial speculation
and hugely increased
economic dynamism.
We cannot know whether
China will succeed
in the extraordinary challenge
of moving from an effective
follower to leadership of
the innovation economy.
Only one nation has
managed that transition.
It was the United States
with the propulsive power
of two world wars and
a Cold War behind it.
But we already have
the opportunity
to observe its
efforts to succeed.
We can also observe its
strategic economic investments
in international
reach and influence--
the Belt and Road, even
as the United States
withdraws from its
historic engagements.
And we can further take account
of its massive investments
at the frontiers of science and
technology under the rubric,
made in China 2025, even as
the public underwriting of such
high-risk investments in
the US is flat to down--
yet and yet.
John Vogelstein hired me at
Warburg Pincus 30 years ago.
And he used to say-- and he
said to me when he hired me--
pessimists cannot survive
as a venture capitalist.
The first time you lose a
startup, you slit your throat
and you're out of the game.
So there's one domain
where in my view
optimism is warranted,
even mandated.
And it's where Mark
started us off--
the domain of ideas, and
particularly the domain
of economic ideas.
It took a long generation
from the end of World War II
for the ideas of the
Mont Pelerin Society--
a tiny group of scholars,
of European scholars
with a couple of American
outriders, one of them
named Milton Friedman, who
promulgated the notion that
was embedded in the title of
Friedrich Hayak's famous book,
The Road to Serfdom.
Any economic role for
government inevitably
leads to totalitarian
dictatorship.
It was a long generation from
then, from the first meeting,
to when Ronald Reagan in his
first inaugural notoriously
said, government is
not the solution,
government is the problem.
I promise you, the
founders of Intel
would not have agreed with him.
But that's the
frame of reference
responsible for
the configuration
of the three-player game--
the current configuration.
So the new edition concludes
with a selective survey
of academic initiatives
that have the potential
to change the context in which
economic policy, public policy
more broadly, is
considered going forward,
not tomorrow perhaps,
but within a generation.
The most strategic level,
thanks to the global crisis,
the disciplines of
economics and finance
have been smashed
back together again,
as represented by the
Rhodes Institute, that
is in the process of ending a
catastrophic generation-long
divorce between the
two disciplines,
as if those two markets did not
independently operate together.
The rational optimizing
automaton, the caricature
abstracted from real
human beings operating
in real markets
as being displaced
from the core of
economics, increasingly
replaced by agents heterogeneous
across multiple dimensions,
embedded in social
networks, and whose behavior
is in all ways imperfect
markets operating
under conditions of uncertainty
reflects empirical observation.
At the more schematic
level, once upon a time,
all of economics,
like Caesar's goal,
had been divided
into three parts--
allocation of
resources, stabilization
of the economy as a whole,
and the distribution
of income and wealth.
Over the course of that
generation in which
the Mont Pellerin Society
triumphed politically,
intellectually
allocation ate economics.
The rational
expectation's hypothesis
demonstrated logically that
an omniscient representative
agent, optimizing her
intertemporal utility
in efficient enough
markets could and would
render any state intervention
in the economy ineffective.
And the neoclassical
production function
assured us that the
factors of production
received their marginal product.
What could be more
fair than that?
Thanks to the financial crisis
and the Great Recession,
stabilization as a
focus of economics
eliminated by the assumptions
of REH has returned.
Distribution as a
focus of economics
has also been rediscovered
after a generation
of shameful neglect with
enormous empirical work
generated, particularly by the
late Tony Atkinson and the very
much alive Thomas Piketty.
And in indirect response to the
Great Recession, a phenomenon
of economics close to my
heart, the multiplier,
invented by my PhD
supervisor Richard Kahn,
has been rediscovered and
its state-contingent dynamics
explored.
And on and on.
Perhaps most significantly, a
new financial macroeconomics
is beginning to emerge
with institutions,
financial intermediaries at
the center of the system,
not excluded by
construction from having
any role in the dynamics
of employment, consumption,
savings, and investment.
So I would conclude by invoking
the words of the Keynes
that Mark referenced,
without directly citing them.
The last words of
Keynes's general theory
are the quote, "Sooner or late."
It is ideas, not
vested interest, that
are dangerous for good or evil.
These ideas that are emerging
in the now increasingly
conflated disciplines
of economic finance
are dangerous for good.
And my optimistic note is that
they will become increasingly
available for mobilization
against the manifest evils that
beset us today.
Thank you.
[APPLAUSE]
Do you want to say
anything from the podium
or just do it from here?
We'll just talk.
Just do it.
OK.
So I wanted to tell
you briefly why it is
that I love this book so much.
I had not read
the first edition.
I read the second edition.
The first reason is that it
contains the greatest Mark
Blyth moment that
I've had so far.
Which is that last night I
got a text around ten o'clock
at night from Mark-- you've got
to read the last two chapters.
They are just wicked good.
So I wasn't there yet.
I was working my way
through the book.
And so I flipped
through on my Kindle,
got to the last two
chapters, started reading.
Second page,
500-word block quote.
Get to the bottom
of the block quote.
Citations, Blyth, 2002.
But I loved the
book because I think
that ideas are undervalued.
I think it's very easy to
get cynical, particularly
when you're a journalist,
particularly when you
cover finance and economics.
You think early in your career
that you're covering ideas,
and then you realize
very quickly, no, you're
covering people.
And then you get
even more cynical
and you think, no, you're
just covering incentives.
And then you get
even more cynical
and you think, no, you're
covering the mechanics.
And then you get to the
bottom of the mechanics
and you realize somebody is
moving all those mechanics,
and those people have ideas.
And you end up right
back where you started.
And so I wanted to
talk about what,
for me, was the most powerful
idea that came out of the book.
Which is-- I talk to
financiers all the time.
And the one thing they all
know in their hearts to be true
is that finance, the
defense of finance,
is that it is about the
efficient allocation
of capital.
You will hear those
words again and again.
It is the thing that
defines what they do.
And here I have one of the
most legendary financiers
that we have telling
me, no that's not true.
And that government
and finance are
equally inefficient
at allocating capital.
That's a very powerful idea
and I'd like you to unpack it.
OK.
So let's be clear.
I'm talking about
investment at the frontier
of scientific discovery and
technical invention where
progress is made, as anyone
who's ever worked in a lab
or ever been part of
a venture firm knows,
by trial and error
and error and error.
Where efficiency in the
allocation of resources
is the enemy of innovation.
I had the direct experience--
I kind of cut my teeth
in the world of computing
as a hanger-on, a groupie at
Xerox PARC, the legendary Xerox
PARC around 1980 where
they were inventing
the future in real time.
You could play with what
was the kind of prototype
of a personal computer with a
mouse and a Windows interface.
By the way, in current dollars
it only cost about $55,000,
because it required a specific
optimal processor inside it
to make it work in time.
But those really smart guys
at Xerox PARC, every time
they came up with
an idea that was
operationalizable,
commercially relevant,
they'd go back to
Stanford, to headquarters,
and they present
their business plan.
And they say, give
us $10 million bucks
and maybe we'll need another
10, and in five years
we'll deliver a company that's
approaching $100 million
in revenues and breaking even.
And the green eyeshades
at Xerox headquarters
would say, what are
you talking about?
We can take $10 million
and we can put it
behind the sales force or
the group of field engineers
who explain how to bring copiers
into your business environment,
and we know exactly what
the returns are going to be,
and it ain't going
to be break-even.
It's going to be a 60%
incremental margin.
Get out of here.
And they did get out and
they founded companies
like Adobe and 3Com.
Because in Xerox headquarters,
they were being efficient
in the allocation of resources.
And every time a
government program
produces a loser like Solyndra,
as it producers maybe,
possibly a winner like Tesla--
We're going to wait
for the next tweet.
We'll let you know.
Yeah.
Well.
And by the way, he only
needs another $20 billion.
So better hope that
the unicorn bubble
persists for a generation more.
But as I say, it's at
the frontier where,
if you cannot tolerate waste,
you will not be in the game.
The Chinese have
read our playbook
and are actually
implementing it.
Whether they can
succeed, as I say,
two world wars and a
Cold War propelled us
into going from being an
effective follower imitating
what we've done, the way
Germany did with England,
the way Japan and
Korea did with us,
and then they got stalled
out at the frontier,
because the institutions
that get you to the frontier,
they're efficient.
And they freeze when
they have to realize
that they deliberately have
to welcome the loss of money
without people
losing their jobs.
And so the motivation that
you've explained and laid out,
century after century after
century, is that the innovation
that we get, these
bursts of innovation
that come from these senseless
misallocation of resources--
it's always war.
Well, you know, war is
certainly the presenting factor.
The language of war for
survival is the liberating force
around allocating.
And of course, you know, Nixon--
I can't remember who it was
who said, if you look back
and the president
you thought was
the worst always
looks a little better
compared to what you've got.
But Nixon declaring
war on cancer
was exactly exploiting
the meaning of that term.
But you can also argue that
national development, which
goes with the ability to gain
the resources to be militarily
significant, not the narrow
definition of war per se,
is also a very
powerful-- you know,
America's manifest destiny
was a war of obliteration
on Native American.
And occasionally it was
rationalized in those terms.
And certainly the build out
of the northern railway system
was accelerated
by the Civil War.
So what I'd like to
think of is that it
would be really nice for
it not to have to be war.
But here's again
the second aspect
of why it's so frustrating
thinking about the opportunity
represented by climate change.
One is, it's just a great way
to put people to work and put
people to work on
profitable projects.
The other is that it's not a
war against other human beings.
It's a war against nature,
like the war on cancer, which
has funded and motivated so much
upstream investment in science,
and really the genetics
and genomics revolution
come out of it.
But this is an
idea, sitting there.
Yeah.
Absolutely.
It's waiting to be plucked.
It's something that I
don't see championed
by any major political party,
not in the US at least.
Well, the US-- this
is an extreme example
of American exceptionalism.
We all, who went to
school in the US,
we all grow up with the notion
of the city on the hill,
America is the beacon
to all nations.
That's American exceptionalism.
But in this case,
the exceptionalism
goes the other way.
This is the only country in
the world where it has not
been legitimate to accept
as reality climate change
and spend time really
debating publicly in Congress.
I'm not talking about all of
the United States, obviously.
In California, in New
York, in many states
this is happening
at the state level.
But at the national level it's
been ruled off of the agenda.
And that is an appalling
waste and loss.
You know, one of the things
that we've seen politically
in the last year is a group
of younger politicians who
are unafraid to say the
word, "socialism" out loud.
Right.
Right.
That's been a
fascinating development
in the world of ideas.
We're actually back to talking
about ideas and politics.
I suspect that we're all
talking past each other
when we talk about
the word, "socialism."
It holds different
meanings for everyone.
You and I talked about this
a little bit earlier today.
I think that if
you're in your 20s
and you've been told your entire
life that every new government
program is socialism, at some
point you will say, well,
can we just have that?
Medicare is socialism.
Give me more.
Yeah, exactly.
Let's just have socialism then.
How do you answer that?
How do you take that
frustration and channel it
into a more coherent
pointed useful idea?
Well, I think one
side of it is clearly
trying to make sense
of what went so wrong.
So I think taking the history
we've lived through seriously
really matters.
If I may take the liberty
of citing our host one more
time, the recognition of the
imbalance between creditors
and debtors, rich and poor,
the political imbalance--
there's a host of
academic literature,
deeply researched
and evidence-based
on how the manner in which
American democracy works
has been tilted.
How you could have,
through this last 30 years,
such an extraordinary
redistribution
from poor to rich, both
in markets and post-market
that is politically
affected distributions.
I'd like to believe that
the invocation of socialism
as a term with some
positive connotation
is a reflection of what you
say about, in a sense the
that the Koch brothers, et
cetera, have just gone too far.
That they've so demeaned
the public discourse
that the answer is yes,
if medicare is socialism,
give me more.
But I think that what
we can hope to see
is bottom up, not
so much top down.
And by this I mean,
operationally in markets,
the emergence of individuals
with agency taking
some degree of responsibility.
You know, one of the things
I like to say to my students
is that working in
an auto plant didn't
become a good middle class
job because Henry Ford wanted
it to be.
Henry Ford increased
the wages of his workers
because turnover on the
line was 40% a quarter.
They had to replace the
whole workforce two and 1/2
times a year because
it was so horrible.
But what really turned
it into a middle class
income began with the sit-in
strikes at Ford in the 1930s
and led to the Treaty of
Detroit in 1946 between the UAW
and the Big Three, and whereby
the accident of World War
II in price and wage controls
benefits pensions and health
care got tied to employment,
which was perhaps historically
a really bad way to go.
And I think that this
is exactly to your point
earlier about economics
bringing in other disciplines.
Right.
Economists for the first
time in the last year
that I've been able to see,
that's actually filtered up
to where we're
writing about it--
That's right.
Maybe that's our fault. They're
willing to talk about power.
That's right.
And the kind of thing
we're beginning to see,
it's scattered.
You can't probably
call it a movement.
But on the one hand, the gig
workers of Uber in some cities
have actually begun
to create, kind
of working guilds to
bargain with Uber over rates
and the various
conditions of employment.
And on the other hand, there's
the other kind of action
in the marketplace,
represented by,
in effect, the kind of sit-down
strike of the Walmart workers
who quit cleaning the stores
and stocking the shelves when
they were getting paid minimum
wage and on food stamps.
And Walmart actually increased
the entry-level wages
for going to work at
Walmart in response,
because their customer
surveys were telling them.
Not because they
all of a sudden got
blessed with Bernie Sanders'
vision of the good life.
But there will be scope
for this to translate
into a political program.
It will take time.
It will take bottom up and
the availability of ideas.
This cannot happen in a--
as I say, it took a generation
for those ideas, the ideas
that the only role
for government
is to screw up markets that
would otherwise give you
the efficient and fair solution,
for that to be operationalized
as the defining constraint
on public policy
from Reagan through Obama,
through the limited crippled
response to the Great Recession
and the global financial
crisis, to undo that, to
reverse that is not going
to take less than a generation.
And it will need both bottom
up initiative cheerleading
from those who discover that
people are following them
because they're
following the people,
and the ideas that
are now beginning
to emerge from the academy
that provide framing metaphors.
So what you've been
talking about is
individual agency as workers,
as politicians, as idea-havers.
There's another trend.
You mention it in your
book, and it's something
that I've been covering as
well is the disappearance
of publicly traded securities.
And one of the things that
is surprising to me as well--
this may be something that
you all are familiar with,
but we have fewer and
fewer IPOs every year.
And more securities are retired
from public stock exchanges
than are created.
And so the stock of things
that you and I can buy,
if we don't have access
to venture capital,
is increasingly limited.
And what is also
happening in parallel
with that is that the
brand new companies bring
in a lot more money in
private investment capital
before they go
public, which means
that you as a
small-time investor,
somebody in your own
retirement savings,
don't have an opportunity
to be a part of that growth.
What you have an
opportunity to do
is buy something
after it's grown.
So how important is
that for all of us
to be able to have a stake
in the growth as well?
Well, I think to
answer that, I really
have to make a little speech.
That's what we're here for.
All phenomenon usually
are a joint product
of both institutional long-term
and transient short-term
factors.
The number of public
companies in the US
has declined by 50%
in the last 15 years.
That is a fact.
It's a function of,
among other things,
companies being bought by
private equity, mergers
and acquisitions in the context
of the anti-trust laws being
suspended.
That's part of the
intellectual revolution that
said intervention by government
and markets is always negative.
It's also a function
in the IPO market
of an institutional
factor, which undoing
is going to take
a long time, which
is neglected extraordinarily
in the academic literature.
And that is the
incredible consolidation
of the intermediaries, of the
investment banking industry
in the course of the 1990s.
And the entire ecosystem
of investment banks
that supported and
grew up around venture
capital-backed emergent
high technology companies
disappeared in four years.
Why?
Because the people who owned and
ran those firms weren't idiots.
They had the chance
to sell their business
at the kind of
valuations that were
reflected in the great
dot.com internet bubble.
Thom Weisel actually
managed to sell his firm
three different times
to three different banks
in the course of three years.
But they all disappeared.
And now there are
seven global banks,
all too big to fail, too big
to jail, that dominate access
to the capital markets.
That's a factor that's
usually left out.
It's institutional.
There's a transient factor which
is in the process of changing.
And it's going, in
my view, very likely,
to reduce the
availability of capital
for these private unicorn
companies growing.
And that is that
between 2008 and 2017,
we had the lowest
level of interest rates
in the history of capitalism--
well, modern capitalism.
Some people have chased it
back to the Middle Ages.
But because government
was rendered illegitimate
as an actor in the recovery
from the Great Recession,
it all went on
the central banks.
As Mohamed El-Erian said,
the only game in town
was for the Federal Reserve,
the Bank of England,
the European Central
Bank, the Bank of Japan
to buy up all of
the debt, pump money
into the financial markets,
reduce interest rates
so low as to drive investing
institutions, inherently
driven to be short-term, because
they're managing other people's
money, and if they
don't keep up the money
is going to be taken away,
higher and higher up the risk
ladder in pursuit of
some return above zero.
Now, interest rates, in
this country at least,
more so than in Germany,
are beginning to normalize.
As and when 10-year bonds
that are now at about 3%?
2.9%.
2.9%.
OK.
Sorry, this morning--
Give me a break.
As they get back to 10-year
bond 3 and 1/2, 4% as credit
spreads reopen up, so
conventional junk is back
to yielding 10% to 12%.
And that's a real return
with 2% inflation.
The shift of funds, the
weight of funds going towards
high-risk, bet the farm,
it's going to be driven by--
you guys all know what FOMO
is, fear of missing out
on the next FANG--
Facebook, Apple,
Amazon, Netflix, Google,
as that shifts, the shift in the
capital markets will be real.
Now the last thing
is, the notion
of owning a piece of America as
part of capitalist democracy,
frankly I think was
always something
between a scam and a fraud.
What mattered when
it was good was
defined benefit pension plans.
That's what locked in the good
life, the good middle class
life for working people.
But that was a function of the
companies that in World War II
had been given the extraordinary
benefit by the United States
government under conditions
of price and wage
controls with 0.2%
unemployment of competing
for labor by offering
fringe benefits,
where the company was allowed to
deduct the cost of the benefits
before paying tax
to the government,
but the beneficiary,
the recipient
didn't have to count
the benefit as income.
And this is what produced
this unique structure
in the American
social safety net,
the American social economy.
It's gone.
And I will promote a book
by a very good, unlikely
French author of a relevant
book to where we are
and what we need to have happen.
His name is Nicolas
Colin, C-O-L-I-N.
He's an [FRENCH] des finance,
which in France is like being,
I don't know, a full colonel
in the United States Marines.
I mean, it means he'd been
through a real filtering
process and then emerged as
an entrepreneur and a kind
of meta-entrepreneur,
creating, being
a co-creator of a remarkable
entrepreneurial community
in Europe.
His book is called, Hedge.
And it's on the
social safety net we
need for the digitalized world.
That's something
that's going to emerge
by experiment, by accident,
and then maybe translate
into public policy if we
keep getting these ideas out
into the public with
evidence behind them
and some ability,
some people who
can promote them effectively,
perhaps even more
effectively than Bernie.
We've got a whole
new generation that's
running for office in 2018.
I think we're going to see
some Darwinian selection
of new leaders that offers me an
alternative basis for optimism.
From your lips to God's ears.
I have a long list of
questions, but we also
got to do a podcast earlier
today, so I have had my chance.
We're going to open it
up to questions from you.
I know Mark, you've
got to have a question.
Yeah, [INAUDIBLE].
[LAUGHING]
So please, raise your hand.
Yeah, I thought this was great.
I thought your discussion
of framing metaphors
was particularly intriguing.
Your specific claim
that the metaphor of war
is what liberates government
from cost-benefit analysis
with examples of the
world wars, the Cold
War, and the war on cancer,
which is an empirical claim
and it's a very old one.
It makes me have three
sort of reactions.
The first is, is it true?
Do all wars do this.
The war on poverty
certainly didn't do this.
Right.
The second is, are all
wars equally productive?
The war on cancer
and the World Wars--
innovative, dynamic, productive.
The war on drugs,
the war on crime
don't seem to get us anything.
And the third is, you talk
about another metaphor that
is equally interesting,
the metaphor of revolution.
You invoke the digital,
the industrial,
the green revolution.
And what's the
difference between
the revolutionary
metaphor and the war
metaphor in terms of what they
do in the political economy.
Well I guess, to take
the last one first,
I think Lenin would
say, war comes
first then comes revolution.
War mobilizes the resources.
The revolution is the
consequences thereof.
You're absolutely right.
There's no metaphor that
can't be misused and abused.
And there's no invocation
of a metaphor that
isn't dependent on the
quality of leadership which
is invoking it.
OK.
Nixon's war on cancer
would have gone nowhere
without that generation of
extraordinary scientists.
By the way, you can see them all
looking as if they stepped out
of what was it, Ted
and Alice and Carol
and the sex movie of the 1970s.
[INAUDIBLE]
Yeah, that's right.
These guys who know ran the
National Cancer Institute,
the National
Institutes of Health,
this amazing
television film that
was done from Mukherjee's book,
"The Emperor of all Maladies,"
about cancer, the founding three
generations of cancer research.
So you're absolutely right.
War on drugs, war on poverty,
never-ending and slogans
in place of real mobilization.
I don't mean to say that it
can't be misused and abused.
And I do mean to say that--
well in fact I could even
argue that while World War I
in the United States, as
documented particularly
in Adam Tooze's
most neglected book,
The Deluge serve the US as
an incredible accelerator
into economic and
scientific leadership.
It did not do the same for
Germany, France, and Britain,
which it left basically
financially, economically,
and politically bankrupt.
So you're absolutely right
about being very careful
in the deployment of metaphors.
And I would say that so far--
I guess Mao was the one who kept
invoking war against, you know,
insects, both two-legged
and six-legged.
And Xi Jinping doesn't
seem to need to deploy
that metaphor in mobilizing.
And in a very challenging--
I mean, I like to think of--
may I go off on a
tangent for a minute?
How to think about China.
This is inaccurate.
This is a metaphor.
It doesn't reflect 3,000 years
of Chinese culture and history.
But I came to think about
China a little bit like--
this is going back
five years or so.
Think of it as Britain in 1820
with all variables increased
by two orders of
magnitude-- you know,
population, where you've got
a corrupt oligarchy that's
exercising national authority
in close collaboration
with a religious
establishment that reaches
into every village that is
allied at the village level
with local authority,
there because of family
and more or less corrupt
integration, that
is legitimized because
everyone-- everyone,
those in power and those
on who power is exercised
can look over their
shoulder and see,
just within a living
generation what
it's like when
authority breaks down,
whether it's Paris in 1793
or the Cultural Revolution.
And they're trying to hold
the lid on the greatest
explosion of economic
energy and financial wealth
in the history of humankind.
So over the next
long generation,
Britain gets the Great Reform
Act, repeal of the corn laws,
Northcutt Trevallion
civil service reforms,
and then the radical
representation of the People
Act in 1867 and is on the
path towards some kind
of liberal quasi-republic
open society.
And will China follow that path?
You know, I think of
the three-player game
with Chinese
characteristics, I'm
very reluctant to
speculate about.
I have to believe that Acemoglu
and Robinson's linear view
that open politics is
necessary for open economics
is necessary for a creative
destruction at the frontier--
that does not explain
why, by 1890, Germany
was the scientific
leader of the world.
It may help explain
why 20 years later they
went on a path that
destroyed what they created.
So I think it's wide open.
But I think, trying
to understand not just
what's happened to
the United States,
but what's going on in China--
it's kind of this balance
point, this central balance
point of such that
we haven't seen
since the end of
the 19th century.
Except this time of
course we're doing it
with super nuclear
weapons around.
Sir.
Is political and
economic reform really--
does it require, sort of unknown
breakthroughs in science,
and therefore risks?
Or is it more just applying
technology know-how
that we already
have, but Mr. Fuller,
for example who said 50
years ago that we already
have the know-how to
provide enough for everyone.
So is it really just
applying technology?
I mean, [INAUDIBLE].
All the know-how we need to
nurture and breed technology.
Well, frankly, I don't think
the last point is true.
I think that we do need, we
are dependent on breakthroughs
and scientific
breakthroughs reduced
to working technology
above all with grid scale,
really large scale
energy storage
so that we can be dependent on
intermittent sources of energy
at a scale far beyond what's
been deployed anywhere.
Right now the
Chinese are probably
investing more money than the
rest of the world combined.
We've got some money going
in, compared even to DARPA.
ARPA-E is trivial.
There's some European
research money going in.
So with respect to
the Green Revolution,
I think we still need some
real upstream investment
and trial and error
experimentation
for relevant new technology.
With respect to political
and economic reform,
I think, frankly, that
they are orthogonal.
Part of the problem with trying
to understand where we are,
and something my
great friend Carlotta
Perez, who has
written about these,
in her language, five
surges, five great
technologically-driven
economic surges
since the late 18th century.
Bob Gordon, the great
techno-pessimist
says it's only three, we've had
three industrial revolutions.
These are very small
numbers on which
to try to extract
reliable heuristics,
let alone laws of
human development.
My sense is that political
reform and economic reform
are orthogonal in
the sense that they
have dynamics that
intersect, but not
in any mechanical way driven.
Mark Blyth makes this
enormously important point
about the divergent
populist responses
to the betrayal of the promise
to the stagnation of incomes
for, whether it's the 80%,
90%, or 99% relative to the 1%,
0.1%, 0.01%.
In Europe when you look at
right-wing populism embedded
in the creditor countries,
left-wing populism
in the debtor
countries, those that
have been the targets of
austerity, versus those who
have been the
enforcers of austerity.
In this country it's probably
a little more complicated
because of the cultural mixes,
as post air-conditioning
is so much greater, the
quasi-homogenization.
But obviously we have
a right-wing populism
and a left-wing populism
in the US, both operational
at the same time.
By the way, we did in 1932.
We did it in 1932.
Was Huey Long a right-winger
or a left-wing populist?
Well, probably left-wing.
Soak the rich.
But Father Coughlin was very
much a right-wing populist.
Roosevelt's genius
was that briefly,
for maybe three, four
years, he managed
to get both the
right-wing populist
and the left-wing populists
united behind him because
of his lack of a program.
When Roosevelt ran
for president in 1932,
he had two planks
to his platform.
The most important one,
overwhelmingly popular--
repeal prohibition.
The second one, a kind of tip
of the hat to respectability--
balance the budget.
And by the, you know,
Roosevelt balanced the budget.
He just created two budgets.
There was the ordinary
budget, which was balanced
and there was the
emergency budget,
which was like the
war budget, except it
was the war on the depression.
But the most important speech
he made in that campaign
was the speech in which
he said, experiment.
Try something.
If it doesn't work, he said--
and I'm just about quoting this
accurately--
frankly recognize and
say that it doesn't work
and then try something else.
But for heaven's
sake, try something.
And that was the motivation
that went through.
One failed experiment--
the NRA, oh my god.
The Supreme Court saved
the New Deal from the NRA
by declaring it
unconstitutional.
It is important to
remember though--
and this goes back to what are
the transients and what are
the institutional--
if there's one factor in what's
happened over the last 10
years, from the global
financial crisis
through the Great Recession, one
factor that has been virtually
ignored, even almost--
there's a paragraph
that recognized it
in Adam Tooze's great book--
it's the fundamental
institutional difference
across the world,
in the structure
of the economic system.
In 1929, the total public
sector of the United States
was 7%, 7% of the
national economy.
5% of that was at
state and local.
The largest component were
school teacher salaries.
The states were required
to balance their budgets.
So when revenues
declined, they had
to cut expenses, fire teachers.
The only people to
fire, close schools.
The federal government was
2% of the national economy.
There was no way,
there was no precedent,
no program that could have
offset the contraction
in the private sector
that took total investment
to a negative number.
Depreciation was larger
than new investment in 1932.
GDP-- your GDP actually declined
by 50% in nominal terms.
Half of that was price,
half of that was volume.
So by the way, the
federal government
was larger at the end of
the Hoover administration
by 100% as a share of
the national economy,
because the national
economy had declined by 50%.
So this time around, even
in the United States,
the public sector was 35%
of the economy in 2007.
It was of the scale to
offset the contraction
in final demand, in cash
flow, in the private sector.
And thereby, with the help
of an active central bank,
put a floor under the
economic consequences
of the financial crisis, fully
as comprehensive, not as 1929.
Much more than '29, as 1931,
'32, '33, the bank crisis that
was global in its reach.
So we do have, on the one
hand, I'd like to say--
I think I said it in the book--
with 25% unemployment
in 1933, you
get the reforms, the
Glass-Steagall reconstruction
of the financial system.
With a lousy 10%,
11% unemployment,
you only get Dodd-Frank.
So the magnitude of
the political response
is in part a function of the
depth of the crisis to which it
is responding.
It's hard to say that
I really wish we'd
had 25% unemployment in 2009.
That's really not something
you want to wish for.
But without it, the
political leadership
found itself still constrained
by the fabric and frame
of ideas that it had inherited
from the previous generation.
There was a question there, sir.
Yeah, I'd like to go back
to China for a minute.
Would China have been able
to become as competitive
as they are without
the effective blackmail
of requiring American and
other companies to give them
the technology?
And the second question is,
let's assume for the moment
that sometime in
the near-term future
they do indeed pass
the United States
in technological
leadership, what effect does
that have on the United States
politically, economically,
and if you will, emotionally?
Well, that I can't-- you know,
I can speculate the way you can,
and of course it doesn't make
for a very pretty picture.
And it could be quite disastrous
for the world, adjusting.
I mean, you know,
Britain has now
had five generations
of trying to adjust
to not being top nation.
And if you talk to
Boris Johnson-- well,
you can't talk to Boris Johnson.
If you've failed to
tune out Boris Johnson,
you can see they're
still not over it.
But going back to
the central question,
first, no, of course
China has been
benefited from appropriating the
intellectual property developed
by others.
Second, that of course is the
first law of every follower
nation that has made
any progress in catching
up and getting to the frontier.
The British got textile
manufacturing technology
from India and Italy
in cotton and silk
in the 17th and 18th centuries.
How far are we from
the Slater Mill?
Pawtucket, yeah.
How far away?
Five miles.
Five miles.
OK.
So Sam Slater worked
for Arkwright's partner.
Arkwright was the
prime entrepreneur
of the first wave of the
textile manufacturing cotton
revolution in Britain.
Yes, the word revolution again.
It was revolutionary.
He memorized, both
the key machines
and the layout of the
mill, got in the boat
and got to Savannah,
Georgia, and worked his way
up the coast, looking
for a venture capitalist.
And he found the Browns.
And the Slater Mill was the
first mill entirely based
on stolen intellectual
property that made money
in the United States.
And then a long generation
later, a couple of
smart young guys
from Fall River--
technology has moved on--
they went to England and they
found the self-acting mule.
It was like the supercomputer
of the first Industrial
Revolution.
They bought one.
At this point in
time in Britain it
was still a felony punishable
by death or transportation
to Australia to export
textile machinery.
I'm not making that up.
[INAUDIBLE]
Well that's Britain's
problem now, right?
So they bought one.
They chopped it into pieces,
smuggled it to France.
Smuggled it from France back
to Fall River, reassembled it,
cloned it.
And 30 years later
Fall River was
producing more yardage of
textile goods than Manchester.
So there's a long--
and you talk to anybody
in the semiconductor
industry about Japan and
Korea in the '70s and '80s.
So there's a long history.
China, I would say, even
more than Japan and Korea,
which had national
programs targeting
particular industries,
particular companies--
I remember being
told by a guy at one
of the most advanced
semiconductor equipment
manufacturing
companies in the 1980s
that they'd sold
one machine to--
I don't think it was Samsung.
I think it was
Hyundai or Daewoo.
And they came over.
You know, how are you
doing with our machine?
And they accidentally-- the
guy opened the wrong door.
There were 50 of them,
exact copies, chomping away,
making chips without
anybody paying
KLA for the privilege of
having those machines.
So there's nothing
new about being
in effect-- what happens is,
when you get to the frontier,
do you start innovating,
trial and error.
Now, could you give me
the copy of the book.
The first edition of
this book, the icon
was a generic smartphone.
Now it couldn't be an
iPhone because Apple
sues everybody who ever
attempts to appropriate anything
that they can claim is
their intellectual property.
But it was a generic
smartphone, but designed
in America, representative
of the triumph
of the digital revolution,
made in America.
This is very different.
This is a photo that appeared--
I think it was on the cover
of Science Magazine about six
months ago.
This is a satellite.
What you can't see
is that the satellite
is over a landmass
which actually
has the outlines of China.
It's a satellite
that demonstrated
quantum communications
over 3,000 kilometers.
Beyond the state of the art.
This is the most extraordinary
demonstration of the ability
to use quantum entanglement.
Don't ask me exactly
what that means.
Quantum entanglement of
photons to communicate
a message in an unbreakably
encrypted manner.
And so it was a
symbol of the fact
that China's at the frontier.
Now they're on their own,
going forward from here.
Oh, behind you, Mark.
Based on your 30-plus
years in venture capital,
how do you sort of
see the transformation
of the digitalization of capital
markets, be in debt or equity?
How do you see that
shaking out in the future.
The big thing to me has actually
been the most obvious thing.
It's the indexation
of the stock market.
That's the first
really big thing.
It's now up to about 70% of
all the money in the market
is more or less formally
mandated to track the index.
That means that 70% of the
money in the market cannot take
a contrarian position.
This makes it very difficult
to have anything that remotely
resembles an efficient market.
In other words, momentum
investing dominates.
Momentum on the way up,
but if confidence breaks,
momentum on the way down.
There's this great line
from the general theory,
you know, best we
should know the future,
but if not, it's really
important that opinions differ.
Otherwise there's no
liquidity in the market.
Second-- I write about this
at length in the book--
the role of computerization
in operationalizing finance
theory.
This is very much drawn
from an extraordinary book,
by a kind of sociologist of
finance named Donald McKenzie,
who's at Edinburgh University.
He wrote a wonderful book before
the crisis called, An Engine
not a Camera, on how modern
finance theory did not
represent how the financial
markets actually worked,
it transformed how
they worked by creating
a means of providing a value--
let's not call it fair value.
It was called fair value.
--for any asset,
and particularly
for derivative securities.
And then only through
computers could you
actually take a
million mortgages,
combine them into a
collateralized debt obligation,
take 1,000 collateralized
debt obligations,
combine them into a CDO squared,
and produce a doomsday machine.
So digitalization played an
enormous role in the markets.
Now the last bit is
something like I always
love the opportunity to talk
about, which our initial coin
offering--
the degenerate offspring of
the Bitcoin blockchain mania.
I think of ICOs as scam squared.
So first you take the money that
you can use to pay the rent,
pay your taxes, buy a hamburger,
buy a double shot of tequila.
You take that and you
buy a cryptocurrency,
the value of which, let
us say, is volatile.
Right.
You take the cryptocurrency
and buy a token
from a new company making
an initial coin offering.
That is an initial
offering denominated
in one or other crypto coin
and represented by tokens.
And the token gives you
the right to participate,
to acquire access to
a service, maybe even
a product to be delivered at
an unspecified date with barely
if any specified attributes.
Now, during the South
Sea bubble in 1720,
there was a notorious, almost
certainly, actually not real,
but so good that it's entered
the kind of folklore of finance
of an offering that
was made, a prospectus
let's say, a project of great
value, the purpose of which
to be disclosed at a later date.
So the fact that
already something--
I mean, every quarter
there have been
billions of nominal
dollar values of ICOs
and some very
substantial portion,
the money has been taken and
disappeared into beach huts
and what have you.
So that kind of
digitalization is clearly--
on the one hand, any
instrument for hedging risk
is an instrument for gambling.
And what digitalization
does is render
that supply infinite
in potential.
And then second, the
last thing I'd say
is that as digitalization
makes markets faster,
as it eliminates time
to pause and reflect,
it obviously makes them
less stable, less volatile.
Actually, way back
when there was still
some semblance of a functional
government with respect
to economics and finance, in the
crash of 1987 the 22% decline
in the United States
stock market in one day,
the answer was the most
primitive technical fix
imaginable.
Time out.
Just what you do with a
four-year-old who's gone nuts.
It was time out.
You stopped trading.
You'd freeze the machines
until human judgment is allowed
to be exercised and common
sense is given some window
to assert itself.
So a lot of the
super-digitization
needs to be balanced by
making room for common sense.
And that's not a
matter of technology.
Sir.
Thanks for this talk.
So it's fully to bring up
Fuller and think about,
sort of utopia or
oblivion, right.
And that's sort of
optimization and trying
to do more with less, which
is I think green technology
and thinking about how to
optimize the way vehicles move.
The state, will
it invest in that,
knowing that that
optimization might
be built on some of
this quantum computing
and this cryptography?
And there's a difference
between the currency,
the cryptocurrency and then the
platform that it's built on.
Yes, absolutely.
And so you talk about
platforms in the beginning.
So I'm wondering
if you think that--
is that a hint at
the platform of--
Well, you know, clearly
there is already,
and there will be an enormous
amount of experimentation
going on with, what
are distributed
ledger technologies good for?
I offer to you that
it's very rare.
And I say to Brendan, with all
respect to a former employer
of yours, it's very
rare that I actually
recommend anything
from the Economist
for public consumption.
I always remember
that the great Norman
Macrae, the deputy editor for
what, 35 years, used to say,
the secret of
great journalism is
first simplify then exaggerate.
But--
I'm just going to
interrupt real quick.
If you work for the Economist,
you have this conversation
once a week.
Oh you work for the Economist?
That's great.
I love that magazine.
I'm a biologist.
You know nothing about biology.
But otherwise it's just perfect.
That is the case that the
more you know about anything,
the less you respect
the Economist.
But they actually have a very
good-- their quarterly tech
review on bitcoin and
blockchain that I think
just came out very recently.
It's a very good
balanced, cool view
of the pluses and minuses, the
uses and abuses, the potential.
Blockchain technology
as instantiated
under the
cryptocurrencies probably
is going to have
very limited use.
Its performance
necessarily sucks.
I mean, if you think
about it, common sense
is allowed into this
discussion with all the hype.
If you have to haul
around behind you
the record of every transaction
that's taken place--
think of it like
Marley's ghost in,
A Christmas Carol,
you know, where
you had to haul the chain
behind him that wakes up Scrooge
in the middle of the night.
So what's happening
is that the notion--
it's sort of an existence
proof of the possibility
of distributed ledger
technology, although I'm told
the US Navy has been running
one of these things for 40 years
so every ship knows where
every other ship is, constantly
updated, and you
can't change it.
So you have the idea of the
permission private blockchain
where you don't have
to do proof of work.
It becomes much more efficient.
But it's the exact opposite
of the vision of liberation--
the anonymity and
liberation from the state.
The last thing, which I think
is really cute for any economist
in the room--
one of the pros, one of
the positive attributes
of the blockchain is it's
purported irreputability.
In other words, once
anything has been recorded,
you can't change it, it's fixed.
One of the most promising
or most hoped for use cases
is automating
contracts so that when
the conditions of the
contract are reached,
it executes without
any human intervention.
Nobody can intervene.
Well, the Nobel Prize two
years ago in economics
was given to a couple
of guys, one of them
Oliver Hart, Brit, for
demonstrating logically
that no contract can
ever be complete.
No contract can take account
of all relevant factors, when
you realize, of course, this
is a formal demonstration
of the most extreme
common sense available,
which is that, as Keynes said,
that's to know the future.
But since we can't, we
can't know the future,
so of course we can't write
a contract that covers
every possible contingency.
What that suggests is that
you get a contract written
in blockchain and it executes
before anybody can say, hey,
wait a second, that's
not what we meant.
Let's renegotiate.
Let's make for a contract
that reflects reality today.
So what was a feature--
and my view, it's
likely to become
a bug once it's implemented.
And I think that's
not generally--
usually it's the performance
issue about blockchain that's
seen as the principal problem.
Time for one more.
I want to take it from
the gentlemen in the back.
But before that, seeing as
I haven't said anything,
which is very uncharacteristic.
I just thought I'd
share this with you,
because it's something
that jumped out
to me a few months ago and
I think you'll enjoy it.
There's a football club
in England called Arsenal.
The Gunners.
The Gunners, right.
Arsenal has partnered with
an American gaming company
to promote an initial
coin offering.
CashBet hopes to raise up
to $70 million from its ICO.
It's not easy to make your
initial coin offering stand out
from the thousands of
fundraising efforts around.
CashBet, a California-based
digital gambling site
thinks they have
found the answer.
Blah, blah, blah, blah, blah.
Here's the claim, right.
CashBet, which does
Ethereum blockchain
will solve the
[INAUDIBLE] delay problem.
Quote, "CashBet
coins, your tokens,
will democratize access the
world-class entertainment
for those underserved by
the centralized banking
establishment."
What does that even mean?
It is total nonsense.
I love it.
I love it.
And they have people
just shelling out.
So whenever I've asked about
this stuff, about just--
before we go to
the last question,
I just want to say that it
took me a long time to come up
to my position on this.
I read a lot.
A lot of it I didn't understand.
I read.
I really tried to get into
and really understand it.
And I came up with the
following formulation.
If you have to explain
to someone, it's money,
it's not money.
That is absolutely brilliant.
And I would only
compliment it by saying
that about 45 years ago, I
met a remarkable fellow who
was a Brit, who was a
professional director
of the sort of company that's
headquartered in the Cayman
Islands.
And he used to say of the
public investors, those
who need access
to entertainment,
the public investors, quote,
"Had God not made them sheep,
they would not have
been born to be shorn."
Yeah.
A slightly more sophisticated
version of PT Barnum.
But we do have a
question back here.
Sir.
Back in the industrial
age, the marginal output
of, say, a factory worker
was easily measurable.
But it seems like
in the modern day
with the rise of super-managers,
complex financial derivatives
and more specialized
work, measuring
this marginal
output seems almost
impossible for a considerable
portion of the population.
How big or how significant
is this market distortion,
and is it a problem
that's to stay with us?
Well, first of all,
what you're reflecting
is something that goes way back.
And that actually
always led me to think
of the neoclassical
production function.
And as I said, I did my
doctorate at Cambridge
when Joan Robinson
was still active,
when Richard Kahn was my
supervisor for my thesis.
Nicky [INAUDIBLE].
The Cambridge guys lost the
war of the two Cambridges
versus MIT versus
Samuelson and Solow.
There is a book you
could actually read.
It's written by wonderful
Australian named
Geoffrey Harcourt called,
The Cambridge Capital
Controversies, and
was about the argument
over the intellectual coherence
of the neoclassical production
function, which as
I mentioned, which
argues that the worker gets the
marginal product of her labor,
just as the capitalist gets
the marginal return on capital.
The argument was about, what
the hell do you mean by capital?
We don't have to
go into that now.
But there's always been, in
my view, a very material issue
about, what the hell that means.
As you go from the world
of the production economy
to the distribution of
the rewards therefrom,
which is always a power game.
You don't have to be a Marxist.
You just have to have
had a chat with anybody
who's ever been in a negotiation
over the distribution
of reward.
That means, a venture capitalist
dealing with an entrepreneur.
There are environments
where the entrepreneur
gets more or less free
capital, sells stock
at a ludicrously high
valuation, and by the way,
gets like Zuckerberg, perpetual
control of the company
no matter how much
money is raised.
And there are
environments where,
as they used to say in
the venture capital world
when capital was scarce,
as it may be yet become
when interest rates rise,
the golden rule applies.
What's the golden rule?
He who has the gold, rules.
And the venture capitalist
dictates the terms of trade
with the entrepreneur.
Now, the virtualization
of work, the
means that it becomes even
more apparent that it's
about power in the marketplace.
As I say, it wasn't
because on the one hand,
first, between 1933 and 1950,
the marginal productivity
of a worker in a
Ford automobile plant
rose so much that
Ford went from being
an employer of just the
low industrial workers,
to creating middle class jobs.
It was because of the United
Autoworkers and the Wagner
Act-- federal legislation.
And it wasn't because
the productivity,
the marginal productivity of the
chairman of a major global bank
increased by some
factor that led
to the compensation of the
chairman of major global banks
to increase by a factor of,
I don't know, what, 500.
Something like that.
Or to take the number that more
or less everybody sort of knows
that in 1960 the average
CEO in the United States
was paid 35 times the median
wage, the median worker,
and now is paid 350
times the median worker.
That's not a function of
the neoclassical production
function in operation.
It's about power.
That's a very nice
place to leave it.
I'll leave it with
one other thing.
If you don't know this
one, you can use this one.
Here's another example for you.
In 2015, despite the crash,
despite the bailouts,
total compensation
on Wall Street
was exactly twice that
of every minimum wage
payout in the United
States that same year.
Yeah.
So the entire
minimum wage go here.
Wall Street bonuses
twice, and that's in 2015.
That's powerful, and
nothing to do with what
you're producing in the market.
When we get some sort
of political reform,
one thing is to
make banking boring.
Make banking boring.
That's a really
important reform.
Excellent.
Thank you, Mark.
[APPLAUSE]
Thank you.
Thank you.
