Few things are more important in capitalism, or any society for that matter, as the incentive structure. If the incentive structure is right, people will move into productive activities. If it is not they might become unproductive or, even worse, destructive. During 1980, the business community engaged in unproductive, or what we call rent-seeking activities. These take from Peter and give to Paul. During the 1990s, the U.S. was involved in one of the most productive periods in its history with large numbers of people engaged in productive activites (ICT revolution) that created new wealth. During the 2000s, a set of unfortunate events created an incentive structure that destroyed instead of creating wealth. This destructive entrepreneurship was caused by ideology, changes in the tax laws, and lax regulation. The outcome - trillions of dollars in wealth lost. This form of destructive entrepreneurship is the legacy of the past decade when investment did not flow into productive activities. In fact, it was destructive. How to change the incentive structure to get us back to a productive form of enterpreneurship is a million dollar question for which there are no easy answers.
December 22nd, 2008 at 5:53 pm
There was a great article today in the WSJ explaining how Sarbanes-Oxley and similar regulations choked-off venture capital opportunities and IPOs. I’m not a fan of the publicly traded company model personally but the article was compelling. No doubt that this decade has seen a lot of waste due to lots of different factors, some policy-driven and others driven by a natural transition from one era to the next. It’s hard to ferret out the good from the bad and plain ugly. What companies, if any, should be saved; which ones should be allowed to die; and which ones must be taken over by government for at least the short-term, for better or worse.
My personal take: the government should become the new venture capital firm and instead of lending to banks who then re-lend and claim the profits for themselves; why not lend directly to entrepreneurs and retain the interest payments, warrants and options for the taxpayers. Companies that are too big to fail are too big to exist; nationalize them and let the government keep the profits too if it has to underwrite the risk. Government could be the quintessential venture capital player because it’s a cash cow; it needs to start using that cash to create public wealth so it can deliver more services to more citizens and create fertile conditions for new businesses. We don’t need to be saving Fortune 500 companies in the long-term, we need to be growing them. And unlike most vulture private capital firms, government could be a venture capital player that creates sustainable long-term public wealth without always looking to steal the new propped-up company as soon as it has begun to fly.
…I could go on and on
December 22nd, 2008 at 8:12 pm
Fully in agreement. GM is worth 3 billion and yet we’re handing them a loan of how much? Easier to just buy them outright, get them back on their feet and sell them for a profit.
December 23rd, 2008 at 9:01 am
Hayden,
no the government should not be in the venture capital business. That unavoidably puts them in the position of deciding what companies fail or make it, which is basically what is happening right now, and failing miserably I might add. The government is not in existence to take care of you or any company. The most important function of a government is to protect you from harm (military-hostile foreign nations, police-criminals) and protect your civil rights. I guess this is the heart of the fundamental disagreement of how liberals and conservatives view the role of the government. I say less is more
December 23rd, 2008 at 9:24 am
Jim,
Your view is rooted in ideology, I view the role of government with an eye towards making a better country, business climate and creating more opportunity for citizens. Conservatives want more government when it comes to abortion (putting doctors and women in jail) and more government when it comes to national security (more wiretaps, a preemptive strategy, etc) but conveniently less government when it comes to banning handguns that are only designed to kill other people (and usually innocent people); but less government (I think) when it comes to governmental policy in the markets, even sound governmental policy. Also less government when it comes to sensible environmental regulation. Etc. Sadly, the so-called conservatives seem, by and large, hypocrites in my view. That’s why I left the GOP and have become an independent and voted straight Democrat in the recent elections for the first time ever. I agree with conservatives on some positions but we need to get away from ideology and begin looking at government’s role more creatively in order that we can evolve political theory rather than remain saddled in stagnation. New eras demand new solutions.
FYI, I personally don’t need the help of government, I’m doing quite fine. But I care about my country and fellow citizens.
December 23rd, 2008 at 10:21 am
Swordsman, by the way, I agree completely. The current proposal is absurd!
December 25th, 2008 at 4:11 pm
I’ve said it before: Government investment in basic science (eg: National Science Foundation, NASA, National Institutes of Health…) IS a form of venture capital that reaps widespread societal and economic benefit for generations to come.
December 26th, 2008 at 2:59 pm
Hayden,
my opinion might be based on ideology, so long as you know that my ideology is based on what works versus what doesn’t, regardless of whether I get a warm fuzzy feeling inside from it.
The best way for a government to improve the lives of it’s citizens and economy is for it to get out of the way. Look at what the good intentions of white politicians did for the african-american community starting in the 60’s. Nothing hurt the black community more than the disappearance of a family unit (fatherless households),welfare (no incentive to work), government subsidized housing (ghettos). Time and time again when the government tries to “fix” anything they make a bad situation worse.
You’re right in that the role of the government should be making a better country, better business climate and creating more opportunity for it’s citizens. I believe they can do that by keeping a low-tax system (based on consumption, not income) and protecting it’s citizens as needed.
December 26th, 2008 at 3:02 pm
Zoltan,
Since you are clearly taking a shot at the Reagan years,and promoting the Clinton years, I wonder if you could elaborate on what you mean by:
“During 1980, the business community engaged in unproductive, or what we call rent-seeking activities. These take from Peter and give to Paul.”
The only taking from Peter to give to Paul is coming out of the Obama camp, a la wealth redistribution