Let’s face it.
We are in something of an innovation rut.
We’ve been hearing about the promises of everything from mapping the human genome to nanotechnology to clean-green tech for the better part of a decade, without seeing very much by way of results.
The venture capital community seems torn between the feeling that there are not enough truly innovative ideas to fund and the idea that there aren’t enough funds available for innovative ideas. In a sense both are probably true since hard to come by funding discourages innovation.
Even some of the hottest ideas in the last couple of years seem like retreads. Or, at best, old ideas that have been improved. From Dodgeball to Foursquare, from Friendster to Facebook: these aren’t so much innovations as improvements on existing models.
What’s gone wrong? Much of the lack of innovation can probably be blamed on the malinvestment that resulted from the housing boom. It’s not just that too much funding got directed into housing—too much human capital got directed into housing and finance during the boom.
This is all too obvious on Wall Street these days. Most financial firms, stung by the tech bust and investor fears of tech companies, shrank their operations in this sector while pouring talent and funds into housing related sectors. Many of the big names who might have mentored the next generation of tech oriented financial professionals were driven out by legal troubles stemming from the dot com bust or by the fact that their firm’s just weren’t interested in keeping them around.
The result is that most financial firms lack the in-house expertise to invest in innovative business ventures on any meaningful scale. The credit departments don’t know how to evaluate loans to these companies, the special executions groups don’t know how to make private equity investments, investment bankers stink at pitching acquisitions, and the capital markets desks do not know how to take companies public.
What’s more, there was so much money to be made in derivatives and credit—largely arising from the underlying housing boom—that many of the smartest people got drawn into these areas rather than tech innovation. Basically, we got lots of questionable financial innovation instead of technological, medical, or environmental innovation.
If all of this had worked out to make us fabulously wealthy, there might not be much to complain about. The tech, green and bio-tech communities would just sound like special interests complaining their favoured projects weren’t capturing as much attention and wealth as the enthusiasts think is deserved.
But that’s not what happened. The dearth of technological innovation is largely attributable to government regulations and a loose money policy that led to massive malinvestment. Sectors of the economy unrelated to housing were deprived of needed capital and talent, while the great quicksand of the housing boom sucked down everything.
None of this is easily reversed. Economists point out that our economy is afflicted with what they call an “output gap”—a gap between the economic output we would be producing if growth was at normal levels and what the economy is actually producing. But this output gap isn’t only caused by “animal spirits” or temporary economic dislocations—it is the direct result of the prior “investment gap”—the gap between what we should have been investing our fortunes and time and what we actually invested in. In short, we can’t produce what we should be able to because we invested in the abilities to produce what we don’t need.
Is there a way out? Of course. The bursting of the housing bubble created a great opportunity to set the economy back on course. Unfortunately, our government engaged what amounted to Shock-and-Awe war against the liquidation of past errors, locking up even more capital in the errant bubble businesses. The greatest fortune of 2009 was made by a hedge fund manager who bet that all the old failures would rise again thanks to government support.
Another couple of years like 2009 will guarantee that we keep talent and funding out of technological innovation for another generation.
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