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George Gilder

In his new book Knowledge and Power, futurist George Gilder challenges existing economic theories of both Keynesians and libertarians by placing creativity, innovation and entrepreneurship at the center of economic development.

In the early 1990’s, Gilder predicted the “end of television“ as the source of mass media entertainment, news and information; the importance of fiber optics with near-infinite bandwidth for data communication and a mobile device in your pocket which would be your phone, source of information and wallet.

Gilder criticizes existing economic theories for treating innovation and entrepreneurship as minor and temporary factors in the progress toward an ordered economic system.  Rather, he believes that economic growth is driven by unpredictable human actions and creativity.

Inspiration for his new economic theories come via the information theory of Claude Shannon, which laid the foundation for the telecommunications industry.  In Shannon’s work from the 1930s, information is surprise in a sea of noise in the transmission of radio waves.  Gilder sees a parallel that economies are governed by surprise in the form of human inspiration and inventiveness.

Gilder’s new economic theories do not fit into neat categories of left and right.  While he rejects the attempts of economists and governments to plan economies, he does not reject all government involvement.  He posits that governmental structure is essential to entrepreneurial success.  These include Adam Smith’s “free trade, reasonable regulations, sound currencies, modest taxation and reliable protection of property rights.”

knowledgeandpowerGilder also challenges traditional notions that entrepreneurship arises from the selfish instincts of individuals.  For Gilder, only by serving the needs of others does an entrepreneur achieve success.  Thus, an entrepreneur sacrifices her personal pleasures and takes risks that have small chances of success to bring new products and services to market.

“The key issue in economics is not aligning incentives with some putative public good but aligning knowledge with power. . . .  Capitalist economies grow because they award wealth to its creators, who have already proved that they can increase it.  Their tests yield knowledge because they are falsifiable; they can be exposed as wrong.”

Gilder’s more challenging point is that accumulation of wealth by the small number of creators of new information and entrepreneurs who commercialize it is justified because these people are best able to use this wealth to promote more innovation and add to the knowledge base of civilization.

William H. Janeway

In contrast, venture capitalist and economic theorist William Janeway was in Seattle last spring discussing his new book, Doing Capitalism in the Innovation Economy. He emphasizes the “central” role of the government “to fund the upstream research that generates discovery and invention, and to preserve continuity in the market economy when the speculative bubble that has funded its transformation bursts.”

Others argue that the government should stimulate demand by increased government spending and adopt tax policies aimed at helping the middle class by transferring wealth from the more successful.

It is comforting to a venture capitalist like myself that Gilder identifies entrepreneurship and innovation as the central contributors to economic growth and that financing entrepreneurs is a necessary corollary.

Most net new jobs come from startups, and 21 percent of U. S. GDP has been created by companies that were launched with venture capital financing, particularly technology companies. But more research-based evidence is needed of the role of inventions and startups in economic development as well as the part played by big companies.

Gilder concedes that economic strategies based on growing big companies or government programs can work “with inspired leadership” for “a limited period”.

But he argues that the accumulation of too much power by large business bureaucracies is as destructive of economic growth as government bureaucracies.  Big businesses and governments tend to work together in a form of “crony capitalism.” As Gilder recognizes, these institutions deteriorate over time as politicians seek to protect and reward established players and their cronies and retard their often newer and smaller competitors through extensive regulations that only large business issues can afford.

The role of innovation and entrepreneurship in economic development is an issue that needs attention and debate because government policy makers have choices that can encourage or impede innovation and entrepreneurship, including in our Seattle region.

Madrona's Tom Alberg
Madrona’s Tom Alberg

For example, last year President Obama supported and Congress adopted on a divided vote the Jobs Act which many believe encourages commercialization of innovations by making it easier to raise funds through private placements and public offerings.  This was adopted over the strong opposition of many who believed that strict government regulation of securities offerings to protect the public was more important than making it easier for entrepreneurs to obtain funding.

Gilder’s new economic theories provide a hope that we can follow a path of sustained economic growth that nurtures entrepreneurs and startups.

But my observation is that there are a lot of platitudes in the halls of government about the importance of innovation and entrepreneurship, which are coupled with inconsistent support of pivotal policies.  It is up to the business community to agitate for consistent policies which support the key tenets of entrepreneurship and it’s up to our innovators and entrepreneurs to come up with those surprise ideas that produce economic progress.

Tom Alberg is a managing director at Madrona Venture Group, a Seattle venture capital firm. Alberg will interview Gilder about his new book, Knowledge and Power, at Town Hall on Monday September, 23rd. The two were undergrad classmates at Harvard University. 

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