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Dubious wisdom from the FT

This priceless comment adorns the Financial Times comment pages this morning:

“Public funds are also not always well-directed”

Wow, alert the media!

This remark is contained in a remarkably wrong-headed piece of analysis as to the implications of a recent decision by 3i, the large UK investment firm, to pull out of financing early-stage companies, or what it is generically known as venture capital. Compared to other news events, this might seem like arcane stuff, but in its own way, tells us a lot about the rough environment that entrepreneurs face not just in Britain but in the continent. Venture capitalists typically will back dozens of fledgling businesses, hoping that a minority of them become Google-type successes to compensate for the inevitable failures and just-about-break-evens. VC is very much a long-term game: it can take up to 10 years or more for a portfolio of these investments to bear fruit. The epicentre of VC investing is in northern California; investment outfits like Sequoia Capital have helped to fuel the Silicon Valley startups that are now part of business folklore.

Yet the writer of the FT piece lamely argues that public – taxpayer’s – money be used to encourage such businesses. Groan. It is vain to point out to this person that politicians should have rather more urgent things to do than risk public funds on highly speculative investments. Far better to get to the roots of why 3i and similar outfits have turned their backs on venture capital: a stifling tax and regulatory climate in Britain and elsewhere. If the rewards to success are not taxed at high marginal rates, then the money will flow in eventually, just as it has in the US.

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22 comments to Dubious wisdom from the FT

  • Governments are alway late learners, and are “intellectually challenged”. Take just what I always call the “State Television Tube factory” that in the 70s was going to transform the “new town” of Skelmersdale, for instance.

    Go to “Skem” now, (if you dare) and think of Ozymadias.

  • Actually I think the article’s saying that the public sector needs to encourage more private investment, rather than that it’s the job of the government to fund small businesses.

    But for me I think the most important issue is not should the government support enterprise, but what’s the alternative given the current financial climate?

    Banks and investors are going to drop startups and the like first as they get nervy. So where else are they going to get the capital from? Remortgaging and credit cards are even worse options. I’m no fan of govt intervention, but is it enough just to cut small business loose as the economy goes pear shaped?

  • Johnathan Pearce

    I’m no fan of govt intervention, but is it enough just to cut small business loose as the economy goes pear shaped?

    So if governments “intervene” to “help” small businesses, where do you think the money comes from to pay for this? Answer: from taxpayers, including other small businesses.

    Dearie me.

  • Dale Amon

    Where is the money going to come from? Try a drastic drop on the capital gains taxes. (Ohhhh Nooooo….. let the RICH get an UNFAIR tax break!!!!). That is one way to get more VC investment capital into play.

    I remember a road trip with some NI government development people. *Really* nice folk but they just did not get it. I commented about venture capital investing in 10 in hopes that they will break even on 2 of them and make it all back on the 10th. One guy from LEDU proudly stated that they got almost 10 of 10. I shook my head and then replied that it meant they were not taking enough risk then.

    I also remember a fellow from LEDU who was the person they assigned to our company to evaluate our plans. Interestingly enough he had been a *student* I had worked with on the QUB course on C. A really precious comment was “The internet is a fad”. They declined to put money in. Given that there was no VC in Belfast at the time, this left us underfunded and limping. We at GPL pioneered but others reaped the benefits, not us. I got out with my shirt.

    So to anyone who *imagines* a government run venture capital system will work… I give you a great big ‘raspberry’ and a great offer on a slightly used arrow collection.

  • The economy is none of the state’s business.

    The way the state can help the economy is very simple:

    1. Maintain order and property rights (police/law courts)

    2. see 1.

    Any questions?

  • It’s called the ‘Financial Times’ but it is seemingly staffed by those ignorant of finance.

    Much like The Economist.

  • Actually the CIA (Left wing liberals ) had, and may still have a successful VC fund “Inteliq’ or something like that.

    It used to be run by NASA administrator Mike Griffin. Who just lost the head of NASA’s Science Directorate (really bad news for the agency, the guy is a gem.)

    DARPA operates something like a VC fund, they only do projects that are really difficult “DARPA Hard”

    Most government VC attempts are pretty pitiful though.

  • Paul Marks

    “Encourage investment”.

    The standard way governments tend to try and do this is by increasing the money supply (in various complex ways), but this new money tends to be used in various silly wars – malinvestment.

    Such as loaning money to people to buy houses – people who can not afford to pay the money back.

    “But that just means the government should guide the investment” – a failure right from when Colbert tried to guide investment in 17th century France.

    I can understand people not understanding economic law (even denying the existance of economic law – a very diffferent thing from the statutes of the government), but denying the repeated empirical failure of government intervention is something I will not forgive.

    And, NO, MITI did not “guide investment” well in Japan – for example this goverment department told Mr Honda that exporting cars would never work.

    As for the Financial Times – it is crap.

    I am told that it is no longer staffed by Marxists (the old unholy alliance between elements of “finance capital” and communism was at least amusing), but the present staff do not tend to be free market people either.

    “How dare you – Sam Britton writes for the F.T.”.

    Yes Sam E.R.M.

    What would Britain do without such a man. If he is the great hope of the free market then I am over six feet tall and have a full head of hair.

    Phony free market types are in some ways worse than open collectivists.

  • Daniel

    Feel free to let me know if you think my premise is wrong, but what about government projects that, in the long run, create huge benefits for the consumer and the economy? One example: GPS. My understanding is that it was developed for the military and was later adopted by the auto industry. Would this technology have been developed and brought to market anyway?

    There’s also the intuitively appealing idea of a “Manhattan project” to develop non (or less) oil consuming technologies, that would seem to have the real effect of forcing the Saudis to go back to hacking each other’s heads off without bothering the rest of the world, and curb global warming (if you believe in that sort of thing). Perhaps the near-term costs of developing these technologies would be too great for private industry to bear on its own, but we incease the chance of reaping the benefits in the long-term.

    I guess this is what leads to corporate welfare, although it might not necessarily be a bad thing.

  • Feel free to let me know if you think my premise is wrong, but what about government projects that, in the long run, create huge benefits for the consumer and the economy? One example: GPS.

    Read Bastiat’s little essay What is seen and what is not seen.

    The premise that the state took people money and did X with it, and X had the following good consequences… may be true but it is also true that by doing that, the state prevented that money going somewhere else.

    The idea of ‘the multiplier’ is based on the notion that if that money had not been spend by the people it was taken from, something equally good (but different) would not have come of it. The government might not get what they want from your money, but so what?

    If there was a demand for nuclear power and GPS, what makes you think that could not come about without the state? Or something even better and maybe completely different? If the state does not take people’s money, it still gets invested in something.

  • Daniel

    Thanks. I’ll read the essay later tonight.

    While I’m loathe to justify state intrusion under the rubric of “national security,” I still find it hard to give the back of the hand to massive government investment (if you like massive government theft) to develop an automobile that doesn’t require oil. The fact is, there’s a giant hole in lower Manhattan and thousands of US troops deployed in hostile territory in large part because our cars require oil based fuel. If the auto industry doesn’t have the resources to do it on its own, I can’t get all too upset if the John Q. Public foots much of the bill, if the alternative is spending the same amount sustaining said military presence or cleaning up said holes.

  • Johnathan Pearce

    I still find it hard to give the back of the hand to massive government investment (if you like massive government theft) to develop an automobile that doesn’t require oil.

    With oil over $100 a barrel, there are plenty of sound, capitalist reasons for reducing our use of the stuff. Substitution and all that. No “massive” government programs of Moon Landing proportions needed.

    The fact is, there’s a giant hole in lower Manhattan and thousands of US troops deployed in hostile territory in large part because our cars require oil based fuel.

    See paragraph above.

    If the auto industry doesn’t have the resources to do it on its own, I can’t get all too upset if the John Q. Public foots much of the bill, if the alternative is spending the same amount sustaining said military presence or cleaning up said holes.

    No, if the public are willing to pay sky-high prices for oil – which will encourage new types of technology eventually – that argument falls down.

    Western use of oil has been falling as a share of GDP due to rising fuel efficiency; letting the market price rise will do the job better than a gazillion government programmes. And of course that assumes that the programmes will be run as intelligently or with as much regard to cost control as happens in a private business (suppresses sounds of laughter)

  • renminbi

    The people in gov’t would give the money to bullshit artists who donated money to their campaign. What makes you think anything worthwhile would come out of it? Why should it? It isn’t their money; it’s ours.Why should they care?The way they spend it they clearly don’t here in the US, or elsewhere.

  • lucklucky

    I think this explains it:

    “The writer is chief executive of Nesta, the National Endowment for Science, Technology and the Arts”

  • veryretired

    A few of the earlier comments in this thread point up a significant element in the worldview of those who are state minimalists, as opposed to those who, however grudgingly, accept the idea of statist policies as a valid use of governmental power.

    The crux of the difference shows up in the idea that means are equivalent, and interchangeble, in the pursuit of good and desirable consequences.

    The error that makes this idea so pernicious is found in the generally unspoken assumption that any means will achieve a desirable end if that is the intention of the actor.

    But means do not simply facilitate ends, the nature of the means determines to a very great degree the value of the end, both economically and morally, which will result.

    The question is usually put in the all or nothing format, i.e., if the state doesn’t do something, then (X) public good will never happen. But, as Perry discusses in his reply, this format blanks out an entire range of other possibilities, including the very real possibility that something much more valuable and desirable will not happen because resources have been diverted by political action trumping considered economic decisions.

    This is a very complex issue, of course, and I won’t pretend to have done more here than scratch the surface of its many variations.

    We have all heard of, and I hope understood, the dangers of moral equivalence. It is, for example, recently in the news regarding a book by a pacifist author which apparently makes the case that the allied war effort in WW2 was just as evil as the aggression of the axis powers.

    The issue in this thread is a cousin of that type of perverse argument. Money is not just money—it matters where it came from, and how it was obtained.

    There is a moral as well as a more practical economic aspect to funding desirable objectives. There is a difference between the poor widow in the gospel who donates her last shekel, and having it taken from her by Dennis Moore, along with all her lupins, to give to someone else of his, not her, choosing.

    That same moral dimension affects the money raised by voluntary means as opposed to tax revenues taken at the point of the states’ sword. To blur that distinction, or ignore it altogether, is to fall victim to one of the more pernicious blank-outs undercutting modern culture.

  • Okay VR I’ll bite.

    The question seems to be: how much state activity is permissible under the cloak of ‘national defense’? When does war become an excuse for illiegitimate state power grabs?

    A lot of the technology that makes the modern world run is based on stuff the US developed to help fight a nuclear war, GPS and the internet to give two examples.

    Stuff that will shape the rest of this century is now being developed thanks to the War on Terror, robotics, medical information systems and alternative fuels to name just a few.

    How much of this would have been built and would have made its way onto the market in a ‘normal’ peacetime environment? I don’t know, but I suspect that little of it would have done so in the forms it eventually took.

    I cannot say if this is good or bad from a small government perspective, but its the way I see reality working in our overgoverned age.

  • Shorter Taylor: “The ends justify the means.”

    verytired: very good. Ayn Rand was completely correct when she pointed out that ethics is the most important philosophical study of our age.

  • Ben

    After reading that bummer of an article in FT it might hearten you all to read this one(Link) about market success.

    He succeeded merely by.
    a) knowing how the market works.
    b) having knowledge of the field in which he wished to exploit that knowledge.
    c) applying this knowledge in order to find a gap in the market where he could fit in and make lots of money and of course.
    d) explaining all this to a Venture Capitalist who was more than happy to lend the money.

    If it ain’t broke then don’t fix it!

  • veryretired

    Taylor—I am not opposed to all taxation, nor am I opposed to all state expenditure. I am a classical believer in a constitutionally structured and limited representative political structure.

    That format, by definition, allows governmental action to raise funds for legitimate state functions, and then to perform those legitimate functions as directed by legislative formulation, and as overseen by judicial review.

    Therefore, there are many developments in many areas which can be traced back to state action. Some are forced by external threat, as with the fascists of WW2, the marxists of WW3, and the current ongoing developments pushed by the various elements of WW4.

    My point is that, even if these are good and significant steps, such as the internet or GPS, there is no reason to believe that the only way they might have been developed was because the state did it. The specific development might have been delayed, or developed in a more piecemeal fashion, or, as in the case of atomic weapons, not been developed at all if there were no state actor forcing the issue.

    It is well to think back to what the US was like at the dawn of the 20th century, for good or ill, and then consider all the various ways that extreme state pressures twisted and warped what would have been the “normal” development of our society if it had not been threatened with world wars, or statist legal demands, or faulty economic policies.

    Einstein postulated that gravity was not a force, but that mass curved and warped the fabric of space-time.
    (Please forgive me if that is a utterly inadequate explanation of general relativity. I am painfully aware of my own shortcomings in this area.)

    My point is that the state, if it gathers “mass”, i.e., power and resources, in an ever increasing amount without limit or check, begins to warp and bend the paths of everything it influences. As it expands and enlarges, it necesarily influences more and more of society in more and more ways. The scope and depth of state influence increases in many ways not always readily apparent—like the computer “Zero” in Rollerball, its waters touch all knowledge, all life.

    To the statist mind, or to those immersed in the parameters of political thought defined by that mind, even if they don’t pay that much attention to a lot of it themselves, (which is the case with most people, as I see it), the more the state tries to do, the more it MUST do, because that is now a state function.

    Eventually, whether by ideology or by default, the state does, and therefore owns and controls, everything. At that point, finding an occasional beneficial consequence is pretty much irrelevant.

    Something wicked that way comes…

  • Onaclearday

    Nice one — thanks VR

  • Paul Marks

    The state is force – organized violance.

    Like veryretired I accept that such organized violence is sometimes needed – to oppose other violence, whether organized (an invasion) or less organized – as in violent disorder. In this I take the other side of the argument from the Rothbardians – I wish they were right (i.e. that force and fear were not needed at times – including taxation), but I believe they are mistaken.

    However, “the Sword of State” is not a productive thing – if can not produce net economic benefits (as Perry points out “what is seen” must not keep “what is unseen” from our minds).

    As veryretired points out, if we try and turn the Sword of State into an organizing principle for society it will twist and distort everything – including itself.

  • Paul Marks

    The state is force – organized violance.

    Like veryretired I accept that such organized violence is sometimes needed – to oppose other violence, whether organized (an invasion) or less organized – as in violent disorder. In this I take the other side of the argument from the Rothbardians – I wish they were right (i.e. that force and fear were not needed at times – including taxation), but I believe they are mistaken.

    However, “the Sword of State” is not a productive thing – if can not produce net economic benefits (as Perry points out “what is seen” must not keep “what is unseen” from our minds).

    As veryretired points out, if we try and turn the Sword of State into an organizing principle for society it will twist and distort everything – including itself.