[FoRK] Obama: communitarian, redistributionist, confused? (from NYT)

J. Andrew Rogers andrew at ceruleansystems.com
Mon Aug 25 18:00:49 PDT 2008


On Aug 25, 2008, at 3:07 PM, Stephen D. Williams wrote:
> I didn't say that optimism without working capital would work.  I  
> was saying that working capital without optimism doesn't work, or at  
> least not with any speed.


I have never noticed a shortage of optimism by the people that would  
spend capital were it available.  In fact, there are abundant and  
foolish amounts of optimism.  I *have* noticed a chronic shortage of  
capital.  It seems to me it would be foolish to further restrict the  
rate limiting resource.


> We have been in a lull in many areas for a while, for instance.


Frequently because of significant hurdles that may not be obvious to  
the casual observer.  Many "lulls" are based in unsolved theory and  
design bottlenecks, or because a neat idea is ultimately useless,  
uneconomical, obsoleted, or stupid in ways not obvious to everyone.

When things do get stuck for no good reason, it tends to indicate a  
general lack of private capital.  The solution is to increase the size  
of the private capital ecosystem.  You can find people who will fund  
damn near anything, and the more such people have that kind of  
capital, the greater the odds are that you can find someone that will  
fund your crazy idea.


> I'm advocating vision + optimism + working capital + some creative  
> approaches, a la X-Prize, DARPA Challenge, etc.  More fluid movement  
> and usage of doers/makers/creators.  That kind of thing.


You've identified the problem, without explicitly pointing it out.   
The people who win things like the X-Prize pour vast amounts of  
private capital into it, driven primarily by optimism they already  
had. What you ignore is that the X-Prize becomes moot if there is not  
a vast pool of private capital in the hands of wealthy capitalists  
that can chase pursuits like the X-Prize.  It is not as though the  
sponsors of the X-Prize gave tens of millions of dollars to everyone  
that applied.  The fewer wealthy capitalists there are with ludicrous  
quantities of wealth, the fewer teams will get funded to try and win  
the X-Prize.  What good is a prize if almost no one shows up?

DARPA has a similar but different set of problems.  On one hand, you  
have the DARPA Challenge, which is basically an X-Prize that again  
presumes vast quantities of liquid private capital.  And when DARPA  
funds these things themselves, they move at a glacial pace and with  
byzantine administrative requirements that are manipulated by the  
political process -- to some extent I suspect DARPA functions in spite  
of Congress.


These prizes and systems are cool, I have no problem with them, but  
they are ultimately premised in a vibrant and healthy private sector  
R&D and capital markets.  However, there are also many kinds of  
technologies that do not lend themselves to this kind structure and  
just need steady supplies of capital that is not risk averse.


> Bush avoids pretty much everything like this, apparently on the  
> grounds that all of those additional smart people might hurt  
> religion in some way, or worse, create more thinking people who tend  
> to be Democrats.  (I'm not maligning all other Republicans,  
> especially the thoughtful and intelligent ones.)


What does Bush have to do with the X-Prize? Or DARPA? Precious little.

However, if you worry about such things you should be *particularly*  
supportive of maximizing private capital and R&D, so that unusual,  
interesting, and politically unseemly  innovation gets funded.   
Congress killed DARPA's prediction markets for the purposes of  
political grandstanding, but such markets seem to be thriving in the  
private sector.


> Simply making sure that individuals who are making a living on an  
> activity that is currently classified as capital gains pay a similar  
> tax rate to the rest of us doesn't seem like it is going to wreck  
> the whole system.


"doesn't seem"?  Even the Europeans know it is better to tax income  
and consumption at ridiculously high rates than capital gains, and  
rumor has it that they love taxes. Unless you work for the government,  
jobs are paid for by private capital.  This is particularly true in  
modern, high-tech economies where agility and innovation matters.  
Tough to make a living if you don't have a job.

Private capital is invested with an expectation of a certain average  
rate of return. If you substantially increase the taxes on capital  
gains, it makes private capital more risk averse so that the average  
expected net profit achieves a certain level, otherwise there is no  
point in investing.  For an economy that spends many tens of billions  
of dollars in private capital per year on high-risk ventures, and the  
millions of jobs that come with it, bad things would happen if half  
those ventures are no longer worth the risk.  Not only do you lose  
those productive jobs in the economy, you also lose the innovations  
and technological advances that a minority of those high-risk ventures  
would have produced and the subsequent other companies and jobs that  
flow from that.

Sure, you can have an economy where capital gains is heavily taxed,  
but you will be creating an economy that must be risk-averse by the  
numbers in terms of capital allocation. Technology and innovation does  
not thrive in markets with risk-averse capital, and it is too late to  
bring back those low-rent manufacturing jobs.


> Perhaps you could split optimism into two categories: optimism that  
> you can create something / solve a problem / make people happier and  
> optimism that you can make money.


These are the same thing for the most part.  Making money is a common  
side effect of solving problems efficiently and improving people's  
lives.

Most of the successful venture people I know are not really in it for  
the money per se -- they love the challenge of building things.   
People who think this is reason enough to take their money, since it  
is not about the money for them, miss the point that the money is the  
raw material that allows them to do what they do.  Innovation and  
creativity makes all of our lives better, but very few people actually  
innovate even when they try so it is arguably foolish to take capital  
away from those that have proven that they can.  In the worst case  
scenario that money will get wasted paying unproductive people, which  
is the default case if you hand it to the government.

Cheers,

J. Andrew Rogers




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