“Tolerating Waste: From Keynes to Schumpeter”

A Conversation with Bill Janeway, Senior Advisor, Warburg Pincus; hosted by Mark Anderson

BJ: Working on a book- recognized how important it is to take waste seriously. Economics is supposed to be about efficiency. A free market will allocate goods and services unefficiently. Keynesian waste — unemployment, machines rusting, etc. Keynes: govt could fix that by spending money on anything, but he lost the argument because the notion of efficiency carried over. Even with 25% unemployment every government project was evaluated in terms of its efficiency. Mainstream conventional economic theory prevented dealing with Keynesian waste.

When you win in the business of economics, its a process of trial and error and error and error.

Schumpeter: When you get to the frontier you reach a process that can be broken into 3 pieces. Two of them are necessarily wasteful. Can’t plan basic science.

John Gerden: Got the nobel prize for putting the nucleus of one cell into another cell and ┬ácontrolling it. You need a source of funding that is unconcerned with economic return. Darwin’s father, Newton’s father, bankrolled their lives.

If you’re a big company making tons of money, there are choices for your money — give to stakeholders, employees OR donate to science. Research that was done

IBM gave Andy Heller the task of inventing a machine to kill Sun Microsystems. Invented RS6000, gave presentation. But they set him up.

Gentry was paying for science as a hobby, big companies were funding research labs.

After WWII the govt took over, but they’re measuring with STARMETRICS, which means they’re encouraged to create a product out of it. It then becomes development, not research.

When you have big deployments of technology, they’re spurred on by economics.

Financial speculation is the second way to fund waste. Eg. LinkedIn IPO: interested in what the supply of greater fools is. There are times when the options worth more than the stock, ie social nets. But you need bubbles.

Finding organizations that are genuinely thinking outside of the box is difficult — you need a certain kind of randomness out of all that waste for the good stuff to emerge. The bubble of 99-00 left some good stuff behind – Amazon,etc. But the latest bubble just left a bunch of empty houses in the desert.

MA: Return on bubble.

BJ: When bubble brings in the banking system, the shadow banking system, etc there are bad consequences. So intervening to prevent faulty loans is more legitimate than intervention otherwise. Limiting Keynesian waste contributes to the good Schumpeter waste.