In his classic book, The Seven Fat Years , Robert Bartley posed the following question to readers: “Rank in order the most likely recipient of capital from an industrial planning bureaucracy: (A) Steve Jobs’s garage.
In his classic book, The Seven Fat Years, Robert Bartley posed the following question to readers: “Rank in order the most likely recipient of capital from an industrial planning bureaucracy:
(A) Steve Jobs’s garage.
(C) A company in the district of the most powerful congressman.”
Bartley’s point was that politicians irrespective of party are “conservative” in their investing style, and because they are they’ll naturally migrate to what is an established concept, or a well-connected one. Most of all they’ll allocate capital toward that which is known to be viable. Steve Jobs was the opposite of viable in the 1970s, as were Microsoft co-founders Bill Gates and Paul Allen.
There’s also the question of talent, but this one is perhaps too easy or obvious. A great investor is never going to toil as a politician. The pay isn’t good enough. Whatever the perks of being a Senator or Congressman, great investors can earn billions, so it’s no major insight to say that if John Boehner, Nancy Pelosi, Mitch McConnell or Harry Reid had a clue about what the commercial future will look like, they would not be politicians.
Simply put, wealth in the hands of Boehner and Pelosi, or those of Reid and McConnell, is not the same as wealth in the hands of Bill Gates, Warren Buffett, Peter Thiel or Jeff Bezos. Government can’t spend or invest us to prosperity for reasons of talent, but for those same reasons it can destroy a lot of precious growth capital.
The above sermonizing, while true, amounts to shooting fish. The talent deficit between politicians and successful investors is a blinding glimpse of the obvious, but even this arguably misses the point. No doubt those who properly decry government as venture capitalist can point to the massive government loan to now bankrupt Solyndra as one of many modern examples of how politicians can’t invest, but if so, political apologists can point to Webvan, theglobe.com and eToys (to name but three) as evidence that for-profit investors are fully capable of funding Solyndra-like debacles. Of course that’s the point.
George Gilder wrote long ago that “It is the leap, not the look, that generates crucial information.” Gilder’s words are pregnant with essential knowledge about how an economy grows. It doesn’t grow based on unrelenting success, and if it did Silicon Valley would easily be the poorest locale in the entire world.
An economy grows based on information, good and bad, reaching investors and entrepreneurs. Silicon Valley thrives today not because all of its companies and start-ups succeed, but precisely because most of them fail. It’s through this constant experimentation with new ideas, good and bad, successful and unsuccessful, that entrepreneurs, businesses and investors attain essential information about what people desire, what businesses need in order to grow, what business practices need to be encouraged, and which ones need to be banished.
Back to politicians and investing, the argument not made often enough is that while the billion-dollar net worths of Buffett, Bezos and Thiel mark them as skillful private allocators of capital, if they were Senators Buffett, Bezos and Thiel their investing track record would be lousy; arguably on par with the consistently bad batting average of the political class. More critically, it must be stressed that it is impossible for politicians to spend or invest us to prosperity given the simple truths previously mentioned about Silicon Valley.
The reality once again is that the vast majority of start-ups in Silicon Valley fail. This is fact. What’s also fact is that when businesses there implode they don’t have an unlimited line of credit to continue committing the same capital-destroying errors. Eventually investors run out of patience, the business is shut down, and the assets sold off to individuals possessing a stated objective to manage them more profitably.
Readers should compare this to government, and when they do it’s important to stress that this is true no matter the ideology of the politicians allocating the money. When politicians spend or invest, they quite simply do not labor under the same market-driven disciplines as private investors do. As the failure rate in Silicon Valley reveals rather plainly, private investors are quite fallible, and yes, they are all-too-capable of funding egregious Solyndra equivalents.
But here’s the major difference: when theglobe.com falters, investors quickly starve it of capital so that it can destroy no more. When politicians spend, they have an unlimited source of funds – you, me, Michael Dell, and Larry Ellison – to tap such that they can continue supporting that which doesn’t work. Businesses disappear on a daily basis, while government programs are generally forever.
Despite no discernible decline in the rate of poverty since 1960s, spending on federal programs meant to fix it continues. Though food is abundant globally, subsidies for rich farmers and sugar moguls have no endpoint. Even though private companies would gladly provide power at a market rate, and do so around the country, the Tennessee Valley Authority remains a federal corporation over 80 years after it was founded by Congress. A Republican-led Congress that pays lip service to limited government couldn’t even gather the votes necessary to shutter the Ex-Im Bank; the latter an entity that largely exists to subsidize loans for businesses buying from global behemoth’s like Boeing.
While Silicon Valley ruthlessly kills off its capital destroying losers so that better ideas can be funded, government – no matter the Party in power – continues to support its duds. If politicians managed the technology sector, Friendster would still rule the roost in what would be a sleepy social media sector, and individuals would access Friendster on Commodore computers.
Too often in modern times the debate about government spending has focused on the breathtakingly dumb programs, and wasteful subsidies. This misses the point. Of course many of them are dumb, just as many private sector creations are laughable. The difference is that in the private sector Berkshire Hathaway’s Warren Buffett must eventually sunset his bad ideas, while a Senator Buffett would face no such constraints.
For investors to be successful, they must have losers. Politicians generally can’t lose thanks to nearly unlimited funding from a coerced electorate that is powerless when it comes to forcing them to shut down their many Webvans.
Warren Buffett speaking to a group of students from the Kansas University School of Business (Photo credit: Wikipedia)
Article originally posted in Forbes website.