Gloomy Optimism 04 November 2015

I really must find a good hobby.

Twice in six days I’ve spent my evenings watching former policymakers talk about books they’ve just written. Last week it was Ben Bernanke. This week, I spent a Monday evening I’ll never get back watching Vince Cable being professionally inoffensive.

Imagine the kind of thing it was like. Yeah, it was like that.

House prices are unaffordably high. Our banking sector’s too big relative to our economy. Things look a bit “oo-er”.

All fair points. All things we should care about. But it was like watching a horror film directed in the style of a Werther’s Original advert.

“Is it going to kill us granddad?”

“Yes, lad. Have a toffee.”

A gloomy optimist

Cable laid out a good case for being gloomy about the future. Then he concluded by saying he’s optimistic. It was weird.

His case for optimism, as far as I could make out, rests in large part on technology. Like many politicians, Cable sets a lot of store by innovation. Innovation will help grow the economy. It will reduce the debt/GDP ratio.

There’s a lot of merit in the idea. Innovation is generally a thing to encourage.

Nevertheless, I’m feeling contrary today, so I’m going to attack it. What follows is an embittered, rancorous moan about some of the things that bug me about the Cult of Innovation.

My first bone of contention is with neophilia – the idea some people seem to hold that if something is new and shiny it’s automatically marvellous. It’s this kind of thinking that leads people to throw money into Bitcoin without thinking through the security risks.

A fetish for newness helped fuel the dot com bubble. I detect its presence in the more recent enthusiasm for biotech (though I know some of my colleagues won’t agree with me on this).

A second bugbear is the idea that people – especially young people – should be encouraged to “Follow Your Dream” and start a business. Often it’s a great move – even if it doesn’t work, you get valuable experience you couldn’t get any other way.

Sadly, though, the imperative to “Go For It!” can too often morph into a fig leaf for a terrible idea that should be terminated tout de suite.

The raw statistics tell us that any given start-up is highly unlikely to work out. That’s fine, in theory – and part-and-parcel of capitalism. If all you lose is a bit of your (or your parents’) cash and a couple of years of your twenties, then no real harm done. Probably a learning experience.

But what if a start-up rumbles on for years without really getting closer to ever being a real business. Anecdotally, I’m hearing more and more stories from my tech contacts of businesses that fit that profile.

Thinking out loud, here are a couple of open questions that come to mind:

  1. To what extent is cheap, abundant money allowing bad start-ups to keep themselves going when they really ought to jack it in?
  2. Is a proliferation of start-ups really the sign of a healthy economy that many assume it is?

On the first, I think the answer is yes. I’ve heard (again, anecdotally and off the record) of investment funds putting money into a company largely because they have a surfeit of capital and they need to put it somewhere.

And where do they get that excess capital from? From investors (institutional and private) who are forced to take more risk to get a decent expected return.

I worry there’s a misallocation of capital and talent going on right under our noses.

On the second question, I hope the answer is yes. Some start-ups will go on to do amazing things, of that there is no doubt.

But there’s an opportunity cost to working for a start-up. It’s time you could be using to build a career in a more conventional setting. More start-ups may be a sign of increased entrepreneurial zeal – or it may just signal that the opportunity cost is lower than it used to be.

So there you go, a depressing interpretation. As Vince Cable would say “I’m optimistic.”

By Ben Traynor, posted on the Daily Reckoning UK website 3rd November 2015