Lessons from Bill Janeway

William H. "Bill" Janeway, a seasoned venture capitalist and economist, has spent decades at the intersection of technology, finance, and public policy. His work, particularly his seminal book Doing Capitalism in the Innovation Economy, offers a profound understanding of the forces that drive technological progress and economic transformation. Janeway's insights are characterized by a pragmatic view of markets, a deep appreciation for the role of the state, and a clear-eyed acknowledgment of the necessary waste inherent in innovation.

The Three-Player Game: State, Speculators, and Entrepreneurs

Janeway’s central thesis is the "three-player game," a dynamic and often unstable interaction between the mission-driven state, financial speculators, and the market economy of entrepreneurs and innovators. This game, he argues, is the engine of the innovation economy.

On the core concept: "Over some 250 years, the Innovation Economy has been driven by a Three-Player Game." [1] This game involves the state, financial capitalism, and the market economy. [1]
The interplay of forces: "The three-player game is this interaction that never finds an equilibrium. It's like the three body problem in physics, between mission driven state programs, financial speculation, that occasionally come together to fund the development and deployment of transformational technologies." [2]
The state's role: The state makes investments for reasons not immediately concerned with economic return, such as national security or development. [2]
The speculator's role: Financial speculation, from tulip bulbs to cryptocurrencies, has animated markets and, at times, funded transformational technologies. [2]
The market's role: The market economy is where people work, buy, sell, and invest, and it is constantly transformed by technological innovation. [2]
A historical perspective: "In the series, Dr Janeway reveals the historic “Three-Player Game” played between mission-driven states and financial speculators that has successively transformed the market economy over the past 200 years." [3]
The game's instability: "Financial capitalists exist and Thrive and prosper by exploiting discontinuities in the market process... and discontinuities in the political process. and that is what I call the three-player game." [4]
No simple equilibrium: The relationship between the state, the market, and financial capitalism is one of both collaboration and competition, with no stable balance. [1]

The Indispensable Role of the State

Contrary to a purely free-market narrative, Janeway emphasizes the foundational role of the state in fostering innovation, particularly in its early, most uncertain stages.

Funding foundational research: "The digital revolution was pioneered by the mission-driven State, and has evolved considerably since." [5]
State as the first customer: The state can serve as an early customer for innovative products not yet ready for commercial competition, as the Department of Defense did for the digital revolution. [6]
Beyond market failure: "Causes that transcend economic calculation – national development, national security, conquest of disease – have been required" for significant state intervention in innovation. [7]
The fallacy of a marginal state: "From the perspective of the economics of innovation... the idea of a marginal role for the state is a recipe for at best stagnation and at worst a freeze-frame." [8]
Inefficiency for a purpose: Rediscovering the history of how "inefficient processes of State investment" led to technological revolutions is crucial. [4]
The need for a mission: The state's role is most effective when driven by a clear, politically legitimate mission, whether it's winning a war or addressing climate change. [9]
Current challenges: "Cutbacks in the flow of information and dollars to support scientific research will have a significant impact on future innovation." [8]

Financial Speculation and "Productive Bubbles"

Janeway offers a nuanced view of financial bubbles, arguing that while often destructive, they can be a necessary, if messy, mechanism for funding transformational technologies.

The banality of bubbles: "Financial bubbles are banal wherever you have a liquid Market in any asset from tulip bulbs to mortgages to the debt of emerging Nations." [4]
The necessity of bubbles: Occasionally, "speculation has focused on assets, which when deployed at large scale have a transformational impact on the economy. The railroads, electrification, the internet are the obvious standout cases." [2]
Productive vs. unproductive bubbles: Janeway distinguishes between bubbles that leave behind valuable infrastructure (like the internet) and those that do not. [9]
A warning against eliminating bubbles: "It's very dangerous to say no more bubbles let's dump them." [4]
The environment for bubbles: "We are in an environment of extraordinary low interest rates, of enormous quantities of liquidity looking for a return, there is the phenomenon of FOMO, fear of missing out on the next Facebook, the next Twitter." [10]
Bubbles and radical uncertainty: Bubbles provide the capital to invest in projects with unknowable futures, something traditional finance is unwilling to do. [11]
The aftermath of a crash: "I've seen this movie before I know how it ends it ends with a crash." [12] Janeway's study of the 1929 crash gave him perspective on later financial crises. [12]

The Nature of Innovation and the Economy

Innovation, for Janeway, is an evolutionary process defined by trial and error, waste, and radical uncertainty. He challenges the neoclassical economic obsession with efficiency.

Trial, error, and error: "Economic growth has been driven by successive processes of trial and error and error and error: upstream exercises in research and invention, and downstream experiments in exploiting the new economic space opened by innovation." [1][11]
The enemy of innovation: "Efficiency is the enemy of innovation at the systemic level." [6] The aggressive pursuit of efficiency is a core tenet of mainstream economics but is detrimental to long-term innovation. [4]
Tolerating waste: "Throughout the lectures, Dr Janeway emphasises the need for tolerance of inescapable economic waste at the frontier, where progress is only achieved through trial and error." [3]
Investing in ignorance: A section of his book is titled "Investing in Ignorance," highlighting that venture capital operates at the frontier of knowledge where outcomes are unknown. [13]
Radical uncertainty: "My experience in the trenches confirmed the relevance of Keynes' emphasis on the radical uncertainty under which investment decisions at the frontier are necessarily made." [3]
The innovation economy's lifecycle: "The innovation economy begins with discovery and culminates in speculation." [11][14]
Coordination of failures: Economics is shifting from celebrating efficient resource allocation to "recognizing that (it's) really the study of the coordination of failures." [15]
Mental capital: "The present state of the nations is the result of the accumulation of all discoveries, inventions, improvements, perfections, and exertions of all generations which have lived before us; they form the mental capital of the present human race." [7]

On Venture Capital

As a practitioner for over 40 years at Warburg Pincus, Janeway provides a grounded, unromanticized view of the venture capital industry.

Venture capital as a craft: "Venture Capital is a craft and not a science." [6]
An unfair advantage: Janeway's academic background in economic history provided an "unfair advantage" as a venture capitalist. [12][16]
The limits of VC: He acknowledges the "limited role" of venture capital and its dependence on the state and financial speculation. [1]
The skewed nature of returns: Venture capital returns are highly skewed, with a few massive successes compensating for many failures. [17][18]
The changing ecosystem: The venture capital ecosystem has undergone a "major structural change" in the last 25 years, with the disappearance of specialist investment banks that traditionally took tech companies public. [16]
The practitioner-theorist: Legendary economist Hyman Minsky first termed Janeway a "theorist-practitioner," a label that captures his dual life in finance and academia. [2]
Corporate happiness: Quoting his friend Fred Adler, Janeway notes: “Corporate happiness is positive cash flow.” [8]
The importance of trust: In his early days, he "discovered that we had a really deep relationship of trust with our institutional investors." [12]

Learnings for the Future

Janeway's historical perspective informs his views on contemporary challenges, from AI and climate change to the future of economic policy.

On Artificial Intelligence: "This is really the third wave of computer techniques being hyped as artificial intelligence." [8] He has been a student of AI since his involvement with Xerox PARC in the 1970s. [8]
The maturing digital revolution: "The digital revolution has really matured... it's so mature that just like electricity after World War II you know it's kind of begun to disappear." [9]
The next frontier - Clean Tech: The "low carbon" sustainable economy is where the most pressing need for state-supported innovation lies. [6]
The danger of financialization: Janeway expresses concern that financialization has gone too far. [9]
Reintegrating economics and finance: He views the reintegration of the academic disciplines of economics and finance as an "unequivocally positive" impact of the 2008 financial crisis. [15]
The power of ideas: The conclusion of his book is titled "The Power of Ideas," and he believes the ideas of economists are becoming "substantially more dangerous for good than they have been for a long generation." [15]
On cryptocurrencies: He sees cryptocurrencies as the latest in a long history of speculative assets, tracing the lineage back to Tulip Mania in the 1630s. [2]
The need for resilience: "We encouraged our business to value efficiency, lowest cost over resilience. We saw part of the -- of that play out and the impact of the pandemic with these long fragile, vulnerable supply chains." [19]
A message to disruptors: It's important that "disruptors take time to understand how the world they're disrupting came to be." [9]
The goal of his work: "My goal is to contribute to the ongoing reconstruction of economics as a more relevant discipline for both practitioners and policy-makers.” [3]
On the political economy: His keen interest lies in "what happens at the interface between markets and government between these two sets of Institutions which each have evolved to allocate resources and distribute income and wealth but with very different bases of legitimacy... one person one vote versus one dollar what vote." [9]
On learning from failure: When asked about teachable moments from failure, he responds, "how much time do you have a lot of teachable moments that they came in at various stages." [12]

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