Guest User

March 31, 2022

Technological Revolutions, Alternative Investments, Economics, Expected Returns

Episode 194: Bill Janeway: Investing in the Innovation Economy

Guest User

March 31, 2022

Technological Revolutions, Alternative Investments, Economics, Expected Returns

William H. Janeway has lived a double life of “theorist-practitioner,” according to the legendary economist Hyman Minsky who first applied that term to him twenty-five years ago. In his role as “practitioner,” Bill Janeway has been an active venture capital investor for more than 40 years.

As a “theorist,” Janeway received a Ph.D in Economics from Cambridge University where he was a Marshall Scholar. His doctoral study on the formulation of economic policy following the Great Crash of 1929 was supervised by Keynes’ leading student, Richard Kahn (author of the foundational paper on “the multiplier.”) Janeway went on to found the Cambridge Endowment for Research in Finance. Currently he serves as a teaching visitor at the Princeton University Economics Department, and visiting scholar in the Economics Faculty of Cambridge University. He is also a regular commentator on Bloomberg TV.

When it comes to the uncertain future of financial markets and technological innovation, a deep understanding of history and the roots of the systems at play in our contemporary climate is often overlooked. This is the argument made by Bill Janeway, our guest on the show today and the author of Doing Capitalism in the Innovation Economy. We have a fascinating conversation with Bill who has vast experience in both the academic and venture capital spheres, having spent years working in both sectors. Bill does an amazing job of sharing his expertise, talking about the role of the state in innovation, how venture capital actually operates, and what the innovation economy means for those who are not on the vanguard of technological progress. We discuss how investors can think about allocating their assets in relation to innovative companies, Bill's reflections and advice regarding financial bubbles, and how Bill applies his understanding to current questions about cryptocurrencies and decentralization. Bill's lifelong passion and commitment to learning about the history of economics and the financial markets makes him a deeply valuable resource and having him on the show was so illuminating, we hope you enjoy the conversation as much as we did.

Key Points From This Episode:

Bill explains his concept of the 'three-player game' and how it brings together two important histories. [0:03:13]
The role of venture capital in technological innovation in the last 50 years. [0:05:16]
Findings on the returns experienced by entrepreneurs in light of VC structures. [0:10:22]
Thinking about venture capital as a private investor; best approaches for asset allocation. [0:15:05]
Investing in innovation and assessing secondary market public equity benefits. [0:20:02]
Bill explores the relationship between innovation and financial bubbles. [0:31:43]
Waste and innovation; what we should expect as we progress. [0:35:43]
The people left behind by innovation; who has taken the role of trade unions? [0:41:09]
Bill weighs in on the question of cryptocurrencies and their place in the conversation about innovation. [0:45:38]
Investment in crypto from big firms; separating the 'adults' from the crooks. [0:51:36]
Why a deep understanding of history is paramount to sustainable innovation. [0:53:10]
Bill's personal definition of success; staying motivated for work! [0:55:15]

Read the Transcript:

Bill to set the stage, can you describe the three-player game?

Sure. I began to recognized long ago the impact of technological innovation on the markets of the economy. The places where people work, and buy, and sell, and spend and invest. But the question in the literature on the history of technological and innovation did not address a really basic question. Where does the money come from to fund innovation at the frontier? By construction, no one can know what the consequences are going to be.

And that led me to two deep histories. On the one hand, the role of the state in making investments for reasons that are not immediately concerned with economic return. That are for national security, national development. Like subsidizing the American railroads during and after the American Civil War. And then recognizing, and this of course really was the case in the late 1990s.

The success of waves of financial speculation that have animated all markets where assets of any kind trade from Tulip Bulb in Amsterdam, in the 1630s onto cryptocurrencies today. But occasionally we can look back and see that the 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.

So my notion of 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. That's what I call the three-player game.

So fascinating. So how important is venture capital to innovation?

Well, its become the very important but only in the last 40 years. There've always been high risk investors, Tom Nicholas of the Harvard Business School has a wonderful history of American venture capital. He begins with the whaling industry and it turns out that the distribution of returns to whalers was not unlike the highly skewed distribution of returns to American venture capitalists.

And what's more, just as with modern venture capitalists there's persistence in those returns uniquely among all asset classes. So there was persistence in the returns of the individual brokers who put together the financing from angel investors, if you like. For sea captains who again and again, actually came back with a lot more money than it had taken to get them to Greenland and back, or to the West Pacific.

And you have the same pattern of highly skewed distribution of returns along with persistence to certain players. But professional venture capital only really becomes meaningful in the last 50 years of a 200 year history of economic transformation with technological innovation.

How much of a difference does it make? Like, do we know how a VC funded versus non-funded company does in terms of the economy?

Well, actually there's some very good solid academic research. I was just teaching it in my course in Cambridge, which does show that companies that are matched before investment, their profiles look similar. The ones that actually have received venture capital investment, typically on average, grow more rapidly in terms of employment, file more patents and those patents in turn are more cited than others.

There is a treatment effect. It's not just venture capitalists picking better companies that would have succeeded anyway. But again, you have to map that against the distribution. It's clear that not all venture capitalists are equally effective, and it's also clear there's a kind of path dependence.

A certain, you got lucky in your first find you had better returns, people know that. So better entrepreneurs come to your firm for the next funding. So you can see how persistence could build up over time based on what initially might be a kind of random sort.

Yeah. That's interesting. So you talked about the distribution of VC returns. How do the mean average VC returns as an asset class look compared to say public equities?

Well, if you go back to the emergence in the 1980s into the 1990s of venture returns. First of all, it was a very small industry. It was typically raising one to 5 Billion a year from 1980 through to the early 1990s. The vintages of the early '80s look good, but it's the vintages of the early '90s that look spectacular. And that of course is the great dotcom tech bubble effect.

And that means that the average and the median, the average way above the median because the top firms pull the average up so high. But even the median returns were significantly better than the public markets for the vintages 1993, 4, 5, 6. From 19 ,7, 8 on for 15 years, they were pretty terrible. The average was at best equivalent to the S&P or the NASDAQ.

If you put in some factor that said, "Well, they should be better because you're buying illiquidity." Okay. In the most recent years through to 2021, we do have a phenomenon of venture returns, matching super performance in the S&P or even better and in the NASDAQ. With the concentration in the public markets on what had been venture backed great, giant, tech companies, we know their name.

However, the best returns reported around 2021 and they were outstanding. I mean, returns for the industry up towards 40 and 50% per year. But most of those returns, the vast majority of them, well over 80% were marked to market returns, they had not actually been distributed.

So we don't know how well the venture industry really did in 2021 until the shares are liquidated, are distributed or sold. And we can see the actual cash-on-cash return to venture industry, which will again of course, show a very high skew between the best and the average.

That's incredible. So with this skewness in VC outcomes, are most entrepreneurs making any money?

Some interesting literature on that as well. There's a great economist named Bob Hall and his wife, and equally very strong economist named Susan Woodward, who have a paper that basically suggests that the entrepreneurs on average don't do well at all.

That the structure of venture financing is such, and given how many ventures actually fail or even fail to return capital. That is only the right hand tail of the distribution of entrepreneurs, that the 2, 3% who make the big bucks, let's say a $100 million.

Now, there's some later work that suggests that yeah, that may be right if you look at the whole universe from day one, from the day that the first dollar goes in from the venture guys. But if you look at how compensation of entrepreneurs evolves with the maturation of the venture, then the odds are not stacked so heavily against the entrepreneur.

But there's no question that if you were just trying to do a matching game... Those who choose to be entrepreneurs need to have a certain set of risk seeking temperamental, mental, emotional characteristics to take the risk. Of course, it's also a point to remember, when we speak about entrepreneurs and venture capital, we're talking about a tiny segment of the American entrepreneurial population.

Because, the vast majority of people who start new businesses, whether it's a restaurant or a dry cleaning establishment or a gas station, they're not getting venture money, they are taking entrepreneurial risk. And we should respect that.

There are a million firms started in the United States every year, and it should be more than that, it has been more than that. Out of that million, barely a thousand are funded by venture capitalists. It's a tiny, tiny proportion.

You mentioned persistence earlier in VC fund returns. Now as an investor, is it easy to call up the best VC general partner and get an allocation in their fund?

Economists have this term called adverse selection and there is no place where it operates more powerfully than in access to venture capital by limited partners, by institutional investors or rich individuals, family offices. The way to put it is very simple. If you're a new player and you want to put new money into venture, the ones you want to invest in don't need your money and the ones who need your money, you don't want to invest in.

Now, in the last set several years, there's been an interesting phenomenon and we saw this in the late 1990s. We actually saw this a bit in the first venture IPL market, which was 1983. Firms that have done very well, that have generated really outstanding returns, typically can't help it. They increased the scale of their next fund.

The return from managing more money just in terms of the management fee is very, very substantial. It's a nice business. So we've seen in some very visible cases, most notably arguably the best single venture capital firm in the United States over the last 40 plus years, Sequoia. Sequoia has radically increased the scale of the funds it's raising.

We don't know what the returns are going to continue to be. They have been outstanding through a previous expansion of Sequoia's scopes. Sequoia became one of the leading venture investors China, for example. That was a challenge but they managed it. But going from managing funds of the order of four, five, 600 million to managing an 8 Billion fund, and now they've created a new concept, a new vehicle, which will be a perpetual fund.

A perpetual fund like Warren Buffett has. But they will allocate money to specific classic limited partnerships in different segments. That's going to be new and different. It's going to be very interesting to see how that plays out. Given 40 years and two successful changeovers in leadership of the Sequoia firm, it doesn't seem a really great idea to bet against Sequoia. But certainly it's going to be a very interesting experiment.

So Bill, the obvious next question is how do you think the majority of investors who can't access VC manager like Sequoia? So how should they approach VC and their asset allocation?

Well, you've got two different questions there, I think that are actually rolled up into one. We've seen a phenomenon over the last five years, it is unprecedented. It goes with the unprecedented financial regime that we've had virtually over the last 12 years since the global financial crisis. Then through the long grinding, great recession and then renewed when we thought it was over.

Renewed of course, by the impact of the pandemic. Central bank policy, moving to unprecedented levels of monetary ease, quantitative ease, low interest rates. Interest rates down to the Investment-Grade Bond Index that are below the rate of inflation, negative real risk-free rates of interest.

In turn, it took a while but by three, four years ago, it was clearly pushing a range of conventionally public market, liquid equity investors into buying late stage rounds of venture capital backed private firms. 2021 was quite amazing. Over the last four years, 2018, 19, 20, the venture industry raised about $75 Billion on average per a year. That was very high, wasn't quite as high as 2000.

But in 2021 it was, it was 125 Billion. However in 2021, some $335 Billion was invested in venture backed private companies. Well, over 200 million of that came from what the NVCA calls nontraditional investors. Hedge funds, mutual funds, sovereign and wealth funds, family offices.

So one thing that public market investors who didn't have access to being limited partners with the best firms did was invest at very high prices with no liquidity in these private companies. Also, they tended to go along with the notion as these companies went public, that the founders should be entrenched in governing, that they should have a separate class of stock.

The most extreme case, WeWork. Adam Neumann was given 20 boats per share when the company was supposed to be going public. That was the great reveal and it did not, though Newman walked away with more money than many winners could even dream of getting. Sometimes you can win by being a loser I guess, perhaps if you have SoftBank as your last late round investor. But in any case that's been one play.

Now there's something else going on, it's really kind of a theoretical game so far. But the idea is being able to instruct some kind of public tradable liquid instrument that could track venture capital performance and returns. I haven't actually seen one of these in operation. There are some academic papers on public market vehicles for tracking venture capital investments.

And this may be shifting gears a little bit. One of the factors that sort of goes with both, there's flood of new money. The reduced degree of governance engagement, the manner that this money has shifted the terms of trade between entrepreneurs and venture capitalists. It's a very open question as to whether we're going to see that switch back or whether venture capital may have become substantially commoditized and the role of the active venture capitalists.

My old boss Lionel Pincus used to say, "You got to remember that, with respect to the entrepreneurs, we're a combination of big brother, Dutch uncle, Rabbi, therapist, confessor." That kind of intimate relationship, which also goes with having the ability to not just influence the course of strategic movement by the company.

But occasionally to suggest to the entrepreneurial founder that in everybody's interest, including his usually, occasionally her own self-interest withdrawing from further competition, as they say in sailboat races may be the wisest move forward. I think that role still remains a valuable role. It's clearly been drowned substantially over the last four or five years in many, many, many situations.

Interesting. Cathie Wood, has a narrative about investing in innovation in the public markets to earn access returns, which worked for a while. Does secondary market public equity investors typically benefit from investing in innovation.

Well. Look, the whole point about being a public market investor is you get to change your mind. There should be a value for liquidity. If you bought the tech companies that went public in the mid 1980s, they have names that Microsoft and Oracle, you did very well buying on the IPO. Hell, if you bought, the company that I was most deeply engaged with that really made a technological and an economic difference, a company called BEA Systems.

When BEA went public in the 1990s, it went public on the single worst day in the market in 97. We thought we were going to offer $12 a share. We sold the same number of shares at half the price. If you bought BEA at six, just six months later, we did same number of shares again but this time at 18. So in effect, we did a two tier two part staggered IPO and got the $12 price that we wanted initially.

So there's still obviously a return. There is a return to intelligence stock picking in high growth sectors having in mind that the greatest technology companies can become as radically overvalued for a time as others. There was a moment in 1999 when there was virtually no technology company that you shouldn't have sold no matter how great it's prospects, because the market as a whole, and those companies as a whole were radically overvalued.

When I see a chart from late 2021 that says that the number of publicly traded software companies selling at the 50 times forward revenues. Well, I've never been a short seller because in terms of asymmetric returns, if you're long in stock, all you can do is lose all your money. If you're short in stock, there's no limit to what you can lose, but there's no question that there are moments in time.

There's an old saying that, "Never try to time the market be a long-term investor." And my answer is yes, never try to time the market, except when you have to. In 1998, 99 into 2000 at Warburg Pincus, we basically liquidated my tech portfolio. My boss, John Vogelstein was an acute student of markets. I wrote my PhD thesis on 1929 to 31. I'd seen what happened to RCA, the great technology stock of the 1920s.

It looked just like my company's profiles from 1926 to 29. And then it looked just like them from 1929 to 32, when the tech stocks went down by 80% of how they'd gone up in the previous three years. So no reason for me to take a point of view on Cathie Wood. The market values Ark Investment every day. So you can read that in the Wall Street Journal, the New York Times or the Financial Times.

So do the best innovative technologies tend to win the competition for market share?

Well, that's a very good question. One factor, one stylized statistical fact that's often ignored or underplayed in the academic literature and somewhat in the commentary is just how narrow the scope of professional venture capital has been during its 40 to 50 years of existence. It's essentially been focused in two broad domains, information technology and new businesses enabled by IT. I'm going to come back to that.

And on the other hand, healthcare, biotech, life sciences. Now, what happens, those are the two sectors where the federal government on the United States has poured hundreds of Billions of dollars. In the case of IT, going back to World War II, right through the 1960s and '70s. In the case of biotech of course, really beginning in roughly 1970 with Nixon's declaration of war on cancer.

So there was a platform of relevant science from material science of Silicon through the computer science disciplines, just as in biology, genetics, genomics for the healthcare life sciences sector. There are other domains where technology really matters, where venture capital had virtually played no role at all.

Typically, apart from Silicon, that includes new materials. Silicon was so supported with respect to science, technological experiment and then finally the demand pull of the U.S. Defense Department for the early products of micro electronics. Before they were remotely cheap and reliable enough for the commercial market, before you could have a personal computer. That pull was very distinct in those sectors.

Nanotechnology is phenomenal, it's fascinating. It's had virtually no venture investment and it's had no venture return. It will emerge over time. These new technologies can be transformational. They take a long time. People don't appreciate that it's not instantaneous. The laser, the laser phenomenon was identified and it took years to be able to replicate it reliably 60 years ago, 60 years plus.

It was 20 years or more before the first commercial applications were discovered and they weren't discovered because of venture capitalists. Who would've guessed that the supermarket checkout counter and consumer music would be the killer apps for the laser. Now, we take lasers for granted, we have them lighting our houses. It seems like in perpetuity.

So there are transformational technologies that filter through over extended periods of time and often require large companies with a longer than maximized shareholder value for the next quarter, so that my stock options will improve. And that are not just taking all their cash flow and using it to buy back shares, but are continuing to invest like Corning, for example in technological innovation.

So I think it's important not to generalize across the frontier of innovation. Right now, the most frustrating thing I think and obviously right now, I'm talking about the longer sweep of the economics of innovation. I'm not talking about Ukraine, there is nothing more frustrating than to be observing what's going on in Ukraine.

But when we think about the factors that are required, the technological enablement of any kind of effective response to climate change. We have a kind of field of play where the template of the digital revolution, the template of the biotechnology revolution is so relevant and it's not being implemented except maybe in China.

The playbook of massive upstream spending on relevant science and technology, energy storage, alternative energy storage methods, for example. Then the sponsoring of multiple experimental candidates, the defense department spread its capital, its funding, its procurement across a huge array of new companies.

Companies with names that nobody in the New York Stock Exchange had ever heard of called Texas Instruments, and Intel and Fairchild. That again, enabled innovation to reach a stage of being ready for commercialization. Being ready for the movement so that by 1980, what was called the mill spec market for semiconductors had become a specialist niche.

As the personal computer produced a tidal wave of demand for these technologies whose development and maturation had been accelerated by a generation, because of the role of the government. Not just as a research funder, but as that first collaborative customer, pulling the suppliers down the learning curve to low cost reliable production.

We need that across an array of climate related technologies. The roadmap is well defined. There was just an excellent review by the people at INET and Oxford on the extraordinary improvement in the costs of alternative energy sources while still seeing these critical needs for grid scale energy storage, and software to manage a grid whose supply of electricity is coming from intermittent sources.

Which in turn means massive physical investment in rebuilding a grid that is designed and implemented, optimized for intermittent resources rather than constant electron flow from power plants. So, as I say, it's frustrating because we have the roadmap. And by the way, this would the first, if you like legitimizing mission that doesn't involve killing anybody, responding to climate change.

Interesting. So, that's the state falling short on not funding.

It's a function of obviously the kind of political polarization that we see principally in the west, in the US, but there are other example. The US for 150 years was an incredibly effective opportunistic appropriators of other people's technology. Going back to the textile industry from Britain, chemical industry from Germany. Chinese have done a very good job of that as well in this sequence of a generation.

The biggest opportunity here put it the other way. Effective response to climate change, I don't think is likely to be able to happen without some kind of working collaboration between the United States and China. China's effective opportunism was revealed actually the dynamic game between Western Europe and specifically Germany and China over the kind of the first generation of solar and wind technology.

Germany put in place really big subsidies for business and households to implement solar and wind but the suppliers that met that demand were overwhelmingly from China. German demand pulled China down the learning curve, the way defense department demand had pulled the American semiconductor in computer industries down the learning curve. Historic irony.

Interesting. What about of financial bubbles? We talked about high prices in a couple of instances. What role do they play in innovation?

Well as I've said, wherever there are tradable assets, you can expect momentum investing, herding behavior, prices decoupling from any relationship to cash flow past, present or perspective. Well, the point about financial bubbles, A, the first point is they are universal.

They occur across all markets heavily in real estate, heavily in certain kinds of precious metals or want to be precious metals. But the way it makes sense to me to break down, to distinct wish amongst bubbles is along two dimensions.

The first dimension is what is the actual target of the financial speculation? Is it just trading existing assets like houses? Is it investing in some kind of bright shiny object, like a Tulip Bulb? Or is it the physical and financial representation of one of these technologies, which when deployed at scale changes everything?

There's a wonderful scholar named Andrew Odlyzko at the University of Minnesota. He's actually a really serious mathematician. But some 20, 25 years ago, he became interested in and then obsessed with the financial history of the British Railways. The first railway boom in the world, going back to the 1830s and then doubled in spades in the 1840s.

He's written a whole raft of papers of the out this. And you can track how the price of the shares of the companies that got parliamentary approval to build railroads spike. A big bubble in the 1830s, a huge bubble in the 1840s, followed by a spike. And then a huge increase in the actual dollar-pounds invested in building those railroads.

This was, if you like the first productive bubble. Now, because it was equity investment, the second dimension for evaluating bubbles is how much of that investment in the assets is funded by debt? The more debt, the more certain that when the bubble bursts and it always will burst. The more certain that there will be real damage.

Now, when you have a pure credit bubble like the United States and most of the world, certainly most of Europe and some of China. In 2007, when the bubble bursts not only are you left with, as I like to say, abandoned beach houses in the Nevada desert, but the economic consequences are profound when you have a debt crisis.

When the bubble is focused on productive assets, whether it railroads, or electrification or computing in the internet. When the bubble bursts, nobody tore up the railroad tracks. When the public utility holding companies went bust in 1930, 31, 32, nobody ripped down the grid and ripped out the generators. And when the internet bubble burst into 2000, nobody pulled up the dark fiber that was sitting there waiting for Netflix.

And on the other side, because the internet bubble, the railroad bubble, the electrification bubble was largely funded by relatively low margin. Electrification had more margin, more debt. The economic consequences in 2000 were just in order of magnitude, less damaging than in 2008.

And of course the great depression was in part tied to bankruptcy from excessive debt. But that came with the banking crisis in the 31, 32, 33, not directly from 1929.

I love the term productive bubble. Is waste inevitable in innovation?

Well, I think waste is inevitable whether or not it's financed by a bubble because we make progress by trial and error, and error and error. If you're not making mistakes, if you're not losing. If you have a venture portfolio that never loses any money, if you're only betting on sure things, the one thing you know you're not doing is innovating.

And that's why culture, business culture, political culture really matters. You need to have an environment where those who fail on a particular experiment don't get fired for failing. That they're allowed to learn from the failure. This is why, I will say one of the miracles of DARPA is that the program managers who are the driving force and have been now for 45 years are in effect given a pass.

They are told to take risks. And they know they're not going to be fired if one of the risks they take doesn't pay off. It's very hard in a corporate environment. This is a perhaps a sidebar into history, but it raises a question going forward. Once upon a time you had our great cooperate technology giants, monopolies, IBM, AT&T, DuPont, Xerox, General Electric.

They had the financial capacity and the cultural freedom if you like, to invest some portion of their rents. Their plus profits from their market power, whether the market power was based on patents like Xerox or by government legitimized monopoly like AT&T, or just by sheer market power like IBM.

They could invest a portion of those extra profits into fundamental advanced research in laboratories that were more like university laboratories than like R&D departments in most companies, to the extent that they exist at all today. It is the case.

The first thing Jack Welch did when he became CEO of General Electric was closed down central research. He may now have said that stockholder maximization is the dumbest thing he's ever heard, but he was the icon and champion of whatever it takes to manage the stock price for the benefit of all stockholders, including the managerial option holders.

And across the board, the great monopolies, their patents ran out. IBM, market power was progressively diluted by success of challengers, as it was kind of frozen in place by its own past success and by the U.S. Justice Departments Antitrust.

And in any case, there has emerged broadly speaking, a great set of economists at Duke University led by Ashish Arora and Wesley Cohen, what they referred to as the division of innovative labor. The big companies that have market access and that have the resources for marketing.

In the case of the pharmaceutical industry for managing clinical trials. They acquire innovative technology from the venture back startups. And this can be very productive except, except venture back startups... Maybe Sequoia will change this with its new fund. Venture back startups necessarily have a limited time horizon.

It's three years to invest a new fund, three years to work on building the value in that fund and three years to liquidate by sale or IPO in order to capture the returns. That time horizon is not the time horizon in which for example, you invent the laser and reap the investment returns from its commercial success.

So the division of an innovative labor is a really neat concept and we can see it in action. We can see the giant tech companies, Microsoft, Alphabet, Amazon, Apple, they've been literally buying hundreds of companies per year. Not all the visible ones, like YouTube or Instagram, but small startups.

Sometimes just because the quality of the talent is so great, but sometimes because there is promising technology there. But the sort of stuff that they're acquiring is stuff that can be put into the machinery pretty quickly. It's a complicated story about out how that competitive landscape in the innovation economy is evolving.

And certainly it remains very dynamic and to the extent that the giant tech companies are now coming under for the first time ever, antitrust assault of the sort that IBM and AT&T did receive. That's going to shake things up as well, if they can't make these hundreds of acquisitions.

It's going to change the profile of venture capital investing since much a very early stage investing it's largely based on the predicate that it's unlikely we'll be able to build a sustainable, valuable franchise business. But at least if we do something good in enough will get acquired and that will make our return that way.

So it's a very interesting frontier in the innovation economy today.

So who looks out for the people in the old economy that get disrupted by this innovation?

That's a very good question, because once upon a time you might say that's what trade unions were for. Walter Reuther, famously had a conversation with the, I guess it was one of the chairman of Ford, about the automation of the assembly line. And supposedly said, "Well, those machines look great, but are they going to buy any of your cars?"

But if you go back to the late '40s after the war to 1950, the Treaty of Detroit was all about that. On the other hand, it also ran into the consequences of the most important Republican legislation of the post-war era, which was the Taft-Hartley Act, which allowed so-called right-to-work laws.

And over time, the automobile industry largely followed the textile industry from heavily unionized towns and cities in the Northeast and the North Midwest, to the right-to-work states of the south. There's a very interesting piece of work that came out about two, three years ago.

Four young scholars, several from Princeton, where there's been a long history of deep research on the labor market. They were able to get data going back to the New Deal back to 1935, back to when the Social Security Act was passed on the households that had at least one union member. That number peaked between 1950 and 1960 at around 35%.

And today, including public sector union it's about 12, 13%, in the private sector, it's 7%. What they did was chart the union density as they call it. The proportion of households with at least one union member against measures of inequality of income and wealth.

And as you might expect, it's a really quite remarkable inverse negative correlation. As union households dropped off the charts, the inequality rose to the sky. Obviously, we're not going back to the industrial structure, let alone the political structure of the New Deal or Truman's Fair Deal.

Let alone the conditions of World War II, where the government and many of the employers actively sought to have unions in place in order to maintain some organizational rigor in a workforce operating under extreme tension and extreme strain. What we're seeing now though is kind of interesting.

You get these kind of indications that the proliferation of the gig economy, the algorithmic management of work. So the content of the work has changed, but perhaps the management has changed even more. Is beginning to produce phenomena, like these guilds of gig workers.

Uber drivers, getting together in particular cities and petitioning, both for recognition as employees but also for response from the algorithmic employer to treat them like employees. Who pays for workman's compensation? For example. What kind of insurance does the company provide versus relying on the driver, the gig worker to take care of their own insurance?

I think that's a very dynamic environment that's going to be changing and changing of course, differently. Different parts of the United States, different countries. I'm sure the difference in Canada would be very great between Ontario and Alberta just as between New York and Texas.

But I think this will continue to be. There's kind of a cycle here, the great Karl Polanyi spoke about it in his great book, The Great Transformation, from the dominance of the market to the rise of social responses to market discipline, which came both in the field. That is in the labor market, as well as politically.

One of the things, as I say about my notion of the three-player game is just like the three body problem of physics. There's no equilibrium solution. It never settles down to a perpetual stable state.

That was absolutely fascinating. So Bill, you were early to spot the technological revolution. What ended up being a technological revolution of networked and distributed computing architectures the internet, and you profited from that as a venture capitalist. What's your take on whether cryptocurrencies are a technological revolution?

Well, first I think it's important to parse out what is kind of meant by the generic term crypto. First of all, there's an infrastructure layer. This is all implemented with more or less, I mean, available computing resource. Although you can... Optimizing chips for running particular kinds of algorithms, a long history of doing that.

And clearly that applies to any kind of distributed ledger technology. At the infrastructure level however, I think the lesson that is being learned and implemented is that there was an inevitable trade off that directly contradicts the original promise of crypto.

If you really want a truly decentralized network where there was no one in any position of control, the performance is going to suck just as the Bitcoin blockchain sucks. If you want performance throughput, transaction rates that are relevant to any kind of commercial application, you're going to have to accept some degree of centralization.

So the movement from proof of work to proof of stake is a movement from that promise of total and complete decentralization to a degree of centralization around who validates that you actually really have that stake. Okay. So you haven't escaped from a need, you are now in an environment that turns on trust, like every other monetary financial system. That's one.

There's a second dimension here and that is to the extent that you want crypto assets to function other and more than as Tulip Bulbs, then as in every other payment system ever devised by humankind sooner or later, it will need a liquidity provider of last resort, a lender of last resort.

Great work on this from the Bank for International Settlements, its chief economist, Song Shin, one of the top financial economists in the world has orchestrated a series of papers on this. Now, no lender of last resort will take responsibility for under writing your balance sheet without having some view of what you are doing, that leads to your balance sheet being of the sort that it is.

We saw what happened in 2007, not just when the regulators decided that as Alan Greenspan, God bless said, he thought he could rely on the self-preservation of the managers of the big banks. His theory as he said, was mistake. And he thought that rational self-interest would dominate without realizing that rational self-interest was, "If I can maximize the value of my stock options in the next three months, why the hell do I care what happens three years from now?"

But that manner in which these two dimensions of how to think about the economic significance of crypto. It seems to me that is beginning to flow through as more and more experiments are made with, well what could we do with a distributed system that was instantiated and irrefutable. There is this third dimension. The third dimension is not being able to reverse a transaction. Is that a feature or a bug?

Because two people make a contract, whether is to buy and sell a house, buy and sell shares and something intervenes. Something intervenes that neither of them had taken account of. The contract... And Nobel Prizes were awarded for the formal proof that no contract can be complete, not in this universe, not with the second law of thermodynamics. There will always be the potential for unanticipated events.

Well, in the world that we mostly live in today, two people can get together and agree, we don't have to go to court. If you're in the world of crypto, if you have an irreversible smart contract and something changes that you know was not taken account when that contract was written, you have no choice but to go to court. It's going to be a lot of work for lawyers in a truly decentralized smart contract world.

Again, there's more thought going into this, of having out clauses and opportunities for mediation and arbitration, et cetera, et cetera. But I think this is all... We're 10 years into this world and people are beginning to appreciate both the limits and what are needed by the opportunities.

One thing that does encourage me is that some of those who certainly present themselves as being amongst the grownups of the crypto world have been clearly involved in thoughtful conversation with people in Washington about how to construct a relevant regulatory regime, knowing that many, many, many of the players in this game are in it to hack, scam, con and steal. Well, there's nothing new about that in financial systems, that's always been the case.

What do you make of VC firms like a16z investing and really promoting crypto?

Well, I have a great deal of respect for Marc Andreessen, and Ben Horowitz and their colleagues. They've done phenomenal job in building a firm from a standing start in less than 10 years effectively. They've made a very substantial, broad base commitment. One of several of their companies like Coinbase are with those include amongst the grownups who are engaged in trying to see how a regulatory regime can be negotiated.

That makes technological sense, but also makes economic and political sense. How that all plays out, we're at a time when the experiments, particularly on the proof of state platforms like Solana are just being conceived and launched. And whether any of these will really become the kind of killer app that mail order retailed, Montgomery Ward and Sears Roebuck were the killer apps for the railroad age.

And Word Processing and Spreadsheet software was the killer app or the killer apps for the PC. I don't think we have any killer apps yet for crypto. But life is long, there are a lot of smart people playing with this stuff, not only to steal, con, hack, scam. So I expect there will be some economic value generated. Of course, crypto is not the only thing that a16z is up to, they have a very broad portfolio.

Right, of course. I found from reading a lot of your stuff, and you're speaking, and your lectures and also today come with a deep historical perspective. How important do you think it is for investors in the present time?

Now, you've really touched a hot button here. I guess I find and there's nothing new with this current generation of young people in Silicon valley more broadly, I think you could say. I certainly saw this 40 years ago. Those who know that they are inventing the future all too often, think that at learning how the world that they're going to disrupt, how that world came to be and how it works is just a waste of time because we're going to blow it away.

And then all too often as it's happened for example, with Uber and Airbnb and city after city, it bites them in the ass. And then there is another aspect of this, deep history, of taking history seriously. And that of course is reading bubbles. It's all very well to say, "We know a bubble will burst, but we don't know when." But nonetheless actually taking the time to read through why Ken Rogoff and Reinhart wrote that book called This Time Is Different. This time is always different up to a point when it becomes the same.

I had this extraordinary privilege of writing my PhD thesis at Cambridge on 1929 to 31. So in 1999, I truly had seen the movie, Before. And that was an enormous age eight to implementing those time honored rubrics, such as when it's too good to last, it's too good to last. Or you never go broke by taking money off the table.

And on the other hand, never count the money when it's still on the table. Time enough for counting when the dealings done as Kenny Rogers wrote it. So I think taking time with history with financial economic, political as well as technological history is enormously valuable.

Our final question Bill, how do you define success in your life?

In my life, waking up in the morning with the motivation to get to work. Now, it's more academics than entrepreneurial in the classic sense.

This has been great. We really appreciate it.