Financing Innovation

Martin Hutchinson has written an article well worth reading about historical lessons on how best to finance innovation – which is key to economic growth. As might be guessed, Mr. Hutchinson has no respect for today’s way of providing potential innovators with financial backing:

The experiences after 2000 and recently, together with the steady decline in small business formation since the 1970s, strongly suggest that the current venture capital model does not work as an incubator for innovation. The U.S. market for bank financing is far too concentrated, with the mergers since the 1980s having conglomerated the financial sector into a few behemoths in even fewer financial centers. On the other hand, the venture capitalists, while doubtless diverse in ethnicity, sex and gender are very un-diverse indeed in their thought processes, as well as being almost equally geographically concentrated.

Humanity used to be much better at funding innovation, leading to Mr. Hutchinson’s recommendation:

Innovation is best financed by a network of financial institutions that are highly localized, small and above all, intellectually and socially diverse — the 18th century [English] country banks were ideal for this purpose. We need to recreate such a system (the U.S. banking system before 1933, with banks doing investment banking and forbidden to bank interstate, got quite close to it). Add to this a few corporate behemoths with incentives set up for long-term growth and diversification, prohibited from repurchasing their shares and able to set up laboratories like Bell, and you would have a system of innovation encouragement that functioned very much better than the present mess.

Definitely worth reading the whole erudite piece.
The Bear’s Lair: Creating an Innovation Economy | True Blue Will Never Stain (tbwns.com)

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Why, you might call it “Decentralised Finance” (DeFi)! The small minority of people working in this area today who are not grifters, scammers, or crooks are explicitly working toward building a system which would permit grass-roots financing of innovation, routing around the stifling superstructure of regulation, centralisation, and venture capital herd mentality which has smothered innovation in the fiat money empires of the “developed world”.

Many of these initiatives are built around or building upon the “smart contract” capability of the Ethereum blockchain. An example of a legitimate company in this sector is Agoric Systems, which was founded by people including a number of veterans of American Information Exchange (AMIX) and Xanadu, and who have been thinking about these issues since the 1980s, long before anybody thought of a “blockchain”.

The consequences of securities regulation, “qualified investor” rules, the nearly impossibly high bar and enormous up-front and ongoing expense of taking a company public, and a venture capital environment and culture that seeks to loot innovator-founders (same as it ever was) has almost completely smothered independent innovation and driven those who would, and should, be starting disruptive technology companies to work in cubicles at Google. The hope is that, like the Internet, DeFi can grow sufficiently “under the radar” to disrupt these entrenched and poisonous institutions before they react to the threat and snuff it out.

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This is yet another example of the political, cultural and economic suicide of the erstwhile united States of America; just somewhat below-the-radar of most people. While it is indeed a shame that the American Experiment is definitively winding down, the level of official corruption (of a heretofore unprecedentedly sophisticated nature) the average citizen is forced to endure, is such that any reasonable citizen cum serf (where is the strikethrough text when you need it) can only wish for complete implosion of the entire malignant political/administrative/police structure.

For starters, Socrates comes to mind. Defund the police. FBI are de-facto federal police with battering rams, automatic weapons and armored vehicles and God knows what else (although - surprise! - the Constitution enumerates no such federal police power). Ergo…

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