Doing Capitalism in the Innovation Economy” by Dr. William H. Janeway : a review

Doing Capitalism is a must-read for anyone interested in the dynamic interactions of market & politics as well as finance & innovation.

by Laurène Tran |Innovation Working Group, Young Scholars Initiative, Institute for New Economic Thinking

Dr. Janeway with the second edition of his book (May, 2018) at Pembroke College, Cambridge, UK.

I have just finished reading Doing Capitalism in the Innovation Economy:
Reconfiguring the Three-Player Game between Markets, Speculators and the State
(2018) by Dr William H. Janeway. This book is the second edition and expanded edition of a first one (2012).

Dr. Janeway’s core message is loud and clear: since the First Industrial Revolution, the Innovation Economy is the outcome of a Three-Player Game between markets, speculators and the State.

The first edition was received with great enthusiasm among the “Three Players” including Silicon Valley venture capital firm Andreessen Horowitz, or policy-makers at the Paris-based OECD.

To the great joy of students, Doing Capitalism also made it to “introduction to financial economics” syllabi. In the past months, Dr. Janeway has embarked on a book tour whose stops include Princeton, Cambridge or University College London, and many institutions (check the next dates!). Our very own Innovation Working Group had the honor to host his lectures at events in Tallinn and Copenhagen).

Who should read Doing Capitalism ?

Doing Capitalism is a must-read for anyone interested in the dynamic interactions of market and politics as well as finance and innovation. It is a kaleidoscopic analysis, full of characters, business drama and theoretical observations. It’s the testimony of a lifelong work as theorist-practitioner, crystallizing the lessons of a 40-year professional life. Today, Dr. Janeway is Senior Advisor at Warburg Pincus and an affiliated member of the Faculty of Economics of Cambridge University.

Even if you’re not a financier, a technologist, or a academic economist, you’ll be inspired by Doing Capitalism.

Cover of the Second Edition (2018)

For practitioners working at the frontier of finance and innovation

You will discover an insider’s history stretching from the emergence of the new Wall Street in the early 1970s to the dot.com bubble. Dr Janeway shares his journey from being a investment banking agent at F. Eberstadt & Co to launching himself as a venture capital principal with Warburg Pincus. For financiers, Doing Capitalism is a reminder that nothing lasts forever. As Blackstone’s Stephen Schwarzman once said : “There are no patents in finance. Everything has a decay curve, in terms of its margins.

Some crucial figures in Dr. Janeway’s journey : Lord Richard Kahn (economics), Ferdinand Eberstadt (investment banking), Lionel Pincus (private equity), Fred Adler (venture capital), Dr. Hyman Minsky (economics)

For economists and social scientists

You will enjoy Dr. Janeway’s "from-the-field" debunking of the building blocks of modern finance theory and neoclassical economics such as fundamental value or Schumpeterian Growth Theory.

“Practice drove any belief in a single, verifiable fair or fundamental value out of my brain long before I seriously thought through the theoretical impossibilities of the Efficient Market Hypothesis and its assertion that market prices could be relied on to represent accurately that fair and fundamental value.
I was fortunate to learn so early in my career the value of viewing the “fundamental” with suspicion. Application of such skepticism faced in two directions. With respect to financial assets, the anchor of a value around which prices are supposed to fluctuate is itself a problematic entity, subject to divergent opinions and estimates. The same stance applies to the calculations that rationalized investment in the physical assets of the so-called real economy — and more so to the extent that those assets embodied innovative technology.
Years later at Warburg Pincus, I would instruct my team that they were allowed to run one instance of a financial model of a start-up to check for logical consistency, but if they insisted on running more instances in the hope of defining the prospective rate of return, we would not do the deal.” (p.29–30)
HP-12C, a Hewlett-Packard financial calculator used by financial professionals before Excel
  • On Schumpeterian Growth Theory and its failure at grasping the full dynamics of innovation, chiefly market risk :
P. Aghion and P. Howitt, The Economics of Growth (2009)
“My own experience suggests that too much weight is often given to management of the process of technical transformation — “research and development” –and too little to the selection of the target market and the establishment of a channel to that market.
At their core, the formal mathematical models constructed to explore the process define a competitive battle to introduce a novel — cheaper, faster, better — “intermediate product” that will earn monopoly profits until superseded. But the market for that innovation is known in advance by construction.
What’s more, that market’s perfectly competitive nature feeds back to enable the innovating entrepreneur to know in advance the return she will earn if she is successful and so equip her to optimize her investment in innovation against its cost. The exercise is all about success in addressing technology risk under the characteristic neoclassical “pretense of knowledge” that assumes the market participant knows more than it is possibly available to know.
And, with respect to the subject at hand, it utterly ignores the existence of market risk.” (p.79–80)

What’s new in the 2nd edition of Doing Capitalism?

The first edition (2012) was published in the aftermaths of the financial crisis. Back then, everyone was talking about “the financial instability hypothesis”, whether we had lived through another “Minsky moment”, how come economists could have missed such a big crisis.

Silicon Valley
“We live on the dark side of America’s Three-Player Game”

Fast-forward 10 years, in 2018, we’re living an anti-tech backlash. Sure, tech stocks are doing fine, venture capital hits all-time record, yet, today the tech industry and the world of startups at large, lives a crisis in intellectual and moral leadership. They have shied away from the most pressing economic and social issues. This is not the case of Dr. Janeway.

What has changed with the digital economy ?

“During the eighteen years since the collapse of the great Internet Bubble, the relationship between the IT sector and the state has been reversed. Dependent on state support of research and procurement through its growth to maturity, the IT sector has now fostered a full- fledged digital revolution, comparable in scale and scope to the consequences of the railroads and of electrification. And the resulting transformation of economic and social and political life now confronts the market and regulatory structures of the legacy economy and re- defines the responsibilities of the state. No longer solely functioning as collaborative partners with government in an extended process of invention and deployment, those at the forefront of the digital revolution are challenging the state at both micro- and macro-levels.” (p.332)

The digital economy disrupts the rules, norms and mechanisms that help agents coordinate and relate to one another (or in the French Régulation school framework, what you call forms of competition, wage-labor nexus, form of the State, monetary, financial and international regimes).

“At the micro-level of individual firms addressing specific markets, the confrontation is deliberate. As always, the innovators are setting out to disrupt established markets and destroy the incumbents who occupy them: to do so, they must override the ecosystem of state- sanctioned and state-enforced rules that co-evolved with the markets, and without which the markets could not have functioned.
At the macro-level, digitalization has powered the triple forces of automation, globalization and financialization to drive the increasingly unequal distribution of income and wealth.”(p.295)
Dr. Janeway, co-founder of the Institute for New Economic Thinking (INET) with INET President Rob Johnson discuss the new edition of his book. Dr. Janeway explains what he’s learned about the economics of innovation.

You can’t get away from culture and politics

Today, the digital economy seems to have reach its own limits. William H. Janeway puts it:

“the Unicorn Bubble is threatened by cumulative evidence that realization of the incalculable returns from digitizing the economy of atoms is subject to impediments that are literally mundane, the frictions of the economic, political and cultural world that exists and has existed and will exist. The most successful digital disruptors have come to recognize this. To achieve their potential growth and ultimate profitability depends on taking these impediments seriously and learning how to address them effectively.”(p.300)
MIT political scientist Prof. Kathleen Thelen is working on a comparative political economy of Uber’s diffusion

For those doing capitalism, institutions, prevailing rules, norms and regulation are often seen as constraints to their growth. Uber learnt it the hard way. Dara Khosrowshahi, Uber’s chief executive himself warns his fellows tech folks:

“While the digital companies build platforms, they have to be more aware of the power of the platform (…). If the shift doesn’t come from the industry, then the government will take over.”

Come in the trenches

Dr. Janeway warns tech companies:

“Firms successful in disrupting the old physical economy will need to have as a core competency the ability to manage the political and cultural elements of the ecosystems in which they operate, as well as the purely economic ones (…) In short, the longer-term, sustainable value (…) will depend as much on successful application of lessons from the humanities (history, moral philosophy and literature) and the social sciences (the political economy and sociology of markets) as on mastery of the STEM disciplines (science, technology, engineering and mathematics).” (p.368)
Does Dr. Janeway suggest that it’s now our turn to storm in the trenches of the digital revolution?

Doing Capitalism is the story of Dr. Janeway’s learning the game of venture capital in the trenches. Does he suggest that it’s now our turn to storm in the trenches of the digital revolution?

The book ends with a powerful reminder:

“A progress is not to be measured by near-term outcomes of debate over specific policies. Rather, it is the context in which such debates are conducted in the long run that truly matters.” (p.371)

Changing the context in which the debate takes place—this is also the raison d’être of Innovation Working Group at the Young Scholars Initiative. Join us!


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Prof. Mary O’Sullivan, Laurène Tran, Dr. Janeway, Besiana Balla with the YSI Innovation Working (Tallinn, 2017)

The Innovation Working Group views Innovation as being central to the process of economic development and growth. The Working Group aims to study how economic actors, policies, technology and market conditions interact and evolve over time. We provide a platform to create professional and academic networks for young scholars to share and promote their work on innovation related topics.