1 00:00:00,090 --> 00:00:02,430 The following content is provided under a Creative 2 00:00:02,430 --> 00:00:03,820 Commons license. 3 00:00:03,820 --> 00:00:06,030 Your support will help MIT OpenCourseWare 4 00:00:06,030 --> 00:00:10,120 continue to offer high-quality educational resources for free. 5 00:00:10,120 --> 00:00:12,660 To make a donation or to view additional materials 6 00:00:12,660 --> 00:00:16,620 from hundreds of MIT courses, visit MIT OpenCourseWare 7 00:00:16,620 --> 00:00:17,992 at ocw.mit.edu. 8 00:00:20,168 --> 00:00:21,710 WILLIAM B. BONVILLIAN: I'm just going 9 00:00:21,710 --> 00:00:24,950 to go very quickly through the World Economic Forum. 10 00:00:24,950 --> 00:00:28,190 I only wanted you all to glance at this and get an idea of it, 11 00:00:28,190 --> 00:00:33,140 because what it's in here for is to show that we're not 12 00:00:33,140 --> 00:00:35,660 the only ones trying to think about innovation factors, 13 00:00:35,660 --> 00:00:35,900 right. 14 00:00:35,900 --> 00:00:37,317 They are trying to figure out what 15 00:00:37,317 --> 00:00:40,730 these factors are as they assess different national economies. 16 00:00:40,730 --> 00:00:43,550 They have a whole global competitiveness rating 17 00:00:43,550 --> 00:00:46,170 system, which they get out every other year. 18 00:00:46,170 --> 00:00:49,250 So in 2015, 2016, as you saw, Switzerland 19 00:00:49,250 --> 00:00:50,840 was number one, Singapore number two, 20 00:00:50,840 --> 00:00:53,780 and the US was number three in their rating. 21 00:00:53,780 --> 00:00:57,590 And then they have a whole series of elements 22 00:00:57,590 --> 00:01:01,310 that they consider in their global competitiveness 23 00:01:01,310 --> 00:01:01,980 analysis. 24 00:01:01,980 --> 00:01:06,620 So they look at what they call factor-driven economies, 25 00:01:06,620 --> 00:01:10,010 and the pillars there are institutions and infrastructure 26 00:01:10,010 --> 00:01:13,640 and macroeconomic environment and actually 27 00:01:13,640 --> 00:01:16,550 early-stage education as a pillar in health. 28 00:01:16,550 --> 00:01:21,080 And then efficiency-driven economies, they call them-- 29 00:01:21,080 --> 00:01:25,220 that's higher education, that's market efficiency for goods, 30 00:01:25,220 --> 00:01:27,980 that's labor market efficiency, that's 31 00:01:27,980 --> 00:01:32,400 financial market developments, technology readiness, and so 32 00:01:32,400 --> 00:01:32,900 forth. 33 00:01:32,900 --> 00:01:34,760 And then innovation-driven economies, 34 00:01:34,760 --> 00:01:37,910 business sophistication, and innovation capability. 35 00:01:37,910 --> 00:01:39,890 So they have a very different mix here. 36 00:01:39,890 --> 00:01:42,170 I just wanted to throw in kind of a comparative way 37 00:01:42,170 --> 00:01:44,570 of other people looking at the problems 38 00:01:44,570 --> 00:01:47,420 that we're talking about, and the kind of pillars 39 00:01:47,420 --> 00:01:49,010 that they come about, and how they 40 00:01:49,010 --> 00:01:53,960 sort different kind of world economies and organize them. 41 00:01:53,960 --> 00:01:59,540 But a lot of these factors we've just been talking about. 42 00:01:59,540 --> 00:02:02,330 Kind of the core, I think, of what 43 00:02:02,330 --> 00:02:08,240 the takeaway is from this study, and let me get-- 44 00:02:08,240 --> 00:02:10,490 you also had Rycroft, Lily, as well, 45 00:02:10,490 --> 00:02:15,590 so why don't I get Rycroft out on the table too. 46 00:02:15,590 --> 00:02:17,540 That's Bob Rycroft and Kash. 47 00:02:21,170 --> 00:02:23,450 They did this piece back in 1999. 48 00:02:23,450 --> 00:02:29,620 And I'm leading in to how do you look at some of these more 49 00:02:29,620 --> 00:02:33,220 indirect innovation factors? 50 00:02:33,220 --> 00:02:35,320 Because they remain important, and we're just 51 00:02:35,320 --> 00:02:38,320 going to pick three. 52 00:02:38,320 --> 00:02:42,820 And you know they're looking at a kind of an element 53 00:02:42,820 --> 00:02:45,460 of innovation organization, which I think is a core factor, 54 00:02:45,460 --> 00:02:48,340 but they're talking about kind of a sub-piece of it, 55 00:02:48,340 --> 00:02:52,930 this kind of networking theory of innovation organization. 56 00:02:52,930 --> 00:02:57,020 I think it's an intriguing piece. 57 00:02:57,020 --> 00:03:00,140 They argue that we are now at a stage in the world economy 58 00:03:00,140 --> 00:03:03,640 that complex technologies drive the economy. 59 00:03:03,640 --> 00:03:08,900 So with complex technologies, the lone inventor 60 00:03:08,900 --> 00:03:12,432 in the garage working solo-- 61 00:03:12,432 --> 00:03:13,015 that's a myth. 62 00:03:13,015 --> 00:03:16,570 That doesn't work anymore, because the technologies that 63 00:03:16,570 --> 00:03:19,930 lead to innovation are just too complex, they argue. 64 00:03:19,930 --> 00:03:23,230 So that means that the traditional focus 65 00:03:23,230 --> 00:03:28,510 of US technology policy on R&D at particular institutions 66 00:03:28,510 --> 00:03:33,520 and in open markets, that's not necessarily right anymore, they 67 00:03:33,520 --> 00:03:34,810 argue. 68 00:03:34,810 --> 00:03:38,680 So they say that a much more self-conscious 69 00:03:38,680 --> 00:03:44,610 networked learning environment is actually key. 70 00:03:44,610 --> 00:03:47,690 And what does that mean? 71 00:03:47,690 --> 00:03:52,670 Well, complex technologies, we know, dominate world exports-- 72 00:03:52,670 --> 00:03:59,650 82% in 1995 compared to 43% in 1970. 73 00:03:59,650 --> 00:04:02,110 The rise in complex products means 74 00:04:02,110 --> 00:04:05,840 a rise in complex organizational models that goes with it. 75 00:04:08,470 --> 00:04:10,060 The number of corporate alliances, 76 00:04:10,060 --> 00:04:12,070 corporate interrelationships, the connectedness 77 00:04:12,070 --> 00:04:14,980 to the actors, becomes all that much more critical 78 00:04:14,980 --> 00:04:19,930 when the dominant products are complex technology based. 79 00:04:19,930 --> 00:04:21,910 So as product complexity grows, the need 80 00:04:21,910 --> 00:04:26,440 for innovative networks grows. 81 00:04:26,440 --> 00:04:31,480 And technological progress in this phase 82 00:04:31,480 --> 00:04:34,480 really requires that network learning, integrating, 83 00:04:34,480 --> 00:04:36,370 and applying a whole wide variety 84 00:04:36,370 --> 00:04:39,490 of new science and technology knowledge and know-how. 85 00:04:39,490 --> 00:04:40,690 That now becomes key. 86 00:04:43,930 --> 00:04:46,680 Gee whiz, you know, we're not organized around that. 87 00:04:46,680 --> 00:04:50,080 If these guys are right, we've got an innovation system 88 00:04:50,080 --> 00:04:53,590 that's organized on a much earlier idea of how 89 00:04:53,590 --> 00:04:55,240 technologies evolve. 90 00:04:55,240 --> 00:04:58,660 It doesn't necessarily reflect the reality of the complexity, 91 00:04:58,660 --> 00:05:00,370 and the fact that the complexity drives 92 00:05:00,370 --> 00:05:04,870 much more complex organizational system, which includes 93 00:05:04,870 --> 00:05:07,190 networking, they argue. 94 00:05:07,190 --> 00:05:13,640 So they cite George Brown, who is a great former chairman 95 00:05:13,640 --> 00:05:16,850 of the House Science Committee, on the point that neglect 96 00:05:16,850 --> 00:05:19,700 of the processes of knowledge and their diffusion 97 00:05:19,700 --> 00:05:23,900 and application needs to be a core concern of the innovation 98 00:05:23,900 --> 00:05:24,400 system. 99 00:05:26,995 --> 00:05:28,620 And Brown is talking about particularly 100 00:05:28,620 --> 00:05:33,100 at the governmental level, the governmental kind of role here. 101 00:05:33,100 --> 00:05:35,090 There's new kinds of learning that need 102 00:05:35,090 --> 00:05:39,030 to take place and need to be organized around. 103 00:05:39,030 --> 00:05:41,360 If you're going to have this kind 104 00:05:41,360 --> 00:05:44,400 of learning network system-- 105 00:05:44,400 --> 00:05:46,830 so a shared network learning, which 106 00:05:46,830 --> 00:05:49,830 cuts across a series of institutions, 107 00:05:49,830 --> 00:05:53,040 institutional engineering that brings 108 00:05:53,040 --> 00:05:55,620 in other parts of the systems, like the regulatory side, 109 00:05:55,620 --> 00:05:58,550 into the network-- 110 00:05:58,550 --> 00:06:00,780 there's got to be a whole evaluation and what 111 00:06:00,780 --> 00:06:04,230 they call co-evaluation between complex organizations 112 00:06:04,230 --> 00:06:06,420 and the technologies that they're developing. 113 00:06:06,420 --> 00:06:10,360 So learning by doing, learning by using, 114 00:06:10,360 --> 00:06:12,850 learning from scientific and technology advances, 115 00:06:12,850 --> 00:06:17,300 learning from spillovers, learning from interaction. 116 00:06:17,300 --> 00:06:20,120 They argue that these are whole new features of learning 117 00:06:20,120 --> 00:06:22,287 that need to occur that aren't necessarily accounted 118 00:06:22,287 --> 00:06:24,300 for our current learning systems. 119 00:06:24,300 --> 00:06:26,690 So they need to be changed to really accommodate 120 00:06:26,690 --> 00:06:29,990 the new realities of the way in which innovation is 121 00:06:29,990 --> 00:06:31,700 going to have to get organized. 122 00:06:31,700 --> 00:06:36,210 So that's their proposition. 123 00:06:36,210 --> 00:06:39,120 I thought it was just kind of a fun read. 124 00:06:39,120 --> 00:06:41,622 It tells us a little more about the determinism piece 125 00:06:41,622 --> 00:06:43,080 that we were talking about earlier, 126 00:06:43,080 --> 00:06:47,250 complex technologies demand new organizational models. 127 00:06:47,250 --> 00:06:49,980 And if Nelson is right, innovation organization really 128 00:06:49,980 --> 00:06:54,070 amounts to a core direct innovation factor, 129 00:06:54,070 --> 00:06:57,660 then you know stuff like what Rycroft and Kash are proposing 130 00:06:57,660 --> 00:06:59,620 becomes significant in the process. 131 00:06:59,620 --> 00:07:01,140 Lily, it's all yours. 132 00:07:01,140 --> 00:07:02,127 LILY: That was speedy. 133 00:07:02,127 --> 00:07:03,710 WILLIAM B. BONVILLIAN: Yeah, I'm going 134 00:07:03,710 --> 00:07:06,150 to go high-speed for the rest of the class. 135 00:07:06,150 --> 00:07:08,610 LILY: First I'll point out a couple of things 136 00:07:08,610 --> 00:07:13,800 that Bill didn't hit the World Economic Forum 2015-16 report. 137 00:07:13,800 --> 00:07:18,870 They do mention that, after the global economic crisis of 2008, 138 00:07:18,870 --> 00:07:24,360 economies are experiencing increased growth again-- 139 00:07:24,360 --> 00:07:26,120 and actually in the United States, 140 00:07:26,120 --> 00:07:29,820 are experiencing the lowest unemployment rate since 2008. 141 00:07:29,820 --> 00:07:31,680 However, global economies are projected 142 00:07:31,680 --> 00:07:34,490 to have slower rates of economic growth 143 00:07:34,490 --> 00:07:39,020 than they did pre-housing or global economic crisis of 2008. 144 00:07:39,020 --> 00:07:42,865 And so that sort of brought me to a question-- 145 00:07:42,865 --> 00:07:47,290 it was a question for a couple of the rest of you as well-- 146 00:07:47,290 --> 00:07:50,700 which is, why is it not enough, or is 147 00:07:50,700 --> 00:07:53,670 it enough, for growth rates to be positive 148 00:07:53,670 --> 00:07:55,970 and slow and steady? 149 00:07:55,970 --> 00:07:59,100 So what is the magic thing that happens between a growth rate 150 00:07:59,100 --> 00:08:02,187 of about, what are we at, 1.8%? 151 00:08:02,187 --> 00:08:03,770 WILLIAM B. BONVILLIAN: Yeah, around 2. 152 00:08:03,770 --> 00:08:06,750 LILY: And about 3%, which seems to be more 153 00:08:06,750 --> 00:08:10,620 of an optimistic atmosphere. 154 00:08:10,620 --> 00:08:15,900 So what's going on in that 1%, and do we 155 00:08:15,900 --> 00:08:21,990 need to maybe, for the next few years, post 2008 prices? 156 00:08:21,990 --> 00:08:24,070 With the global economy struggling, 157 00:08:24,070 --> 00:08:27,780 do we need to readjust ourselves to adapt to a lower 158 00:08:27,780 --> 00:08:28,780 rate of economic growth? 159 00:08:31,735 --> 00:08:33,110 MAX: So in the report, I remember 160 00:08:33,110 --> 00:08:36,530 that they had mentioned that we should 161 00:08:36,530 --> 00:08:40,010 be trying to push further and try to keep our growth, 162 00:08:40,010 --> 00:08:41,200 to try to make it faster. 163 00:08:41,200 --> 00:08:45,270 But when I was reading I felt like, well, 164 00:08:45,270 --> 00:08:47,060 maybe that extremely high growth rate 165 00:08:47,060 --> 00:08:50,300 was emphasized in the first place, part of it anyway. 166 00:08:50,300 --> 00:08:54,600 So, at least from what I see, maybe we should just 167 00:08:54,600 --> 00:08:56,160 try to adapt to what we have now, 168 00:08:56,160 --> 00:09:01,888 and just keep things more steady [INAUDIBLE] 169 00:09:01,888 --> 00:09:04,152 we do that it'll be less intense. 170 00:09:04,152 --> 00:09:06,610 AUDIENCE: So, like kind of stay on that more gradual slope, 171 00:09:06,610 --> 00:09:10,350 rather than the steep one that bubbles out and then hits that? 172 00:09:10,350 --> 00:09:11,625 Is that what you're saying? 173 00:09:11,625 --> 00:09:12,412 MAX: Yeah. 174 00:09:12,412 --> 00:09:14,870 WILLIAM B. BONVILLIAN: So let me take that on for a minute. 175 00:09:14,870 --> 00:09:17,840 Because if technological and related innovation is 176 00:09:17,840 --> 00:09:21,390 the dominant causative factor of growth, 177 00:09:21,390 --> 00:09:25,950 and your societal well-being depends upon your ability 178 00:09:25,950 --> 00:09:28,860 to have that growth and to spread that well-being across 179 00:09:28,860 --> 00:09:34,290 this society, then if we're stuck at a one at a 1.8-2% 180 00:09:34,290 --> 00:09:38,490 growth rate, isn't that going to be an enduring disruptive 181 00:09:38,490 --> 00:09:41,787 problem in this society? 182 00:09:41,787 --> 00:09:43,370 Aren't we going to be a lot better off 183 00:09:43,370 --> 00:09:45,065 if we could push that up to 3%? 184 00:09:48,500 --> 00:09:49,417 LILY: Is it emotional? 185 00:09:49,417 --> 00:09:52,550 Is it like the stock market, that's emotionally driven? 186 00:09:52,550 --> 00:09:53,758 Is that what's going on here? 187 00:09:53,758 --> 00:09:55,300 WILLIAM B. BONVILLIAN: Well, if we've 188 00:09:55,300 --> 00:09:57,460 got a deep problem of economic income inequality 189 00:09:57,460 --> 00:10:02,770 at this point, an economic growth rate helps a lot 190 00:10:02,770 --> 00:10:04,080 in dealing with that. 191 00:10:04,080 --> 00:10:06,780 It's much more problematic to deal with that 192 00:10:06,780 --> 00:10:08,490 with a low growth rate. 193 00:10:08,490 --> 00:10:11,580 For example, this kind of barbell effect that we've 194 00:10:11,580 --> 00:10:16,740 got in this society of a growing upper-middle class, and then 195 00:10:16,740 --> 00:10:22,020 a thinning middle, and a growing lower-end services, 196 00:10:22,020 --> 00:10:24,870 lower-paid services sector which the middle is being pushed 197 00:10:24,870 --> 00:10:27,330 into, it gets a lot harder to fix 198 00:10:27,330 --> 00:10:29,820 that unless you've got a stronger growth rate, 199 00:10:29,820 --> 00:10:31,320 I'd argue. 200 00:10:31,320 --> 00:10:32,340 I understand your point. 201 00:10:32,340 --> 00:10:35,310 How much stuff do we really need, right? 202 00:10:35,310 --> 00:10:38,280 How many things we actually have to have? 203 00:10:38,280 --> 00:10:42,270 Is there a whole new way of organizing this society? 204 00:10:42,270 --> 00:10:46,646 So you're making an interesting underlying point, I think, Max. 205 00:10:46,646 --> 00:10:49,520 AUDIENCE: Then there's also the competitive [INAUDIBLE] 206 00:10:49,520 --> 00:10:56,190 competitive piece we're supposed to be beating other countries. 207 00:10:56,190 --> 00:10:58,016 We need those innovation waves if we're 208 00:10:58,016 --> 00:11:03,000 going to keep ownership of technologies. 209 00:11:03,000 --> 00:11:04,880 MAX: Although, in this more globalized world, 210 00:11:04,880 --> 00:11:06,420 we're all very connected, which is 211 00:11:06,420 --> 00:11:09,420 why the housing crisis that really was local 212 00:11:09,420 --> 00:11:11,970 here affected everyone. 213 00:11:11,970 --> 00:11:13,600 AUDIENCE: Yes, on the other hand, 214 00:11:13,600 --> 00:11:18,730 we definitely see ourselves as leaders 215 00:11:18,730 --> 00:11:19,940 compared to other countries. 216 00:11:19,940 --> 00:11:21,357 I mean, there's no doubt about it, 217 00:11:21,357 --> 00:11:23,470 and I think that there's a real argument 218 00:11:23,470 --> 00:11:26,350 to be made that if we're not the ones 219 00:11:26,350 --> 00:11:28,720 to do the discovery around energy, or whatever, 220 00:11:28,720 --> 00:11:31,840 others will. 221 00:11:31,840 --> 00:11:34,290 WILLIAM B. BONVILLIAN: And the gains are substantial. 222 00:11:34,290 --> 00:11:36,315 A first mover advantage is substantial. 223 00:11:36,315 --> 00:11:37,690 AUDIENCE: But I guess I would say 224 00:11:37,690 --> 00:11:39,520 that it's a good question of how much do 225 00:11:39,520 --> 00:11:42,632 we really need to consume? 226 00:11:42,632 --> 00:11:44,500 LILY: Or perhaps it's not necessarily 227 00:11:44,500 --> 00:11:46,990 the 1.8% that's the problem, it's 228 00:11:46,990 --> 00:11:49,700 the one-two punch of the dot-com, 229 00:11:49,700 --> 00:11:52,440 our technological wave, or bubble, bursting, 230 00:11:52,440 --> 00:11:54,070 and then immediately after that having 231 00:11:54,070 --> 00:12:01,670 also a global economic crisis that compounded each other. 232 00:12:01,670 --> 00:12:05,330 But one of your points brought up another question 233 00:12:05,330 --> 00:12:10,850 that someone made, and that is have we identified, 234 00:12:10,850 --> 00:12:13,520 either within the United States or internationally, 235 00:12:13,520 --> 00:12:17,480 what could be our next innovative wave? 236 00:12:17,480 --> 00:12:19,280 And is it the same for the United States 237 00:12:19,280 --> 00:12:20,500 as it is for the rest of the world, 238 00:12:20,500 --> 00:12:22,083 or have we even identified it or do we 239 00:12:22,083 --> 00:12:23,478 think we know what it is yet? 240 00:12:25,868 --> 00:12:27,243 MARTIN: The next wave is probably 241 00:12:27,243 --> 00:12:30,770 going to be biotech as well. 242 00:12:30,770 --> 00:12:32,480 Because what's happening with biotech 243 00:12:32,480 --> 00:12:36,080 is that there's this thing called Moore's law, which 244 00:12:36,080 --> 00:12:39,970 is a [INAUDIBLE] every year, I think, every 18 months 245 00:12:39,970 --> 00:12:41,400 you double your capabilities. 246 00:12:41,400 --> 00:12:46,730 For a lot of bioengineering the ability to sequence and also 247 00:12:46,730 --> 00:12:49,098 write DNA, [INAUDIBLE] sequencing, 248 00:12:49,098 --> 00:12:50,640 I forget how fast the [INAUDIBLE] is. 249 00:12:50,640 --> 00:12:52,940 You might be able to Google it, I forget what the name is. 250 00:12:52,940 --> 00:12:53,898 LILY: That's what I do. 251 00:12:53,898 --> 00:12:58,070 The Human Genome Project was over 10 years and cost 252 00:12:58,070 --> 00:12:59,570 billions of dollars, and now I can 253 00:12:59,570 --> 00:13:02,967 sequence a couple hundred genomes for a few thousand 254 00:13:02,967 --> 00:13:04,170 dollars. 255 00:13:04,170 --> 00:13:06,105 MARTIN: Those kind of exponential economics 256 00:13:06,105 --> 00:13:08,820 is what drives the next wave. 257 00:13:08,820 --> 00:13:12,461 But that's a lot like IT, energy would probably 258 00:13:12,461 --> 00:13:14,650 be like [SNAPS] somebody figures some key thing out, 259 00:13:14,650 --> 00:13:17,780 and it's all ahead. 260 00:13:17,780 --> 00:13:19,290 Due to the nature of that market, 261 00:13:19,290 --> 00:13:20,873 because of fusion and stuff like that, 262 00:13:20,873 --> 00:13:22,350 you could figure out a way to-- 263 00:13:22,350 --> 00:13:23,633 LILY: True, but then I think-- 264 00:13:23,633 --> 00:13:25,800 AUDIENCE: It's not the history of energy technology. 265 00:13:25,800 --> 00:13:28,715 LILY: Yeah, I was going to say something like, for example, 266 00:13:28,715 --> 00:13:29,340 the light bulb. 267 00:13:29,340 --> 00:13:31,615 Yeah, sure, Edison figured out the light bulb, 268 00:13:31,615 --> 00:13:33,990 but then on top of that, there was all the infrastructure 269 00:13:33,990 --> 00:13:36,180 and moving over to that technology 270 00:13:36,180 --> 00:13:39,447 that really spilled over. 271 00:13:39,447 --> 00:13:41,280 WILLIAM B. BONVILLIAN: So Lily, why don't we 272 00:13:41,280 --> 00:13:45,002 go to Rycroft and Kash. 273 00:13:45,002 --> 00:13:49,410 LILY: It was summarized by Bill, and I just 274 00:13:49,410 --> 00:13:52,440 wanted to bring attention to a couple of questions 275 00:13:52,440 --> 00:13:56,620 about Rycroft and Kash. 276 00:13:56,620 --> 00:13:59,280 So one was a closed question. 277 00:13:59,280 --> 00:14:01,680 How do you strike a proper balance, 278 00:14:01,680 --> 00:14:04,440 or can you identify a proper balance between encouraging 279 00:14:04,440 --> 00:14:08,620 competitive R&D inside a single industry or field, 280 00:14:08,620 --> 00:14:12,000 and then for encouraging this collective learning 281 00:14:12,000 --> 00:14:14,390 that Rycroft and Kash say is so important? 282 00:14:14,390 --> 00:14:16,230 And I also have a similar question 283 00:14:16,230 --> 00:14:18,840 is, is it possible to foster networking 284 00:14:18,840 --> 00:14:22,280 and shared learning while protecting profits and patents? 285 00:14:22,280 --> 00:14:24,680 Which I think is exactly what you were saying. 286 00:14:24,680 --> 00:14:26,410 So do we-- yeah. 287 00:14:26,410 --> 00:14:29,000 AUDIENCE: So, while not always considered the most innovative 288 00:14:29,000 --> 00:14:30,750 field, the oil and gas sector has actually 289 00:14:30,750 --> 00:14:33,910 come up with interesting ways to do shared learning with, 290 00:14:33,910 --> 00:14:35,440 like, joint industry projects where 291 00:14:35,440 --> 00:14:39,990 they have third-party labs run projects and companies 292 00:14:39,990 --> 00:14:40,960 or buy into them. 293 00:14:40,960 --> 00:14:43,890 And that they all share the knowledge of information that 294 00:14:43,890 --> 00:14:45,073 has collective good to them. 295 00:14:45,073 --> 00:14:46,740 And I've always thought it's interesting 296 00:14:46,740 --> 00:14:49,020 that you don't see that in many other industries, 297 00:14:49,020 --> 00:14:51,520 but it seems like it has a lot of potential to be useful. 298 00:14:51,520 --> 00:14:56,180 Some of you sign these confidentiality agreements, 299 00:14:56,180 --> 00:14:58,050 and you recognize that we all benefit 300 00:14:58,050 --> 00:14:59,790 from understanding this better. 301 00:14:59,790 --> 00:15:02,303 It seems like it could be widely applicable 302 00:15:02,303 --> 00:15:04,220 AUDIENCE: I think one thing to note about that 303 00:15:04,220 --> 00:15:09,690 is that oil and gas is pretty mature heard industry. 304 00:15:09,690 --> 00:15:11,850 And, say, take biotech. 305 00:15:11,850 --> 00:15:14,610 There's a ton of startups and new companies, 306 00:15:14,610 --> 00:15:18,990 like for example the new IP battle over the CRISPR/Cas-9 307 00:15:18,990 --> 00:15:21,570 technology, that's huge, because there's so many different 308 00:15:21,570 --> 00:15:23,490 companies-- like five or six-- 309 00:15:23,490 --> 00:15:28,020 things spawned out of these core ideas and these IP technologies 310 00:15:28,020 --> 00:15:30,060 that they're licensing from essentially 311 00:15:30,060 --> 00:15:31,490 two different entities. 312 00:15:31,490 --> 00:15:35,580 And whoever gets those rights, they have to pay money to. 313 00:15:35,580 --> 00:15:38,760 So I think it makes sense, like to kind 314 00:15:38,760 --> 00:15:41,280 of share knowledge on a more mature level, 315 00:15:41,280 --> 00:15:46,100 but for early technologies and early companies 316 00:15:46,100 --> 00:15:48,240 it's hard to say, because you're still 317 00:15:48,240 --> 00:15:50,560 trying to protect your market share 318 00:15:50,560 --> 00:15:53,450 and kind of enter the market that way. 319 00:15:53,450 --> 00:15:55,450 AUDIENCE: Could I [INAUDIBLE] you? 320 00:15:55,450 --> 00:15:56,970 How do you feel like that will be 321 00:15:56,970 --> 00:16:03,090 impacted by international science competitiveness? 322 00:16:03,090 --> 00:16:07,020 AUDIENCE: Yeah, I feel like international kind of-- 323 00:16:07,020 --> 00:16:08,690 AUDIENCE: Again, so I probably should've 324 00:16:08,690 --> 00:16:10,750 framed that a little bit better, I 325 00:16:10,750 --> 00:16:13,300 think the context of CRISPR technologies, 326 00:16:13,300 --> 00:16:15,070 it's primarily domestic right? 327 00:16:15,070 --> 00:16:18,150 It's really Berkeley and MIT who are really 328 00:16:18,150 --> 00:16:20,200 fighting for the patent. 329 00:16:20,200 --> 00:16:23,190 So in that instance, what do you think, 330 00:16:23,190 --> 00:16:26,370 in terms of this particular technology, 331 00:16:26,370 --> 00:16:28,350 is the role in international competition 332 00:16:28,350 --> 00:16:31,420 or is this a conflict that can be resolved domestically-- 333 00:16:31,420 --> 00:16:33,530 in another more innovative way that 334 00:16:33,530 --> 00:16:34,814 does not involve patenting? 335 00:16:34,814 --> 00:16:36,189 I don't know if that's too much-- 336 00:16:36,189 --> 00:16:39,660 AUDIENCE: So I think the fight also kind of extends to Europe, 337 00:16:39,660 --> 00:16:42,780 just because there has been some patents filed there. 338 00:16:42,780 --> 00:16:45,510 I don't know too much about the legal stuff necessarily, 339 00:16:45,510 --> 00:16:49,110 but I think especially since CRISPR 340 00:16:49,110 --> 00:16:52,170 is kind of like the new frontier for biotech and medical 341 00:16:52,170 --> 00:16:55,020 technologies to really get into the genome editing 342 00:16:55,020 --> 00:16:57,595 and could be really applicable to a whole bunch 343 00:16:57,595 --> 00:16:59,220 of different subfields and applications 344 00:16:59,220 --> 00:17:02,630 that actually about lot labs are working on here and elsewhere. 345 00:17:02,630 --> 00:17:05,349 So I think it's also kind of international, 346 00:17:05,349 --> 00:17:07,290 just because companies abroad-- 347 00:17:07,290 --> 00:17:09,960 I'm sure Germany and other big biotech companies 348 00:17:09,960 --> 00:17:13,950 there are probably interested in probably working them, 349 00:17:13,950 --> 00:17:14,887 like right now. 350 00:17:14,887 --> 00:17:16,470 WILLIAM B. BONVILLIAN: Right, and just 351 00:17:16,470 --> 00:17:19,920 to add a point to this IP point that you all have been raising. 352 00:17:19,920 --> 00:17:24,660 So in our panoply of direct and indirect innovation factors, 353 00:17:24,660 --> 00:17:28,470 this whole world of intellectual property rights is indirect, 354 00:17:28,470 --> 00:17:30,600 but we can all see how potentially significant 355 00:17:30,600 --> 00:17:31,240 it could be. 356 00:17:31,240 --> 00:17:34,530 In other words, it's not going to fundamentally affect 357 00:17:34,530 --> 00:17:37,032 your ability to undertake the innovation itself, 358 00:17:37,032 --> 00:17:38,490 but it sure may affect your ability 359 00:17:38,490 --> 00:17:39,996 to realize gains off of it. 360 00:17:45,708 --> 00:17:48,800 MATT: Can I ask a quick question about the-- 361 00:17:48,800 --> 00:17:53,110 you mentioned the advantage of a first mover, 362 00:17:53,110 --> 00:17:56,457 and so Nelson was saying that the first firm doesn't 363 00:17:56,457 --> 00:18:00,150 necessarily get most of the economic gains. 364 00:18:00,150 --> 00:18:01,740 To me intuitively, especially where 365 00:18:01,740 --> 00:18:03,240 it's something like energy, where 366 00:18:03,240 --> 00:18:06,075 you're maybe the first person, and you're setting up a bunch 367 00:18:06,075 --> 00:18:08,616 nuclear plant, you get stuck with outdated infrastructure, 368 00:18:08,616 --> 00:18:10,926 and you can't change that. 369 00:18:10,926 --> 00:18:13,403 So could you elaborate a little bit on that? 370 00:18:13,403 --> 00:18:15,320 WILLIAM B. BONVILLIAN: Matt, I agree with you. 371 00:18:15,320 --> 00:18:17,660 I think the distinction here, and I probably 372 00:18:17,660 --> 00:18:21,590 should have been more explicit, but the first-mover advantage 373 00:18:21,590 --> 00:18:24,290 in launching an innovation wave, in other words 374 00:18:24,290 --> 00:18:28,790 a national or regional advantage for the benefitting economy, 375 00:18:28,790 --> 00:18:29,940 I think is very real. 376 00:18:29,940 --> 00:18:33,920 I think the point you made, that the first-mover advantage 377 00:18:33,920 --> 00:18:37,075 for a particular firm may be much more questionable. 378 00:18:37,075 --> 00:18:38,450 Others may see what they're doing 379 00:18:38,450 --> 00:18:40,460 and be able to make improvements and bring those out 380 00:18:40,460 --> 00:18:42,860 more rapidly than the initial firm that's kind of locked 381 00:18:42,860 --> 00:18:44,450 into its initial approach. 382 00:18:44,450 --> 00:18:50,210 And we see in many cases, with new inventions that 383 00:18:50,210 --> 00:18:53,270 bring on innovation advances, we can certainly 384 00:18:53,270 --> 00:18:55,220 see firms that have a first-mover advantage. 385 00:18:55,220 --> 00:18:58,820 We can also see second movers that are able to capture that. 386 00:18:58,820 --> 00:19:02,420 So I think it's a more complex question at that company level, 387 00:19:02,420 --> 00:19:06,420 but I think it's clearer at the regional economy, 388 00:19:06,420 --> 00:19:09,690 national economy kind of level. 389 00:19:09,690 --> 00:19:15,510 So I would argue that the US, by building strong innovation 390 00:19:15,510 --> 00:19:19,170 capacity and its ability to lead most of the innovation 391 00:19:19,170 --> 00:19:25,470 waves of the second half of the 20th century, 392 00:19:25,470 --> 00:19:28,360 that was a huge advantage. 393 00:19:28,360 --> 00:19:30,760 That was a huge gain. 394 00:19:30,760 --> 00:19:34,690 So no sooner did the US miss the quality manufacturing wave 395 00:19:34,690 --> 00:19:39,400 to Japan in the '70s and '80s, but it came right back 396 00:19:39,400 --> 00:19:43,390 with the IT innovation wave in the '90s, which Japan missed. 397 00:19:43,390 --> 00:19:47,860 So when you put your economy at the edge of the frontier, 398 00:19:47,860 --> 00:19:51,130 leadership of the frontier, capturing those innovation 399 00:19:51,130 --> 00:19:52,824 waves becomes pretty important. 400 00:19:55,430 --> 00:19:58,400 But I digress, Lily. 401 00:19:58,400 --> 00:20:00,705 LILY: We have 45 minutes total left, which 402 00:20:00,705 --> 00:20:02,630 would mean 15 for each of us. 403 00:20:02,630 --> 00:20:04,130 WILLIAM B. BONVILLIAN: Why don't you 404 00:20:04,130 --> 00:20:08,320 give us a closing thought on Rycroft and Kash. 405 00:20:08,320 --> 00:20:10,280 LILY: OK. 406 00:20:10,280 --> 00:20:12,893 Yeah, I thought they needed to be more explicit with what they 407 00:20:12,893 --> 00:20:14,690 were actually saying, as someone who 408 00:20:14,690 --> 00:20:19,480 doesn't come from an economics background, 409 00:20:19,480 --> 00:20:21,483 the terminology was hard for me to get past. 410 00:20:21,483 --> 00:20:23,150 WILLIAM B. BONVILLIAN: All this learning 411 00:20:23,150 --> 00:20:24,940 by doing was a little too squishy. 412 00:20:24,940 --> 00:20:25,820 LILY: Yeah, exactly. 413 00:20:25,820 --> 00:20:28,320 WILLIAM B. BONVILLIAN: Right you need a more exact portrait. 414 00:20:28,320 --> 00:20:29,570 LILY: I need my terms defined. 415 00:20:29,570 --> 00:20:30,820 WILLIAM B. BONVILLIAN: Got it. 416 00:20:30,820 --> 00:20:34,020 OK, well, I think that's a valid critique. 417 00:20:34,020 --> 00:20:34,520 All right. 418 00:20:34,520 --> 00:20:36,470 So I'm going to race through the next couple, 419 00:20:36,470 --> 00:20:38,015 which, Martin, I think you've got. 420 00:20:38,015 --> 00:20:38,557 MARTIN: Yeah. 421 00:20:41,180 --> 00:20:44,100 WILLIAM B. BONVILLIAN: This is Egils Milbergs 422 00:20:44,100 --> 00:20:47,490 and I'm not going spend a lot of time on it. 423 00:20:47,490 --> 00:20:50,240 But again, it's one of these indirect factors that turns out 424 00:20:50,240 --> 00:20:52,520 to have some significance here. 425 00:20:52,520 --> 00:20:59,150 His point is the old economy was a world of tangible assets. 426 00:20:59,150 --> 00:21:03,440 What counted were your plant, your equipment, your land, 427 00:21:03,440 --> 00:21:07,040 your physical resources, your product inventory, 428 00:21:07,040 --> 00:21:12,000 your infrastructure, support system, physical stuff. 429 00:21:12,000 --> 00:21:16,170 In the 21st century of a new economy, 430 00:21:16,170 --> 00:21:23,050 intellectual and intangible assets, those are key. 431 00:21:23,050 --> 00:21:28,030 So we have a wonderful 19th century accounting system. 432 00:21:28,030 --> 00:21:29,500 It's really wonderful. 433 00:21:29,500 --> 00:21:32,080 Can really value the old economy. 434 00:21:32,080 --> 00:21:36,858 It really can't value the new economy. 435 00:21:36,858 --> 00:21:39,400 And we've been discussing this whole problem with the ability 436 00:21:39,400 --> 00:21:42,400 to get capital on the advances. 437 00:21:42,400 --> 00:21:45,850 If you've got an accounting system that 438 00:21:45,850 --> 00:21:51,193 can't value true value in the new economy, then of course 439 00:21:51,193 --> 00:21:53,110 you're going to have a serious problem getting 440 00:21:53,110 --> 00:21:55,840 capital funding available. 441 00:21:55,840 --> 00:21:58,210 So here's an indirect thing, you know, 442 00:21:58,210 --> 00:22:01,270 the accounting system, that turns out 443 00:22:01,270 --> 00:22:03,860 to have a fairly significant effect. 444 00:22:03,860 --> 00:22:09,250 So the inability to measure intangibles 445 00:22:09,250 --> 00:22:11,170 undermines the willingness of firms 446 00:22:11,170 --> 00:22:14,260 to invest in innovation because they can't really 447 00:22:14,260 --> 00:22:17,770 score it and get gains from it, and it limits the investment 448 00:22:17,770 --> 00:22:20,880 flow into innovation as a result. 449 00:22:20,880 --> 00:22:23,290 So, and he argues, paints a picture, 450 00:22:23,290 --> 00:22:27,910 of how this intangible process came about, 451 00:22:27,910 --> 00:22:34,090 arguing that by the late 90s, looking at the US economy 452 00:22:34,090 --> 00:22:36,520 overall, it was about $1.1 trillion invest 453 00:22:36,520 --> 00:22:40,090 in intangible assets in the manufacturing sector. 454 00:22:40,090 --> 00:22:42,670 In that same sector, there was a trillion dollars in 455 00:22:42,670 --> 00:22:46,240 combined in R&D business processes and software. 456 00:22:46,240 --> 00:22:49,180 Much more intangible. 457 00:22:49,180 --> 00:22:53,740 And intangible capital, he argues, 458 00:22:53,740 --> 00:22:57,520 became 82% of US firms' market value, 459 00:22:57,520 --> 00:23:00,700 just an overwhelming portion of their market value. 460 00:23:00,700 --> 00:23:03,310 So we need new metrics for how firms 461 00:23:03,310 --> 00:23:09,400 invest in these qualitative innovation factors, 462 00:23:09,400 --> 00:23:12,220 so that we can drive investment in an efficient way 463 00:23:12,220 --> 00:23:15,070 and to the right places and we just don't have them. 464 00:23:15,070 --> 00:23:16,780 We only measure a couple of things. 465 00:23:16,780 --> 00:23:19,570 We measure total company R&D investment-- 466 00:23:19,570 --> 00:23:21,940 that gets reported on quarterly reports, 467 00:23:21,940 --> 00:23:24,220 and we get company patent filings-- 468 00:23:24,220 --> 00:23:25,810 that gets revealed as well. 469 00:23:25,810 --> 00:23:28,068 But then all this other stuff, and maybe these 470 00:23:28,068 --> 00:23:29,110 aren't the right factors. 471 00:23:29,110 --> 00:23:30,777 Maybe some of them are completely wrong. 472 00:23:30,777 --> 00:23:33,350 But there's a whole set of other potential measures 473 00:23:33,350 --> 00:23:37,360 we don't even ask for, or even think about how 474 00:23:37,360 --> 00:23:38,610 they could be best organized. 475 00:23:38,610 --> 00:23:44,280 So that's Egils core idea here. 476 00:23:44,280 --> 00:23:46,780 That's why you need to get some of these indirect innovation 477 00:23:46,780 --> 00:23:49,720 factors right, along with the direct ones. 478 00:23:49,720 --> 00:23:52,330 Another example. 479 00:23:52,330 --> 00:23:56,710 This was Udayan Gupta's early book 480 00:23:56,710 --> 00:23:59,990 on venture capital, kind of an early history of venture 481 00:23:59,990 --> 00:24:00,490 capital. 482 00:24:00,490 --> 00:24:02,950 It came out in 2000. 483 00:24:02,950 --> 00:24:09,580 Venture capital, by 1999, had grown from $3 billion 484 00:24:09,580 --> 00:24:12,460 at the beginning of the decade to $30 billion. 485 00:24:12,460 --> 00:24:16,690 Now venture capital in 2015 was $60 billion. 486 00:24:16,690 --> 00:24:19,540 So venture capital was built on the idea 487 00:24:19,540 --> 00:24:21,460 that introducing new technologies 488 00:24:21,460 --> 00:24:24,472 delivers much higher investor returns. 489 00:24:24,472 --> 00:24:25,930 Remember that chart that one of you 490 00:24:25,930 --> 00:24:28,680 cleverly asked me how many years it covered, was that-- 491 00:24:28,680 --> 00:24:31,270 that was Martin? 492 00:24:31,270 --> 00:24:33,220 This is, he's saying the same thing. 493 00:24:33,220 --> 00:24:36,190 In other words, if you can capture 494 00:24:36,190 --> 00:24:40,942 the gains of radical investment, they can be really big. 495 00:24:40,942 --> 00:24:42,400 And that's what the venture capital 496 00:24:42,400 --> 00:24:43,600 sector is organized around. 497 00:24:43,600 --> 00:24:46,030 And he notes this interesting history. 498 00:24:46,030 --> 00:24:49,420 So we're in one of the capitals of venture capital, 499 00:24:49,420 --> 00:24:51,910 we're in the place that originated it. 500 00:24:51,910 --> 00:24:56,170 The East Coast model originally was much more focused 501 00:24:56,170 --> 00:25:00,260 on what we would call, today, financial engineering-- 502 00:25:00,260 --> 00:25:04,100 you know, tax benefits, short term returns, 503 00:25:04,100 --> 00:25:09,860 that conceptual framework kind of dominated the early Boston 504 00:25:09,860 --> 00:25:12,290 venture capital model. 505 00:25:12,290 --> 00:25:15,350 The West Coast developed a very different model 506 00:25:15,350 --> 00:25:19,220 around science and technology-driven growth 507 00:25:19,220 --> 00:25:21,440 in places like Sand Hill Road and Silicon Valley, 508 00:25:21,440 --> 00:25:22,790 it's still its capita. 509 00:25:22,790 --> 00:25:27,020 So now those distinctions have pretty much disappeared. 510 00:25:27,020 --> 00:25:30,800 Both sides are in the same game. 511 00:25:30,800 --> 00:25:33,830 And you include within the term of venture capital, 512 00:25:33,830 --> 00:25:35,900 some people include a much broader phraseology, 513 00:25:35,900 --> 00:25:40,700 including angel investors, corporate venture firms, 514 00:25:40,700 --> 00:25:42,560 foundation venture firms, sometimes 515 00:25:42,560 --> 00:25:44,180 university endowment funds, that go 516 00:25:44,180 --> 00:25:45,520 to a venture kind of purpose. 517 00:25:45,520 --> 00:25:51,110 So it's a bigger landscape than it was at the early stages. 518 00:25:51,110 --> 00:25:53,510 But the East Coast model, which did things 519 00:25:53,510 --> 00:25:56,600 like late-stage buyouts, turnarounds, roll-UPS, 520 00:25:56,600 --> 00:26:00,110 consolidations, in addition to early-stage venture. 521 00:26:00,110 --> 00:26:03,020 That's now prevalent, frankly, in both the East Coast and West 522 00:26:03,020 --> 00:26:04,410 Coast models. 523 00:26:04,410 --> 00:26:06,380 So the two sides have kind of merged. 524 00:26:06,380 --> 00:26:09,830 The originator of the venture capital idea 525 00:26:09,830 --> 00:26:14,420 was General Georges Doriot, who was World War II general, 526 00:26:14,420 --> 00:26:17,990 helped in the organization of industry 527 00:26:17,990 --> 00:26:21,500 in Europe during World War II and following it, so 528 00:26:21,500 --> 00:26:22,342 a remarkable figure. 529 00:26:22,342 --> 00:26:24,050 He taught at the Harvard Business School, 530 00:26:24,050 --> 00:26:26,930 but he's the one who kind of saw this potential gain 531 00:26:26,930 --> 00:26:28,775 from innovation-based growth. 532 00:26:28,775 --> 00:26:32,390 And the West Coast model really was kind of a maverick model. 533 00:26:32,390 --> 00:26:35,750 It was very high-risk investment based 534 00:26:35,750 --> 00:26:39,530 on quite unproven technologies, and that turned out 535 00:26:39,530 --> 00:26:41,495 to be the right model. 536 00:26:41,495 --> 00:26:43,370 The problem is we're not frankly doing enough 537 00:26:43,370 --> 00:26:44,787 of that in enough areas, and we'll 538 00:26:44,787 --> 00:26:47,030 get to that at another point in class. 539 00:26:47,030 --> 00:26:49,970 So that's the venture capital story, and let me just close, 540 00:26:49,970 --> 00:26:53,720 and then we'll have some dialogue that Martin will lead. 541 00:26:53,720 --> 00:26:58,650 This is Charles Schultze, who was quite a famous economist. 542 00:26:58,650 --> 00:27:00,950 He was budget director for Lyndon Johnson 543 00:27:00,950 --> 00:27:02,510 and for Jimmy Carter, who is head 544 00:27:02,510 --> 00:27:04,100 of the Council of Economic advisors. 545 00:27:04,100 --> 00:27:08,060 Very highly thought of economist from Minnesota. 546 00:27:08,060 --> 00:27:12,080 Deep historical role in governmental policymaking. 547 00:27:12,080 --> 00:27:15,560 He's taking a look at the debate-- 548 00:27:15,560 --> 00:27:19,400 which will actually get into our next class-- 549 00:27:19,400 --> 00:27:22,640 about what's going on with Japan's economy of the 70s 550 00:27:22,640 --> 00:27:24,890 and 80s, where they're bringing on this new innovation 551 00:27:24,890 --> 00:27:28,880 wave of quality manufacturing and the US is trying 552 00:27:28,880 --> 00:27:31,720 to figure out how to respond. 553 00:27:31,720 --> 00:27:33,555 And he's talking about the political debate, 554 00:27:33,555 --> 00:27:35,930 much as we were talking about the political debate that's 555 00:27:35,930 --> 00:27:37,880 going on now, he was talking about 556 00:27:37,880 --> 00:27:41,990 the current political debate of that time 557 00:27:41,990 --> 00:27:44,780 when he writes this in 1983. 558 00:27:44,780 --> 00:27:47,690 And there was a big debate over US competitiveness. 559 00:27:47,690 --> 00:27:50,660 There was a deep concern that the US was, guess what, 560 00:27:50,660 --> 00:27:52,070 de-industrializing. 561 00:27:52,070 --> 00:27:53,870 Sound familiar? 562 00:27:53,870 --> 00:27:57,530 That essential US heavy industry was in decline. 563 00:27:57,530 --> 00:28:04,040 And the 80s concern was that the US may have been at the cutting 564 00:28:04,040 --> 00:28:06,650 edge of technology advanced, but it was not implementing 565 00:28:06,650 --> 00:28:08,810 those technology advances. 566 00:28:08,810 --> 00:28:13,160 Whereas, by comparison, the US perception of the time 567 00:28:13,160 --> 00:28:16,940 was that they had a very activist governmental kind 568 00:28:16,940 --> 00:28:19,940 of role, an interventionist governmental kind of role, 569 00:28:19,940 --> 00:28:22,910 that's identifying technological winners 570 00:28:22,910 --> 00:28:26,270 and moving those right into implementation. 571 00:28:26,270 --> 00:28:29,630 So in a way, Martin, it's like the point 572 00:28:29,630 --> 00:28:30,920 you were raising earlier. 573 00:28:30,920 --> 00:28:33,350 Don't just do sculptures, do buildings. 574 00:28:33,350 --> 00:28:35,120 Japan was deep into the building phase. 575 00:28:35,120 --> 00:28:37,070 The US was still at the sculpture phase. 576 00:28:39,800 --> 00:28:42,875 And its principal arm for doing this was MITI-- 577 00:28:45,560 --> 00:28:47,420 which is now called METI-- 578 00:28:47,420 --> 00:28:48,620 but still very prevalent. 579 00:28:48,620 --> 00:28:54,200 But considerably less interventionist now 580 00:28:54,200 --> 00:28:58,100 than it was back in the 70s and 80s. 581 00:28:58,100 --> 00:29:00,050 What proposals are the parties coming up 582 00:29:00,050 --> 00:29:01,590 with on how to deal with this? 583 00:29:01,590 --> 00:29:03,770 Well, here's what the Democrats were up to. 584 00:29:03,770 --> 00:29:07,340 They decided there should be an industrial development bank. 585 00:29:07,340 --> 00:29:10,670 It would, just like in Japan, pick winners 586 00:29:10,670 --> 00:29:14,690 and, heaven forbid, it would protect losers. 587 00:29:14,690 --> 00:29:17,310 So no one would have to lose, jobs would be protected, 588 00:29:17,310 --> 00:29:18,660 and so forth. 589 00:29:18,660 --> 00:29:21,980 And yet they would also select winning new areas 590 00:29:21,980 --> 00:29:24,110 to get investment. 591 00:29:24,110 --> 00:29:27,950 And it would work to rehab failing major industries, 592 00:29:27,950 --> 00:29:30,890 upgrade them, protect their workforces, 593 00:29:30,890 --> 00:29:32,900 but also attempt on working on a new labor 594 00:29:32,900 --> 00:29:36,560 agreement between management and labor 595 00:29:36,560 --> 00:29:40,670 to get labor cost cuts that would 596 00:29:40,670 --> 00:29:44,300 help fund the restoration of these sectors. 597 00:29:44,300 --> 00:29:48,140 That was the Democrats idea. 598 00:29:48,140 --> 00:29:50,690 The Republican idea was to-- 599 00:29:50,690 --> 00:29:53,910 you guessed it-- support reductions in marginal tax 600 00:29:53,910 --> 00:29:54,410 rates. 601 00:29:58,620 --> 00:30:01,855 Schultze is very concerned about this idea. 602 00:30:05,580 --> 00:30:09,630 His concern is that the US government is not 603 00:30:09,630 --> 00:30:14,250 able to select a winning industrial structure. 604 00:30:14,250 --> 00:30:16,620 This is just not a good job for government to be doing. 605 00:30:16,620 --> 00:30:18,570 It will not be good at this. 606 00:30:18,570 --> 00:30:22,080 The regional politics, the state politics, 607 00:30:22,080 --> 00:30:24,630 are just so powerful that it's going 608 00:30:24,630 --> 00:30:26,460 to unglue the government's ability 609 00:30:26,460 --> 00:30:30,180 to pick a winning technology sector and ride with it. 610 00:30:30,180 --> 00:30:31,663 It's going to have to be dispersed, 611 00:30:31,663 --> 00:30:33,330 everybody's going to have to have gains, 612 00:30:33,330 --> 00:30:35,940 jobs are going to have to be located all over the place. 613 00:30:35,940 --> 00:30:38,520 Just not something that's going to be supported well, 614 00:30:38,520 --> 00:30:41,490 that the political system really cannot efficiently choose 615 00:30:41,490 --> 00:30:46,490 between individual firms, and particularly regions, 616 00:30:46,490 --> 00:30:49,530 for getting support at this stage of the industrial 617 00:30:49,530 --> 00:30:50,640 process. 618 00:30:50,640 --> 00:30:53,250 So find and support R&D, but when 619 00:30:53,250 --> 00:30:56,070 it comes closer much further down the pipeline 620 00:30:56,070 --> 00:30:59,460 and you're actually picking industrial winners, that's 621 00:30:59,460 --> 00:31:03,160 a really tricky political process he warns us about. 622 00:31:03,160 --> 00:31:04,770 So a lot of this class, as you all 623 00:31:04,770 --> 00:31:06,630 were driving us towards today, is 624 00:31:06,630 --> 00:31:10,050 going to be what is the governmental role. 625 00:31:10,050 --> 00:31:14,510 So Schultze stands as a warning about 626 00:31:14,510 --> 00:31:17,150 the political imperfections of government, 627 00:31:17,150 --> 00:31:19,580 the political difficulties of government 628 00:31:19,580 --> 00:31:22,520 in undertaking an interventionist role. 629 00:31:26,980 --> 00:31:31,690 So I think that's probably a pretty good since we all 630 00:31:31,690 --> 00:31:33,730 skipped the rest of Schultze, but that's 631 00:31:33,730 --> 00:31:36,520 really his core idea, is to tell us 632 00:31:36,520 --> 00:31:40,300 a cautionary tale about what the governmental role is going 633 00:31:40,300 --> 00:31:40,960 to be. 634 00:31:40,960 --> 00:31:43,510 That the sheer massive weight of politics 635 00:31:43,510 --> 00:31:48,460 is not going to necessarily drive optimal technology 636 00:31:48,460 --> 00:31:50,490 decision-making. 637 00:31:50,490 --> 00:31:50,990 Now. 638 00:31:50,990 --> 00:31:53,230 Martin, let me turn it over to you, 639 00:31:53,230 --> 00:31:55,490 and let's go through these three. 640 00:31:55,490 --> 00:32:00,170 So first Egils, and then maybe do 641 00:32:00,170 --> 00:32:02,420 a couple of questions on that and say some points, 642 00:32:02,420 --> 00:32:10,143 and then let's do Gupta on the venture capital structure. 643 00:32:10,143 --> 00:32:11,810 MARTIN: Just do like a general overview? 644 00:32:11,810 --> 00:32:14,185 WILLIAM B. BONVILLIAN: Yeah, let's just have an overview, 645 00:32:14,185 --> 00:32:17,400 and we'll start with Milbergs, and then 646 00:32:17,400 --> 00:32:19,083 go into a couple of questions. 647 00:32:19,083 --> 00:32:21,000 MARTIN: The objective is to increase incentive 648 00:32:21,000 --> 00:32:23,490 for private sector, especially long-term, innovation 649 00:32:23,490 --> 00:32:25,650 strategies and investments, but that 650 00:32:25,650 --> 00:32:28,370 can be pretty difficult to do. 651 00:32:28,370 --> 00:32:32,490 Market values are driven by economic conditions, demand, 652 00:32:32,490 --> 00:32:34,553 potential market size, and profits. 653 00:32:34,553 --> 00:32:36,636 Various [INAUDIBLE] competitors reason [INAUDIBLE] 654 00:32:36,636 --> 00:32:39,510 alternative substitutes. 655 00:32:39,510 --> 00:32:42,610 But intangible assets most likely 656 00:32:42,610 --> 00:32:45,310 will determine the long-term success of a company. 657 00:32:45,310 --> 00:32:48,880 It has to do a lot with their corporate strategy. 658 00:32:48,880 --> 00:32:50,980 Most likely, the company that we see 659 00:32:50,980 --> 00:32:52,902 that are successful today that are going 660 00:32:52,902 --> 00:32:54,360 to be successful 100 years from now 661 00:32:54,360 --> 00:32:56,680 won't be doing the same thing. 662 00:32:56,680 --> 00:32:59,590 An easy example would be if you look 663 00:32:59,590 --> 00:33:02,020 at what Monsanto, originally they were a chemical company, 664 00:33:02,020 --> 00:33:05,030 and now they're focusing on agriculture. 665 00:33:05,030 --> 00:33:07,420 So I know a few of these long-term innovation 666 00:33:07,420 --> 00:33:11,120 strategies, on these things that are hard to measure. 667 00:33:11,120 --> 00:33:14,230 And so a couple of questions that were left up 668 00:33:14,230 --> 00:33:17,110 were, what innovation trends and sectors represent the most 669 00:33:17,110 --> 00:33:20,717 promising growth areas for VCs in the few years? 670 00:33:27,420 --> 00:33:30,050 What can incentivize the shift to long-term intrinsic value 671 00:33:30,050 --> 00:33:32,485 creation compared to short-term objectives? 672 00:33:35,790 --> 00:33:38,440 If anybody has any interesting insights or experiences 673 00:33:38,440 --> 00:33:43,050 that just kind of [INAUDIBLE] Feel free to share them. 674 00:33:43,050 --> 00:33:45,450 Rasheed: I think about, particularly 675 00:33:45,450 --> 00:33:47,592 the old accounting system, which is 676 00:33:47,592 --> 00:33:50,985 kind of measuring money flows, financial engineering which 677 00:33:50,985 --> 00:33:54,730 is kind of important, I think that might have been easy-- 678 00:33:54,730 --> 00:33:57,010 I guess it was easy and so it's easy to probably think 679 00:33:57,010 --> 00:34:01,130 of it as easy because you were doing it for so long. 680 00:34:01,130 --> 00:34:03,460 But I think particularly in valuing its intangibles 681 00:34:03,460 --> 00:34:05,310 as something that we see is going 682 00:34:05,310 --> 00:34:07,330 to be create all this growth. 683 00:34:07,330 --> 00:34:11,530 And then, I don't know if there's any management studies 684 00:34:11,530 --> 00:34:15,370 or kind of behavioral things that we can take a look at how 685 00:34:15,370 --> 00:34:18,790 are we doing at these intangibles, 686 00:34:18,790 --> 00:34:21,282 because these intangibles seem like something like, 687 00:34:21,282 --> 00:34:22,449 you know it when you see it. 688 00:34:22,449 --> 00:34:25,130 You might not be able to put bounds on it, 689 00:34:25,130 --> 00:34:26,429 or put a number on it. 690 00:34:26,429 --> 00:34:29,034 I feel like it's because we haven't tried. 691 00:34:29,034 --> 00:34:30,409 And so I don't know if there have 692 00:34:30,409 --> 00:34:34,440 been any efforts sustained, or even accepted, 693 00:34:34,440 --> 00:34:38,929 or even argued over, to start valuing these intangible things 694 00:34:38,929 --> 00:34:41,690 as we can complain all we want about how we can't measure 695 00:34:41,690 --> 00:34:43,580 the intangibles [INAUDIBLE] 696 00:34:43,580 --> 00:34:45,830 WILLIAM B. BONVILLIAN: So, Rasheed, a very interesting 697 00:34:45,830 --> 00:34:46,330 point. 698 00:34:46,330 --> 00:34:50,000 And there's been a significant amount of work in Britain, 699 00:34:50,000 --> 00:34:54,139 actually, to try and figure out measurement systems 700 00:34:54,139 --> 00:34:59,420 for these intangibles, these kind of know-how based assets. 701 00:34:59,420 --> 00:35:01,430 And then following from that work 702 00:35:01,430 --> 00:35:04,000 in the EU on trying to measure these. 703 00:35:04,000 --> 00:35:06,440 Interestingly, we really haven't done much in the US 704 00:35:06,440 --> 00:35:08,562 on this, as crucial as it is. 705 00:35:08,562 --> 00:35:10,520 AUDIENCE: Because I think it's really important 706 00:35:10,520 --> 00:35:12,710 to have some sort of standardized way 707 00:35:12,710 --> 00:35:14,990 to measure this, because otherwise it all comes down 708 00:35:14,990 --> 00:35:19,190 to trust between companies and investors, 709 00:35:19,190 --> 00:35:22,850 and companies will always have an incentive to overstate what 710 00:35:22,850 --> 00:35:24,320 their intangible assets are. 711 00:35:24,320 --> 00:35:26,070 And because they're intangible it's harder 712 00:35:26,070 --> 00:35:28,730 to prove whether they're being honest or not, 713 00:35:28,730 --> 00:35:33,360 so there needs some sort of standardization process. 714 00:35:33,360 --> 00:35:36,350 AUDIENCE: On the other end, like from an investing standpoint, 715 00:35:36,350 --> 00:35:40,880 isn't the fact that valuing intangibles and things 716 00:35:40,880 --> 00:35:43,460 like IP, the main reason why there could 717 00:35:43,460 --> 00:35:47,510 be like hidden value or of mispricing based on, 718 00:35:47,510 --> 00:35:50,660 because not everyone has a good idea of how 719 00:35:50,660 --> 00:35:53,810 to price these things, that's how they can find sort 720 00:35:53,810 --> 00:35:58,370 of an edge based off other companies that might not 721 00:35:58,370 --> 00:35:59,510 have the same insight. 722 00:35:59,510 --> 00:36:02,000 I feel like that might be one of the reasons 723 00:36:02,000 --> 00:36:05,900 why there hasn't been a push to kind of, 724 00:36:05,900 --> 00:36:08,900 I don't know, standardize, how to quantify those-- not 725 00:36:08,900 --> 00:36:10,370 only because it's difficult to. 726 00:36:10,370 --> 00:36:12,200 Especially, like, I think he brought up 727 00:36:12,200 --> 00:36:13,790 like customer satisfaction. 728 00:36:13,790 --> 00:36:17,060 I feel like that's really hard to figure out a way 729 00:36:17,060 --> 00:36:20,420 to come up with a metric to say, oh, 730 00:36:20,420 --> 00:36:24,002 this customer satisfaction is higher than this one. 731 00:36:24,002 --> 00:36:26,918 I feel like it'd be difficult but interesting 732 00:36:26,918 --> 00:36:28,376 to come up with a system. 733 00:36:33,250 --> 00:36:35,800 AUDIENCE: I was also curious whether he's 734 00:36:35,800 --> 00:36:39,590 talking about a system that's applicable to companies 735 00:36:39,590 --> 00:36:41,340 in different industries, or just companies 736 00:36:41,340 --> 00:36:42,900 within the same industry. 737 00:36:42,900 --> 00:36:45,150 Are you looking at Dropbox and Box, 738 00:36:45,150 --> 00:36:48,540 or are you looking at like Dropbox and Facebook? 739 00:36:48,540 --> 00:36:51,850 Can you actually compare across-- 740 00:36:51,850 --> 00:36:56,220 not even the same industry, but across like applications, even. 741 00:36:56,220 --> 00:36:57,720 MARTIN: Another interesting question 742 00:36:57,720 --> 00:37:00,660 to add onto that is, why are we treating 743 00:37:00,660 --> 00:37:03,630 intellectual property for different industries the same? 744 00:37:03,630 --> 00:37:06,480 I think the lifetime of a pattern is around 20 years, 745 00:37:06,480 --> 00:37:08,130 and so why is it that something that 746 00:37:08,130 --> 00:37:11,370 is really easy or relatively easy to do that [INAUDIBLE] 747 00:37:11,370 --> 00:37:16,530 as a patent for IT, like for Facebook, where it's very 748 00:37:16,530 --> 00:37:19,610 quick to capture value relatively to other industries 749 00:37:19,610 --> 00:37:22,980 versus like energy, where they might take you years 750 00:37:22,980 --> 00:37:24,740 and years of research to do it. 751 00:37:24,740 --> 00:37:26,460 And then even to execute, 20 years 752 00:37:26,460 --> 00:37:29,900 is a short time frame because it might take you 10 years 753 00:37:29,900 --> 00:37:31,650 to negotiate where you're going to put it, 754 00:37:31,650 --> 00:37:33,610 right, if you're doing a reactor system. 755 00:37:33,610 --> 00:37:37,083 So by the time you kind of get started, 756 00:37:37,083 --> 00:37:39,000 there's incentives there to now really focused 757 00:37:39,000 --> 00:37:39,833 on those industries. 758 00:37:39,833 --> 00:37:43,110 So even biotech, where I think it's around a billion 759 00:37:43,110 --> 00:37:45,900 to $2 billion to create a drug. 760 00:37:45,900 --> 00:37:48,660 Why aren't there longer intellectual property cycles 761 00:37:48,660 --> 00:37:50,670 for those industries, in order to incentivize 762 00:37:50,670 --> 00:37:53,200 more growth in those areas? 763 00:37:53,200 --> 00:37:56,910 MATT: So I mean, the 20 year thing is a general framework, 764 00:37:56,910 --> 00:37:59,020 but there is for pharmaceuticals, 765 00:37:59,020 --> 00:38:01,920 there are patent laws that will extend 766 00:38:01,920 --> 00:38:06,560 the lifetime of your patent to compensate for some of the R&D. 767 00:38:06,560 --> 00:38:08,472 But they do exist. 768 00:38:13,270 --> 00:38:15,760 WILLIAM B. BONVILLIAN: When we do a class on the life 769 00:38:15,760 --> 00:38:19,740 science, health science kind of case study, 770 00:38:19,740 --> 00:38:23,430 we'll get deeply into this whole question about patent term, 771 00:38:23,430 --> 00:38:26,490 and could you start to vary patent term, 772 00:38:26,490 --> 00:38:32,330 to encourage small-market drugs, third-world disease drugs which 773 00:38:32,330 --> 00:38:35,390 wouldn't ordinarily come about to the system. 774 00:38:35,390 --> 00:38:38,090 Where you're right, our team, we've got to capture 775 00:38:38,090 --> 00:38:42,352 a [? billion-eight ?] just upfront in order to bring 776 00:38:42,352 --> 00:38:43,060 a drug to market. 777 00:38:46,309 --> 00:38:48,351 MARTIN: Did anybody have any interesting thoughts 778 00:38:48,351 --> 00:38:50,351 or disputes or any ideas they wanted to express? 779 00:38:50,351 --> 00:38:56,960 [INAUDIBLE] Can you put on the Doriot slide? 780 00:38:56,960 --> 00:38:59,730 WILLIAM B. BONVILLIAN: Sure. 781 00:38:59,730 --> 00:39:02,700 MARTIN: So originally, venture capital started, the story 782 00:39:02,700 --> 00:39:06,330 is that William Shockley came up with the transistor. 783 00:39:06,330 --> 00:39:10,050 He won a Nobel Prize for it, but then he got really cocky. 784 00:39:10,050 --> 00:39:11,670 And he had all these brilliant people, 785 00:39:11,670 --> 00:39:14,440 he acquired the best talent in the nation, PhDs 786 00:39:14,440 --> 00:39:18,510 from MIT, Stanford at the time, and they all 787 00:39:18,510 --> 00:39:19,950 came to work for him. 788 00:39:19,950 --> 00:39:22,800 But he was such a bad boss that all these great minds felt 789 00:39:22,800 --> 00:39:24,330 under stress working for him. 790 00:39:24,330 --> 00:39:25,980 They were called the Traitorous Eight, 791 00:39:25,980 --> 00:39:29,648 and they chose to leave him and start their own company. 792 00:39:29,648 --> 00:39:31,940 What they did is they wrote a letter to this guy called 793 00:39:31,940 --> 00:39:35,610 Arthur Rock, who was a Wall Street financier, 794 00:39:35,610 --> 00:39:38,100 and they asked him if they could get some funding 795 00:39:38,100 --> 00:39:39,525 to create their own company. 796 00:39:39,525 --> 00:39:41,400 And they had a strong IP and strong knowledge 797 00:39:41,400 --> 00:39:43,642 of the industry. 798 00:39:43,642 --> 00:39:44,600 And he got the funding. 799 00:39:44,600 --> 00:39:48,120 So that was the beginnings of venture capital. 800 00:39:48,120 --> 00:39:51,210 It really didn't speed up until the 90s and the IT revolution, 801 00:39:51,210 --> 00:39:54,180 because originally venture capital was very much 802 00:39:54,180 --> 00:39:55,860 a long-form capital. 803 00:39:55,860 --> 00:39:58,860 What happened is that you would invest money, 804 00:39:58,860 --> 00:40:03,180 and you expected it-- they were going to get a core capability, 805 00:40:03,180 --> 00:40:06,050 they were able to reap profits for long periods of time. 806 00:40:06,050 --> 00:40:08,430 But that changed when the IT religion hit, 807 00:40:08,430 --> 00:40:11,520 in that it could be a fast way of making a return. 808 00:40:11,520 --> 00:40:14,910 And so a venture capital fund became a lot like hedge fund, 809 00:40:14,910 --> 00:40:17,260 and it took a lot more risk. 810 00:40:17,260 --> 00:40:20,050 So pretty much the way a VC firm runs 811 00:40:20,050 --> 00:40:24,780 is they'll last round 10 years. 812 00:40:24,780 --> 00:40:27,180 The way they work is that they focus on outliers, 813 00:40:27,180 --> 00:40:29,860 and winning with outliers, so pretty much what they'll do 814 00:40:29,860 --> 00:40:31,380 is, they'd give each of us about-- 815 00:40:35,130 --> 00:40:36,780 well, I'll just keep the same figures-- 816 00:40:36,780 --> 00:40:39,238 so they'll give us each like a seed round of about $100,000 817 00:40:39,238 --> 00:40:41,700 to a million, but they only expect one of us 818 00:40:41,700 --> 00:40:43,287 to really become like a Facebook. 819 00:40:43,287 --> 00:40:45,120 And they know that every single year there's 820 00:40:45,120 --> 00:40:47,010 probably only like 10 companies that you 821 00:40:47,010 --> 00:40:49,260 should invest in that are going to be the big winners. 822 00:40:49,260 --> 00:40:55,230 And they focus on these multiple high-factor returns. 823 00:40:55,230 --> 00:40:57,600 If you make less than 15x to your original investment 824 00:40:57,600 --> 00:41:00,420 as a VC, you're considered a bad VC. 825 00:41:00,420 --> 00:41:02,380 And there's still only like a couple of VCs 826 00:41:02,380 --> 00:41:04,830 that are known as the really, really good ones, 827 00:41:04,830 --> 00:41:08,190 and what they focus doing nowadays 828 00:41:08,190 --> 00:41:09,460 is not just getting you money. 829 00:41:09,460 --> 00:41:11,627 They actually focus on helping you build out a team. 830 00:41:11,627 --> 00:41:13,620 And in that paper they actually talked about, 831 00:41:13,620 --> 00:41:15,900 we look a lot at the technology but also the person, 832 00:41:15,900 --> 00:41:18,360 because pretty much we're going to help you grow 833 00:41:18,360 --> 00:41:20,430 this company like it's a jet. 834 00:41:20,430 --> 00:41:22,568 It's going to be changing rapidly. 835 00:41:22,568 --> 00:41:24,360 You're going to have [INAUDIBLE] the person 836 00:41:24,360 --> 00:41:25,910 during each phase of it. 837 00:41:25,910 --> 00:41:31,350 And so this is a form of capital that has become very popular. 838 00:41:31,350 --> 00:41:34,080 If you look into the, I think we have some of the numbers 839 00:41:34,080 --> 00:41:38,517 there for how much was raised every year in terms of funds. 840 00:41:38,517 --> 00:41:39,850 WILLIAM B. BONVILLIAN: I got it. 841 00:41:39,850 --> 00:41:45,360 MARTIN: A billion in 1990, $30 billion in 1999, 842 00:41:45,360 --> 00:41:46,740 and 2015, $60 billion. 843 00:41:46,740 --> 00:41:49,410 So there is kind of a VC capital bubble, 844 00:41:49,410 --> 00:41:51,810 and it's really illogical because there's 845 00:41:51,810 --> 00:41:53,935 only ten companies you should really invest in that 846 00:41:53,935 --> 00:41:55,320 are going to make huge returns. 847 00:41:55,320 --> 00:41:57,087 At the same time, though, because it's 848 00:41:57,087 --> 00:41:59,670 a really great business, or it seems that way, a lot of people 849 00:41:59,670 --> 00:42:01,140 are putting in money. 850 00:42:01,140 --> 00:42:03,410 So there's bubble-ish behavior. 851 00:42:03,410 --> 00:42:07,133 And so, couple questions from that era. 852 00:42:07,133 --> 00:42:08,550 What innovation trends and sectors 853 00:42:08,550 --> 00:42:10,258 represent the most promising growth areas 854 00:42:10,258 --> 00:42:12,268 for VCs in the next few years? 855 00:42:17,138 --> 00:42:19,086 Any questions about VC capital? 856 00:42:22,500 --> 00:42:23,790 LILY: Yeah I do, actually. 857 00:42:23,790 --> 00:42:24,380 It's Lily. 858 00:42:27,020 --> 00:42:30,720 So you said that in the first round, 859 00:42:30,720 --> 00:42:36,160 or like the younger VC capital, a few years ago, 860 00:42:36,160 --> 00:42:39,400 the expectation was for longer return. 861 00:42:39,400 --> 00:42:42,110 Now we've been spoiled with the tech revolution 862 00:42:42,110 --> 00:42:46,000 and people want returns on a two-year, two- to five-year? 863 00:42:46,000 --> 00:42:47,465 Is that reasonable? 864 00:42:47,465 --> 00:42:48,340 MARTIN: More or less. 865 00:42:48,340 --> 00:42:49,930 Like, if you're a really great company 866 00:42:49,930 --> 00:42:53,580 you're going to exit to an IPO in about seven years, ten 867 00:42:53,580 --> 00:42:54,080 years. 868 00:42:54,080 --> 00:42:55,455 So that's what we're looking for. 869 00:42:58,831 --> 00:43:08,032 LILY: Can VC have funds that mix, long-term and short-term? 870 00:43:08,032 --> 00:43:09,740 Is that what they're going to have to do, 871 00:43:09,740 --> 00:43:12,990 because I see short term and this huge influx. 872 00:43:12,990 --> 00:43:15,200 Look, we have excess capital now. 873 00:43:15,200 --> 00:43:18,140 If you say that there are only x number of companies that really 874 00:43:18,140 --> 00:43:21,620 hit it big in the short-term, we have excess capital as 875 00:43:21,620 --> 00:43:23,550 compared to previous years. 876 00:43:23,550 --> 00:43:25,740 So do you think that VCs are going 877 00:43:25,740 --> 00:43:28,400 to have to start paying more attention to long-term returns, 878 00:43:28,400 --> 00:43:32,000 and is that a more sustainable business model for them? 879 00:43:32,000 --> 00:43:33,642 MARTIN: So what's happened is, it's 880 00:43:33,642 --> 00:43:35,600 not so much like VCs in terms of making return, 881 00:43:35,600 --> 00:43:38,840 because the way a VC fund works is that they'll acquire money 882 00:43:38,840 --> 00:43:40,530 from, say, MIT's funds. 883 00:43:40,530 --> 00:43:42,170 And then you increase that capital. 884 00:43:42,170 --> 00:43:43,570 So a lot of times they can't say, 885 00:43:43,570 --> 00:43:46,070 oh, well, we're going to focus on this and it's much better, 886 00:43:46,070 --> 00:43:49,640 it's going to be net profitable, but not in terms of money. 887 00:43:49,640 --> 00:43:52,125 It'll be good for society. 888 00:43:52,125 --> 00:43:53,250 That doesn't really happen. 889 00:43:53,250 --> 00:43:55,520 What ends up happening, recently there's 890 00:43:55,520 --> 00:43:58,150 been a fund that's like that, that was invested where 891 00:43:58,150 --> 00:44:01,910 the investors are Jack Ma from Alibaba, Bill Gates, 892 00:44:01,910 --> 00:44:03,740 I forget the name of it-- 893 00:44:03,740 --> 00:44:06,200 Breakthrough Energy-- and they focus on longer time cycles 894 00:44:06,200 --> 00:44:08,510 of around 20 years. 895 00:44:08,510 --> 00:44:11,660 And also they focus on having, it's pretty much like the dream 896 00:44:11,660 --> 00:44:13,000 team of billionaires on it. 897 00:44:13,000 --> 00:44:14,750 AUDIENCE: And they announced it a year ago 898 00:44:14,750 --> 00:44:17,070 and they've now formed the pool of money, 899 00:44:17,070 --> 00:44:20,637 but I have yet to hear about any actual investments. 900 00:44:20,637 --> 00:44:22,220 MARTIN: The reason I bring that one up 901 00:44:22,220 --> 00:44:24,512 is because it's not so much that they're trying to make 902 00:44:24,512 --> 00:44:26,150 huge returns on capital. 903 00:44:26,150 --> 00:44:29,970 What they're doing is a mix of philanthropy and venture 904 00:44:29,970 --> 00:44:30,470 capital. 905 00:44:30,470 --> 00:44:31,680 AUDIENCE: [INAUDIBLE] patient capital. 906 00:44:31,680 --> 00:44:32,222 MARTIN: Yeah. 907 00:44:35,110 --> 00:44:38,252 MATT: So, related to that, I'm sure you 908 00:44:38,252 --> 00:44:40,550 know that there are VC firms that will only 909 00:44:40,550 --> 00:44:45,450 do a Series A financing, Series B financing, 910 00:44:45,450 --> 00:44:46,430 or Mezzanine financing. 911 00:44:46,430 --> 00:44:49,670 And there are firms that would do a mix of that, 912 00:44:49,670 --> 00:44:52,160 at different stages in companies. 913 00:44:52,160 --> 00:44:54,500 But then you run into the upper limit, 914 00:44:54,500 --> 00:44:56,365 where you have groups like the [INAUDIBLE] 915 00:44:56,365 --> 00:44:59,380 I'm working on where venture capitalists don't 916 00:44:59,380 --> 00:45:05,620 want to wait more than 15 years or so to [INAUDIBLE] a return. 917 00:45:05,620 --> 00:45:07,993 AUDIENCE: So I've heard of the number of funds, 918 00:45:07,993 --> 00:45:10,410 especially in Silicon Valley, that aren't just like solely 919 00:45:10,410 --> 00:45:14,200 VC now, but are also like long/short equity funds, 920 00:45:14,200 --> 00:45:16,660 like more of a hedge fund style combined with VC, 921 00:45:16,660 --> 00:45:17,590 so it's sort of like-- 922 00:45:17,590 --> 00:45:19,745 VCs more longer-term horizon like two 923 00:45:19,745 --> 00:45:21,760 to five years or whatever. 924 00:45:21,760 --> 00:45:24,870 They're willing to wait out for but also in the short term, 925 00:45:24,870 --> 00:45:27,310 playing around with getting some returns that way. 926 00:45:27,310 --> 00:45:31,480 So I think that might be a response to how 927 00:45:31,480 --> 00:45:33,960 to address that problem with what to do 928 00:45:33,960 --> 00:45:35,680 with a longer-term horizon. 929 00:45:35,680 --> 00:45:38,470 Rasheed: Is it also just really early to tell? 930 00:45:38,470 --> 00:45:41,450 Because I guess the idea is you see firms 931 00:45:41,450 --> 00:45:45,890 and [INAUDIBLE] So I guess we're probably not slowing down 932 00:45:45,890 --> 00:45:48,420 according to this one venture capital group 933 00:45:48,420 --> 00:45:51,567 but like, is it kind of hard to see out, 934 00:45:51,567 --> 00:45:53,150 you know, these firms are now starting 935 00:45:53,150 --> 00:45:57,890 to pop up who are willing to invest out past 15 towards 20 936 00:45:57,890 --> 00:46:03,835 years, and is it a little bit early for us to say maybe 937 00:46:03,835 --> 00:46:05,960 these firms might have more success or less success 938 00:46:05,960 --> 00:46:07,160 than the traditional model? 939 00:46:07,160 --> 00:46:09,920 Because it really is just really new 940 00:46:09,920 --> 00:46:11,830 and they haven't made a single investment. 941 00:46:11,830 --> 00:46:14,240 AUDIENCE: Well, and the percent of VC money 942 00:46:14,240 --> 00:46:17,732 that this represents is small. 943 00:46:17,732 --> 00:46:19,940 WILLIAM B. BONVILLIAN: Yeah just to put a few numbers 944 00:46:19,940 --> 00:46:20,600 on the table. 945 00:46:20,600 --> 00:46:26,030 So, venture capital funding in 2015 was $60 billion. 946 00:46:26,030 --> 00:46:29,270 Venture capital funding before the great recession 947 00:46:29,270 --> 00:46:30,770 was about $60 billion as well. 948 00:46:30,770 --> 00:46:33,030 So we're sort of back to that number. 949 00:46:33,030 --> 00:46:35,240 But when you, think about, I mean 950 00:46:35,240 --> 00:46:38,810 after all, if growth is driven by technological and related 951 00:46:38,810 --> 00:46:44,240 innovation, and you've get $19 trillion economy, say, 952 00:46:44,240 --> 00:46:46,400 nationwide. 953 00:46:46,400 --> 00:46:49,250 $60 billion in nothing. 954 00:46:49,250 --> 00:46:51,290 That's not a lot of money to be banking 955 00:46:51,290 --> 00:46:53,870 on what our future growth is going to be. 956 00:46:53,870 --> 00:47:00,620 So the issue I think Martin shrewdly raised, 957 00:47:00,620 --> 00:47:04,670 was we're not on an innovation wave at the moment. 958 00:47:04,670 --> 00:47:08,030 We're on the kind of scale-up part of the IT wave. 959 00:47:08,030 --> 00:47:10,610 It's not the 1990s anymore. 960 00:47:10,610 --> 00:47:13,880 VCs really work amazingly when they're 961 00:47:13,880 --> 00:47:16,820 right on the cusp of an innovation wave. 962 00:47:16,820 --> 00:47:20,210 And playing for that very rapid scale-up in growth so Art 963 00:47:20,210 --> 00:47:23,700 Rocks' investments in intel-- which, 964 00:47:23,700 --> 00:47:26,180 you're absolutely right Martin, did drive the creation 965 00:47:26,180 --> 00:47:30,050 of the West Coast model-- 966 00:47:30,050 --> 00:47:34,310 that was just at the cusp of the IT wave. 967 00:47:34,310 --> 00:47:37,720 And the VC firms really rode it, and we're not 968 00:47:37,720 --> 00:47:39,470 on one of those ways at the moment. 969 00:47:39,470 --> 00:47:43,790 So the VC model has gotten much more complicated, 970 00:47:43,790 --> 00:47:46,910 because the number of firms that are actually 971 00:47:46,910 --> 00:47:50,160 going to carry the kind of rewards that occur typically 972 00:47:50,160 --> 00:47:55,100 in the fast scale-up part of the innovation wave is just slower. 973 00:47:55,100 --> 00:47:56,330 Things are slower. 974 00:47:56,330 --> 00:48:00,980 We're waiting for the waves, right, like surfers. 975 00:48:00,980 --> 00:48:05,420 And I think the old model, the maverick model, 976 00:48:05,420 --> 00:48:08,360 will come right back if we get onto one of these waves, 977 00:48:08,360 --> 00:48:10,790 but as we've discussed these are typically 978 00:48:10,790 --> 00:48:13,070 40-year-long propositions. 979 00:48:13,070 --> 00:48:16,370 And you can be in a long trough before a wave takes off, 980 00:48:16,370 --> 00:48:21,210 so that's the fundamental question for this industry. 981 00:48:21,210 --> 00:48:23,840 On the other hand, maybe there's another way of looking at it. 982 00:48:23,840 --> 00:48:27,170 Maybe the other way of looking at it is, could you spur waves 983 00:48:27,170 --> 00:48:31,940 more rapidly, and is the short-term return 984 00:48:31,940 --> 00:48:38,270 model of venture capital a real barrier in our ability 985 00:48:38,270 --> 00:48:42,920 to stand up longer, stronger, more enduring innovation 986 00:48:42,920 --> 00:48:45,470 waves sooner? 987 00:48:45,470 --> 00:48:50,720 So there's a couple of ways of looking at this that I 988 00:48:50,720 --> 00:48:51,620 think are intriguing. 989 00:48:51,620 --> 00:48:55,430 And we're going to we're going to take a dive into venture 990 00:48:55,430 --> 00:48:58,130 capital later in the class, kind of looking 991 00:48:58,130 --> 00:49:00,650 in little more detail, too, as you suggested, Matt, 992 00:49:00,650 --> 00:49:01,950 about the engine. 993 00:49:01,950 --> 00:49:02,670 MARTIN: Yeah. 994 00:49:02,670 --> 00:49:05,030 I was going to bring up, there is one venture capitalist 995 00:49:05,030 --> 00:49:10,260 that focuses on the longer time horizons, about 40 years. 996 00:49:10,260 --> 00:49:11,500 His name is Peter Thiel. 997 00:49:11,500 --> 00:49:13,400 Actually the whole idea that we are kind of 998 00:49:13,400 --> 00:49:16,402 like a technological recession is from him. 999 00:49:16,402 --> 00:49:18,110 He talks a lot about how we're not really 1000 00:49:18,110 --> 00:49:20,055 increasing our capabilities, and he's 1001 00:49:20,055 --> 00:49:21,597 famous for having this one quote that 1002 00:49:21,597 --> 00:49:24,070 goes something along the lines of, 1003 00:49:24,070 --> 00:49:27,210 we were promised flying cars, but we got 144 characters. 1004 00:49:27,210 --> 00:49:28,940 WILLIAM B. BONVILLIAN: It's one of my favorite quotes, Martin. 1005 00:49:28,940 --> 00:49:30,023 I was going to use it too. 1006 00:49:30,023 --> 00:49:32,542 AUDIENCE: [INAUDIBLE] 1007 00:49:32,542 --> 00:49:35,000 MARTIN: The thing is, if you looked into the '50s and '70s, 1008 00:49:35,000 --> 00:49:37,647 or if you look at the comic books, 1009 00:49:37,647 --> 00:49:39,855 if you look at Iron Man and all different characters, 1010 00:49:39,855 --> 00:49:43,040 they show this feature where energy, 1011 00:49:43,040 --> 00:49:47,810 flying into the air, enough water, 1012 00:49:47,810 --> 00:49:52,310 we're not focusing on resources and resource wars anymore. 1013 00:49:52,310 --> 00:49:53,810 And what kind of ended up happening 1014 00:49:53,810 --> 00:49:57,170 is we have the IT wave but now we are even more 1015 00:49:57,170 --> 00:49:59,390 pessimistic, right? 1016 00:49:59,390 --> 00:50:03,980 And so his point of view is more that we have better things, 1017 00:50:03,980 --> 00:50:05,270 in some sense. 1018 00:50:05,270 --> 00:50:08,730 But in terms of having these long-form kind of technologies 1019 00:50:08,730 --> 00:50:11,750 that have a huge impact on our society, we haven't had that. 1020 00:50:11,750 --> 00:50:15,420 It's just really good times for this one technology. 1021 00:50:15,420 --> 00:50:16,785 And that's his main proposition. 1022 00:50:16,785 --> 00:50:18,410 But he does focus on these technologies 1023 00:50:18,410 --> 00:50:19,823 that are a longer timeframe. 1024 00:50:19,823 --> 00:50:21,740 And that might actually be a huge opportunity, 1025 00:50:21,740 --> 00:50:26,560 because if, you know, $59 billion of the capital 1026 00:50:26,560 --> 00:50:31,730 are focusing on these ten year sexy chat companies, 1027 00:50:31,730 --> 00:50:35,216 like Snapchat, Facebook, Pinterest, that really won't 1028 00:50:35,216 --> 00:50:37,716 have a big impact, and you're one of the investors who goes, 1029 00:50:37,716 --> 00:50:39,245 OK, I'll wait 10 more years, but I 1030 00:50:39,245 --> 00:50:41,703 have kind of trillion-dollar companies, that are coming off 1031 00:50:41,703 --> 00:50:43,900 [INAUDIBLE] That's a huge opportunity. 1032 00:50:43,900 --> 00:50:46,317 The big thing, too, is we were talking about entrepreneurs 1033 00:50:46,317 --> 00:50:49,440 and how the first inventor usually 1034 00:50:49,440 --> 00:50:50,870 doesn't capture that value. 1035 00:50:50,870 --> 00:50:53,410 This is actually an opportunity for maybe the first inventor 1036 00:50:53,410 --> 00:50:55,220 to capture a lot of value, and then people 1037 00:50:55,220 --> 00:50:58,760 focus on that becoming the first wave of venture again. 1038 00:50:58,760 --> 00:51:01,250 But the drawback of that, too, is that, say, 1039 00:51:01,250 --> 00:51:04,718 somebody in this room discovered some great technology, 1040 00:51:04,718 --> 00:51:06,843 but you still have like a semester worth of school, 1041 00:51:06,843 --> 00:51:08,060 or something like that. 1042 00:51:08,060 --> 00:51:10,040 You want to stay at MIT for an extra year. 1043 00:51:10,040 --> 00:51:11,960 Somebody could see the technology 1044 00:51:11,960 --> 00:51:17,140 and go to Silicon Valley, raise $1 million, $3 million, 1045 00:51:17,140 --> 00:51:18,570 and they get the scale. 1046 00:51:18,570 --> 00:51:20,770 The Silicon Valley model isn't first to invent, 1047 00:51:20,770 --> 00:51:22,600 it's first to scale. 1048 00:51:22,600 --> 00:51:25,380 Facebook was the 15th social network invented, pretty much. 1049 00:51:25,380 --> 00:51:29,210 You've got some notoriety. 1050 00:51:29,210 --> 00:51:33,850 So that's another big thing is that maybe that divide 1051 00:51:33,850 --> 00:51:36,760 between the first wave and the second wave of invention 1052 00:51:36,760 --> 00:51:38,856 is going to get either smaller or bigger. 1053 00:51:38,856 --> 00:51:41,830 Just because you have these kind of Wall Street 1054 00:51:41,830 --> 00:51:42,800 hyper-rapid effects. 1055 00:51:42,800 --> 00:51:43,690 WILLIAM B. BONVILLIAN: Right. 1056 00:51:43,690 --> 00:51:46,232 So you're driving us, I think, to an important point, Martin, 1057 00:51:46,232 --> 00:51:50,530 about the venture capital sector as it's organized now. 1058 00:51:50,530 --> 00:51:55,600 It's really organized for this, that's what it wants. 1059 00:51:55,600 --> 00:51:58,780 It doesn't know what to do with this, 1060 00:51:58,780 --> 00:52:02,920 and it's desperately trying to make this look like this. 1061 00:52:02,920 --> 00:52:05,000 That's kind of where we are. 1062 00:52:05,000 --> 00:52:07,630 There's a problem with his model. 1063 00:52:07,630 --> 00:52:10,810 It's not there. 1064 00:52:10,810 --> 00:52:18,100 And so just as we critique the Merrill Lynch piece for the gap 1065 00:52:18,100 --> 00:52:20,770 here, and longer-term patient capital, 1066 00:52:20,770 --> 00:52:24,910 it turns out that the VC model isn't really 1067 00:52:24,910 --> 00:52:27,370 helping us where we really need a lot of help, which is 1068 00:52:27,370 --> 00:52:29,020 more in this kind of territory. 1069 00:52:29,020 --> 00:52:29,885 Chloe? 1070 00:52:29,885 --> 00:52:32,585 CHLOE: I wonder if some of that comes from, in this piece 1071 00:52:32,585 --> 00:52:34,100 especially, there seemed to be a lot of obsession of, 1072 00:52:34,100 --> 00:52:36,350 like, building the right team, and all the right stuff 1073 00:52:36,350 --> 00:52:38,360 will come if you have the right billionaires all 1074 00:52:38,360 --> 00:52:40,930 in the room together, just a small number of people. 1075 00:52:40,930 --> 00:52:44,170 And it's probably easier to ask for a lot in a short period 1076 00:52:44,170 --> 00:52:48,160 of time from people, because their career lifespan 1077 00:52:48,160 --> 00:52:51,180 is much shorter than the lifespan of a technology. 1078 00:52:51,180 --> 00:52:53,330 It would be easier to look a person in the face 1079 00:52:53,330 --> 00:52:56,380 and be like, develop this for me right now, because, you know, 1080 00:52:56,380 --> 00:52:58,440 your career is 20 years long. 1081 00:52:58,440 --> 00:53:01,510 Not your career, but that billionaire [INAUDIBLE] 1082 00:53:01,510 --> 00:53:05,350 so maybe that's why their current model is more 1083 00:53:05,350 --> 00:53:07,717 suited for the fast growth, when actually they're 1084 00:53:07,717 --> 00:53:08,550 in slow growth mode. 1085 00:53:08,550 --> 00:53:10,390 WILLIAM B. BONVILLIAN: Yeah, so I mean, Martha was pushing us 1086 00:53:10,390 --> 00:53:11,890 and Martin you mentioned it as well, 1087 00:53:11,890 --> 00:53:16,030 this whole Gates has organized this new group 1088 00:53:16,030 --> 00:53:18,460 that wants to deal with exactly this problem. 1089 00:53:18,460 --> 00:53:20,590 They want to start dealing with some of this stuff, 1090 00:53:20,590 --> 00:53:25,120 not just trying to focus on this in order to get an energy 1091 00:53:25,120 --> 00:53:26,890 innovation wave going. 1092 00:53:26,890 --> 00:53:29,830 So that may be big enough to be a different model. 1093 00:53:29,830 --> 00:53:31,720 I don't know. 1094 00:53:31,720 --> 00:53:34,090 It's not $60 billion and it's a long way away from it, 1095 00:53:34,090 --> 00:53:36,640 but he is shaking down people with a lot of money. 1096 00:53:36,640 --> 00:53:40,240 AUDIENCE: So, Bill and Martin, isn't the VC model working 1097 00:53:40,240 --> 00:53:41,760 just fine for the VC firms? 1098 00:53:41,760 --> 00:53:44,260 I mean, Lily mentioned, hey, there's more capital out there. 1099 00:53:44,260 --> 00:53:45,380 I'm not sure that's true. 1100 00:53:45,380 --> 00:53:48,313 I think it's-- aren't they doing just fine? 1101 00:53:48,313 --> 00:53:49,480 WILLIAM B. BONVILLIAN: Yeah. 1102 00:53:49,480 --> 00:53:50,350 It's fine. 1103 00:53:50,350 --> 00:53:53,770 As long as all we want is software and biotech, 1104 00:53:53,770 --> 00:53:54,460 it's great. 1105 00:53:54,460 --> 00:53:55,660 AUDIENCE: I just wanted to check on that. 1106 00:53:55,660 --> 00:53:56,170 WILLIAM B. BONVILLIAN: Right. 1107 00:53:56,170 --> 00:53:56,800 It's great! 1108 00:53:56,800 --> 00:53:57,490 It's fabulous! 1109 00:53:57,490 --> 00:53:59,230 And some services sectors. 1110 00:53:59,230 --> 00:54:02,530 Media and entertainment are good too. 1111 00:54:02,530 --> 00:54:04,822 But if the society wants some other stuff, 1112 00:54:04,822 --> 00:54:07,030 right, then we've got a serious problem on our hands. 1113 00:54:07,030 --> 00:54:09,670 AUDIENCE: And Bill Gates has taken it upon himself to find-- 1114 00:54:09,670 --> 00:54:12,045 WILLIAM B. BONVILLIAN: The energy solution for the world. 1115 00:54:12,045 --> 00:54:12,910 Right. 1116 00:54:12,910 --> 00:54:17,200 Because energy is a huge loser in the current venture capital 1117 00:54:17,200 --> 00:54:17,770 market. 1118 00:54:17,770 --> 00:54:20,015 MARTIN: I mean another thing to consider too, 1119 00:54:20,015 --> 00:54:22,390 is that these institutes-- they're more like institutions 1120 00:54:22,390 --> 00:54:22,940 now. 1121 00:54:22,940 --> 00:54:24,980 Like, there's only really five that matter, 1122 00:54:24,980 --> 00:54:28,980 like Sequoia Capital, Andreessen Horowitz is one of the top 1123 00:54:28,980 --> 00:54:31,400 ones, what's it called, there's-- 1124 00:54:31,400 --> 00:54:33,200 AUDIENCE: John Doerr's group. 1125 00:54:33,200 --> 00:54:36,590 MARTIN: John Doerr's [INAUDIBLE] something like that? 1126 00:54:36,590 --> 00:54:39,853 So yeah they're kind of like the MITs and Harvards. 1127 00:54:39,853 --> 00:54:41,270 Also if you're getting investment, 1128 00:54:41,270 --> 00:54:42,812 you want it from one of the top ones, 1129 00:54:42,812 --> 00:54:44,950 because you have to get multiple rounds of funding. 1130 00:54:44,950 --> 00:54:47,500 So if you get your first round and and investor 1131 00:54:47,500 --> 00:54:49,450 doesn't matter, isn't that important, it's 1132 00:54:49,450 --> 00:54:51,575 going to make it so much more difficult [INAUDIBLE] 1133 00:54:51,575 --> 00:54:54,000 that will matter in the future. 1134 00:54:54,000 --> 00:54:56,233 But another thing too is that Silicon Valley, which 1135 00:54:56,233 --> 00:54:57,816 is the cool thing is like they come up 1136 00:54:57,816 --> 00:55:01,050 with all these ideas on how to structure teams and make 1137 00:55:01,050 --> 00:55:02,940 innovation. 1138 00:55:02,940 --> 00:55:05,340 They focus a lot on disruptive business models, 1139 00:55:05,340 --> 00:55:08,170 so what might be interesting is if somebody who focuses on 1140 00:55:08,170 --> 00:55:11,802 like a harder industry and the energy sector, 1141 00:55:11,802 --> 00:55:13,260 right now we could say that they're 1142 00:55:13,260 --> 00:55:14,970 a lot like the early telegraph lines, 1143 00:55:14,970 --> 00:55:15,930 that they're everywhere, right? 1144 00:55:15,930 --> 00:55:18,263 But it's only focused still on building the mobile phone 1145 00:55:18,263 --> 00:55:18,970 for energy. 1146 00:55:18,970 --> 00:55:20,553 Or it's something that's very modular. 1147 00:55:20,553 --> 00:55:23,170 You have these disruptive angles with technology. 1148 00:55:23,170 --> 00:55:26,430 And so the top like fusion startups right now 1149 00:55:26,430 --> 00:55:27,930 they're focusing on something that's 1150 00:55:27,930 --> 00:55:30,150 the size of a truck or a reactor that's mobile 1151 00:55:30,150 --> 00:55:31,260 and stuff like that. 1152 00:55:31,260 --> 00:55:33,177 But you probably know a lot better than I did. 1153 00:55:33,177 --> 00:55:34,890 MAX: Yeah, that's Lockheed Martin. 1154 00:55:34,890 --> 00:55:36,510 MARTIN: Lockheed Martin's is indoor. 1155 00:55:36,510 --> 00:55:38,610 I'm talking about Helion. 1156 00:55:38,610 --> 00:55:42,255 That's the one that YCombinator or someone invested in. 1157 00:55:42,255 --> 00:55:43,880 WILLIAM B. BONVILLIAN: Even YCombinator 1158 00:55:43,880 --> 00:55:45,570 is only two years down. 1159 00:55:45,570 --> 00:55:48,393 All right, so I'm going to push us to-- 1160 00:55:48,393 --> 00:55:50,810 why don't you give us a few comments on Schultze and we'll 1161 00:55:50,810 --> 00:55:52,160 close out the session. 1162 00:55:52,160 --> 00:55:55,040 MARTIN: OK I wanted to link Schultze to this idea, 1163 00:55:55,040 --> 00:55:58,220 too, because should the government be a VC bunch, maybe 1164 00:55:58,220 --> 00:56:01,280 focusing on let's pick the winners and the losers 1165 00:56:01,280 --> 00:56:06,410 when inherently, that's not their nature. 1166 00:56:06,410 --> 00:56:08,660 In general you're looking for the wellfare of society, 1167 00:56:08,660 --> 00:56:13,700 and there is a market failure. 1168 00:56:13,700 --> 00:56:18,400 Another big aspect, too, is they've done better-- 1169 00:56:18,400 --> 00:56:20,868 well, Schultze's main point is that economies 1170 00:56:20,868 --> 00:56:23,160 have done better when the government gives a supportive 1171 00:56:23,160 --> 00:56:25,920 role, and he does talk a lot about Japan. 1172 00:56:25,920 --> 00:56:28,440 I think another factor to consider for Japan 1173 00:56:28,440 --> 00:56:30,863 and also South Korea, because I don't think he brought up 1174 00:56:30,863 --> 00:56:33,030 in his paper, but his ideas kind of align with that, 1175 00:56:33,030 --> 00:56:36,270 is that their population periods were in a certain way. 1176 00:56:36,270 --> 00:56:39,858 Usually you hit into these industrial high-growth areas 1177 00:56:39,858 --> 00:56:42,150 where you have a lot of young people and very few older 1178 00:56:42,150 --> 00:56:43,170 people. 1179 00:56:43,170 --> 00:56:45,540 And that's why they kind of die off very quickly. 1180 00:56:45,540 --> 00:56:47,490 So that might be a hidden factor that he 1181 00:56:47,490 --> 00:56:50,540 didn't consider at this point. 1182 00:56:50,540 --> 00:56:51,180 But so, yeah. 1183 00:56:51,180 --> 00:56:53,597 Is it this idea of, do we create this for the environment, 1184 00:56:53,597 --> 00:56:55,440 or do we focus on industries? 1185 00:56:55,440 --> 00:56:58,590 I think it also might have been Jorgenson in the last week's 1186 00:56:58,590 --> 00:57:01,530 class, where he talked about this idea of specific cities 1187 00:57:01,530 --> 00:57:03,330 that focus on certain industries. 1188 00:57:03,330 --> 00:57:06,990 That was very interesting, especially contrasting 1189 00:57:06,990 --> 00:57:09,022 with this point of view, where we make it easier 1190 00:57:09,022 --> 00:57:10,980 to innovate on certain areas and certain cities 1191 00:57:10,980 --> 00:57:13,350 and you develop the capability for the city 1192 00:57:13,350 --> 00:57:15,780 because cities tend to last longer. 1193 00:57:15,780 --> 00:57:18,260 Well, cities tend to have longer-lasting effects 1194 00:57:18,260 --> 00:57:22,242 where people stay there. 1195 00:57:22,242 --> 00:57:22,950 LILY: It's funny. 1196 00:57:22,950 --> 00:57:25,210 I kept thinking completely different things while I 1197 00:57:25,210 --> 00:57:26,750 was reading the Schultze piece. 1198 00:57:26,750 --> 00:57:30,270 I kept thinking, or wondering, would he be writing-- 1199 00:57:30,270 --> 00:57:34,410 I didn't look up any of his later papers or pieces-- 1200 00:57:34,410 --> 00:57:36,180 but I kept thinking would he be writing 1201 00:57:36,180 --> 00:57:40,650 the same thing if he wrote it today or five years ago? 1202 00:57:40,650 --> 00:57:43,507 Because he keeps-- and I kept thinking, oh my gosh. 1203 00:57:43,507 --> 00:57:45,965 Schultze is the reason we have the president we have today. 1204 00:57:45,965 --> 00:57:47,520 He keeps on telling everyone we're 1205 00:57:47,520 --> 00:57:49,590 not de-industrializing, don't worry, 1206 00:57:49,590 --> 00:57:50,910 we're not de-industrializing. 1207 00:57:50,910 --> 00:57:53,370 But we really were, weren't we? 1208 00:57:53,370 --> 00:57:57,510 And so, granted, all of my economic knowledge 1209 00:57:57,510 --> 00:58:01,320 comes from Freakonomics, but I would 1210 00:58:01,320 --> 00:58:05,350 say that wasn't this a pretty popular view? 1211 00:58:05,350 --> 00:58:07,307 We're not de-industrializing, or even 1212 00:58:07,307 --> 00:58:09,390 if we are, don't worry, because the jobs are going 1213 00:58:09,390 --> 00:58:12,210 to be replaced by the technology that we're developing, 1214 00:58:12,210 --> 00:58:14,470 and so don't worry, don't worry. 1215 00:58:14,470 --> 00:58:16,910 And we really let a lot of the industry 1216 00:58:16,910 --> 00:58:19,347 here get away from us and to other countries. 1217 00:58:19,347 --> 00:58:21,180 And so I just think he would change his tune 1218 00:58:21,180 --> 00:58:23,000 if he were writing it today. 1219 00:58:23,000 --> 00:58:24,750 WILLIAM B. BONVILLIAN: You know, you raise 1220 00:58:24,750 --> 00:58:26,590 a very interesting point, Lily. 1221 00:58:26,590 --> 00:58:28,890 Schultze's writing in 1983. 1222 00:58:28,890 --> 00:58:32,130 Solow doesn't get the Nobel Prize until 1987, 1223 00:58:32,130 --> 00:58:34,887 so growth economics doesn't-- 1224 00:58:34,887 --> 00:58:37,470 Beth and I were talking a little bit about this before class-- 1225 00:58:37,470 --> 00:58:40,080 but growth economics doesn't really 1226 00:58:40,080 --> 00:58:44,490 lock in until really we start to see 1227 00:58:44,490 --> 00:58:46,050 what's happening in the 1990s. 1228 00:58:46,050 --> 00:58:49,170 That's when you can't ignore growth theory, 1229 00:58:49,170 --> 00:58:51,660 you see it right in front of you. 1230 00:58:51,660 --> 00:58:57,370 So Schultze is out of classical economics. 1231 00:58:57,370 --> 00:59:00,650 He keeps pointing us to Japan's success story 1232 00:59:00,650 --> 00:59:04,280 being the national savings rate. 1233 00:59:04,280 --> 00:59:08,390 Solow says it's useful, but that's not the driver, 1234 00:59:08,390 --> 00:59:11,000 it's this technological related innovation. 1235 00:59:11,000 --> 00:59:14,960 So in a way you can see Schultze, just as you suggest, 1236 00:59:14,960 --> 00:59:19,100 as a dialogue within different stages of economics 1237 00:59:19,100 --> 00:59:19,940 thinking right. 1238 00:59:19,940 --> 00:59:23,600 And Schultze, in many ways, is certainly in the neoclassical 1239 00:59:23,600 --> 00:59:26,750 and in a way earlier classical economics 1240 00:59:26,750 --> 00:59:29,840 thinking about growth, before new growth theory 1241 00:59:29,840 --> 00:59:33,890 develops from people like Solow and Romer. 1242 00:59:33,890 --> 00:59:35,610 So that's part of what he's saying here. 1243 00:59:35,610 --> 00:59:41,420 But I do think that his point about the difficulty 1244 00:59:41,420 --> 00:59:44,390 of the political system to operate 1245 00:59:44,390 --> 00:59:46,820 in a sophisticated technology realm, 1246 00:59:46,820 --> 00:59:49,730 I think that's very real. 1247 00:59:49,730 --> 00:59:51,825 So every time we-- 1248 00:59:51,825 --> 00:59:54,200 you know, I'm guilty of this periodically-- every time we 1249 00:59:54,200 --> 00:59:56,450 want to expand the governmental role 1250 00:59:56,450 --> 00:59:58,880 and push it further down the pipeline, 1251 00:59:58,880 --> 01:00:01,730 Schultze always stands as a warning for me 1252 01:00:01,730 --> 01:00:04,310 about the complexity of how the political process is 1253 01:00:04,310 --> 01:00:06,090 going to wrestle with this. 1254 01:00:06,090 --> 01:00:10,130 And the reward system in the political system 1255 01:00:10,130 --> 01:00:14,840 is not the same reward system that technology standup 1256 01:00:14,840 --> 01:00:16,585 necessarily needs. 1257 01:00:16,585 --> 01:00:17,960 AUDIENCE: Going off your point, I 1258 01:00:17,960 --> 01:00:20,120 think it is interesting that he mentions, 1259 01:00:20,120 --> 01:00:22,150 like, if this were a problem, these 1260 01:00:22,150 --> 01:00:23,900 would be some solutions, like unemployment 1261 01:00:23,900 --> 01:00:26,520 compensation, relocation assistance, training, 1262 01:00:26,520 --> 01:00:29,140 but at the time it was a problem. 1263 01:00:29,140 --> 01:00:32,690 So we can recognize solutions to potential problems, 1264 01:00:32,690 --> 01:00:35,180 but we don't seem to recognize the problem when 1265 01:00:35,180 --> 01:00:38,555 it's rising so that we come up with other solutions. 1266 01:00:42,190 --> 01:00:43,565 WILLIAM B. BONVILLIAN: So Martin, 1267 01:00:43,565 --> 01:00:47,200 a closing thought for us on Schultze? 1268 01:00:47,200 --> 01:00:49,795 MARTIN: I mean, I thought it was pretty straightforward. 1269 01:00:51,990 --> 01:00:54,490 These kind of growth webs are very tricky for the government 1270 01:00:54,490 --> 01:00:57,850 to focus on, and also to do it well. 1271 01:00:57,850 --> 01:01:01,867 But having some kind of function in the innovation space 1272 01:01:01,867 --> 01:01:02,950 is also important to have. 1273 01:01:02,950 --> 01:01:05,050 So it's really like being supportive 1274 01:01:05,050 --> 01:01:08,170 of the economic environment, but if you get too close 1275 01:01:08,170 --> 01:01:11,660 you'll burn yourself, in terms of the complexity. 1276 01:01:11,660 --> 01:01:13,530 WILLIAM B. BONVILLIAN: Good summary. 1277 01:01:13,530 --> 01:01:14,030 All right. 1278 01:01:14,030 --> 01:01:16,600 I want to thank our three discussion leaders for getting 1279 01:01:16,600 --> 01:01:19,120 us off to such a good start. 1280 01:01:19,120 --> 01:01:21,340 Good work, team. 1281 01:01:21,340 --> 01:01:24,970 You set a model for us at a high threshold. 1282 01:01:24,970 --> 01:01:27,432 I think now our classes, the participation 1283 01:01:27,432 --> 01:01:28,390 is pretty well settled. 1284 01:01:28,390 --> 01:01:30,640 I think we've got a great size. 1285 01:01:30,640 --> 01:01:33,157 I can just tell from the discussion today 1286 01:01:33,157 --> 01:01:34,240 it's going to be terrific. 1287 01:01:34,240 --> 01:01:36,365 You guys are going to be great. 1288 01:01:36,365 --> 01:01:38,240 And I think we're going to have a lot of fun. 1289 01:01:38,240 --> 01:01:42,467 So I had a good time last week, but I'm really reassured 1290 01:01:42,467 --> 01:01:43,550 about where this is going. 1291 01:01:43,550 --> 01:01:47,380 So thank you all for participating. 1292 01:01:47,380 --> 01:01:49,090 So I'll see you on the 28th, and I 1293 01:01:49,090 --> 01:01:51,880 will put out a longer-term list of discussion leaders 1294 01:01:51,880 --> 01:01:53,640 in the interim.