The one book on Wall Street you haven’t read—but should.
Illustration by Mike Norton
Why Wall Street? What good does Beezlebubbian finance really provide? Wouldn’t America be better off if we could magically transport ourselves back to the ’50s—when Wall Street was sleepy, the middle class was robust, and children dreamed of rocket ships? What is the essence of this activity known as finance? These are issues shaping William Janeway’s memoir-cum-analysis, Doing Capitalism in the Innovation Economy: Markets, Speculation and the State. You can be forgiven if you missed this book. The title could send you into hibernation. Despite the fact that Janeway writes a more polished prose than one would expect of an economist-turned-investor, the book has been packaged by Cambridge University Press in a bland baby-blue cover featuring a clip-art cellphone, its glossy pages dense with text, warning: Everyone but academics stay away.
That’s a pity, because this is one of the most intelligent, sensible, and insightful books about Wall Street published since the financial implosion of 2008. It deserves a larger audience than it will get and serves as a refreshing relief to jeremiads from the left like Matt Taibbi’s Griftopia, and ones from the right, such as former Bain Capital partner Edward Conard’s Unintended Consequences. Taibbi, despite sharing Janeway’s progressive leanings, often seems to believe finance is essentially criminal, while Janeway views it as a necessary—if flawed—component of any modern economy. Meanwhile, Conard and Janeway share common experiences as private investors but differ in their politics. Conard speaks to the great unwashed from a fortress of assumed technical omniscience, arguing the case for a brutally divided society of givers and takers in which a tiny number of the former take risks and fuel growth that allows everyone else to bathe in self-indulgence. Conard provides the grim underpinning for Mitt Romney’s 47 percent, while insisting that actions that allow greater risk-taking—including the activities of banks involved in the meltdown of 2008—were actually good, not bad; necessary steps to drive growth, productivity, and innovation, not a moral and financial disaster.
Janeway is the son of Eliot Janeway, an economic commentator and adviser to Roosevelt and Johnson, and the novelist Elizabeth Janeway; his liberal political tendencies thus come naturally, supplemented by a long study of Keynesian economics, including close contact with one of Keynes’ greatest disciples, Hyman Minsky. In fact, he has long pursued two careers, which effectively inform each other: as an economist at Cambridge University (home of Keynes) delving into the financial breakdown of 1929-31; and as a Wall Street practitioner who learned at the well-shod feet of Ferdinand Eberstadt, venture capitalist Fred Adler, and John Vogelstein, one of the founders of Warburg Pincus, Janeway’s longtime firm.
Janeway’s case studies, based on his own experiences both in the insular club of private partnerships that was 1960s Wall Street, and as an early venture investor in emerging biotech and computing concerns, are often fascinating and insightful, if arcane for those who don’t recall the history. But he continually tries to extract broader conclusions from these cases, focusing on the essential role government played in incubating those industries. Janeway lays out what he calls the “Three-Player Game” necessary to fuel innovation: the state, financial capitalism, and the market economy (that is, “institutions that enable the production and exchange of goods and services”). This is a three-legged stool; weaken any leg, say by deregulation or by overregulation, and you spawn instabilities and stagnation. He envisions a kind of creative tension that has broken down with the free-market ascendancy. “That very success in ‘liberating’ the market economy from the encroachment of the state has potentially dire consequences for the Innovation Economy,” he writes.
Janeway’s real target here is in the “innovation economy,” the nurturing of new, transformational technologies. Without mentioning them, he seems to be acknowledging fears from the likes of Peter Thiel and Tyler Cowen that we’ve entered a period of technological stagnation. He believes government must step in to support R&D where private investors fear to tread—where risk is too high, costs too steep, or investment periods too long.
But Janeway also recognizes that speculation is intertwined in any innovative activity. Without speculation, markets would not participate in supporting anything risky—from early biotech to desktop computing to renewable energy. Capitalists (certainly Wall Street) always try to escape what historian Fernand Braudel calls “the world of transparence and regularity,” and seek windfalls, what Braudel calls “super-profits.” Regulatory arbitrage—the drive to do business where oversight is lightest—is built into the business model of Wall Street. So is greed. So is speculation.
This speculative enterprise always has an element of a lottery. Not only is greed eternal, but markets have often been casinos; take risk away and reward goes with it—nowhere more so than in venture capital. Given those realities, and their material benefits, markets require strong government oversight. What defines markets is the kind of uncertainty that Keynes propounded, but that many of Keynes’ postwar disciples effectively undercut when they mathematized his doctrines, only to be further buried by free-market economists who built mechanical models that afforded markets an omniscient wisdom, efficiency, and rationality. Janeway rejects those attempts to make markets their own justification, noting that their failure to predict the two great bubbles of the new millennium has made them increasingly suspect as useful tools.
This brings us to the nature and importance of bubbles, which are popularly viewed as reckless episodes of lunacy and corruption. Janeway, who has studied bubbles since his research into 1929, is more sanguine. Bubbles, he writes are “boringly repetitive”—he titles one chapter “The banality of bubbles”—but speculative excess “has played a historic role as the engine of transformation, driving growth and economic productivity and living standards for 250 years of the modern era.”
Photo By Rogier van Bakel/Eager Eye Photography.
Here Janeway and Conard share something. In fact, what Janeway calls “the necessity of bubbles” isn’t an unknown argument, just an unpopular one: Michael Mandel wrote Rational Exuberance in 2004 and Daniel Gross published Pop! Why Bubbles are Great for the Economy just as the credit bubble was giving way in 2007. Janeway understands the differences between a less damaging stock-market bubble, such as the dot-com bubble, and one involving banks, as in 2008. He recognizes how some bubbles leave the world better off, with innovations scattered across the landscape for our use, while other bubbles leave behind wastelands.
Janeway is seeking a balance between paradoxical forces. He views capitalism, for better or worse, as a massive set of necessary experiments that churn out considerable waste. Because the future is unknown—he quotes Thomas Hobbes on “the future being but a fiction of the mind”—there is no rational equilibrium discernable in markets, and investors make decisions with less-than-perfect knowledge. In other words, they’re wrong a sizeable portion of the time, but they’re not irrational. To maximize the odds of bringing new innovations steadily to the market, a lot of bets have to be laid. Many of them will go awry, sometime in big ways. But that’s the price to be paid for material progress.
In Janeway’s view, governments have a responsibility to insure that innovative capitalism thrives. They must actively regulate markets that need policing and that are prone to breakdown; they must support long-term R&D; they must serve as lenders of last resort; they must intervene when things blow up, particularly when demand flags. (Janeway, near the end of the book, offers a chapter on the absurdity of austerity in a financial crisis that could come from Paul Krugman.) So much of this is commonsensical, though he does leave some issues hanging, particularly on how to retain that three-party balance. He does not deal at any depth with regulatory and political capture, often by interests that have been empowered by markets. He does not deal with inequality or the effects of a financial capitalism that has become so large, complex, speculative and global.
But that’s simply to say Janeway can’t solve all our problems. What he does very well — besides provide head-clearing historical perspectives — is lead us to back to fundamentals. Why capitalism? Why markets? Why this den of predation and speculation called Wall Street? He is a reasonable man who offers a rational view. Both are rare these days, and valuable.
Doing Capitalism in the Innovation Economy: Markets, Speculation and the State by William Janeway. Cambridge University Press.
Robert Teitelman is the former editor of Institutional Investor Magazine and the founding editor in chief of The Deal.