Venture Capital in the 21st Century: Climate Change, State Intervention, and the Next Green Economy

This podcast episode delves into the complex interplay of technological innovation, economic policy, and political will, particularly in the context of climate change and the digital revolution. It highlights the ongoing extension of the digital revolution through machine learning and the internet, while simultaneously emphasizing the urgent need for a "next new green economy." The discussion critiques conventional economic approaches to climate change, such as a simple carbon tax, arguing that they often fail to account for real-world complexities like imperfect markets, irrational agents, and significant distributional implications. The episode underscores the American state's perceived failure to address both the economic consequences of the digital revolution and the imperative of the green revolution, leading to political polarization and policy paralysis.

A central argument is that efficiency, while often a goal, can be the "enemy of innovation" and "fairness" in resource allocation and return distribution. The podcast explores the nuances of carbon pricing, contrasting a gradual increase with a sharp one to induce technological innovation, and drawing parallels with the first oil crisis. Behavioral economics is introduced to explain resistance to policy initiatives due to loss aversion, and the potential for economic incentives to undermine social norms is illustrated with the Israeli daycare fine example. The episode advocates for specific regulatory interventions and non-price policies, including direct mission-driven state investment, as essential complements or alternatives to carbon taxes, especially when considering the political responses generated by economic policies.

The podcast emphasizes the critical role of a "mission-driven state," legitimized by the urgency of climate change, to catalyze productive speculation and fund the massive investments required for green innovation. It points to the Advanced Research Projects Agency-Energy (ARPA-E) as a model, albeit one that has been critically underfunded in the U.S. The discussion also highlights China's accelerating advance to global leadership in renewable energy, leveraging European subsidies and domestic R&D, and questions the potential for an effective division of innovative labor between the U.S. and China. The coronavirus pandemic is presented as a "limited war" whose lasting impact may accelerate online technologies and cultural shifts beneficial to climate response, but it does not diminish the longer struggle against climate change.

In conclusion, the episode outlines the dynamics of the innovation economy as a "three-player game" involving the financial system, political processes, and the market economy. It asserts that technological innovation at the frontier requires investing in ignorance of long-term economic value, historically relying on politically legitimate state interventions and episodic waves of financial speculation. While professional venture capital has played a significant role in specific sectors like ICT and healthcare biotech, it has been "missing in action" in clean and green tech due to the lack of state support. The current financial environment, characterized by low interest rates and an excessively globalized economy, inflates speculative future cash flows but fails to drive real growth. The podcast ultimately calls for broad collaboration among nation-states, particularly between the U.S. and China, to underwrite the necessary investments for the next green economy, acknowledging the significant political and financial challenges ahead.

"the digital revolution continues to be extended through exploration of the internet as a medium for innovation relating both to consumer and business requirements and needs and desires"

"economists have long had a first best policy response to climate change address the externality the negative externality of carbon generation by pricing it"

"efficiency is not only the enemy of innovation in the allocation of resources it can also be the enemy of fairness and the distribution of the returns from the use of those resources"

"economic policy should never be divorced from the political responses it generates"

"imposing attacks to affect behavior runs a further risk it can translate what might properly be a social norm into an exercise in economic calculus"

"climate change as a mission offers an enormous unique political opportunity to legitimize state investment at systemic scale with enormous benefits spread across the spectrum of incomes and jobs throughout the private sector and without killing anyone"

"loss of authority breeds loss of confidence"

"abdication by the u.s. has indeed left space for china which in turn has raised its targets for renewable energy"

"an effective not an efficient green new deal will also require a mission-driven state legitimized this time by the urgency of climate change"

"the dynamics of the innovation economy encompasses complex and unstable feedbacks between the financial system political processes and the market economy what i call the three player game"