Part of The Best Books of 2012 on Economic, Social, and Environmental Subjects

Doing Capitalism in the Innovation Economy

In this engaging book, Janeway, a venture capitalist who trained as an economist, combines his academic erudition with lessons learned during 40 years of working in the financial sector. His novel argument is that financial bubbles can be expected to occur from time to time in modern economies and that on balance they contribute to positive economic transformations by financing new technologies, even though many of them inevitably prove to be false starts or dead ends. Irrational exuberance, although not grounded in close assessments of balance sheets or plausible prospective earnings, is perhaps a necessary component of a dynamic economy, driving what the economist Joseph Schumpeter (following Karl Marx) famously termed “creative destruction.” Janeway also asserts that government plays three necessary roles in the development of an innovative economy. Government promotes the basic research that fuels innovation and nurtures the talent and skills to develop it: think of the Pentagon’s role in the evolution of information technology or the National Institutes of Health’s contributions to contemporary medicine. It also helps stabilize the economy when private demand fails to fully employ a country’s resources. Finally, government limits the damage to the economy caused by unavoidable episodic financial bubbles.

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