Month: July 2020

Are Venture Capitalists racists?

Shifting sovereignty from Kings to the people, was the beginning of human flourishing. In the United States, in its constitution the people returned only those powers to their government necessary to protect their wellbeing. The right to and protection of ones honestly acquired property is an essential aspect of this arrangement. This includes, of course, the right to invest our property anyway we choose.

Venture capitalists are those wealthy people who choose to take great risks in the prospect of large gains by investing in “startups” that have not yet established their profitability.  Put differently venture capitalists are prepared to finance an unproven idea/product/service that might gain public approval, i.e. might become profitable, though most of them fail.  As consumers we have benefited enormously from goods and services my parents never would have even imagined that a few wealthy investors took a chance on.

So the idea that the government might need to enact laws to insure that a venture capitalist’s investments do not reflect racial bias is shocking at several levels. “In the clubby world of venture capitalists, who spent $130 billion in the United States last year and helped anoint the world’s four most valuable companies and countless other successful start-ups, there is effectively no legal backstop that ensures people of color have an equal opportunity to share in its wealth creation.”   “Black-entrepreneurs-venture-capital”

First of all is the right of these investors to their property. They can give it all to their daughters if they want to.  Marxists and other egalitarians reject such a right but that would throw away the whole basis of the wealth our capitalist system has created that Marxists would like to redistribute.  But I want to focus on why capitalism minimizes the role of bias in our economic decisions.  This was explored long ago by Nobel Lauriat Gary Becker in his famous 1976 book on the Economics of Discrimination.

Becker’s basic point is that if your economic decision is influenced by racial or sexual or any other non-economic bias it will cost you money, i.e. you will make less than you otherwise would have.  If you hire a man when a woman was better qualified, he will contribute less to your company’s income than would have the woman, thus you pay a financial price for your bias. The same is true if you hire a white person when a black one was better qualified, etc.

The purpose of venture capitalist investments is to make a bundle by funding the next great idea. Most will fail but one or two turn into Facebook, or Amazon.  It may well be that a venture capitalist systematically under rates the potential of black entrepreneurs, i.e. that he suffers racial bias.  But in that case he will be less successful in his investments.  Capitalism will punish him for his prejudices and diminish his importance as a venture capitalist because it will diminish his wealth. None the less, an Irish venture capitalist may well bias her investments toward fellow Irishmen and a black venture capitalist may risk an extra break for a fellow black. But the profit motive of capitalism will discourage departures from objective evaluations of investment prospects.

The idea that a law should forbid or discourage racial or sexual bias when venture capitalists decide in what to invest is without merit.  Moreover, it is hard to imagine what such a law would look like and/or on what basis a government bureaucrat would overrule and direct the placement of a private investor’s chose of investments.

To peak briefly at the other–entrepreneurial–side of the equation, the unbiased opportunity provided by capitalism has attracted many foreigner entrepreneurs to our shores.  Steve Jobs (Apple, NeXT, Pixar), who was adopted at birth, was the son of Joanne Schieble who was Swiss-American and Abdulfattah “John” Jandali who was Syrian.  Steve Wozniak, Apple cofounder, was the son of Polish and Swiss-German parents.  Sergey Brin cofounder of Google/Alphabet escaped from the Soviet Union.  The famous architect, I.M. Pei, immigrated from China.  “How-12-immigrant-entrepreneurs-have-made-america-great”

Independence Day Celebration

As we listen carefully to the current criticisms of America, we should see them in the context of the wonderful features of our nation that continue to attract tens of thousands of the world’s best and brightest to become Americans and thus add to the material and cultural richness of our lives. We should not lose sight of, nor stop defending, the features of our society that have made us the Land of Opportunity even as we confront and strive to deal with our shortcomings. Those motivated by making more money and those motivated by serving and doing good to others enjoy the incentives for both in our free enterprise system. We make money by serving others, by creating better things and services for the benefit of our fellow man.

Our rights to make our own decisions and speak our minds are protected by our Constitution and its Bill of Rights. Our property and commitments (contracts) are protected by the Rule of Law. Indeed, our history is not without sin, far from it.  Slavery was practiced almost from the beginning of time, and our new nation shamefully participated in the practice for almost the first hundred years of its existence. Discriminatory laws and practices replaced slavery for many decades beyond the end of slavery.  Though all Americans now enjoy the equal protection of the law, the uninformed prejudices of some persevere. Our culture of mutual caring that is nurtured by our capitalist economic system and the values taught by all major religions, continue to make progress towards shrinking and isolating bigots. But we have a ways to go.  We have engaged in wars that are not justified by our defense and that are inconsistent with our values. In this area our economic incentives are perverse.

Our freedom to speak out when we see wrong and to praise what is good are critical to preserving what is good and fixing what is not.  The “cancel culture” crowd seem more intent on tearing America down than building it up by fixing its weaknesses.  The current cancerous attacks on our freedom to speak out and debate the important issues of our day in the name of political correctness risks undermining our progress:  “America’s Jacobin moment”.  This is not to say that we should not strive to address our fellow Americans politely “What is wrong with PC?”.  But if we become afraid to express our views and concerns honestly, we lose the ability to understand one another and build mutually satisfactory compromises. “Do we really need free speech?”.

So on this celebration of our Declaration of Independence and the birth of our nation let’s commit ourselves to preserving what has made us great, which includes the ability to freely criticize what is not so great, and to admit and learn from our mistakes and to work at becoming better still: freer, responsible for our own lives, and more compassionate toward others.