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”

Science, Discrimination, and Larry Summers

It is clear that Harvard President Larry Summers has hit a nerve, yet again. It is far less clear why reactions have been so strong and often so disappointing to those of us who believe in science. Let us know the truth, whatever it is. If women have less “intrinsic aptitude” for science than men, and no one—not even Larry Summers—is arguing that such a fact has been established, then we should know about it. Choices are better made on the basis of facts than ignorance or fiction. To my mind, the key overlooked point is that such a fact would have almost no relevance to the values most of us believe in.

Equal treatment under the law and in public policy has nothing to do with whether the average intelligence or other indicators of aptitude or virtue of women is the same as men, or whether the same is true for blacks, whites, Asians, Jews, Arabs, Christians, Moslems, etc, or for gays or straights. We are each individuals, not averages. Our public policy and the personal beliefs of most of us are based upon the morality and advantage of dealing with individuals rather than classes of one sort or another. Whatever the averages might turn out to be—and why should we be afraid to know?—currently available evidence clearly establishes a very large dispersion of traits within each group and a very large overlap with all other groups.

Such principles are expressed and upheld by governments only when they are broadly believed by the governed (in democracies), or by enlightened rulers, or, as in our case of a constitutional democracy, when enlightened leaders in the contemplative environment of a constitutional convention imbed such principles in a constitution that limits what majorities may do. Fortunately, in free market economies self-interest works in favor of such principles. Profit minded employers want the best employees for the least cost.

It is human nature to economize and conserve in various ways. It is part of being efficient. Economizing on the gathering of information is but one of the many ways we prioritize the use of our time. We often develop impressions of people or groups of people (say Southern Baptists) on the basis of partial information. We often rely on the views of others we trust. It would take more of our time than it is worth to gather ALL of the facts. Biases and prejudices are perpetrated for some time for these reasons even among the good hearted.

If women are being discriminated against in the market place, presumably because of incorrect perceptions of their productivity, they will tend to earn less for the same work. If this is the case, it is economically advantageous for an employer to hire them. Thus there is an economic incentive for firms to look beyond the stereotypes (or averages) for individuals whose talents may not be fully appreciated yet in the market place. Not all employers will bother to do so, but those who do so will profit at the expense of those who discriminate. Over time more profitable firms tend to grow more rapidly than less profitable ones. If employers are forced to pay women the same wages as men when they believe they are less productive, fewer women will be hired until such time as broadly held prejudices are over come.

Open and honest debate about such issues is another way of advancing the truth and overcoming prejudice. In my opinion Larry Summers has contributed to that goal and the sometimes hysterical reactions to his raising legitimate scientific questions have not.