Has any society ever recovered from an economic recession by holding what ground it has? Absolutely not. Progress requires forward movement, no man has ever reached his destination by standing still. The prime example of a society that stood still in order to save its economy is Soviet Russia. An example of a society that pulled itself out of recession by unleashing the force of individual ambition is the United States following the Great Depression. No, it was not the New Deal or World War II that facilitated economic recovery, it was the forward movement of risk takers that drove innovation and production. Now, in the midst of another severe economic downturn, we are once again embracing a “hold the line” mentality, and rejecting ambition as the motor of economic success.
The Wall Street Journal reports:
Just when the economy needs risk-taking the most, risk-takers are under the most threat. The Treasury now wants venture-capital firms declared as systemic risks and put under tight restrictions as part of the broader re-regulation of financial firms. Venture capitalists argue that since they don’t use debt and their firms are comparatively small, they shouldn’t come under rules designed for highly leveraged, too-big-to-fail banks.
How this debate turns out matters, because some 20% of U.S. gross national product is created by companies that were formed through venture backing. They include Intel, Apple and Google. How policy makers treat venture capital is a measure of the amount of innovation and enterprise that happens in an economy, with more regulation leading to less innovation.
This is a good time to recall that the venture-capital industry was born as a reaction to New Deal regulations that stifled capital and prolonged the Depression. The country’s first venture-capital firm (other than family-run funds) was American Research and Development, planned in the 1930s and launched after World War II in Boston.
Its leader was longtime Harvard Business School professor Georges Doriot, who is the subject of a fascinating recent biography, “Creative Capital,” by Spencer Ante. Mr. Ante, a BusinessWeek editor, tells me that as he researched the topic “one of the most surprising things I learned was how concerned financiers and industrialists had become about the riskless economy in direct response to the New Deal. Even in the 1930s, people understood that small business was the lifeblood of the economy.”
American Research and Development backed early-stage companies deemed too risky by banks and investment trusts at the time. The firm was an early investor in Digital Equipment Corp., the Boston-area company that revolutionized computing.
Uncertainty about which regulations applied to early-stage investing slowed the growth of venture capital. It wasn’t until deregulation in the late 1970s that the industry took off. The capital gains tax rate was cut to 28% from nearly 50% in 1978, and for the first time pension funds and other fiduciaries could include venture capital as part of an overall portfolio. During this vital period venture firms began to nourish what are today’s high-tech leaders, from information technology and the Internet to genetic research and health care.
The proposal now to tighten how venture firms operate suggests that we are in a stage of the regulatory cycle closer to the New Deal than to the entrepreneurial era that followed. Adding regulatory burdens would do nothing to help the investors in venture funds who are willing to take the big risks, knowing that about half of venture-backed companies fail. It would only increase the costs of doing business and make risk-takers more risk-averse.
No venture capital firm has asked to be bailed out, and none are too big to fail. As hard as it is for regulators to understand, the nature of venture capital is such that it should not even aspire to be a low-risk enterprise.
The practical arguments against further regulation (particularly of small businesses and risk takers) are overwhelming. From a philosophical standpoint, we have to ask the question: by what right? Was the U.S. not founded on the belief that every individual should be free to stand or fall, succeed or fail on his own merits and by his own strength?
Once again, the U.S. government is punishing individuals for showing initiative and daring to succeed above and beyond their fellow man –individuals who have asked nothing of society beyond the freedom to live their own lives.
Posted by Ariel Goldring 
