Wednesday, September 12, 2012

Innovation: Silicon Valley vs Wall Street

In preparation for The Greatest Innovations of Silicon Valley (BUS 117), I read a lot of papers about innovation and growth. Here's a good sentence from Bresnahan and Trajtenberg NBER/Journal of Econometrics (1995) paper "General Purpose Technology: 'Engines of Growth?'"
Economists have known for a long time that technical change is the single most important force driving the secular process of growth (Abramovitz, 1956; Solow, 1957).
From a purely financial (risk) perspective, Silicon Valley is an engine of growth because it is really good at developing uncorrelated assets using new technologies. That is, while everybody is happy with proven technologies, the creative crowd in the valley is willing to bet on something totally new. As the result — and in accordance with both the financial and economic growth theories — Silicon Valley innovations stimulate growth and at the same time reduces overall financial risks.

By contrast, Wall Street innovations create a trade-off between growth and risks. Therefore, when the Wall Street creates a lot of innovation the financial system becomes prone to disasters (or as Nassim Taleb calls them "Black Swans").

tags: innovation, theory, technology, silicon valley, course, stanford

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