Peter Thiel's Question
By Arnold Kling
Bryan has one angle. I have another. In this video, Thiel confronts Google CEO Eric Schmidt over the issue of Google’s cash hoard. If you have $50 billion in low-yielding investments, are you not more of a bank than a technology company?
I think this question goes beyond any one company. It is a global paradox. If we look around, we see potential innovation in computers, biotechnology, and nanotechnology, among other areas. Why are investors not selling U.S. Treasury securities in order to invest in companies that are innovating?
1. Perhaps investment in these fields is already saturated, so that the expected returns are low. As Alex Tabarrok points out, this is the Great Stagnation interpretation. (Thiel is a stagnationist who Cowen credits with helping to inspire the book.)
2. Perhaps the typical household wants to hold a large share of assets in risk-free securities, even though other investments might yield more. Folks have been burned the past few years, and they do not know who to trust.
3. Perhaps the present is a period of great uncertainty about the path of technology going forward, and the option value of waiting to invest is particularly high. The classic paper is by Robert McDonald and Dan Siegel, reprinted here.
4. Everybody is in survival mode, more worried about the threat of bankruptcy than the opportunity of gain.
These hypotheses are not mutually exclusive. I lean toward a combination of (2)-(4), particularly (3). I should hasten to add that the source of uncertainty is not exclusively, or even mainly, public policy. There are genuinely conflicting views about where the “next big thing” is coming from. For example, as you know, there are folks who see education as ripe for disruption and those who dispute that view.