Could ICO Funding Help Find “Lost Einsteins?”

Tuesday, January 9, 2018

Google the phrase “lost Einsteins” and you’ll find a slew of articles from early December discussing a study by several economists associated with the Equality of Opportunity Project about who in the United States becomes an inventor. Not surprisingly, patent rates and other measures of innovation correlate with income. Also as expected, women and underrepresented minorities tend to invent less. The standard story, which no doubt is true and important, is that Americans from less advantaged backgrounds are less likely to accumulate the human capital to deliver our country’s next wave of innovations. But there’s a second, tantalizing effect that the authors explore at least in part: perhaps these people are lost Einsteins who have ideas for important new innovations, but they simply aren’t being connected to sources of funding to get projects off the ground.

The authors find that one strong determinant of propensity to innovate is exposure to innovation as a child. Children who grow up in high-innovation areas such as Silicon Valley are more likely to become inventors themselves, even after controlling for demographic variables. This may suggest better education or social norms around innovation, but it also suggests that people in those areas are better connected to the centralized gatekeepers of funding that are often required to get a project off the ground. Families from most places in the country may not know any venture capitalists or investment bankers, but a family from Silicon Valley or New York City may know the right people to at least open the door.

That’s one of the reasons why the recent boom in initial coin offerings (ICOs) is so exciting. We’ve described ICOs in detail in several pieces: some function more like an IPO of a stock, while others provide a coin that is exchangeable for a future product or service. Think about how many brilliant ideas may have been squashed because a would-be inventor was either turned down by traditional gatekeepers of funding, or because they lacked the network or social capital to even initiate the process. ICOs are easier, cheaper, and more open to anyone with a good idea than IPOs regulated by the SEC (with high compliance costs) or funded by venture capitalists (involving the potentially idiosyncratic preferences of a small number of people).

It is deeply ironic that while the usual political suspects dream up top-down policies to “foster innovation” among lower-income Americans, they are threatening to get in the way of such an elegant, bottom-up solution. The SEC hasn’t gotten entirely specific, but beginning in August 2017 — and as Jeffrey Tucker discussed, continuing this week — it suggests we may see considerably more regulation down the road. Such regulation might prevent misinformed investors (who probably shouldn’t be investing in ICOs anyway) from some amount of fraud, but wouldn’t it be a shame if in the name of investor protection, the SEC stifled innovation among the people that could most benefit from such entrepreneurship? Let’s not lose track of these Einsteins again, just as some are beginning to be found.

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Max Gulker, PhD

Max Gulker joined AIER in 2015. His primary research areas are applied microeconomics and industrial organization. Max previously worked as an economist for Keystone Strategy, supporting expert testimony for antitrust and intellectual property litigation in high tech industries. Prior to that, he worked on financial litigation matters with NERA Economic Consulting. Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Follow @maxgAIER.