Capital moves to where it’s least impeded. I’ll quote a recent New York Magazine article by Gabriel Sherman to illustrate this point:
For New York’s bankers and traders, the new math suddenly reordered their assumptions about their place in a post-crash city. “After tax, that’s like, what, $75,000?” an investment banker at a rival firm said as he contemplated Morgan Stanley’s decision. He ran the numbers, modeling the implications. “I’m not married and I take the subway and I watch what I spend very carefully. But my girlfriend likes to eat good food. It all adds up really quick. A taxi here, another taxi there. I just bought an apartment, so now I have a big old mortgage bill.” “If you’re a smart Ph.D. from MIT, you’d never go to Wall Street now,” says a hedge-fund executive. “You’d go to Silicon Valley. There’s at least a prospect for a huge gain. You’d have the potential to be the next Mark Zuckerberg. It looks like he has a lot more fun.”
Wall Street bargained with the government and the central bank for access to an infinite lending facility. In return, it gave up autonomy. Investment banks are becoming increasingly regulated. As far as I can tell, the main game that’s been running since the financial crisis has been the Treasury “carry trade” — borrowing from the Fed at near zero percent and lending the proceeds to the government for a slender, nigh-riskless profit on massive volume. It’s not risk-free, of course — the general public takes the risk — but it is for the banks in the context of that particular trade.
Silicon Valley has yet to accept such a bargain, so long as you ignore the many (now-mostly-failed) ‘clean’ or ‘green’ tech startups.
In Silicon Valley, risk and reward lies with companies, investors, and employees. The more risk that you take, the higher your potential upside. There are infinitely fewer rules and regulations governing user interface design than there are about kitchen sizes and seating arrangements in any restaurant in any state in the country.
You can decide where to place a button on a screen in a program used by millions of people with less oversight than selecting table height in a restaurant used by a few dozen people at once. This is part of the reason why Silicon Valley remains so widely admired: businesses can focus most of their efforts on solving problems rather than dancing a convoluted jig to please the regulatory gods.
Seeing what’s happened to Wall Street can be instructive to Silicon Valley. The more that you ask for “help” from the government, the more arbitrary rules that they’ll impose on your industry.
The final result of these protections in an era of international competition is stagnation and doom. China was the world’s leading power in the late Middle Ages and early Rennaissance, but hobbled itself for centuries through its intermittent bans on naval trade in 1371 and 1550. American presidents attempted to protect concerns like Bethlehem Steel in the later 20th century to no avail — people still make, buy, and sell steel, but most of the production happens elsewhere.
Those free trillions enjoyed by the banks aren’t weren’t really free — they were stolen from other people. They got mad once they figured it out. The costs that were obscured in the aftermath of the financial crisis are now apparent. The banks and politicians that colluded to pass incredibly unpopular bailout legislation are now dealing with large popular protest movements of various ideological flavor.
Silicon Valley’s competitive advantage is freedom, in the real sense, rather than that of a politician’s stump speech platitudes.
Workers, managers, and investors in many sectors can make decisions without needing to check with their legal compliance officer. The law only typically intrudes when an internet company attempts to do business in a legacy sector. Startups like AirBnB are able to avoid entire rolls full of red tape governing hotels, landlord-tenant agreements, and other onerous rules because their business isn’t legible to the legal system.
By the time that lobbyists for the hotel industry got around to bribing the right politicians and hyping the press with planted stories, it’s too late — the service is too popular. Once a sufficient number of people have adopted a technology, they become extremely resistant to having it taken away from them through legal means. Political action to suppress that technology becomes too expensive.
While the industry isn’t immune from regulatory overhead, it’s comparatively freer than any other industry. Computer systems engineering is less regulated than any other engineering discipline. As such, capital can flow more directly towards technological development without being diverted to regulatory obeisance.
This is why the anonymously-quoted Wall Street guy is a Mark Zuckerberg wannabe. Life in a protected industry sucks.