[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

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FINANCING THE NEW ECONOMY
We have seen how the capital market links households who
save with firms that invest, so that saving equals investment
at the equilibrium interest rate. But how do firms actually get
their hands on household saving? The answer is that financial
intermediaries such as banks and investment companies perform
the function of transferring funds between households
and firms. Their job is to make sure that the households’ money
is well invested, so that the households can get it back with
a return.
Banks are perhaps the most important financial intermediary.
In the nineteenth century, banks mainly lent money to
firms to help finance their inventories. The inventories were
held as collateral—that is, if the borrower defaulted on the
loan, the lender could seize the inventories. Gradually, banks
expanded their lending activities—for instance, to finance
houses and commercial real estate, in such cases holding the
buildings as collateral. The past decade’s revolution in information
technology has presented special problems to these
traditional forms of finance. Today firms invest heavily in software
and new ideas. If the idea does not pan out, the firm may
go bankrupt, but there is no collateral: there is little of value
that the creditor can seize.
In the United States, financial markets have adapted, and
there now is a new form of financial institution—venture capital
firms. Typically, the funds are provided by either wealthy private
investors or institutions, such as universities, seeking high
returns. The venture capital firms have developed expertise in
assessing new ideas in the new economy—the most successful
of the venture capital firms have an impressive record of picking
winners. But they offer more than capital; they typically also
give managerial assistance and take an active role in oversight.
After providing the initial capital that enables a firm to get established,
the firm supported by the venture capital firms typically
“goes public”—that is, it sells at least some of its shares on the
market. It is at this point that venture capitalists reap their gains.
While the first venture capital firms concentrated on Silicon
Valley (the area surrounding Stanford University where much
of the early development of computers occurred), more
recently they have expanded their focus to other areas of the
country and other sectors.
Table 9.1
YEARS OF SCHOOLING BY AGE
% with a high school
% with less than a degree but no % with at least a
Age group (in 2003) high school degree bachelor’s degree bachelor’s degree
25–34 13 57 30
35–44 12 59 29
45–54 11 59 30
55–64 15 58 27
65–74 25 56 19
75 and older 33 52 15
SOURCE: Statistical Abstract of the United States, 2004
(www.census.gov/prod/2004pubs/04statab/educ.pdf).
EDUCATION AND HUMAN CAPITAL ∂ 205