 By Sarah OuyangFaith comes in many forms. For startup businesses planning for long-term growth and in need of sustenance, some cold, hard cash is preferred above all else.
And that’s where venture capitalists swoop in like reverse vultures who, instead of gorging on carcasses, breathe life into struggling newborns. Entrepreneurs might worship these firms for their financial benevolence, but venture capitalists are not exactly altruistic saints — thorough and adroit in calculating potential gains, they take into consideration factors such as the network and experience of the founders. For 2010’s Berlin, this type of scrutiny became the basis of its economy, replacing the more defining business atmospheres of other European cities: chic culture in Paris, for example, or music in London. Three factors directed the V.C.-friendly spotlight shining on Berlin and pulled the city out of its financial mire in the years surrounding 2008. In fact, the global recession itself paved the way for venture capital in Berlin: the crisis left the city poor in capital and rich in opportunity. Office space was rent-free and plentiful for startups who entered the scene early in the game, since the only real competition they faced was the public sector. Another contribution to the city’s venture capital originated from local hipsters. Influential artists, among them David Bowie and Iggy Pop, flocked to Berlin for cheap, trendy respite. This boosted its reputation in the eyes of entrepreneurs and venture capitalists alike. Finally, Germany had become a rival to America in “melting pot” status (perhaps either a cause or effect of the rise in hip culture), a development in which engineers from all over the continent were happy to partake. Such economic and cultural shifts have designated 59% of German national V.C. investments to Berlin, rendering it a hub of possibility for tech companies. In 2019, a data report revealed startling numbers showcasing the progress that Berlin has made: startups manifesting 80,000 jobs; startups receiving 3.7 billion euros in funds; startups placing the city in 2nd place for European tech investment. The second place prize can also be attributed to the number of unicorns, or private startups valued at over 1 billion USD, created within a certain period of time. It is essential to understand how this change has occurred in Berlin. Barely more than a decade ago, Berlin was turning itself inside out in search of industries that could set it apart from the rest of the bleak crowd, envying Paris and London for their glittering cultural je ne sais quoi. The desperate scramble for economic progress led to some “knock-offs” of American e-commerce. One such “shallow tech” company, Rocket Internet, left behind a legacy of unoriginality and misfortune that lasted until Berlin decided to concentrate its efforts on tech startups rather than “consumer clones.” Foreign startups also peak the interest of Berlin’s venture capitalists, who see profits made from companies in faraway lands as an “external validation” of sorts. The richness of the city’s risk capital has diversified the focuses of its V.C. firms, expanding beyond simple, safe ventures to projects that might have universal benefits — a definite step forward in the morality of venture capital. For instance, June Fund partner David Rosskamp proudly describes an increase in funding towards “the agricultural world… [in response to] a large need, and an equally large economic opportunity in digitizing these flows, in providing transparent access to agricultural supplies and in empowering millions of small-scale farmers. So June has invested in agricultural trading networks from Europe to Africa.” Berlin has thus been near-flourishing in V.C. pursuits and tech advancements. And then the coronavirus hit. With the current pandemic exacerbating an economic crisis of our own, the United States is, as General Washington was according to Lin-Manuel Miranda, “in dire need of assistance.” More than anything else, the country needs an understanding of the situation in order to further analyze the best paths to recovery. Whether by following role models or avoiding worst-case scenarios, watching trends in other countries appears to be greatly important for a successful return to normalcy. The problem is, experts are not quite certain whether Berlin is the former or the latter. Speaking from a rather humanitarian perspective, Germany is a clear example to follow for its relatively low percentage of COVID-19 fatalities, courtesy of Chancellor Merkel’s precise and effective handling of the virus. On a fundamentally economic level, however, virus effects in Germany leave observers skeptical. Investment level decreases have been drastic, especially when compared with the fairly more fortunate European cities such as Dublin and Amsterdam. The vast range of different level changes is astonishing: while Zurich has seen a 98% increase in investment levels since the previous year, Madrid’s levels have dropped 69%. Berlin is on the devastating side, with a 51% drop in investment. NGP Capital partner Bo Ilsoe attributes this to Germany being “more conservative and more prudent in reigning back spending” while the pandemic unleashes its claws on German businesses. Others, however, present optimistic outlooks: Berlin is less expensive to operate in compared to other tech hubs, including San Francisco, so many V.C. firms are not too worried for the long term. The impacts of the coronavirus on society have also reshaped the process of venture capitalism. Firms have begun encouraging clients to “focus on extending the runway both by increasing capital efficiency as well as taking on additional funding.” Different industries have been impacted differently as well. With the communications industry consolidating into an “oligopolistic market structure” featuring Zoom and Google Meet as its two lead stars, Berlin V.C. firms are wary about prospects for startups in the technology sector. In any case, the city’s progress of the past decade cannot be ignored. There remains still a considerable amount of hope for startups in the German capital city. And where there is hope, there is venture capitalism. Or is it the other way around?
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 By: Sarah OuyangThe simplified neoclassical economic theory, originating from John Hicks’ “post-war synthesis” of Keynesianism and classical economics, demands that the government invest in the economy for short term growth. It also assures that in the long term, markets will reach a steady equilibrium of growth by themselves through “boom and bust” cycles, as the classical theory suggests. The key point of this theory — or rather, this synthesis of two theories — is that economies are meant to grow, whether by itself or with government intervention.
Following the recession of 2008, however, dismayed economists watched as the US economy failed to meet their expectations, disappointing “even the most pessimistic early predictions.” A 2016 estimate records a 2.2% annual growth (1.3% lower than the Federal Reserve’s lowest prediction) and a 2% long term growth (0.5% lower). [1] This situation has now been categorized as “secular stagnation,” a term coined by Alvin Hansen and familiarized by Lawrence Summers. [2] The concept describes a sustained and seemingly indelible deceleration of the economy, and it has provoked a new, heatedly debated question: is this lack of growth really that concerning — or should it be embraced? The “degrowth” movement, as it has now been dubbed, supports its argument with three main reasons: the environmental unsustainability of eternal growth, the increase of other significant problems in an industrialized economy, and the suitability of GDP growth as a measurement of prosperity. Environmental activists like Greta Thunberg have condemned corporations and the government for blindly pursuing economic growth, which culminates in resource-intensive activity. Criticizing the ecological impacts of sustained growth, this stance cites climate change as evidence of the planet’s limitations. While advocates of continued growth have argued that it is possible to decouple economic growth and resource consumption, a process known as “green growth,” this has not happened in the least so far, save for relative decoupling, or a “decrease in resource use per unit of GDP.” Paired with the limitations of recycling, the facts show that eternal economic growth is unsustainable and green growth is only “wishful thinking.” [3] Although the EU has made promises to decrease carbon emissions, it is unclear how this can be achieved without tampering with economic growth. Current energy consumption demands fossil fuels, which add greenhouse gases to the air and thus contribute to global warming. Therefore, the only way to reach this goal would be to reduce energy consumption, a process that will likely impede growth. Further, expanding concerns such as income inequality can be partially traced back to economic growth. Technological advancements have induced an increase in supply and demand of high-skilled labor jobs such as “business managers, consultants, and design professionals.” These occupations tend to include a higher salary, widening the gap between real incomes of different classes. [4] Economists have even traced problems like higher mortality rates and extreme political polarization to the unquenchable thirst for economic growth. The latter may occur because, as Nobel Prize winners Abhijit Banerjee and Esther Duflo iterated, social tensions arise when the “benefits of growth are mainly captured by an élite.” If growth must be pursued, then, the government must also address problems with income inequality and wealth distribution, as well as provide relief with “health care, education, and social advancement.” [2] A final issue that the degrowth movement has with the stance of growth advocates is whether or not GDP is an appropriate measure of a country’s prosperity. One of the primary hurdles of GDP is that it represents solely aggregate data and ignores the “nuances” of inequality that can be disguised by an increase in absolute wealth, especially when the increase is enjoyed mostly by an élite class while the poorer divisions of the nation remain desolate. [5] Countries with high GDP’s may show astonishing income inequality. This is often measured by the Gini coefficient, a “statistical measure of distribution intended to represent the income or wealth distribution of a nation.” The Gini coefficient may range from 0%, which represents perfect equality, to 100%, which represents perfect inequality. Using this measurement, the problems with GDP as a measure of prosperity become evident. Take the U.S.: the United States currently has, according to the World Bank, a GDP of about 20.54 trillion USD. [6] Meanwhile, Norway has a GDP of about 434.17 billion USD, approximately one-fiftieth of that of the U.S. [7] However, when examining the Gini coefficient of each country, Norway measures at about 25.8% while the U.S. has one of the highest among developed nations: a whopping 40.8%. [8] Another weakness of GDP is its pure focus on numbers. Physical output alone portrays a rise of GDP, so the current measure of growth neglects the quality of services such as health care and education. Recent dips in GDP should not be cause for concern, as a closer look actually reveals a shift of consumer spending “from tangible goods… to services, such as child care, health care, and spa treatments.” [2] Progress and development in innovation also contributes nothing to GDP. Such oversight refutes GDP as a reliable measure of prosperity, thus encouraging the need for a new and more applicable measurement. Either embrace the benefits of secular stagnation — or redefine economic growth altogether. To combat the potential concerns of stagnation, economists recommend “policies such as work-sharing and universal basic income.” [2] Job sharing allows multiple people to complete, in part-time shifts, a task that would usually be accomplished by one person working full-time. A universal basic income sets a mandatory minimum wage for people everywhere to be guaranteed by the government. Such policies could provide financial security for the people and may assist the fight against inequality. In fact, there have already been examples that this tactic works. For instance, Finland offered 2,000 unemployed citizens 560€ per month in 2017, resulting in “reduced stress” for the participants and “more incentive to find a good job.” [9] While the degrowth movement challenges established economic theories and common sense itself, the evidence points, in reality, to its exigent benefits. Scholars continue to debate whether this is truly the best path and fiddle with the possibility of policy changes, but at the moment degrowth supporters argue that economic growth, at this rate, is simply not sustainable. [1] https://time.com/4269733/secular-stagnation-larry-summers/ [2] https://www.newyorker.com/magazine/2020/02/10/can-we-have-prosperity-without-growth [3] https://theecologist.org/2018/feb/22/why-economic-growth-not-compatible-environmental-sustainability [4] https://courses.lumenlearning.com/wmopen-microeconomics/chapter/causes-of-growing-inequality/ [5] https://time.com/5118026/gdp-metric-success-wealth/ [6] https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:USA:CHN&hl=en&dl=en [7] https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:NOR:SWE:FIN&hl=en&dl=en [8] http://hdr.undp.org/en/content/income-gini-coefficient [9] https://www.thebalance.com/universal-basic-income-4160668 |