The need for innovation and long-termism in finance

By James Anderson, chair of the Panmure House Prize

James Anderson of Panmure House. Image: Matt Marcus
James Anderson of Panmure House. Image: Matt Marcus

Why do we need to stimulate academic thought about the combination of innovation and finance? ‘Surely this should happen naturally?’, you might well ask. The answer is that it should, but it doesn’t.

And as we mark the 300th anniversary of the renowned Scottish economist Adam Smith, who championed innovation and a long-term approach, this debate is more pertinent than ever.

It seems that both academic economics and finance have lost their way over the years. Of course, there are exceptions in the economics profession, as exemplified by members of the Panmure House Prize judging panel. The Panmure House Prize is an annual award of $75,000 for research into long-term investing and its relationship with innovation. It is awarded to emerging leaders in academia who are planning to produce outstanding research on the topic of the long-term funding of innovation in the spirit of Adam Smith.

Meanwhile, the venture capital branch of finance is at least interested in moulding the future over time horizons beyond the calendar year.

But, in general, we are in a mess. Economics revels in complex equations, usually based on the illusions of equilibrium and perfect competition to explain our world. This is nowhere truer than in its direct application to finance economics. The gospel of market efficiency tells us that we cannot aspire to achievement rather than submission to the iron laws of return. It’s even worse that by defining risk as volatility around a market capitalisation-based index institutional investors are remorselessly pushed towards allocating the bulk of their capital to giant companies. These companies have zero need for their money (most of them have serious amounts of excess capital) and a natural impulse to preserve the status quo.

Whether finance has sought out academic rationalisations to satisfy its self-interest or whether it has genuine belief in the academic nostrums is impossible to discern. As ever economist John Maynard Keynes put it eloquently and accurately: ‘Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back’.

So, what should the Panmure House Prize aim to contribute? To my mind it would succeed if it can shift the attention of academics, and eventually the giants of the finance industry, towards supplying resources for building a brighter, more productive, more sustainable and yes, more innovative economy.

That vision would replace the trillions currently deployed in an endless - if highly remunerative to insiders - game of beating competitors in quarterly annual returns without deploying even fractions of the available capital in the ever uncertain but always essential search for a better future. Serious long-term investment capital is essential to economic progress. Our initial Panmure House Prize winners, Professor Rachelle Sampson and Doctor Aravind Ganesh, have pointed the way forward on this long path.

Our vision is for future winners of the Panmure House Prize to continue the journey of flying the flag for the benefits of long-term investment, along with the need for innovation.

We are currently calling for proposals for this year’s Panmure House Prize and you can find out more here.