Virginia Postrel asks whether a flourishing economy depends on delusion. To answer it, she quotes economic historian John V.C. Nye, who argued that "countries become economically stagnant when their business people become too mature and rational":
That’s what happened to Victorian Britain, [Nye] suggests, when it was surpassed by the United States and Germany. Britain had capable businessmen and good financial markets to support them. There’s no evidence that Victorian businessmen failed to invest wisely. The problem, argues Nye, is that they didn’t invest unwisely.
The odds of any given venture succeeding are, of course, low. But it’s rational to invest $1 million in a business that will fail nine out of ten times, as long as the tenth time will earn least $10 million. Nye is talking about irrational bets: investing $1 million on a one in 50 shot of $10 million. An entrepreneurial culture encourages those crazy bets as well, and a few startups get lucky. We should, Nye suggests, think of “the entrepreneur as the valiant, but overoptimistic investor rather than the heroic seer.”
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