Peter Thiel has long argued that technological innovation has slowed and that this slowdown is behind today’s economic ills. He is no crank. He co-founded PayPal and other successful companies and then became a venture capitalist, investing early and very profitably in Facebook.
As you may imagine, technology executives take exception to his theory. Eric Schmidt, the executive chairman of Google, debated Thiel on Monday, at an Aspen, Colorado event sponsored by Fortune magazine. Thiel landed a good one by zeroing in on Google’s own investment policy, which he said was essentially to put its cash under the mattress:
Google is a great company. It has 30,000 people, or 20,000, whatever the number is. They have pretty safe jobs. On the other hand, Google also has 30, 40, 50 billion in cash. It has no idea how to invest that money in technology effectively. So, it prefers getting zero percent interest from Mr. Bernanke, effectively the cash sort of gets burned away over time through inflation, because there are no ideas that Google has how to spend money.
A little later, Thiel added:
…Google is no longer a technology company, it's basically a search engine. The search technology was developed a decade ago. It's a bet that there will be no one else who will come up with a better search technology. So, you invest in Google, because you're betting against technological innovation in search. And it's like a bank that generates enormous cash flows every year, but you can't issue a dividend, because the day you take that $30 billion and send it back to people you're admitting that you're no longer a technology company. That's why Microsoft can't return its money. That's why all these companies are building up hoards of cash, because they don't know what to do with it, but they don't want to admit they're no longer tech companies.
Though prodded by the moderator, Schmidt never really responded to this go-for-the-jugular indictment of his company’s cash hoard (which according to public sources hovers around $45 billion). Other tech companies are doing the same; Apple’s sitting on $100 billion.
Thiel argues that our stock of scientific discoveries has been exploited and that all the low-hanging fruit has been picked. That leaves would-be innovators with only the hard-to-reach stuff, like thermonuclear fusion and a cure for cancer. The theory was elaborated last year by Thiel’s friend, the George Mason University economist Tyler Cowen, in his essay, “The Great Stagnation.”
Looking at those cash hoards, investors might want to think twice before crediting established tech stocks with great growth potential. Sure, Google, Apple and Microsoft are good at what they do. Then again, so are the car-rental agencies.