So if you want to encourage startups you should have a low rate on capital gains. Politicians are caught between a rock and a hard place here, however: make the capital gains rate low and be accused of creating "tax breaks for the rich," or make it high and starve growing companies of investment capital. As Galbraith said, politics is a matter of choosing between the unpalatable and the disastrous. A lot of governments experimented with the disastrous in the twentieth century; now the trend seems to be toward the merely unpalatable.

Oddly enough, the leaders now are European countries like Belgium, which has a capital gains tax rate of zero.

The other place you could beat the US would be with smarter immigration policy. There are huge gains to be made here. Silicon valleys are made of people, remember.

Like a company whose software runs on Windows, those in the current Silicon Valley are all too aware of the shortcomings of the INS, but there's little they can do about it. They're hostages of the platform.

America's immigration system has never been well run, and since 2001 there has been an additional admixture of paranoia. What fraction of the smart people who want to come to America can even get in? I doubt even half. Which means if you made a competing technology hub that let in all smart people, you'd immediately get more than half the world's top talent, for free.

US immigration policy is particularly ill-suited to startups, because it reflects a model of work from the 1970s. It assumes good technical people have college degrees, and that work means working for a big company.

If you don't have a college degree you can't get an H1B visa, the type usually issued to programmers. But a test that excludes Steve Jobs, Bill Gates, and Michael Dell can't be a good one. Plus you can't get a visa for working on your own company, only for working as an employee of someone else's. And if you want to apply for citizenship you daren't work for a startup at all, because if your sponsor goes out of business, you have to start over.

American immigration policy keeps out most smart people, and channels the rest into unproductive jobs. It would be easy to do better. Imagine if, instead, you treated immigration like recruiting-- if you made a conscious effort to seek out the smartest people and get them to come to your country.

A country that got immigration right would have a huge advantage. At this point you could become a mecca for smart people simply by having an immigration system that let them in.

If you look at the kinds of things you have to do to create an environment where startups condense, none are great sacrifices. Great universities? Livable towns? Civil liberties? Flexible employment laws? Immigration policies that let in smart people? Tax laws that encourage growth? It's not as if you have to risk destroying your country to get a silicon valley; these are all good things in their own right.

And then of course there's the question, can you afford not to? I can imagine a future in which the default choice of ambitious young people is to start their own company rather than work for someone else's. I'm not sure that will happen, but it's where the trend points now. And if that is the future, places that don't have startups will be a whole step behind, like those that missed the Industrial Revolution.

[1] On the verge of the Industrial Revolution, England was already the richest country in the world. As far as such things can be compared, per capita income in England in 1750 was higher than India's in 1960. Deane, Phyllis, The First Industrial Revolution, Cambridge University Press, 1965.

[2] This has already happened once in China, during the Ming Dynasty, when the country turned its back on industrialization at the command of the court. One of Europe's advantages was that it had no government powerful enough to do that.

[3] Of course, Feynman and Diogenes were from adjacent traditions, but Confucius, though more polite, was no more willing to be told what to think.

[4] For similar reasons it might be a lost cause to try to establish a silicon valley in Israel. Instead of no Jews moving there, only Jews would move there, and I don't think you could build a silicon valley out of just Jews any more than you could out of just Japanese. (This is not a remark about the qualities of these groups, just their sizes. Japanese are only about 2% of the world population, and Jews about .2%.)

[5] According to the World Bank, the initial capital requirement for German companies is 47.6% of the per capita income. Doh. World Bank, Doing Business in 2006, http://doingbusiness.org

[6] For most of the twentieth century, Europeans looked back on the summer of 1914 as if they'd been living in a dream world. It seems more accurate (or at least, as accurate) to call the years after 1914 a nightmare than to call those before a dream. A lot of the optimism Europeans consider distinctly American is simply what they too were feeling in 1914.

[7] The point where things start to go wrong seems to be about 50%. Above that people get serious about tax avoidance. The reason is that the payoff for avoiding tax grows hyperexponentially (x/1-x for 0 < x < 1). If your income tax rate is 10%, moving to Monaco would only give you 11% more income, which wouldn't even cover the extra cost. If it's 90%, you'd get ten times as much income. And at 98%, as it was briefly in Britain in the 70s, moving to Monaco would give you fifty times as much income. It seems quite likely that European governments of the 70s never drew this curve.

Thanks to Trevor Blackwell, Matthias Felleisen, Jessica Livingston, Robert Morris, Neil Rimer, Hugues Steinier, Brad Templeton, Fred Wilson, and Stephen Wolfram for reading drafts of this, and to Ed Dumbill for inviting me to speak.

The Power of the Marginal

(This essay is derived from talks at Usenix 2006 and Railsconf 2006.)

A couple years ago my friend Trevor and I went to look at the Apple garage. As we stood there, he said that as a kid growing up in Saskatchewan he'd been amazed at the dedication Jobs and Wozniak must have had to work in a garage. "Those guys must have been freezing!"

That's one of California's hidden advantages: the mild climate means there's lots of marginal space. In cold places that margin gets trimmed off. There's a sharper line between outside and inside, and only projects that are officially sanctioned-- by organizations, or parents, or wives, or at least by oneself-- get proper indoor space. That raises the activation energy for new ideas. You can't just tinker. You have to justify.

Some of Silicon Valley's most famous companies began in garages: Hewlett-Packard in 1938, Apple in 1976, Google in 1998. In Apple's case the garage story is a bit of an urban legend. Woz says all they did there was assemble some computers, and that he did all the actual design of the Apple I and Apple II in his apartment or his cube at HP. This was apparently too marginal even for Apple's PR people.

By conventional standards, Jobs and Wozniak were marginal people too. Obviously they were smart, but they can't have looked good on paper. They were at the time a pair of college dropouts with about three years of school between them, and hippies to boot. Their previous business experience consisted of making "blue boxes" to hack into the phone system, a business with the rare distinction of being both illegal and unprofitable.

Now a startup operating out of a garage in Silicon Valley would feel part of an exalted tradition, like the poet in his garret, or the painter who can't afford to heat his studio and thus has to wear a beret indoors. But in 1976 it didn't seem so cool. The world hadn't yet realized that starting a computer company was in the same category as being a writer or a painter. It hadn't been for long. Only in the preceding couple years had the dramatic fall in the cost of hardware allowed outsiders to compete.