October 4, 2024 • 41 mins
Author and former Bank of England regulatory economist Dan Davies joins this week to discuss his new book, The Unaccountability Machine, which describes how the cost of large organisations deferring decision-making is a widening “accountability sink.”
As companies grow more complicated, the bigger the “sink” gets, he argues. “We’ve reached a crisis point.”
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Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:10):
Welcome to Maren Talks Money, the podcast in which people
who know the markets explain the markets. I'm Meren thumset
web with me for this week's interview. Unusually, but happily
is John Steppek, senior reporter and author of the Money
Distilled newsletter.
Speaker 3 (00:22):
Hello.
Speaker 2 (00:23):
John, hi'ml You know where you're.
Speaker 1 (00:25):
Here, right, Yes, I've actually read the book.
Speaker 2 (00:28):
That's right. We are talking today about the unaccountability machine,
why big systems make terrible decisions, on how the world
lost its mind, something I think we can all agree with.
This is written by our guest Dan Davies, and John
has read the entire thing. I've only read little bits
of it, which doesn't mean I don't have opinions, but
does mean that I'm going to defer to John quite
a lot during this interview. Davi's worked as an economist
(00:51):
at the Bank of England and a bank analyst before
moving to consulting and writing. He's also the author of
Lying for Money, which is obviously about financial fraud. In
this conversation with Dan, we fogus on the unaccountability machine
and it's look at why so many of the world's
systems are failing now. The other reason I wanted to
get John on this podcast, apart from the fact that
he's actually been good enough to read the book, is
(01:11):
because lack of accountability drives him crazy, and we've talked
about it on and off on this podcast over the years.
So it drives us mad that the NHS doesn't work,
and nobody knows why. It drives us mad. We can't
build anything in the UK, That infrastructure simply doesn't appear,
despite the fact that everybody agrees that it should be.
That's mad, that our transport network doesn't work, that productivity
(01:33):
doesn't go up. All these things that we all know
aren't working, that we all want to fix, every politician agrees,
yet nothing ever happens in the NHS. Is the classic
of this. John and I think we've talked a lot,
haven't we, Johne, about why is it that we never
see Amanda Pritchard on the Telly or listen to her
on the radio. In fact, does anyone know who Amanda
(01:54):
Pritchard is. She's the CEO of the NHS. She's the
person that should be up there, I feel should be
up there on the race on the Telly every day
explaining to us why it's so absolutely appallingly useless. But
she's not their accountability deficit. Dan, Welcome to Maren Talks Money.
I'm so glad you're here because you're going to explain
all this to us, right.
Speaker 4 (02:16):
Thanks, thanks very much, Thanks very much for inviting me,
and you know I will have a go brilliant.
Speaker 2 (02:22):
Well, I tell you what, why don't we start bre
you just giving us a big overview of what the
book's really about. I may have jumped your gun slightly
with my introduction, but what is it actually about? What
the main message here?
Speaker 3 (02:33):
The main message is exactly the kind of thing that
you were talking about, Maren, which is that personal accountability
for decisions is just in many ways a thing of
the past for lots of the kind of systems and
institutions that we interact with. There is just no individual
(02:54):
person who feels like they're accountable for these decisions. But yeap,
the strange thing is that I started out wanting to
write a very different book from the one that ended
up published, and the book was actually pretty much delayed
by a year in being delivered because I'd begun by
(03:14):
thinking that this was a straightforward issue of weasily responsibility.
Ducking managers just trying to create systems so that they
could avoid having to take any kind of accountability for
their decisions. And by the time I was halfway through it,
I started thinking, maybe that's not entirely fair, and that
(03:37):
maybe the reason that these people don't take accountability for
the decisions is that they don't feel like they made
the decisions. So Amanda Pritchard as chief Executive of the NHS,
she's got that title, she's in a role where you
would expect to see someone controlling the system, but actually
(04:00):
she's just kind of the operator of a huge, great
industrialized decision making machine. Most of the important decisions that
cause the NHS to dysfunction just arise out of a system,
and they don't have any individual human being owning them.
(04:20):
And this is a very weird, kind of new way
to live our life in the industrialized world. It's not
like the good old days of the nineteen twenties when
John Paul Getti could get a report from all of
his rigs every single morning and make decisions about all
of his rigs in the afternoon. Everything these days is
just so complicated that there's no one human being that
(04:44):
can hold the whole system in their head and make
decisions about us.
Speaker 2 (04:49):
So it's a function of complication, and the complication driven
presumably by both size and also by interaction between say
that corporation in the state and regulation and accounting rules
and all these kinds of things. So you no longer
have a system where say the ceover company has a
(05:10):
direct line of power across the company, because they have
to interact along the way with endless levels of regulation
for example.
Speaker 4 (05:19):
Yeah. Absolutely. When I was an analyst, Fred Goodwin, or
as he was then called, Serf Fred Goodwin once said to.
Speaker 3 (05:27):
Me, you know, some things are big because they're complicated,
and some things are complicated because they're big. And Royal
Bank of Scotland is books. It's just as things grow,
they have to deal with more things. But the killer
thing is that they have to deal with more combinations
of things. So you get in this horrible kind of
(05:49):
arms race, because as something grows, the complexity grows exponentially,
because roughly it grows as the square of the object.
The network and the capability to manage that complexity only
grows linearly, and you know, exponential versus linear is a
(06:09):
race that they ever has one winner, and so after
a time the system gets completely unmanageable in the literal
sense that it cannot be managed, it cannot be regulated,
and then something has to happen. And what I argue
in the book is that over a lot of the
industrialized world, a lot of our most important systems are
(06:32):
reaching that something has to happen stage where some kind
of reorganization is just absolutely necessary, because the complexity is
now completely beyond the ability of anyone to make remotely
sensible decisions that have any connection with the world of
their consequences.
Speaker 2 (06:53):
Yeah, but interestingly, on the way to this point, it's
been rather brilliant, right, And the state says, right, back
to Adam Smith andvization and everyone doing different things, back
to the making of pins, isn't it and Adam Smith originally,
and all these other things where no one knows how
to make the entire thing. Everyone knows a tiny bit
of it. And that's been phenomenal for us. And I
spent a lot of time earlier this year reading books
(07:15):
by Joseph Heinrich, which was all about how this hive
brain effectively creates things that would be impossible for us
to create alone, for example. So until relatively recently, this
complication that meant that everybody specializes in together we can
create significantly more than anyone could ever create alone, has
(07:35):
been rather brilliant. So your suggestion that we've now reached
a tipping point of a level of complication where it
no longer works anymore.
Speaker 3 (07:42):
Well, we've reached a crisis point, which is not necessarily
the same as the end of the road, because one
of the really fantastic things about the market economy and
about the way that human beings work together is that
we're capable of reorganizing ourselves in these kinds of things.
You know, it's the mark of a viable system that
they can reorganize to meet challenges that weren't anticipated when
(08:05):
it was designed. There's really fast, fascinating book, one of
the only management science books that economists have any respectful,
called Strategy and Structure by Alfred Chandler from the nineteen
forties fifties, when he's looking at the history of DuPont's,
(08:27):
General Electric, General Motors, or the big US corporations, and
what he discovered is that this phenomenon repeats itself over
and over Again, the reason he called the book Strategy
and Structure is that the structure of those companies kept
on changing because they would grow, they would get more complicated,
(08:47):
they would become unmanageable based on the reporting lines and
the reporting systems that they had. Then they would either
invent new technology to improve the communication and improve them capacity.
And so obviously you know you have telegrams, but also
you know accounting systems, cost accounting, even the humble filing
(09:10):
cabinet was a huge piece of information technology in its day.
And then when that didn't work, they would reorganize, they
would restructure, they would develop the multidivisional company model, they
would deconglomerate. So what you end up doing, and what
I think we are going to end up as a
society doing, after we have tried all of the other possibilities,
(09:33):
is reorganizing, devolving, restructuring our institutions so that we're not
trying to manage so many things from a big central
command center with one person having the title of chief
executive of the NHS or whatever, because that's just not
a viable way to go on managing these things. It
(09:55):
means it has to be reorganized, not necessarily that it's
the end.
Speaker 4 (09:59):
Of the road.
Speaker 2 (10:00):
So no more centralized services, no more giant companies.
Speaker 3 (10:04):
There's always a cycle of conglomeration and deconglomeration, there's all.
Speaker 4 (10:09):
You know.
Speaker 3 (10:09):
The kind of the history of quoted companies has always
been that they're either in acquisition and consolidation mode or
they're in spin off and deconglomeration mode. You know. That's
why investment banking is such a profitable industry. Companies are
always trying to do one of those two things. And
so I just think we must be moving into a
(10:33):
cycle of spin offs and breakups and companies deciding to.
Speaker 4 (10:39):
Do less but do it better.
Speaker 2 (10:40):
Huh. That could be incredibly lucrative for investors. Lots of
small spin off companies that then as a whole perform
better than the original conglomerate. So we'll keep an eye
on that. John, you've read the book over to you.
Speaker 1 (10:53):
I thought what was really interesting, Diana, is you can
lousy very it can intriging ideas like the accountability sink
and this idea of looking at systems in particular as
being you look at that outcomes rather than their intentions
to see what's going on in the poissy where the
(11:14):
products of the system is what it does rather than
what it's kind of meant to do. When you say
we're reaching a tipping point, where do you think that
that sense comes from? What is it about the present
day that makes this a particularly chaotic moment?
Speaker 3 (11:29):
I think that it's a growing gap between the stated
purpose of systems and their actual purpose. So you mentioned
that one of the things I discussed in the book
is a great old kind of scientist from the nineteen seventies,
a hippie management consultants There really were such things in
(11:49):
the seventies called Stafford Beer, who coined this fantastic phrase,
the purpose of a system is what it does, which
is kind of known by the acronym positive wood in
the kind of in the jargon. And what he means
by that is that to understand a system, you have
to respect the fact that the behavior of that system
(12:12):
is going to be defined by the way it's set up,
by the information that it pays attention to, and by
the way that it converts that information into decisions, not
necessarily by the actual kind of goals and aids of
any of the people involved in it, even the ones
(12:33):
who've got titles like chief executive officer. I'll give you
a more concrete example of this, I think, because that's
kind of a bit abstract. A system, dear to all
of our hearts is the British railway network. Now, the
British railway network might say that as its purpose is
to provide comfortable and convenient travel for everyone as a
(12:58):
reasonable price, and Stafford Beer would argue, you cannot say
that is the purpose of that system, because you cannot
say that a system has a purpose when it's structurally
and systematically provides a different result. And so you think, well,
(13:19):
let's look at how the purpose of the British railway
system evolves. And individual people in the system might have
kind of purposes like drive this train from London to Edinburgh,
or they might have purposes like cel tickets at a station,
but they're embedded in a wider system that has to
(13:40):
run an overall timetable. That timetable is embedded in a
system that has to make best use of the trains
and rails kind of provided, which in turn is embedded
in the overall system of governments, which has to make
decisions about how much it's going to subsidize a rail network,
(14:01):
and how much it's going to spend of taxpayer's money
on investing in capital as sets for the railway network.
So you end up thinking, well, this system is a
compromise between all these different levels. What's its actual behavior.
Its actual behavior is that this is not a railway
(14:23):
transport providing system. It's a rationing system. So if you've
kind of sitting on one of those trains from Euston
to Glasgow or from King's Cross to Edinburgh and everything's
broken down, everyone's sitting in the gaps between the carriages,
the train's delayed, and you start thinking, is the purpose
(14:45):
of this system literally to make this experience as unpleasant
and demoralizing for me as possible. Then, to a certain extent,
the answer to that question is yes, because this is
a rail rationing system and one of the ways that
it rations these journeys is by making the experience less
pleasant compared to driving or flying, so that the number
(15:09):
of people trying to get on the trains can be
reconciled with all those other priorities about long term investments,
running a safe time table with the rolling stock provided.
And so what I'm arguing in the book is that
all across so many of our systems. This gap between
(15:29):
what people want the system to do and the emergent
behavior of the system is getting bigger and bigger. And
you know, getting back to the title of the book,
the Unaccountability Machine, there's no real feedback mechanism from the
people at the bottom of the tree, for the people
who are actually kind of affected by the consequences of
(15:53):
all these decisions, to get their voice heard and to
feed back into the system that it's got to change.
Speaker 1 (16:00):
That's a really interesting point, and that's really perceptive looking
at the system and saying that's a rationing system. But
one of the things I found interesting was that when
I've read reviews of your book or even some of
the interviews, one of the frustrations people often bring up
is the scenario where you're at an airline boarding desk
and you get there a wee bit late and the
person that there says, well, I'm afraid you're going to
(16:21):
have to go away, and I can't say or ask
anyone anything, and if you go in, basically the computer
says no sort of scenario. But what occurred to me, though,
is that if you look at airlines as a whole
then on almost any metric that's actually important, they've vastly
improved over recent decades in terms of, you know, safety,
(16:45):
level of pollution per plane, costs, the number of flights
being done. So I think it's interesting that you take
this sort of the rail as a contrast to that
where the rail is actually rationing system, whereas were the
frustrations of the airlines are relatively petty. Accountability thinks relative
to the connect in the you know, the advances that
that partailer industry has made. So I suppose I'm just
(17:07):
point on other I guess because accountability sinks are there
to manage the chiost partly on they it's about it's
about getting read of things that you don't have the
ability to attend to or pay. It's kind of like
taken excess information. Now the system is that? Is that right?
Speaker 3 (17:25):
Yeah? I mean basically, an accountability sink is my word
for the kind of system that managements create as almost
a survival mechanism. And they have all of this information
coming into them, lots of it quite hostile information, and
they've got more of it than they can handle. So
(17:48):
what you do in that situation is you have to
cut off some of it. You have to kind of
reorganize your inputs so that you can handle them with
the management ability that's available to you. And the easiest
link to cut off is always the link to the customers,
(18:10):
because the customers are the ones causing the problems. The
customers are complaining to you, And if you cut off
that feedback link, you can then start to manage all
of the rest of the system. And you know, you
can deliver a product. The customers might like it or
they might not. They but as long as they their
(18:32):
kind of displeasure with it doesn't reach a threshold where
they stop actually buying it, you've made your business manageable again.
And I think that's kind of almost the difference between
the airlines and the railways. You know, the airlines will
cut off some kinds of customer feedback, but they have
(18:53):
to pay attention to the kind of signal of people
either buying the flights or not at the price that
they're willing to set. And they've got enough freedom and
capacity to manage their airline to keep on delivering that
service and to keep on meeting, as you say, all
of their other constraints. The railway network has somehow got
(19:14):
itself into a situation where it's not got the capacity
to manage all of the complexity that it's embedded in,
and as a result, it just seems to have become unregulated.
It's not really kind of managing itself towards a goal.
It's just responding to immediate stimuli, you know, like you know,
(19:38):
like some creature in some horrible experiments. It's not able
to make coherent plans and carry them out with.
Speaker 1 (19:46):
It going to be overly ideological about it, but the
airlines are basically kind of I mean about with free
market competition at the end of the day and consumer choice,
which as yeah, I mean I only had a choice
of one train to get this morning, and you know,
I can't think of, you know, an easy way to
be able to get a different kind of train. I
(20:08):
suppose what I means, how much of this is down
to any specific form of because for example, you told
about kind of Milton Friedman as an element of where
things went wrong. But I suppose I don't quite see
the connection between Freedman and a rationing system, is what
I'm getting.
Speaker 2 (20:28):
That is this about shareholder value? Yeah, and about the
idea that it is this shift to shareholder value as
opposed to what we now call stakeholder value. That is
part of the problem.
Speaker 3 (20:39):
Yeah, I mean, I talk about Milton Friedman or what
in the book, and I even kind of ended up
writing so much about him. I had to put an
author's note at the start saying I realized I was
being unfair in some places and that wasn't really all
about him. But on that point, I think it's not
really ideological, and it's one of Friedman's other insights that
isn't much to do with shareholder value, which is that
(21:03):
airlines go a bust. Airlines are exposed to the market,
and they're exposed to the free market in such a
way that there's a way for a failing aircraft airline
company that can't manage its complexity to get out of
the game, have its physical and some of its intangible
assets taken over by someone else, and then for the
(21:26):
overall system to reorganize itself. The entire problem in the
railway system, to my mind, is that it's not got
any mechanism of reorganizing itself, and because of that, it's
going to always end up dealing with a changing situation
being unable to reorganize itself quickly enough and consequently becoming
(21:48):
unregulated in that way. And where I think that ties
up with Milton Friedman in shareholder value is that, unfortunately,
when you get a company that is overly concerned with
accounting metrics, then it starts losing that connection to the
(22:10):
real world and losing that ability to reorganize itself because
you know kind of share hold the value is great.
You know, who doesn't like shareholder value. But unfortunately, when
managers start talking about shareholder value, firstly, they start paying
attention to short term quarterly earnings and accounting metrics, which
(22:32):
is immediately, you know, it's just immediately giving yourself a
cognitive impairment. It's just immediately putting a huge information reducing
filter on your environment. And secondly, when people start moving
in that direction, they start thinking too much about leverage buyouts,
and they start thinking too much about taking on debts,
(22:55):
and I think, you know, we should probably talk about
that in some more detail.
Speaker 2 (23:00):
I don't think I'm going to slightly interrupt, because that's
I think that I know you said yourself that you
were a bit on fair to Milton Friedman occasionally, but
I do think that's a fairly, fairly extreme interpretation of
what people mean by shareholder value. And this is the
idea that if you if you think about profits, you're
immediately thinking short term. And that's simply not true because
the you know, the best companies in the world, the
(23:22):
ones that have lasted the longest and done the best,
definitely think intently about shareholder value, but they think about
that over the longer term. And you provide excellent shareholder
value if you provide stakeholder value at the same time,
you know, we know that. So you can't really separate
these things, I think in that in that rather dramatic way.
Speaker 3 (23:42):
Phill, yes and no, because the in principle you're right,
but in practicable way that the shareholder value movement started
to as it were enforced discipline on corporate managements was
through left ridge bias. So the trouble is that if
(24:04):
you have a company which is kind of planning in
the long term and not kind of delivering short term
returns to shareholders or not delivering short term cash flow,
then it tends to get taken over, and it specifically
(24:24):
tends to get taken over and loaded up with debt.
So really, with respect to Muslim Freedman's shareholder value. The
problem is not so much that as the fact that
it was the ideological justification for the LBO boom, and
the LBO boom, I would argue, has been incredibly destructive.
Speaker 2 (24:44):
That I will give you.
Speaker 3 (24:45):
I'll give you that, you know, And I think it's
it's kind of a way you can talk about it
in terms of companies as information processing systems, because it's
just simply that a company that's unleavered can have all
sorts of priorities and cannot all sorts of plans and
goals and all sorts of ways to respond to its environment.
A company which has debt has to have servicing that
(25:09):
debt as one of its priorities, and a company that
is very indebted can't have any priorities other than generating
en off nears and cash flow to service the debt,
because that's you know, that's not one priority among others.
It's a survival condition. And so I argue this at
(25:30):
length in the book. I think some people, including there,
as far as I can tell, John, think I was
still a bit too unfair. But my argument in the
book is that the way that Friedman's argument was picked
up and taken ended up being the ideological foundations of
the LBO boom, and that's actually been kind of a
(25:54):
disaster for companies because it's caused this kind of fixation
on short term, short term cash flow actually not even
short term megantic profit. Yeah, I mean I do.
Speaker 1 (26:07):
I don't think that's unreasonable, by the way, and also
in terms of debt and favorable treatment and debt relative
to equity in the tax system. And also I thought
you make some good points about private equity and how
essentially they it needs to be more accountable for the
(26:28):
debt that it ends up bailing ointed companies. Actually, from
that point of view, what are your feelings about the
current I guess interest rate related lull in the private
equity world. Do you see an opportunity for things to
change there?
Speaker 3 (26:45):
To be honest, I would be lying if I said
I was optimistic on that lot. The private equity boom
was to a certain extent a low interest rate phenomenon.
But you there were plenty of leverage biots in the
seventeaes and eighties. You know, we've had leverage biots and
(27:06):
corporate raiders in periods when interest rates will weigh up
in double digits. The pool of money might not be
quite as big going forward, but realistically there's always going
to be leverage buyouts, not least because you know, it's
actually pretty difficult to stop someone from buying shares in
(27:27):
a company if they think they can run it better.
And there's always going to be that disciplinary effect on
managers that, even if they don't have all of the
problems associated with high leverage and private equity ownership, they're
always going to be thinking that they've got to have
(27:50):
that kind of person looking over their shoulder.
Speaker 4 (27:53):
You know.
Speaker 3 (27:53):
It's takes a very strong corporate culture and a very
strong ownership structure to resist that. And I think it's
not a coincidence that when we look at the really big,
really successful companies that are making huge long term investments
that are in raised as counter examples, they're things like Amazon,
(28:16):
They're things like Tesla, they're things like kind of Facebook, Meta,
and what do.
Speaker 4 (28:21):
They have in common.
Speaker 3 (28:22):
What they're in common is very strong hands ownership structures
with a controlling party that is able to regard external
shareholders and the stock markets as one priority among others
rather than as their only priority.
Speaker 1 (28:40):
That's interesting, obviously one of the things that has divided
the UK in the U S secuity markets is the
fact that in the US it's possible for founders to
effectively stay in control and lest that companies, but is
overhere up until very recently with some of the tweaks,
it's been harder for does to maintain that voting control.
(29:04):
And a lot of people obviously have said that's a
that's a that's a bad thing that shareholders don't have
that ability to change things. But I guess if sheerholders
are not going to engage in that way, and you
do have a strong founder, we have a strong version, then
perhaps that actually is something that's a better model. So
(29:24):
that's interesting that you kind of like that.
Speaker 3 (29:27):
Yeah, I mean, don't get me started on corporate governance
rule books, so it will be kind of here. It's
in my last book actually about financial fraud. While I
was doing the research for that, okay, up with fantastic
statistic which is in the high period of the Victorian
Areas stock market, so about eighteen twenties to eighteen fifties,
(29:49):
roughly one sixth of the companies that were floated on
the London Stock Exchange were frauds. One third of the
companies floated on the London Stock Exchange were bankrupt within
two years of flotation. And the thing is that if
you look at that, you go, you know, my god,
that place was worse even than the present day aim.
(30:13):
But the railways got built. There was a huge amount
of wealth created during that period. And it really let
me think that you can write down all sorts of
corporate governance rules, and every corporate governance rule has its
roots in some scandal or other that someone wants to
prevent from happening again. But you end up throwing the
(30:35):
baby out at the bath walls. You end up having
a huge box ticking culture which is meant to prevent
all kinds of bad practice, which also ends up putting
so many constraints that you don't get the good practice either,
you know, at the end of the day, And this
is probably the form of financial regulator in me talking.
(30:57):
You can spend your whole life come up with rules
and checks and kind of incentives to try and make
sure that someone's going to act honestly. But basically, if
you don't trust someone to act honestly already anyway, that's
your problem right there. At a rule book is not
(31:18):
going to help you solve it.
Speaker 1 (31:19):
Yeah, And you're always closing the stable door after the horse,
that last horse is bolted, then find in another one
somewhere else that you didn't think of.
Speaker 4 (31:27):
Yeah. And often you're actually providing a templates because everything
that you check up on, you're also making a decision
about what you're not going to check up on, So
you're often actually providing a design template for the next
round of fraud.
Speaker 2 (31:39):
Dan, can I ask you about the impact of this
on democracy? I wrote and asked garously about tax morale,
and you were talking earlier about you when you get
to the point with an accountability sync where people don't
want to pay anymore? And do you feel that we're
reaching that in terms of government as well. I mean
in the UK, you look at everything and everyone and goes,
as we discussed at the very big nothing works, nothing
(32:02):
happens anymore. I don't want to pay anymore and that
has an effect on democracy as a whole. Have we
reached a dangerous point there too?
Speaker 3 (32:10):
There's certainly that kind of feeling that people don't kind
of understand any particular connection between what's demanded of them
and the decisions that people are taking and you know,
you know, tax morale is certainly one part of that.
The thing that always comes back to me is the
(32:32):
way that the government handles kind of climate regulations and
EPCs for buildings, for things like that, which always seems
to be to announce really kind of restrictive and really
difficult standards, wait a couple of years, and then say
(32:54):
that this is too tough and we are relaxing them,
which always, to me has the effect of making anyone
who tried to comply with the law feel like a fool.
And that sort of thing is incredibly corrosive of trust
in the long term. And you kind of see across
the world that people are turning towards politicians that promise
(33:21):
simple solutions to the problems. And a lot of this
is simply that people are just tired of dealing with great,
big systems in which there's no way to communicate back
to them, but where you're still expected to pay for
the whole thing. So I wouldn't necessarily be talking about
(33:44):
imminent crisis, but there's a definite downward slope there. There's
a definite kind of gap opening up between what people
are prepared to put up with and what's being kind
of asked of them, and that's something which can only
end up in reorganization of some sorts.
Speaker 1 (34:00):
Where do you think that feeling stemmed from. I mean,
I would say that the kind of the wake up moment,
and I think you'd probably agree, judging by the book,
was around two thousand and eight and the financial crisis,
and that's the point where all of this tension, if
you like, sort of crystallized. And obviously the actual system
(34:21):
did collapse, but presumably, I mean clearly it's been going
on for longer because the ymbie you know, yes, in
my backyard kind of people keep talking about things like
the nineteen forty seven Town Planning Act as being the
root of all of our kind of woes. And I'm
just curious as to do you do you see a
(34:42):
way forward? I know, the end of the book doesn't
have a lot of you know, easy solutions, which you
wouldn't expect it to have, But like I mean, if
Rachel Reeves at the end of October was to stand
up and say one thing, is there one thing that
you would like to hear from it, that'd be quite
a lot of people, you know, since publishing the book
(35:03):
about kind of possible solutions, and I think my guess
at the whole cause of the whole crisis is that
people don't feel like they're being listened to, you know,
and not being listened to is absolutely intolerable. You know,
everyone has been in a bad relationship knows that the
(35:24):
worst kind of thing that you can do to someone
is to just pointedly not pay any attention to anything
that they're saying. And kind of the relationship between the
government and the people seems to have kind of gone
in that direction. You know, we decided in the nineteen
(35:44):
nineties that monetary policy was something in which it was
a good thing to never to listen to where anyone
outside the central bags, which might have been right from
an economic policy point of view, but you're adding a
little bit of emotional and cognitive burden there because now
there's something that people used to think was they had
(36:06):
a vote on and they don't anymore.
Speaker 3 (36:08):
Then we bring in the Office of Budget Responsibility and
Fiscal Rules, so there's even less space of these things.
Most of our big institutions kind of listen less and
less because they've got less resources to listen. What we
actually need is to bring bad customer service into government.
(36:31):
You know, we need like to hire one thousand more
local onboards men. We almost need to have a whole
cadre of the civil service that's dedicated to listening to
people's complaints and doing something for them, to kind of
almost helping people to navigate through this system, and more
(36:55):
importantly than that, to feel like the system is paying
attention to them and to their problems. That to me
means that you've got to have devolution, smaller government, more
local responsibility, because I don't see how you can do
that that sensible resource cost in the huge monolithic structures
(37:16):
that we have today. And maybe I'm wrong about that.
Maybe kind of technology and kind of larger language models
can help do that at large scale. But I think
the crucial thing is that unaccountability is the name that
we give to a broken communication channel between the bottom
(37:39):
and the top of the organization, so that there's no
feedback from the consequences of the decisions to the people
making them. And you know, for most of the time
since the Second World War, we've been moving in the
direction of breaking those links because things have been getting
more compon located, and breaking that link seemed like the
(38:03):
only way to keep things manageable, and that's that was
a mistake. That's the communication link that we've got to
build back.
Speaker 1 (38:11):
You're obviously very interested in artifessional intelligence and panalt of
attention to that area. Yes, and you clearly aren't a skeptic,
as in you don't think it's all annoy instance, where
do you see that being in helping out in maybe eight,
a couple of years time, five years time, Where do
you see it going from here?
Speaker 3 (38:28):
It's a communications technology, it's an information handling technology. You know,
if something like the filing cabinet was such a huge
revolutionary improvement to the management of the American railroads, and
it was, then this is, you know, many orders of
magnitude more important than the filing cabinets. The thing is, though,
(38:51):
that if you're going to use those information and technologies,
all of the evidence of history suggests that there's got
to be very relarge reorganization in order to reorganize the
kind of whole system to take advantage of the much
more effective and broader communication links. My guy Stafford Bier
(39:14):
had this great joke of the nineteen seventies which he
said that the corporations of the time installed mainframe computers,
but all they really did was to use them to
automate the same accounting and payroll systems that they had beforehand.
And he said it was like having the ability to
(39:36):
hire Shakespeare, Galileo, and Einstein and then just putting them
to work memorizing the phone book so that you could
make calls a bit quicker. And we've got this technology now.
I don't necessarily think it's like human intelligence that's going
to replace us all, or it's conscious or anything. But
it's a fantastic way of summarizing huge, complex fields of
(40:01):
information to an understandable level. And it's a fantastic way
of borrowing up simple instruction sets to rich large kind
of communication products. That's amazing, and it will be such
a missed opportunity if all we ever use it for
is to send more emails, which is probably exactly what
(40:22):
we'll do. Cheerful, Yeah, ever, cheer for end.
Speaker 2 (40:32):
Thanks for listening to this week's Meren Talks Money. If
you like our show, rate review and subscribe Wherever you
listen to podcasts and keep sending questions or comment. It's
to Merorn Money at Bloomberg dot net. You can also
follow me and John on Twitter or x I'm at
mariness w and John is John Underscore Stepic. This episode
was hosted by Me Maren Zumset Web with questions and
insight mainly from John Stepek. It was produced by Semasadi,
(40:54):
Production support and sound design by Moses and and special
thanks to Dan Davis. Thank you so much for coming
on today, Dan. We really enjoyed having you mhm
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:10):
Welcome to Maren Talks Money, the podcast in which people
who know the markets explain the markets. I'm Meren thumset
web with me for this week's interview. Unusually, but happily
is John Steppek, senior reporter and author of the Money
Distilled newsletter.
Speaker 3 (00:22):
Hello.
Speaker 2 (00:23):
John, hi'ml You know where you're.
Speaker 1 (00:25):
Here, right, Yes, I've actually read the book.
Speaker 2 (00:28):
That's right. We are talking today about the unaccountability machine,
why big systems make terrible decisions, on how the world
lost its mind, something I think we can all agree with.
This is written by our guest Dan Davies, and John
has read the entire thing. I've only read little bits
of it, which doesn't mean I don't have opinions, but
does mean that I'm going to defer to John quite
a lot during this interview. Davi's worked as an economist
(00:51):
at the Bank of England and a bank analyst before
moving to consulting and writing. He's also the author of
Lying for Money, which is obviously about financial fraud. In
this conversation with Dan, we fogus on the unaccountability machine
and it's look at why so many of the world's
systems are failing now. The other reason I wanted to
get John on this podcast, apart from the fact that
he's actually been good enough to read the book, is
(01:11):
because lack of accountability drives him crazy, and we've talked
about it on and off on this podcast over the years.
So it drives us mad that the NHS doesn't work,
and nobody knows why. It drives us mad. We can't
build anything in the UK, That infrastructure simply doesn't appear,
despite the fact that everybody agrees that it should be.
That's mad, that our transport network doesn't work, that productivity
(01:33):
doesn't go up. All these things that we all know
aren't working, that we all want to fix, every politician agrees,
yet nothing ever happens in the NHS. Is the classic
of this. John and I think we've talked a lot,
haven't we, Johne, about why is it that we never
see Amanda Pritchard on the Telly or listen to her
on the radio. In fact, does anyone know who Amanda
(01:54):
Pritchard is. She's the CEO of the NHS. She's the
person that should be up there, I feel should be
up there on the race on the Telly every day
explaining to us why it's so absolutely appallingly useless. But
she's not their accountability deficit. Dan, Welcome to Maren Talks Money.
I'm so glad you're here because you're going to explain
all this to us, right.
Speaker 4 (02:16):
Thanks, thanks very much, Thanks very much for inviting me,
and you know I will have a go brilliant.
Speaker 2 (02:22):
Well, I tell you what, why don't we start bre
you just giving us a big overview of what the
book's really about. I may have jumped your gun slightly
with my introduction, but what is it actually about? What
the main message here?
Speaker 3 (02:33):
The main message is exactly the kind of thing that
you were talking about, Maren, which is that personal accountability
for decisions is just in many ways a thing of
the past for lots of the kind of systems and
institutions that we interact with. There is just no individual
(02:54):
person who feels like they're accountable for these decisions. But yeap,
the strange thing is that I started out wanting to
write a very different book from the one that ended
up published, and the book was actually pretty much delayed
by a year in being delivered because I'd begun by
(03:14):
thinking that this was a straightforward issue of weasily responsibility.
Ducking managers just trying to create systems so that they
could avoid having to take any kind of accountability for
their decisions. And by the time I was halfway through it,
I started thinking, maybe that's not entirely fair, and that
(03:37):
maybe the reason that these people don't take accountability for
the decisions is that they don't feel like they made
the decisions. So Amanda Pritchard as chief Executive of the NHS,
she's got that title, she's in a role where you
would expect to see someone controlling the system, but actually
(04:00):
she's just kind of the operator of a huge, great
industrialized decision making machine. Most of the important decisions that
cause the NHS to dysfunction just arise out of a system,
and they don't have any individual human being owning them.
(04:20):
And this is a very weird, kind of new way
to live our life in the industrialized world. It's not
like the good old days of the nineteen twenties when
John Paul Getti could get a report from all of
his rigs every single morning and make decisions about all
of his rigs in the afternoon. Everything these days is
just so complicated that there's no one human being that
(04:44):
can hold the whole system in their head and make
decisions about us.
Speaker 2 (04:49):
So it's a function of complication, and the complication driven
presumably by both size and also by interaction between say
that corporation in the state and regulation and accounting rules
and all these kinds of things. So you no longer
have a system where say the ceover company has a
(05:10):
direct line of power across the company, because they have
to interact along the way with endless levels of regulation
for example.
Speaker 4 (05:19):
Yeah. Absolutely. When I was an analyst, Fred Goodwin, or
as he was then called, Serf Fred Goodwin once said to.
Speaker 3 (05:27):
Me, you know, some things are big because they're complicated,
and some things are complicated because they're big. And Royal
Bank of Scotland is books. It's just as things grow,
they have to deal with more things. But the killer
thing is that they have to deal with more combinations
of things. So you get in this horrible kind of
(05:49):
arms race, because as something grows, the complexity grows exponentially,
because roughly it grows as the square of the object.
The network and the capability to manage that complexity only
grows linearly, and you know, exponential versus linear is a
(06:09):
race that they ever has one winner, and so after
a time the system gets completely unmanageable in the literal
sense that it cannot be managed, it cannot be regulated,
and then something has to happen. And what I argue
in the book is that over a lot of the
industrialized world, a lot of our most important systems are
(06:32):
reaching that something has to happen stage where some kind
of reorganization is just absolutely necessary, because the complexity is
now completely beyond the ability of anyone to make remotely
sensible decisions that have any connection with the world of
their consequences.
Speaker 2 (06:53):
Yeah, but interestingly, on the way to this point, it's
been rather brilliant, right, And the state says, right, back
to Adam Smith andvization and everyone doing different things, back
to the making of pins, isn't it and Adam Smith originally,
and all these other things where no one knows how
to make the entire thing. Everyone knows a tiny bit
of it. And that's been phenomenal for us. And I
spent a lot of time earlier this year reading books
(07:15):
by Joseph Heinrich, which was all about how this hive
brain effectively creates things that would be impossible for us
to create alone, for example. So until relatively recently, this
complication that meant that everybody specializes in together we can
create significantly more than anyone could ever create alone, has
(07:35):
been rather brilliant. So your suggestion that we've now reached
a tipping point of a level of complication where it
no longer works anymore.
Speaker 3 (07:42):
Well, we've reached a crisis point, which is not necessarily
the same as the end of the road, because one
of the really fantastic things about the market economy and
about the way that human beings work together is that
we're capable of reorganizing ourselves in these kinds of things.
You know, it's the mark of a viable system that
they can reorganize to meet challenges that weren't anticipated when
(08:05):
it was designed. There's really fast, fascinating book, one of
the only management science books that economists have any respectful,
called Strategy and Structure by Alfred Chandler from the nineteen
forties fifties, when he's looking at the history of DuPont's,
(08:27):
General Electric, General Motors, or the big US corporations, and
what he discovered is that this phenomenon repeats itself over
and over Again, the reason he called the book Strategy
and Structure is that the structure of those companies kept
on changing because they would grow, they would get more complicated,
(08:47):
they would become unmanageable based on the reporting lines and
the reporting systems that they had. Then they would either
invent new technology to improve the communication and improve them capacity.
And so obviously you know you have telegrams, but also
you know accounting systems, cost accounting, even the humble filing
(09:10):
cabinet was a huge piece of information technology in its day.
And then when that didn't work, they would reorganize, they
would restructure, they would develop the multidivisional company model, they
would deconglomerate. So what you end up doing, and what
I think we are going to end up as a
society doing, after we have tried all of the other possibilities,
(09:33):
is reorganizing, devolving, restructuring our institutions so that we're not
trying to manage so many things from a big central
command center with one person having the title of chief
executive of the NHS or whatever, because that's just not
a viable way to go on managing these things. It
(09:55):
means it has to be reorganized, not necessarily that it's
the end.
Speaker 4 (09:59):
Of the road.
Speaker 2 (10:00):
So no more centralized services, no more giant companies.
Speaker 3 (10:04):
There's always a cycle of conglomeration and deconglomeration, there's all.
Speaker 4 (10:09):
You know.
Speaker 3 (10:09):
The kind of the history of quoted companies has always
been that they're either in acquisition and consolidation mode or
they're in spin off and deconglomeration mode. You know. That's
why investment banking is such a profitable industry. Companies are
always trying to do one of those two things. And
so I just think we must be moving into a
(10:33):
cycle of spin offs and breakups and companies deciding to.
Speaker 4 (10:39):
Do less but do it better.
Speaker 2 (10:40):
Huh. That could be incredibly lucrative for investors. Lots of
small spin off companies that then as a whole perform
better than the original conglomerate. So we'll keep an eye
on that. John, you've read the book over to you.
Speaker 1 (10:53):
I thought what was really interesting, Diana, is you can
lousy very it can intriging ideas like the accountability sink
and this idea of looking at systems in particular as
being you look at that outcomes rather than their intentions
to see what's going on in the poissy where the
(11:14):
products of the system is what it does rather than
what it's kind of meant to do. When you say
we're reaching a tipping point, where do you think that
that sense comes from? What is it about the present
day that makes this a particularly chaotic moment?
Speaker 3 (11:29):
I think that it's a growing gap between the stated
purpose of systems and their actual purpose. So you mentioned
that one of the things I discussed in the book
is a great old kind of scientist from the nineteen seventies,
a hippie management consultants There really were such things in
(11:49):
the seventies called Stafford Beer, who coined this fantastic phrase,
the purpose of a system is what it does, which
is kind of known by the acronym positive wood in
the kind of in the jargon. And what he means
by that is that to understand a system, you have
to respect the fact that the behavior of that system
(12:12):
is going to be defined by the way it's set up,
by the information that it pays attention to, and by
the way that it converts that information into decisions, not
necessarily by the actual kind of goals and aids of
any of the people involved in it, even the ones
(12:33):
who've got titles like chief executive officer. I'll give you
a more concrete example of this, I think, because that's
kind of a bit abstract. A system, dear to all
of our hearts is the British railway network. Now, the
British railway network might say that as its purpose is
to provide comfortable and convenient travel for everyone as a
(12:58):
reasonable price, and Stafford Beer would argue, you cannot say
that is the purpose of that system, because you cannot
say that a system has a purpose when it's structurally
and systematically provides a different result. And so you think, well,
(13:19):
let's look at how the purpose of the British railway
system evolves. And individual people in the system might have
kind of purposes like drive this train from London to Edinburgh,
or they might have purposes like cel tickets at a station,
but they're embedded in a wider system that has to
(13:40):
run an overall timetable. That timetable is embedded in a
system that has to make best use of the trains
and rails kind of provided, which in turn is embedded
in the overall system of governments, which has to make
decisions about how much it's going to subsidize a rail network,
(14:01):
and how much it's going to spend of taxpayer's money
on investing in capital as sets for the railway network.
So you end up thinking, well, this system is a
compromise between all these different levels. What's its actual behavior.
Its actual behavior is that this is not a railway
(14:23):
transport providing system. It's a rationing system. So if you've
kind of sitting on one of those trains from Euston
to Glasgow or from King's Cross to Edinburgh and everything's
broken down, everyone's sitting in the gaps between the carriages,
the train's delayed, and you start thinking, is the purpose
(14:45):
of this system literally to make this experience as unpleasant
and demoralizing for me as possible. Then, to a certain extent,
the answer to that question is yes, because this is
a rail rationing system and one of the ways that
it rations these journeys is by making the experience less
pleasant compared to driving or flying, so that the number
(15:09):
of people trying to get on the trains can be
reconciled with all those other priorities about long term investments,
running a safe time table with the rolling stock provided.
And so what I'm arguing in the book is that
all across so many of our systems. This gap between
(15:29):
what people want the system to do and the emergent
behavior of the system is getting bigger and bigger. And
you know, getting back to the title of the book,
the Unaccountability Machine, there's no real feedback mechanism from the
people at the bottom of the tree, for the people
who are actually kind of affected by the consequences of
(15:53):
all these decisions, to get their voice heard and to
feed back into the system that it's got to change.
Speaker 1 (16:00):
That's a really interesting point, and that's really perceptive looking
at the system and saying that's a rationing system. But
one of the things I found interesting was that when
I've read reviews of your book or even some of
the interviews, one of the frustrations people often bring up
is the scenario where you're at an airline boarding desk
and you get there a wee bit late and the
person that there says, well, I'm afraid you're going to
(16:21):
have to go away, and I can't say or ask
anyone anything, and if you go in, basically the computer
says no sort of scenario. But what occurred to me, though,
is that if you look at airlines as a whole
then on almost any metric that's actually important, they've vastly
improved over recent decades in terms of, you know, safety,
(16:45):
level of pollution per plane, costs, the number of flights
being done. So I think it's interesting that you take
this sort of the rail as a contrast to that
where the rail is actually rationing system, whereas were the
frustrations of the airlines are relatively petty. Accountability thinks relative
to the connect in the you know, the advances that
that partailer industry has made. So I suppose I'm just
(17:07):
point on other I guess because accountability sinks are there
to manage the chiost partly on they it's about it's
about getting read of things that you don't have the
ability to attend to or pay. It's kind of like
taken excess information. Now the system is that? Is that right?
Speaker 3 (17:25):
Yeah? I mean basically, an accountability sink is my word
for the kind of system that managements create as almost
a survival mechanism. And they have all of this information
coming into them, lots of it quite hostile information, and
they've got more of it than they can handle. So
(17:48):
what you do in that situation is you have to
cut off some of it. You have to kind of
reorganize your inputs so that you can handle them with
the management ability that's available to you. And the easiest
link to cut off is always the link to the customers,
(18:10):
because the customers are the ones causing the problems. The
customers are complaining to you, And if you cut off
that feedback link, you can then start to manage all
of the rest of the system. And you know, you
can deliver a product. The customers might like it or
they might not. They but as long as they their
(18:32):
kind of displeasure with it doesn't reach a threshold where
they stop actually buying it, you've made your business manageable again.
And I think that's kind of almost the difference between
the airlines and the railways. You know, the airlines will
cut off some kinds of customer feedback, but they have
(18:53):
to pay attention to the kind of signal of people
either buying the flights or not at the price that
they're willing to set. And they've got enough freedom and
capacity to manage their airline to keep on delivering that
service and to keep on meeting, as you say, all
of their other constraints. The railway network has somehow got
(19:14):
itself into a situation where it's not got the capacity
to manage all of the complexity that it's embedded in,
and as a result, it just seems to have become unregulated.
It's not really kind of managing itself towards a goal.
It's just responding to immediate stimuli, you know, like you know,
(19:38):
like some creature in some horrible experiments. It's not able
to make coherent plans and carry them out with.
Speaker 1 (19:46):
It going to be overly ideological about it, but the
airlines are basically kind of I mean about with free
market competition at the end of the day and consumer choice,
which as yeah, I mean I only had a choice
of one train to get this morning, and you know,
I can't think of, you know, an easy way to
be able to get a different kind of train. I
(20:08):
suppose what I means, how much of this is down
to any specific form of because for example, you told
about kind of Milton Friedman as an element of where
things went wrong. But I suppose I don't quite see
the connection between Freedman and a rationing system, is what
I'm getting.
Speaker 2 (20:28):
That is this about shareholder value? Yeah, and about the
idea that it is this shift to shareholder value as
opposed to what we now call stakeholder value. That is
part of the problem.
Speaker 3 (20:39):
Yeah, I mean, I talk about Milton Friedman or what
in the book, and I even kind of ended up
writing so much about him. I had to put an
author's note at the start saying I realized I was
being unfair in some places and that wasn't really all
about him. But on that point, I think it's not
really ideological, and it's one of Friedman's other insights that
isn't much to do with shareholder value, which is that
(21:03):
airlines go a bust. Airlines are exposed to the market,
and they're exposed to the free market in such a
way that there's a way for a failing aircraft airline
company that can't manage its complexity to get out of
the game, have its physical and some of its intangible
assets taken over by someone else, and then for the
(21:26):
overall system to reorganize itself. The entire problem in the
railway system, to my mind, is that it's not got
any mechanism of reorganizing itself, and because of that, it's
going to always end up dealing with a changing situation
being unable to reorganize itself quickly enough and consequently becoming
(21:48):
unregulated in that way. And where I think that ties
up with Milton Friedman in shareholder value is that, unfortunately,
when you get a company that is overly concerned with
accounting metrics, then it starts losing that connection to the
(22:10):
real world and losing that ability to reorganize itself because
you know kind of share hold the value is great.
You know, who doesn't like shareholder value. But unfortunately, when
managers start talking about shareholder value, firstly, they start paying
attention to short term quarterly earnings and accounting metrics, which
(22:32):
is immediately, you know, it's just immediately giving yourself a
cognitive impairment. It's just immediately putting a huge information reducing
filter on your environment. And secondly, when people start moving
in that direction, they start thinking too much about leverage buyouts,
and they start thinking too much about taking on debts,
(22:55):
and I think, you know, we should probably talk about
that in some more detail.
Speaker 2 (23:00):
I don't think I'm going to slightly interrupt, because that's
I think that I know you said yourself that you
were a bit on fair to Milton Friedman occasionally, but
I do think that's a fairly, fairly extreme interpretation of
what people mean by shareholder value. And this is the
idea that if you if you think about profits, you're
immediately thinking short term. And that's simply not true because
the you know, the best companies in the world, the
(23:22):
ones that have lasted the longest and done the best,
definitely think intently about shareholder value, but they think about
that over the longer term. And you provide excellent shareholder
value if you provide stakeholder value at the same time,
you know, we know that. So you can't really separate
these things, I think in that in that rather dramatic way.
Speaker 3 (23:42):
Phill, yes and no, because the in principle you're right,
but in practicable way that the shareholder value movement started
to as it were enforced discipline on corporate managements was
through left ridge bias. So the trouble is that if
(24:04):
you have a company which is kind of planning in
the long term and not kind of delivering short term
returns to shareholders or not delivering short term cash flow,
then it tends to get taken over, and it specifically
(24:24):
tends to get taken over and loaded up with debt.
So really, with respect to Muslim Freedman's shareholder value. The
problem is not so much that as the fact that
it was the ideological justification for the LBO boom, and
the LBO boom, I would argue, has been incredibly destructive.
Speaker 2 (24:44):
That I will give you.
Speaker 3 (24:45):
I'll give you that, you know, And I think it's
it's kind of a way you can talk about it
in terms of companies as information processing systems, because it's
just simply that a company that's unleavered can have all
sorts of priorities and cannot all sorts of plans and
goals and all sorts of ways to respond to its environment.
A company which has debt has to have servicing that
(25:09):
debt as one of its priorities, and a company that
is very indebted can't have any priorities other than generating
en off nears and cash flow to service the debt,
because that's you know, that's not one priority among others.
It's a survival condition. And so I argue this at
(25:30):
length in the book. I think some people, including there,
as far as I can tell, John, think I was
still a bit too unfair. But my argument in the
book is that the way that Friedman's argument was picked
up and taken ended up being the ideological foundations of
the LBO boom, and that's actually been kind of a
(25:54):
disaster for companies because it's caused this kind of fixation
on short term, short term cash flow actually not even
short term megantic profit. Yeah, I mean I do.
Speaker 1 (26:07):
I don't think that's unreasonable, by the way, and also
in terms of debt and favorable treatment and debt relative
to equity in the tax system. And also I thought
you make some good points about private equity and how
essentially they it needs to be more accountable for the
(26:28):
debt that it ends up bailing ointed companies. Actually, from
that point of view, what are your feelings about the
current I guess interest rate related lull in the private
equity world. Do you see an opportunity for things to
change there?
Speaker 3 (26:45):
To be honest, I would be lying if I said
I was optimistic on that lot. The private equity boom
was to a certain extent a low interest rate phenomenon.
But you there were plenty of leverage biots in the
seventeaes and eighties. You know, we've had leverage biots and
(27:06):
corporate raiders in periods when interest rates will weigh up
in double digits. The pool of money might not be
quite as big going forward, but realistically there's always going
to be leverage buyouts, not least because you know, it's
actually pretty difficult to stop someone from buying shares in
(27:27):
a company if they think they can run it better.
And there's always going to be that disciplinary effect on
managers that, even if they don't have all of the
problems associated with high leverage and private equity ownership, they're
always going to be thinking that they've got to have
(27:50):
that kind of person looking over their shoulder.
Speaker 4 (27:53):
You know.
Speaker 3 (27:53):
It's takes a very strong corporate culture and a very
strong ownership structure to resist that. And I think it's
not a coincidence that when we look at the really big,
really successful companies that are making huge long term investments
that are in raised as counter examples, they're things like Amazon,
(28:16):
They're things like Tesla, they're things like kind of Facebook, Meta,
and what do.
Speaker 4 (28:21):
They have in common.
Speaker 3 (28:22):
What they're in common is very strong hands ownership structures
with a controlling party that is able to regard external
shareholders and the stock markets as one priority among others
rather than as their only priority.
Speaker 1 (28:40):
That's interesting, obviously one of the things that has divided
the UK in the U S secuity markets is the
fact that in the US it's possible for founders to
effectively stay in control and lest that companies, but is
overhere up until very recently with some of the tweaks,
it's been harder for does to maintain that voting control.
(29:04):
And a lot of people obviously have said that's a
that's a that's a bad thing that shareholders don't have
that ability to change things. But I guess if sheerholders
are not going to engage in that way, and you
do have a strong founder, we have a strong version, then
perhaps that actually is something that's a better model. So
(29:24):
that's interesting that you kind of like that.
Speaker 3 (29:27):
Yeah, I mean, don't get me started on corporate governance
rule books, so it will be kind of here. It's
in my last book actually about financial fraud. While I
was doing the research for that, okay, up with fantastic
statistic which is in the high period of the Victorian
Areas stock market, so about eighteen twenties to eighteen fifties,
(29:49):
roughly one sixth of the companies that were floated on
the London Stock Exchange were frauds. One third of the
companies floated on the London Stock Exchange were bankrupt within
two years of flotation. And the thing is that if
you look at that, you go, you know, my god,
that place was worse even than the present day aim.
(30:13):
But the railways got built. There was a huge amount
of wealth created during that period. And it really let
me think that you can write down all sorts of
corporate governance rules, and every corporate governance rule has its
roots in some scandal or other that someone wants to
prevent from happening again. But you end up throwing the
(30:35):
baby out at the bath walls. You end up having
a huge box ticking culture which is meant to prevent
all kinds of bad practice, which also ends up putting
so many constraints that you don't get the good practice either,
you know, at the end of the day, And this
is probably the form of financial regulator in me talking.
(30:57):
You can spend your whole life come up with rules
and checks and kind of incentives to try and make
sure that someone's going to act honestly. But basically, if
you don't trust someone to act honestly already anyway, that's
your problem right there. At a rule book is not
(31:18):
going to help you solve it.
Speaker 1 (31:19):
Yeah, And you're always closing the stable door after the horse,
that last horse is bolted, then find in another one
somewhere else that you didn't think of.
Speaker 4 (31:27):
Yeah. And often you're actually providing a templates because everything
that you check up on, you're also making a decision
about what you're not going to check up on, So
you're often actually providing a design template for the next
round of fraud.
Speaker 2 (31:39):
Dan, can I ask you about the impact of this
on democracy? I wrote and asked garously about tax morale,
and you were talking earlier about you when you get
to the point with an accountability sync where people don't
want to pay anymore? And do you feel that we're
reaching that in terms of government as well. I mean
in the UK, you look at everything and everyone and goes,
as we discussed at the very big nothing works, nothing
(32:02):
happens anymore. I don't want to pay anymore and that
has an effect on democracy as a whole. Have we
reached a dangerous point there too?
Speaker 3 (32:10):
There's certainly that kind of feeling that people don't kind
of understand any particular connection between what's demanded of them
and the decisions that people are taking and you know,
you know, tax morale is certainly one part of that.
The thing that always comes back to me is the
(32:32):
way that the government handles kind of climate regulations and
EPCs for buildings, for things like that, which always seems
to be to announce really kind of restrictive and really
difficult standards, wait a couple of years, and then say
(32:54):
that this is too tough and we are relaxing them,
which always, to me has the effect of making anyone
who tried to comply with the law feel like a fool.
And that sort of thing is incredibly corrosive of trust
in the long term. And you kind of see across
the world that people are turning towards politicians that promise
(33:21):
simple solutions to the problems. And a lot of this
is simply that people are just tired of dealing with great,
big systems in which there's no way to communicate back
to them, but where you're still expected to pay for
the whole thing. So I wouldn't necessarily be talking about
(33:44):
imminent crisis, but there's a definite downward slope there. There's
a definite kind of gap opening up between what people
are prepared to put up with and what's being kind
of asked of them, and that's something which can only
end up in reorganization of some sorts.
Speaker 1 (34:00):
Where do you think that feeling stemmed from. I mean,
I would say that the kind of the wake up moment,
and I think you'd probably agree, judging by the book,
was around two thousand and eight and the financial crisis,
and that's the point where all of this tension, if
you like, sort of crystallized. And obviously the actual system
(34:21):
did collapse, but presumably, I mean clearly it's been going
on for longer because the ymbie you know, yes, in
my backyard kind of people keep talking about things like
the nineteen forty seven Town Planning Act as being the
root of all of our kind of woes. And I'm
just curious as to do you do you see a
(34:42):
way forward? I know, the end of the book doesn't
have a lot of you know, easy solutions, which you
wouldn't expect it to have, But like I mean, if
Rachel Reeves at the end of October was to stand
up and say one thing, is there one thing that
you would like to hear from it, that'd be quite
a lot of people, you know, since publishing the book
(35:03):
about kind of possible solutions, and I think my guess
at the whole cause of the whole crisis is that
people don't feel like they're being listened to, you know,
and not being listened to is absolutely intolerable. You know,
everyone has been in a bad relationship knows that the
(35:24):
worst kind of thing that you can do to someone
is to just pointedly not pay any attention to anything
that they're saying. And kind of the relationship between the
government and the people seems to have kind of gone
in that direction. You know, we decided in the nineteen
(35:44):
nineties that monetary policy was something in which it was
a good thing to never to listen to where anyone
outside the central bags, which might have been right from
an economic policy point of view, but you're adding a
little bit of emotional and cognitive burden there because now
there's something that people used to think was they had
(36:06):
a vote on and they don't anymore.
Speaker 3 (36:08):
Then we bring in the Office of Budget Responsibility and
Fiscal Rules, so there's even less space of these things.
Most of our big institutions kind of listen less and
less because they've got less resources to listen. What we
actually need is to bring bad customer service into government.
(36:31):
You know, we need like to hire one thousand more
local onboards men. We almost need to have a whole
cadre of the civil service that's dedicated to listening to
people's complaints and doing something for them, to kind of
almost helping people to navigate through this system, and more
(36:55):
importantly than that, to feel like the system is paying
attention to them and to their problems. That to me
means that you've got to have devolution, smaller government, more
local responsibility, because I don't see how you can do
that that sensible resource cost in the huge monolithic structures
(37:16):
that we have today. And maybe I'm wrong about that.
Maybe kind of technology and kind of larger language models
can help do that at large scale. But I think
the crucial thing is that unaccountability is the name that
we give to a broken communication channel between the bottom
(37:39):
and the top of the organization, so that there's no
feedback from the consequences of the decisions to the people
making them. And you know, for most of the time
since the Second World War, we've been moving in the
direction of breaking those links because things have been getting
more compon located, and breaking that link seemed like the
(38:03):
only way to keep things manageable, and that's that was
a mistake. That's the communication link that we've got to
build back.
Speaker 1 (38:11):
You're obviously very interested in artifessional intelligence and panalt of
attention to that area. Yes, and you clearly aren't a skeptic,
as in you don't think it's all annoy instance, where
do you see that being in helping out in maybe eight,
a couple of years time, five years time, Where do
you see it going from here?
Speaker 3 (38:28):
It's a communications technology, it's an information handling technology. You know,
if something like the filing cabinet was such a huge
revolutionary improvement to the management of the American railroads, and
it was, then this is, you know, many orders of
magnitude more important than the filing cabinets. The thing is, though,
(38:51):
that if you're going to use those information and technologies,
all of the evidence of history suggests that there's got
to be very relarge reorganization in order to reorganize the
kind of whole system to take advantage of the much
more effective and broader communication links. My guy Stafford Bier
(39:14):
had this great joke of the nineteen seventies which he
said that the corporations of the time installed mainframe computers,
but all they really did was to use them to
automate the same accounting and payroll systems that they had beforehand.
And he said it was like having the ability to
(39:36):
hire Shakespeare, Galileo, and Einstein and then just putting them
to work memorizing the phone book so that you could
make calls a bit quicker. And we've got this technology now.
I don't necessarily think it's like human intelligence that's going
to replace us all, or it's conscious or anything. But
it's a fantastic way of summarizing huge, complex fields of
(40:01):
information to an understandable level. And it's a fantastic way
of borrowing up simple instruction sets to rich large kind
of communication products. That's amazing, and it will be such
a missed opportunity if all we ever use it for
is to send more emails, which is probably exactly what
(40:22):
we'll do. Cheerful, Yeah, ever, cheer for end.
Speaker 2 (40:32):
Thanks for listening to this week's Meren Talks Money. If
you like our show, rate review and subscribe Wherever you
listen to podcasts and keep sending questions or comment. It's
to Merorn Money at Bloomberg dot net. You can also
follow me and John on Twitter or x I'm at
mariness w and John is John Underscore Stepic. This episode
was hosted by Me Maren Zumset Web with questions and
insight mainly from John Stepek. It was produced by Semasadi,
(40:54):
Production support and sound design by Moses and and special
thanks to Dan Davis. Thank you so much for coming
on today, Dan. We really enjoyed having you mhm
Host
Merryn Somerset Webb
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