November 13, 2024 • 53 mins
Recorded live at Web Summit Lisbon, Ed Zitron is joined by William Lazonick, professor emeritus of economics at the University of Massachusetts, who is also the co-founder and president of the Academic-Industry Research Network, to talk about how the incentives of shareholder capitalism and stock buybacks are destroying innovation.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Also media, Hello, and welcome to Better Offline.
Speaker 2 (00:06):
I am, of course your host ed Zittron and know
a lot of people have been asking, hundreds of thousands
of people. In fact, I will be submitting myself at
the next d NC is the left is Joe Rogan.
(00:27):
I am two or three inches taller as well. But
today I'm joined by Professor William Lazonek. He's a professor
emeritus of Economics ever at University of Massachusetts and the
co founder of the Academic Industry Research Network. William, thank
you so much for coming.
Speaker 3 (00:41):
Pleasure to be here.
Speaker 2 (00:42):
All right, So, if you look at the tech industry
right now, it's probably the most it's definitely the most
profitable it's ever been, and probably the worst. It feels
like the furthest it's been from really innovating, and it's
moved to value extraction, I think, and you know, you
know a great deal about that.
Speaker 4 (00:59):
How did we get here? And I mean historically, how
did we get here?
Speaker 5 (01:02):
Well, first of all, you have to understand that the
United States as the most formidable developmental state in history.
A lot of people think that Japan in the eighties
invented the developmental state, but actually the United States was
japan developmental state from the point of view of technology.
Speaker 3 (01:23):
So I won't go into.
Speaker 5 (01:24):
The whole history of that, but it goes back to
the nineteenth century building of Langrand colleges, railroads, and going
into aviation, the computer.
Speaker 3 (01:33):
Industry, etc.
Speaker 5 (01:35):
So tech was provided with all kinds of resources.
Speaker 3 (01:41):
Those resources were.
Speaker 5 (01:42):
Originally used by large corporations that actually gave people lifetime employment.
So that's something else. When people discovered Japanese competition in
the nineteen eighties, he said, oh, a secret to Japan's
success is they give people permanent employment, life time employment.
US companies were doing that, particularly post World War Two.
(02:06):
Iconic company that did that, which became a totally shareholder
value company, and that's where I'm going was IBM. You
had a job for life, so you had a defined
benefit pension, you had all your medical compenses paid, et cetera.
Those companies were highly innovative, A lot of them connected
(02:27):
to what was called the military industrial complex, and in
the early late fifties early sixties, some companies started setting off,
spinning off of that, companies that would have been like
companies here today that that were, and they went on,
they went public and they were called glamorous stocks, but
(02:49):
they were thinly traded. So the Security and Exchange Commission,
which was set up in the mid thirties to get
rid of manipulation and fraud on markets, they had what
was called a Special Study that created Nasdaq, which you
all know about, but you probably don't know the origins
of it. So Nasdaq was really backed by the US
(03:10):
government to create a liquid market in a spec highly
speculative stocks. And so the National Association Dealer's Automated Quotation
system came online in April nineteen seventy one, and it
wasn't actually a trading market, it was just a quotation system.
So the security dealers who were all working on their
phones and rollodexes in isolation and never knowing what the
(03:34):
price of a stock would be, all of a sudden.
This is really the first use of internetworking, right, because
computers mainframes had just come in in the sixties, So
you now have NASDAK. One of the first companies that
listened on Nasdaq was Intel, three years after was founded.
That would never have been possible with the New York
Stock Exchange. They could have gone the over counter market
(03:57):
because the New York Stock exchange had listen requirements in
terms of capitalization profitability that would require ten to fifteen
years at least, right, Okay, but now you could get
companies going pro public.
Speaker 3 (04:10):
They didn't even have a product.
Speaker 5 (04:12):
That really was the thing that brought venture capital into
the picture. There was no well defined venture capital industry
until nineteen seventy two, a year after Nasdaq was created,
and it came out of Silicon Valley, which by the way,
was dubbed Silicon Valley in nineteen seventy one by a
journalist because there were so many startups producing silicon ship.
Speaker 4 (04:34):
Fill this point.
Speaker 2 (04:34):
Going public required you to be a good company.
Speaker 5 (04:37):
You had to, yeah, so often you went over the
counter and then graduated to what they called the Big
Board the New York Stockution be Yeah, and you had
to have a lot of different shareholders, cetera. Yeah, so
rid of that, and well, those companies tended to pay dividends,
but they didn't do something which I'm going to talk
about today, which is the way the datory value extraction
(05:01):
is working in the US economy, particularly in the tech sector,
and that's the phenomenon of companies buying back their stock.
Speaker 3 (05:09):
Okay, but before we get to that.
Speaker 5 (05:11):
We basically have to see that in the nineteen seventies
there was a change in the institutions of the stock market,
particularly around Nasdaq and venture capital, that made it possible
all of a sudden to get funding from for startups
that couldn't get funding before.
Speaker 6 (05:33):
Now.
Speaker 5 (05:33):
A big change was and it was really under the radar,
was in nineteen seventy nine July of nineteen seventy nine
when the Department of Labor in the US said that
pension funds could put some of their money into risky assets.
There had been some legislation earlier in the decade which
(05:53):
said that if pension fund managers put their money into
companies like the companies on show here they're trying to
go public, that they could get into.
Speaker 3 (06:03):
Trouble or company, it's a company.
Speaker 5 (06:05):
Immediately, from that point in time on, there was no
shortage of money in the US economy for venture.
Speaker 3 (06:12):
Capital, for new firms.
Speaker 5 (06:13):
There was really always Since then, it's been a shortage
of good firms and a lot of money chasing.
Speaker 2 (06:19):
Well. Pushing back on that way, yeah, agreeing, But isn't
the problem more so that venture capital no longer really works.
It isn't really taking risks, it's just okay doing more
value extraction.
Speaker 5 (06:30):
Now, venture capital at that point where it was really
dominated by people who came out of the industries in
which they were investing. Right, So there were individuals who
decided to be a like Don Valentine who backed Cisco
and other companies. He came out of National Semiconductor, had
been in the semiconductor industry. They were in a whole
(06:51):
number of them, and so they understood the industries in
which they were investing.
Speaker 3 (06:55):
Some of them were better, some of the worst.
Speaker 5 (06:57):
Right, But really what put it venture capital made it
something that people would now say, hey, let's go after
this stuff. We're two IPOs in nineteen eighty one was
Apple and the other was Genentech. One attack and one
on biotech. And from then on there was well, in
(07:20):
the early eighties, there was a whole bunch of investing
in venture capital. Here's your point comes up. There was
a very good book written in nineteen eighty five by
BusinessWeek journalist your named John Wilson, called The New Ventures.
Speaker 3 (07:35):
It was the first real good book.
Speaker 5 (07:36):
Out there on venture capital, and the last chapter was
vulture Capital. So it was basically the bad venture capitalists
coming in and just hyping companies and the whole thing
falling apart. And then so you always you have these
cycles of good venture capital, and then you know, in
(07:57):
the dot com period you have the boom and bust,
et cetera.
Speaker 2 (08:00):
I think, I think what I'm thinking is the way
venture capital is today is strange because after twenty twenty one,
the collapse of the zero interest free era, you're kind
of seeing that a lot of venture capitalists did not
exactly know how to invest in companies at all.
Speaker 4 (08:14):
They knew how to invest in concepts, in.
Speaker 2 (08:17):
Things that they could take public or things that they
could flog to another company. And that's venture capital is
falling off quite a lot.
Speaker 4 (08:24):
Now.
Speaker 2 (08:26):
Is that something that reflects the larger market conditions of
the tech industry, because it feels like the same problem
in that meta makes their Facebook sucks. Now, if I'm
sure you all use Instagram and Facebook, if you don't
think it's bad, please go on the app take a look.
Speaker 4 (08:38):
It feels like they're.
Speaker 2 (08:39):
All following the same thing of they have all fallen
into Jack Welch's shareholder value system of bigger, more money
as much as we can squeeze my users as possible,
which only appears to work in the public market.
Speaker 4 (08:53):
So how did how did we we really get here? Though? Like,
how do how do we get to the sho Okay?
Speaker 5 (09:01):
So, now what you had with venture capital, with Nasdak
being part part of it, with a shift actually of
Wall Street self from investing in these older companies and
doing their bond issues to trading in stocks that also
occurred in the nineteen seventy you when the stock market
(09:22):
actually was.
Speaker 3 (09:22):
Not doing very well.
Speaker 5 (09:23):
But you then had a whole situation where you had,
I mean, this really did unleash innovation. The older economy companies,
they were good at doing some things, but a lot
of them became conglomertized, became sclorotic, et cetera. There was
a demand coming out of basically conservative economics, led by
(09:48):
a guy named Michael Jensen, to discourage the free cash flow,
as they called it. It actually invented the term free
cash flow, which every company used. A free cash flow,
by the way, means that if you got to lay
off five thousand and workers to create free cash flow,
well that's fine, you know, as long as anything that
isn't nailed down is free cash flow. And this prioritized
(10:12):
shareholder value ideology that I witnessed firsthand when I was
at Harvard Business School in the mid nineteen eighties, and
they hired this guy, Michael Jensen. I'm not sure if
you've heard of him, but he died recently, the guru
of a maximizing shareholder value.
Speaker 3 (10:28):
And once he did that, you start.
Speaker 5 (10:31):
Getting hits in the Wall Street Journal of Financial Time
Center shareholder value. Okay, then they start with executive pay,
stock based pay. That was already the longer history of that,
but that comes in in the nineteen eighties. That's aligning
the top executives with shareholder value.
Speaker 3 (10:49):
And then how do you.
Speaker 5 (10:52):
Create and I use creative quotes value for shareholders. Not
only do you pay dividends, but you buy back the
company's stock the stock buy back. You tell your broker
go into the market, buy back our stock. You're giving
their money away to get the stock price up, and
you're nactually not benefiting shareholders who get dividends. You're benefiting
(11:17):
share sellers who are using the opportunity to sell their shares,
including the top executives who pay is stock based stock options.
Now it's more stock awards, but also corporate raiders who
want to come in and say, get the stock price up,
do the buybacks, then we'll sell the shares. So this
(11:38):
becomes a massive phenomenon. Now, this was enabled by in
nineteen eighty two again the Security Exchange Commission, which has
said was set up to get rid of manipulation and
fraud in the market. It went from being a regulator
of the stock market to being a promoter of the
(11:59):
stock market. And to this day that's what the Security
Exchange Commission is. It is not a regulator of the
stock market, it's a promoter of the stock market.
Speaker 3 (12:09):
And what they did it was really under the radar.
Speaker 5 (12:13):
Usually in the US you have public comment on these issues.
They said, any company on any single trading day can
buy back twenty five percent of their average daily trading
volume over the previous four weeks without being charged with manipulation.
Speaker 3 (12:31):
It was a safe harbor.
Speaker 5 (12:32):
So didn't say if you went over that you would
be charged. It just said if you want to be
sure that you won't be charged manipulation, that's how much
you can you can do and buy backs.
Speaker 2 (12:42):
Now, so how does this lead to where we are today,
which is a death of innovation?
Speaker 5 (12:47):
Okay, So What that means is that a company like Apple.
I looked at the figures, they change a bit from
year to year, or sometimes quite a bit. They could
do about four billion a day day in buybacks, day.
Speaker 3 (13:02):
After day after day. They Apple just.
Speaker 5 (13:05):
Came out with his twenty twenty four annual report. They
did ninety five billion in buybacks. They had ninety four
billion of profits. Hugely profitable, but ninety five billion in buybacks.
Apple has done seven hundred and twenty six billion dollars
in stock buybacks over the previous twelve years, plus about
(13:26):
one about two hundred billion in dividends. The buybacks are
about ninety three percent of its profits. Now Apples hugely profitable,
but there are costs to doing that now. By the way,
when if you look on Apple's website, they call this
program of paying out dividends and doing buybacks, which really
(13:50):
only got going.
Speaker 3 (13:51):
Is a longer history to this.
Speaker 5 (13:54):
When Steve Jobs left in nineteen eighty five or was
pushed out of Apple, the executives there start paying doing
giving in the buyback almost drove the company into bankruptcy.
Jobs came back in nineteen ninety seven said we're not
doing that. We're doing what I call retaining and reinvesting.
And we know the history of that. They have the iPod, iPhone, iPad,
et cetera. Steve Jobs died in twenty eleven. Shortly before
(14:20):
he did that, he died, he gave the CEO position
to Tim Cook, who was claimed to fame. There was
outsourcing their manufacturing to China and.
Speaker 3 (14:30):
Courtually everything that operations guy, yeah, operation guy.
Speaker 5 (14:33):
And he got pressured by the hedge fund activists starting
in twenty twelve twenty thirteen, including Carl Icon, and they
started doing the buybacks. And once they started doing them,
they just kept doing more and more of them, as
I say, an average of sixty billion a year over
(14:53):
the last twelve years. Now they call it their capital
return program. But the only time Apple ever got money
from the stock market was in nineteen eighty and it's ibo,
so who is it returning capital too?
Speaker 2 (15:06):
But what I understand this is bad because it makes
it's basically just money going into the corporation's mouth from.
Speaker 4 (15:12):
It hand its hands. But how does this fuck up
the innovation economy?
Speaker 2 (15:15):
How does this stop people actually building more cool stuff,
all right, or useful things I guess, or at least,
how does it enable the bad habits.
Speaker 5 (15:21):
Yeah, okay, so first of all, again, sticking with a
company like Apple, they could be paying people in the
Apple stores maybe twenty percent more, maybe twenty five percent more,
making those even though they can might be able to
substitute a lot of those people fairly easily. But they
could have made those the best jobs that anybody could
(15:42):
have in the economy. It wouldn't just be in the
US all over the place, and that would have pulled
up wages for the kinds of people who work in
the Apple stores by other competitors, right, you know, and
this is not just Apple, there's a whole all the
big companies.
Speaker 3 (15:55):
Are doing this stuff. Okay.
Speaker 5 (15:59):
They could have invested in innovation that was not immediately
profitable or commercially profitable, but for public good like for
disabilities things like this. They did hardly any of that.
Speaker 4 (16:17):
Okay, they sornety billion.
Speaker 5 (16:19):
Year when they did try to move into new technology.
And I use all the Apple products you know out there,
but the ones they didn't produce, the you know, AI,
self driving cars, et cetera. They spent billions and failed.
But it's worse than that. The US is now engaged
in what some people call the chipwar with Samsung and TSMC.
(16:43):
Intel turned down the contract for Apple processors after the
iPhone was launched in two thousand and seven. That's because
Intel was doing massive buybacks at the time and they
had a financial guy running the company. But then they
gave the contract to Samsum. Sansum became a high end
(17:05):
producer fabricator of chips, the highest end by doing the
products for.
Speaker 3 (17:13):
Apple.
Speaker 5 (17:13):
Then they became a competitor, so they switched to TSMC.
And so basically the US is from a US point
of view, does not have a leading edge producer of
fabricator of chips now because in fact it was outsourced
by one of the leading companies that could have actually
(17:37):
sixty billion dollars away would build a state of the
art plant. That's that's that's what TSMC is spending in
Arizona now, and that's just the one year with Apple's
is spent on average.
Speaker 2 (17:59):
Maybe I want to take a step further out because
whiles stock buybacks are a major problem, there is a
much larger one as well, with the growth of all
coast row economy. As I call it, the idea that
every single company I mentioned matter earlier The reason my
bag on matter is because the average Instagram Facebook experience
is horrible, interfered with, it's full of aislop. In fact,
Mark Zuckerbot literally just said he wants to have a
(18:21):
channel just for AI. Slop makes you want a channel
a gun in my mouth. And the thing is, we
are seeing tech getting worse. And it's not just these buybacks.
It's if they had that money to spend, they probably
wouldn't spend it on an innovation. If we're honest, they're
not incentivized to innovate. So how do we change this?
How do we actually unfucked this system? Because right now,
(18:42):
if you look at Google, you look at Microsoft, these
products are getting worse as they get more profitable.
Speaker 4 (18:48):
How do you write this and what can be done
to them to change them?
Speaker 5 (18:52):
Okay, well yeah, so first, companies that prioritize getting this
stuff price up over investing in innovation and that, by
the way, that doesn't mean just spending money on our ID.
It means employing people, integrating them, getting the learning going,
and actually maintaining a stable labor force so that you
(19:14):
can actually produce those products serve as those products once
in the market. But companies that prioritize shareholder value get
involved in other kinds of all kinds of mysfils like
they price gouge, they tax avoid taxes, they layoff lots
of workers. When they're profitable, they'll basically shareholder value takes
(19:37):
over everything. Okay, so how do you deal with that? Yes, okay,
here's part of the problem that the people, a lot
of people understand that this is a problem, at least
the work I've done on this. On stock buybacks, I
had an article in Harvard Business Review ten years ago,
which was just an article I wrote, but because where
(20:00):
it appeared and because it had it was called profits
without Prosperity. The subtitle was the best part, how stock
buybacks manipulate the market at least most Americans worse off.
It shocked me that Harvard Business Review actually published that article.
Usually yeah, yeah, okay, so but the fact is that
it did get a lot of attention.
Speaker 4 (20:21):
Right, But.
Speaker 3 (20:23):
If you are in power.
Speaker 5 (20:25):
As the Democrats were for the last four years, they
gave it a lot of attention when Trump was in power.
Speaker 4 (20:32):
But I got to push back on that. I'm sorry,
did they because.
Speaker 5 (20:35):
Oh no, yeah, they did? Pal okay around the Trump
tax cuts. They had what it was called hashtag GOP
tax scam. It was all about stock buybacks.
Speaker 2 (20:47):
I know he's the thing, okay, the larger economic conditions
of the problem here. The tax thinks, sure, it's a
part of it. But the problem is that the incentive
is the dual company grows and continues for writing shareholder value, which,
as my listeners will know, into the audience here literally
just means what will increase stock price and increased dividends.
(21:07):
Very basic, Jack Welsh, bullshit. How do you change those incentives?
Because I don't think that true, and this is not
even a political statement. I don't think there's any movement
to stop that other than maybe Lena Khan and rip
very soon, probably sadly, an attempt to move away from
the monopolies. How do you actually breach this machine, because
(21:28):
the machine is breaking everything else.
Speaker 5 (21:29):
There is actually legislation, okay, influenced by the work first
introduced by Senator Tammy Baldwin, who won by a whisker
in Wisconsin, was reelected, called the Reward Work.
Speaker 3 (21:43):
Act, and it would ban buy backs.
Speaker 5 (21:46):
It would get rid of this rule from nineteen eighty
two that allows companies to do and without being charged
with manipulation, and so in effect, it would say that
if you do buybacks on the scale that you're doing
them now would man it also the other side of it,
which is that you would put worker representatives on boards.
(22:07):
I think you have to put representatives on boards. I
think they actually I want to be as a taxpayer
represented on boards if they're using my money, if Elon
Musk is using my money of apples, yeah, I mean.
Speaker 3 (22:20):
The boards boards, boards are a joke.
Speaker 5 (22:22):
I mean the notion of independent board members and given
given the money that board members are making went from
shareholder value.
Speaker 4 (22:31):
Yeah.
Speaker 5 (22:32):
We just wrote an article on Elon musk twenty eighteen
pay package.
Speaker 3 (22:40):
The so called independent.
Speaker 5 (22:43):
Directors have made hundreds of millions of dollars on giving
him that PayPal being around giving that and staying on
the board. Interestingly enough, there was one board member, her
name was Linda Johnson Rice, who actually made one hundred
and thirty five dollars from her stock based pay because
(23:04):
they didn't renew her her board seat after twenty nineteen
and she left. We calculate one hundred and seventy three
million dollars of options on the table, So that's what happened.
Then it came out that she had spoken out against
Musk Anyway, that's part of the problem is you have
a totally corrupt governance system.
Speaker 2 (23:23):
It's that, but it's also bigger. The market is incentivized
for growth. You can these are pieces of the puzzle.
But how do I realize that what I'm suggesting destroy
the markets, which is the markets are focused on growth.
They are five actually just one part of this machine.
And as long as that happens, innovation is going to
be stemy because if you're just trying to make more
(23:45):
money and not even more profit, just trying to grow
the stock value, you're not trying to make yeah, lots
of things.
Speaker 5 (23:52):
A company it's successful by producing a higher quality, lower
cost product.
Speaker 2 (23:57):
Then I'm sorry, look at me. I have to hate
to disagree that. Look at Meta, Look at Microsoft. The
Microsoft three sixty five is a product of realign't going
to little NSA.
Speaker 4 (24:07):
It's become a worse product.
Speaker 5 (24:08):
Oh no, I'm not saying that. I said it becomes
it gets into that position. Now what you call a
higher quality product, you know different people can have.
Speaker 2 (24:17):
Oh do you mean this in a higher quality selling
product that makes more money.
Speaker 5 (24:22):
It's one that can get customers. Okay, all right, and
now there is a problem I call it. Okay, companies
retain and reinvest when they when they are doing this,
they retain their money, they reinvest in the company. The
other side of that is they do what I call
downsize and distribute. They downsize the labor force and distribute
(24:43):
cast channel. There's most tech that are doing the big
bypass are in between. I call them dominate and distribute.
That's where Microsoft comes in. Yes, so they have a
dominant product. No one can get in there. Now, that's
where there's an element of monopoly there.
Speaker 3 (24:57):
Uh.
Speaker 5 (24:57):
And but but basically they they're they're pulling in the
cash from from that product, from their their their their
software suite, and uh they're using it to pump up
their stock.
Speaker 4 (25:08):
Price right and crushing crushing gold competition.
Speaker 5 (25:11):
Yeah and so, and not investing in things like Apple,
not investing in a fab Apple outsourced dolls, it's rechargeable
batteries to China and running.
Speaker 2 (25:23):
Because Apple, one of the best moves was when they
invested in their own silicon.
Speaker 4 (25:27):
It's probably been one of the best softest moves.
Speaker 5 (25:29):
Well, of course they put Tim Cook that was the
guy they put in charge there with you know, he
outsourced the Fox con et cetera. And okay, now, but
I think the bigger issue maybe that you're getting at,
is where did this whole idea of shareholder value come from? Right?
And you know, people often cite an article by Milton Friedman,
(25:54):
Chicago economists, who in nineteen seventy wrote an article in
The New York Times called the only responsibility or social
responsibility of a company is to increase its profits.
Speaker 2 (26:08):
This man is one of the most evil people alone.
Well he's dead now, he's bounding in hell. But he
just to be clear, he is.
Speaker 5 (26:13):
Like, yeah, now, okay, what's interesting about that? And off
and overlooked when people read the articles.
Speaker 3 (26:22):
Two things.
Speaker 5 (26:23):
One is he wrote that, in the context of a
what was called campaign GM against general motors to put
three public interests people on the board, right, Okay, they
wanted one person to be They wanted to deal with pollution,
they wanted to deal with safety, and they wanted an.
Speaker 3 (26:45):
African American on the board. They okay, okay.
Speaker 5 (26:49):
That came out of the consumer movement that was launched
in nineteen sixty five by Ralph Nator's book unsafe at
any speed. Al Ralph Nator's still around with his podcast
The Government. Yeah, okay that Actually many corporate executives, top level,
they wanted to do some of those things, but people
(27:12):
like Milton Friedman came along and said, this is what
he called it is pure unadulterated socialism. Okay, to put
those people on the board. Now we know the history
of what's happened in the auto industry since then. Okay,
if you didn't produce safer cars, you lost market share.
If you didn't produce more fuel efficient cars, you lost
my market share. Actually, what happened in the US automobile
(27:34):
industry that African Americans became a very important source of
semi skilled and skilled blue collar workers during the sixties
and seventies when immigration was low, So that was important
for them in terms of being competitive, having a blue.
Speaker 3 (27:50):
Collar day perforce.
Speaker 5 (27:52):
They should have put those people on the board, absolutely,
and they might have done better. So you get back
to this notion that it sharedholders who basically owned the company.
All those profits belonged to them, and that was what
shareholder value kind of legitimized. And it came out of academia.
I mean it's Milton Friedman won so called Nobel Prize
(28:15):
in economics. It's really a Swedish Central Bank Prize in economics.
But basically, and it was also in many ways that
whole movement was racist, sexist, et cetera. Why because the
world that I described of secure employment that existed up
(28:37):
to that time, and I think this had a lot
to do with it, was a white man's world. And
what happened is the labor force was changing. Women were
getting into the l African Americans both because of demand
and equal opportunity. Okay, And this was a backlash against it.
It was a backlash against Nator and a backlash against
the civil rights movement. So it has to be seen
(29:00):
in that context, although it was often disguised as you know,
mainstream economics, legitimate economic yes, yes. And by the way,
you know, of course it's called liberal and conservative in
the US. You know, the liberal counterpart of that was
a guy named Paul Samuelson. There was no difference really
ultimately between Paul Samuelson and Milton Freeman in terms of
(29:23):
their fundamental economics. They thought, just let the market work
and everything will be fine if it fails. In Paul
Samuels said, Okay, the government should intervene a little bit,
but basically what they missed was the role of the corporation,
for better or worse in the economy. I mean basically,
right now, there's about two thousand companies in the US
(29:46):
that employ five thousand or more people to average about
twenty twenty two thousand. That account for about thirty five
percent of total business sector employment in the US. And
those are the most profitable companies. They pay higher wages.
The investment decisions that they may drive the economy. They
determine what kind of jobs are availed in the economy.
(30:07):
They determine what kind of education we get, They determine
what kind of resources go.
Speaker 4 (30:12):
So if they if they decided.
Speaker 5 (30:14):
And so, yeah, and so, once those companies changed their
their their purpose, they they they they became a big problem.
Speaker 4 (30:25):
And so Friedman was successful in influencing.
Speaker 5 (30:29):
Yeah, it took time, but he was successful and he
was successful. Now here's where the tech industry comes in,
because the tech industry was much more dependent on the
stock market than those old economy companies. Okay, the old
economy companies. There's five functions of the stock market for
(30:50):
a company what they called creation, which is inducing venture
capital to come in. You create companies because you can exit.
Speaker 3 (30:57):
On the stock market.
Speaker 5 (30:59):
There's control that is separating ownership and control, which a
lot of the shareholder value people see as the original
sin of American industry. But it's actually necessary because once
you have owner entrepreneurs who want to pass on the company,
what they did in the United States, they passed on
on to professional managers. Yes, and this actually opened up
(31:19):
the growth of the company. When did that still happening, Well,
that was already come in, That was already by the
nineteen twenties.
Speaker 4 (31:25):
And how do we get rid of them?
Speaker 2 (31:26):
Is the thing because if you look at most major
tech companies, Apple included, MBAs, these people are right now.
Speaker 5 (31:32):
Yeah, but that's the problem, that's the way nbas are educated.
Speaker 3 (31:36):
Now.
Speaker 5 (31:37):
Basically, the people who are running companies in the twenties
and thirties were basic engineers. The thirties, even though the
Great Depression that was incredibly important.
Speaker 4 (31:49):
But the value multiplieres was so much smaller of us.
Speaker 3 (31:52):
Yeah.
Speaker 5 (31:52):
Yeah, but these companies for the US, and this is
true globally, these large companies and critical industries dominated and
you had to be they had to be run professionally,
and yeah, basically you got this separation, so that that's
the second thing control. The third is what it called combination.
(32:12):
You can use your stock to acquire other companies, right.
The fourth is compensation, you can use your stock to
pay people, and the fifth is cash. Most people think
that the role of the stock market is raised cash
for companies. That is not necessarily true, and it certainly
wasn't true historically. Okay, Now, what happened with the rise
of the what I call these new economy companies coming
(32:33):
up basically out of Silicon Valley is they started using
cash the stock market to induce venture capital, They started
using it to acquire other companies. They started using it
to compensate people deep down in terms of stock options,
and particularly in the biotech industry where companies go public
(32:55):
without a product, they raised tons of money on the.
Speaker 4 (32:57):
Side they effectively to so, so yeah, they pay.
Speaker 5 (33:02):
So once they start within that model, you basically are
looking at your stock price all the time, and so
it's hard to resist the shareholder value arguments, particularly when
they're self serving. Now, and once those companies became big,
they all started saying, oh, we got to keep our
(33:23):
stock price up, so I can trace when companies like Intel, Apple, Microsoft,
et cetera started going from just saying all that money
we're bringing in, we got to just put it back
in the company, to oh, no, that company that money
can go out and just boost our stock price. And
then you get a whole system of what called results
(33:46):
in predatory value extraction, which have to do with corporate raiders,
institutional shareholders, pension funds, everybody is trying to get their
yields out of companies and basically support this. And this
is based for the economy as a whole. This means
a huge increase in income inequality driven by the stock market,
(34:09):
making money in the stock market and then looking for
other ways to make that money through private equity, et cetera.
One figure, the top one tenth of one percent of
households in terms of net worth in the United States
about fifteen percent of their assets we're in the stock market.
Speaker 3 (34:25):
In nineteen ninety.
Speaker 5 (34:26):
Now it's about forty five percent of their assets. So
their wealth is very much tied up with the stock market.
The stock market is very hard to crash now because
there's so many people are making so much money out
of money that they have to put it somewhere. And
actually this number of listed stock the companies are shrinking
and through buybacks the shares out there.
Speaker 2 (34:48):
At some point this has to fall apart though, because
surely if everything is based on the value of the stock,
every single large company is effectively at the will of
the stock market, which will mean that the companies will
have eventually stop making things with the purpose of doing
anything of them. Than racing shareholder value does not lead Okay,
death of innovation.
Speaker 5 (35:06):
Yeah, okay, yes it does, but it doesn't happen overnight.
Speaker 4 (35:10):
We're watching it happen now.
Speaker 5 (35:11):
And and so, uh, you start seeing China has a
different model. They start out competing the United States, and
you try to block China. Right, this is a big
problem for the United States because tech companies are so
they're so integrally related with trade with China and manufacturing
and imparting from China.
Speaker 3 (35:30):
This is a total disaster.
Speaker 5 (35:33):
And but but basically what has happened is companies, and
I can have a whole bunch of them, have fallen
behind global competitors in the US because they stuck with
this shareholder value model.
Speaker 3 (35:46):
So the US is.
Speaker 5 (35:47):
Falling behind in a whole range of critical technologies. So
reasons there's no major EVY battery produced in the United States,
the problem of FABS, which I already mentioned. The problem
well Boeing they did forty three billion dollars in buybacks
from twenty thirteen to the week before the second crash.
(36:09):
Jack Welch Boys then yeah, and they had Boeing's Boeing
stock price was at a record level in March March first,
twenty twenty nineteen, ten days before the second crash, and
there was no doubt. I wrote an article on this
in May of twenty nineteen that the.
Speaker 3 (36:28):
Boeing crashes were the result of top.
Speaker 5 (36:31):
Management ignoring issues of safety because it would.
Speaker 6 (36:36):
Hurt the stockprist Right, So I have a theory.
Speaker 2 (36:52):
I'd love to run it by your school, the roll Coombubble.
Right now, I think the tech industry is reckoning with
the fact that they're all no big ideas. Sure the
audience will love this. I do not think general if
AI is the future. I think it is a ginied
up software product based on desperation. But what happens if
the tech industry stops coming up with hypergrowth markets because
(37:13):
they haven't had one for a while, what happens, like,
what happens to these companies stop having new things?
Speaker 5 (37:19):
Well, first of all, were reliant on these things still, Yes,
so even though they're not new things, we're still using
the whole ecosystem.
Speaker 3 (37:30):
You know.
Speaker 5 (37:30):
Again, I use the Apple products, and to Apple is
going to make money off of me because I'm.
Speaker 4 (37:36):
Standing by every iPhone.
Speaker 2 (37:37):
I'm just saying, what if this is I have the
new iPhone with me because I'm a little pig and
I own for Apple every time. What happens if this
is about as good as it gets, if each version
is more incremental, is just more and more incremental, If
it's faster but not that faster, because we're hitting a
wall on CPUs as well, More's lawa is falling apart.
Speaker 5 (37:57):
Well, we don't really have to. I mean it's easy
to answer that question. We get Donald Trump.
Speaker 4 (38:02):
I mean basically, well we have Donald Trump. What happens
off to that?
Speaker 5 (38:06):
Okay, well that will find out because you know this,
you know.
Speaker 2 (38:11):
Say sorry, but perhaps like me whil back, are you
saying that the death of innovation led to Trump?
Speaker 5 (38:16):
No, I'm saying the financialization of the economy. Oh yeah,
so so oh yeah.
Speaker 4 (38:20):
Also the corporate authoritisery.
Speaker 5 (38:21):
Say so, even here's the problem. Even when I put
more stress on, even when there is innovation, the wrong
people are going to grab it. Okay, and the economy
is going to become more financialized, you know, the people
who actually should be sharing in in the first instance,
employees of those companies. They can be laid off and
(38:43):
in some elon musk one hundred and forty thousand people
at Tesla the end of last year, just like that,
laid off twenty thousand people.
Speaker 2 (38:53):
Yeah. Yeah, But my point is if they have no
other vehicles for growth, because you look at Microsoft for example,
they are able to They've had I think a year
of a year growth of over lower ten percents.
Speaker 4 (39:04):
You these companies are slowing down.
Speaker 3 (39:06):
Yeah.
Speaker 5 (39:06):
Well, first of all, I don't think that the companies
themselves don't need to grow bigger and bigger. They could
spin off other companies, okay, And I think that that's
a model that works very well because you create incentives
for people in those companies to become their own bosses,
to become the head of other.
Speaker 4 (39:24):
If that's not their culture. Though, the reason I'm pushing isn't.
Speaker 2 (39:27):
Yeah, the reason I'm pushing on this is I'm thinking Microsoft,
I'm thinking Meta especially, I'm thinking I mean Cisco as well,
and even Oracle. I mean these companies don't have new innovations.
Oracles doing a ripe smokes up, became the largest customer,
they make data sentence, fine, but what if they stop
being able to grow revenue every year? Like that is
(39:47):
the real question.
Speaker 5 (39:48):
What happens, Well, they'll lay off some of their workers,
you know, that's that's the first thing that is not enough. Well,
then they might you know, they might go out of existence.
I mean this has happened to some companies who Sun Microsystems. Yeah, okay,
(40:09):
so you know there are companies that that that just
don't make it. And you know, but once once you
have made it, it's very hard to disappear in ten
years or twenty years, of course, because you have that
that that demand base, and you have the capabilities, you
(40:29):
have very very basically the barriers to entry. You have
a whole lot of advantages that allow you to dominate.
And the question is, you know, and then if you
take the global competitors and you try to just shut
them out, then you have a problem.
Speaker 2 (40:46):
I mean, the I think my bigger point is that
in the lost ten years, the tech industry has categorically
failed to find any hypergrowth movement that matches smartphones, that
matches clouds software. They've not had any of them to
create the level of value that those did. And they
are squeezing everything. And my concern is what happens if
(41:12):
they don't have anything left to squeeze Because they're all Microsoft, METSA,
all these companies. They've laid up tens of thousands of people,
they've tried that, and they could lay off more. And
now they're putting billions into a two hundred billion into.
Speaker 4 (41:23):
Capex into that to lose money. I just feel like
we're in a corporate psychosis.
Speaker 5 (41:27):
Well see the other Another way to answer this question
is is today, ultimately, what is the economy run for
the economy? Actually?
Speaker 3 (41:39):
Is this a normative?
Speaker 5 (41:41):
In my view, should be run to provide services to
people that are not profitable like healthcare, education, uh, you know,
care for all people whatever. That's what a prosperous economy
should do. Now, these goods producing companies, these innovative companies,
have a lot of capability produced through those markets. But
(42:04):
that means the government becomes a big source or it's
either governments or you're well paid employees, right become sources
of demand for those products. And that's the opportunity that's
been missed. Yeah, yeah, And and what you have now
(42:25):
is with all this financialization of the whole economy, with
all this money being funneled out of these highly successful
goods producing companies successful in terms of profits, you have
money looking money looking to make more money. And you
have the whole which has been written about a lot recently,
private equity moving into healthcare, for example, moving into areas
(42:47):
which would not be for profit at all, buying up
doctors office, thensince's office, you know, yeh, basically nursing, labor supply,
what have you. A lot of stuff being written about
that now, and a lot of it is kind of
under the radar because you don't even know who owns
these various companies that the corporate structures are so paid.
But basically what should have been happening all along was
(43:12):
that when you became prosperous, this was really taking some
of those profits, not just paying your workers better, creating
more stable employment upwards socio economic ability. We have downwards
socio economic ability for a lot of a lot of
big proportion of the population, into more education, into more
producing things that people need but aren't necessarily the next
(43:37):
big profitable product. Actually, some of those would become profitable
products if in fact you have enough government demand for
them and you are the companies as as in the military.
So that's what that's what should have been happening. That's
what's not been happening.
Speaker 4 (43:52):
So how do we make it happen? How do we
force them?
Speaker 5 (43:55):
Well, okay, so you have to change the whole way
in which companies allocate resources.
Speaker 4 (43:59):
So how do you do that?
Speaker 3 (44:00):
Well, so'm I.
Speaker 5 (44:03):
If you wanted to talk practically, you say, you cannot
do buybacks anymore.
Speaker 3 (44:07):
You're manipulating the market. There should be a need.
Speaker 5 (44:09):
This, this is a phenomenon. Buybacks are past dividends as
distribut starts of distribution shareholders in nineteen ninety seven. They're
much more volatile, but way bigger than dividends.
Speaker 4 (44:20):
But it's bigger than just by this.
Speaker 3 (44:23):
Well, okay, but that's the start. Okay.
Speaker 5 (44:26):
You stop tying executive pay to the stock market. You
tie executive paid to the success of the company in
terms of employing people, keeping people employed, innovative products. You
change corporate boards. Okay, you put people on corporate boards
who have a real interest in that company's position in
(44:48):
the economy. Okay, you change the tax system. The tax
system rewards value extraction rather than value creation. Uh. And
you basically, and this I think is the most important thing,
you figure out how to mobilize all the resources in
(45:08):
the economy, the human resources in particular, or what I
call collective and cumulative learning. When you get down to it,
innovation is about people getting together collectively.
Speaker 3 (45:19):
And learning cumulatively.
Speaker 5 (45:21):
That is, what you learned yesterday determines what you can
learn today. And what happens is when these companies stop
retaining and reinvesting, you just have all kinds of people
with capabilities who are not living up using those capabilities,
(45:43):
or in the end never even get those capabilities because
money doesn't go back through the education. I mean the
US at a point in time in the nineteen eighties
when it was necessary to everybody knew you had to
really up the educational system. And the US was absolutely
and still is ideally situated for that because of the
(46:07):
history of higher education in the United States, which goes
back to something called the Lion Grand colleges, which really
came out in the late nineteenth century and were the
bedrock of innovation in the US economy at that point
in time. The huge investments that should have been made
were not made. Public education was virtually in every state
(46:28):
free before then became expensive student loans. The interest rates
that extortionate in the US from the government. Basically it
was white people not wanting to fund other people.
Speaker 3 (46:40):
For upward mobilities.
Speaker 5 (46:41):
So that's definitely yeah, and that's when you now, how
was that resolved. It was resolved through the fact that Asia,
in particular in the tech industry, was educating people and
those people were in the United States and I think
to the benefit of them and benefit of the United States.
(47:04):
So I'm not saying that Asians in some case took
any jobs away from anybody they but they became an
available labor supply through what's called L one visas, H
one B VISUS permanent VISUS employee and preference visas. I've
got all the data on this. This is all encapsulated
in the Immigration Act of nineteen ninety and for the
(47:27):
tech industry, they were now off the hook in terms
of US economy for saying, oh, we have to ensure
that higher education is available for African Americans, available for
white families who are coming out of low income that
(47:48):
we have to be sure that this system is available
for upwer mobility. They took a walk on that, and
they were able to take a walk on that because
they were part of the global system.
Speaker 3 (48:01):
That's what I mean.
Speaker 5 (48:01):
It's very ironic now that United States is in this
conflict with things.
Speaker 4 (48:06):
It feels like we've gone yeah, socially regressive.
Speaker 5 (48:09):
Absolutely absolutely, And what you see is concentration on the
top downwards socioeconomic mobility for people particularly who have no
more than high school educations. And that's why I say,
that's why it leads to Trump. Basically, it's no big mystery.
Once you understand the concentration on the top, the money
(48:30):
that will go, and.
Speaker 2 (48:31):
I imagine to some extent, even if you don't understand it,
you look at the system, you look at the current
political apparatus. Why would you trust authority even if Trump
is a he's obviously not going to do a whole
bunch of stuff, and he's going to do much worse.
It's almost like you, I feel like people need to
realize everything you've discussed today, is just describing how the
(48:53):
system fucks regular people, how the system has somehow we
were more progressive in America in the seventy's corporate why
it's just it's very worrying. So I'm gonna end on
a nice note. What actually should give people hope?
Speaker 4 (49:07):
Where can people find it right now? In your opinion?
Speaker 3 (49:10):
Ah?
Speaker 5 (49:11):
Well, that's hard to say right now, I mean because
because I mean the you know, there was a notion
that with all the opposition before the election and before
before Biden had that disasters debate. Okay, you know, he
(49:32):
had tried to push policies in a much more progressive way,
and I think it's true.
Speaker 3 (49:35):
Yeah, they were trying.
Speaker 5 (49:36):
They couldn't get any of the family stuff passed, but
they were trying to do it. They got the infrastructure
infrastructure Builds pass, et cetera, Inflation Reduction Act, starting finally
to to try to negotiate health care prices. Basically, they
were trying to do some things that got a resounding
no from the electorate. And in fact, that part of
(49:59):
the regressive policy was not part of the campaign. And
certainly Joe Biden was a big fan of this stuff
on binding buybacks back when he was vice president. I'll
tell you a little story about that. We can end
on this, which is not that. Basically, in twenty sixteen,
(50:21):
when he was still vice president, he wrote an op
ed in the New York Times in the Wall Street
Journal about stock buybacks executive pay and said, we have
to rain all this stuff in. This is really screwing
up the economy. The future of the economy depends on it.
In that article he named one person that was me.
It said, according to economist, William was on at Comma,
(50:42):
and then he had data from the article I mentioned
in twenty fourteen. I looked at it a couple of
years ago when a journalist contacted me and I said, oh, Biden,
when he was vice president was I really thought this
was a problem. Now he's not saying anything about it.
And I said, look at the article. I looked at
the article and it said, according to economists, blank space Comma,
(51:04):
someone had actually hacked out my name.
Speaker 2 (51:07):
Yes, it feels like it. We need a populist movement,
then straight up pro no.
Speaker 5 (51:12):
Basically, Basically, the when the Democrats got into power, and
this happened under Obama, It's happened.
Speaker 3 (51:22):
It was happened under Clinton.
Speaker 5 (51:24):
Uh, they have just cosied up to Wall Street, cosied
up to rich people. Basically, they do not have a
critique of shareholder value. There is nothing coming out of
the of from the Democrats when they are in power
in particular. Uh, and that that is that it's confronting
this and I think it's now basically comfortull circle in
(51:47):
terms of the people being affected by the lack of
upward mobility, the lack of job security, living people living
paycheck to paycheck while other people are getting richer and richer.
Finding Okay, we'll just take someone who you know with
a hope that they're going to do something different. Of
course they're not. So yeah, So what's what's the where's
(52:09):
the optimism of courts? We need, we need a progressive movement.
Speaker 3 (52:13):
But but it is, Yeah.
Speaker 2 (52:15):
I feel like you can find hope in the fact
that these ideas will become more prevalent because at some point,
we mean, we need to review these systems. We need
to also realize that worker power will make cooler shit,
it will make more innovation. William, thank you so much
for joining me, and everyone, thank you so much for
joining us today for the first live episode of Better Offline.
Speaker 4 (52:34):
From the beautiful country of Portugal. Websummit.
Speaker 1 (52:37):
Thank you everyone, Thanks, thank you for listening to Better Offline.
Speaker 2 (52:49):
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Also media, Hello, and welcome to Better Offline.
Speaker 2 (00:06):
I am, of course your host ed Zittron and know
a lot of people have been asking, hundreds of thousands
of people. In fact, I will be submitting myself at
the next d NC is the left is Joe Rogan.
(00:27):
I am two or three inches taller as well. But
today I'm joined by Professor William Lazonek. He's a professor
emeritus of Economics ever at University of Massachusetts and the
co founder of the Academic Industry Research Network. William, thank
you so much for coming.
Speaker 3 (00:41):
Pleasure to be here.
Speaker 2 (00:42):
All right, So, if you look at the tech industry
right now, it's probably the most it's definitely the most
profitable it's ever been, and probably the worst. It feels
like the furthest it's been from really innovating, and it's
moved to value extraction, I think, and you know, you
know a great deal about that.
Speaker 4 (00:59):
How did we get here? And I mean historically, how
did we get here?
Speaker 5 (01:02):
Well, first of all, you have to understand that the
United States as the most formidable developmental state in history.
A lot of people think that Japan in the eighties
invented the developmental state, but actually the United States was
japan developmental state from the point of view of technology.
Speaker 3 (01:23):
So I won't go into.
Speaker 5 (01:24):
The whole history of that, but it goes back to
the nineteenth century building of Langrand colleges, railroads, and going
into aviation, the computer.
Speaker 3 (01:33):
Industry, etc.
Speaker 5 (01:35):
So tech was provided with all kinds of resources.
Speaker 3 (01:41):
Those resources were.
Speaker 5 (01:42):
Originally used by large corporations that actually gave people lifetime employment.
So that's something else. When people discovered Japanese competition in
the nineteen eighties, he said, oh, a secret to Japan's
success is they give people permanent employment, life time employment.
US companies were doing that, particularly post World War Two.
(02:06):
Iconic company that did that, which became a totally shareholder
value company, and that's where I'm going was IBM. You
had a job for life, so you had a defined
benefit pension, you had all your medical compenses paid, et cetera.
Those companies were highly innovative, A lot of them connected
(02:27):
to what was called the military industrial complex, and in
the early late fifties early sixties, some companies started setting off,
spinning off of that, companies that would have been like
companies here today that that were, and they went on,
they went public and they were called glamorous stocks, but
(02:49):
they were thinly traded. So the Security and Exchange Commission,
which was set up in the mid thirties to get
rid of manipulation and fraud on markets, they had what
was called a Special Study that created Nasdaq, which you
all know about, but you probably don't know the origins
of it. So Nasdaq was really backed by the US
(03:10):
government to create a liquid market in a spec highly
speculative stocks. And so the National Association Dealer's Automated Quotation
system came online in April nineteen seventy one, and it
wasn't actually a trading market, it was just a quotation system.
So the security dealers who were all working on their
phones and rollodexes in isolation and never knowing what the
(03:34):
price of a stock would be, all of a sudden.
This is really the first use of internetworking, right, because
computers mainframes had just come in in the sixties, So
you now have NASDAK. One of the first companies that
listened on Nasdaq was Intel, three years after was founded.
That would never have been possible with the New York
Stock Exchange. They could have gone the over counter market
(03:57):
because the New York Stock exchange had listen requirements in
terms of capitalization profitability that would require ten to fifteen
years at least, right, Okay, but now you could get
companies going pro public.
Speaker 3 (04:10):
They didn't even have a product.
Speaker 5 (04:12):
That really was the thing that brought venture capital into
the picture. There was no well defined venture capital industry
until nineteen seventy two, a year after Nasdaq was created,
and it came out of Silicon Valley, which by the way,
was dubbed Silicon Valley in nineteen seventy one by a
journalist because there were so many startups producing silicon ship.
Speaker 4 (04:34):
Fill this point.
Speaker 2 (04:34):
Going public required you to be a good company.
Speaker 5 (04:37):
You had to, yeah, so often you went over the
counter and then graduated to what they called the Big
Board the New York Stockution be Yeah, and you had
to have a lot of different shareholders, cetera. Yeah, so
rid of that, and well, those companies tended to pay dividends,
but they didn't do something which I'm going to talk
about today, which is the way the datory value extraction
(05:01):
is working in the US economy, particularly in the tech sector,
and that's the phenomenon of companies buying back their stock.
Speaker 3 (05:09):
Okay, but before we get to that.
Speaker 5 (05:11):
We basically have to see that in the nineteen seventies
there was a change in the institutions of the stock market,
particularly around Nasdaq and venture capital, that made it possible
all of a sudden to get funding from for startups
that couldn't get funding before.
Speaker 6 (05:33):
Now.
Speaker 5 (05:33):
A big change was and it was really under the radar,
was in nineteen seventy nine July of nineteen seventy nine
when the Department of Labor in the US said that
pension funds could put some of their money into risky assets.
There had been some legislation earlier in the decade which
(05:53):
said that if pension fund managers put their money into
companies like the companies on show here they're trying to
go public, that they could get into.
Speaker 3 (06:03):
Trouble or company, it's a company.
Speaker 5 (06:05):
Immediately, from that point in time on, there was no
shortage of money in the US economy for venture.
Speaker 3 (06:12):
Capital, for new firms.
Speaker 5 (06:13):
There was really always Since then, it's been a shortage
of good firms and a lot of money chasing.
Speaker 2 (06:19):
Well. Pushing back on that way, yeah, agreeing, But isn't
the problem more so that venture capital no longer really works.
It isn't really taking risks, it's just okay doing more
value extraction.
Speaker 5 (06:30):
Now, venture capital at that point where it was really
dominated by people who came out of the industries in
which they were investing. Right, So there were individuals who
decided to be a like Don Valentine who backed Cisco
and other companies. He came out of National Semiconductor, had
been in the semiconductor industry. They were in a whole
(06:51):
number of them, and so they understood the industries in
which they were investing.
Speaker 3 (06:55):
Some of them were better, some of the worst.
Speaker 5 (06:57):
Right, But really what put it venture capital made it
something that people would now say, hey, let's go after
this stuff. We're two IPOs in nineteen eighty one was
Apple and the other was Genentech. One attack and one
on biotech. And from then on there was well, in
(07:20):
the early eighties, there was a whole bunch of investing
in venture capital. Here's your point comes up. There was
a very good book written in nineteen eighty five by
BusinessWeek journalist your named John Wilson, called The New Ventures.
Speaker 3 (07:35):
It was the first real good book.
Speaker 5 (07:36):
Out there on venture capital, and the last chapter was
vulture Capital. So it was basically the bad venture capitalists
coming in and just hyping companies and the whole thing
falling apart. And then so you always you have these
cycles of good venture capital, and then you know, in
(07:57):
the dot com period you have the boom and bust,
et cetera.
Speaker 2 (08:00):
I think, I think what I'm thinking is the way
venture capital is today is strange because after twenty twenty one,
the collapse of the zero interest free era, you're kind
of seeing that a lot of venture capitalists did not
exactly know how to invest in companies at all.
Speaker 4 (08:14):
They knew how to invest in concepts, in.
Speaker 2 (08:17):
Things that they could take public or things that they
could flog to another company. And that's venture capital is
falling off quite a lot.
Speaker 4 (08:24):
Now.
Speaker 2 (08:26):
Is that something that reflects the larger market conditions of
the tech industry, because it feels like the same problem
in that meta makes their Facebook sucks. Now, if I'm
sure you all use Instagram and Facebook, if you don't
think it's bad, please go on the app take a look.
Speaker 4 (08:38):
It feels like they're.
Speaker 2 (08:39):
All following the same thing of they have all fallen
into Jack Welch's shareholder value system of bigger, more money
as much as we can squeeze my users as possible,
which only appears to work in the public market.
Speaker 4 (08:53):
So how did how did we we really get here? Though? Like,
how do how do we get to the sho Okay?
Speaker 5 (09:01):
So, now what you had with venture capital, with Nasdak
being part part of it, with a shift actually of
Wall Street self from investing in these older companies and
doing their bond issues to trading in stocks that also
occurred in the nineteen seventy you when the stock market
(09:22):
actually was.
Speaker 3 (09:22):
Not doing very well.
Speaker 5 (09:23):
But you then had a whole situation where you had,
I mean, this really did unleash innovation. The older economy companies,
they were good at doing some things, but a lot
of them became conglomertized, became sclorotic, et cetera. There was
a demand coming out of basically conservative economics, led by
(09:48):
a guy named Michael Jensen, to discourage the free cash flow,
as they called it. It actually invented the term free
cash flow, which every company used. A free cash flow,
by the way, means that if you got to lay
off five thousand and workers to create free cash flow,
well that's fine, you know, as long as anything that
isn't nailed down is free cash flow. And this prioritized
(10:12):
shareholder value ideology that I witnessed firsthand when I was
at Harvard Business School in the mid nineteen eighties, and
they hired this guy, Michael Jensen. I'm not sure if
you've heard of him, but he died recently, the guru
of a maximizing shareholder value.
Speaker 3 (10:28):
And once he did that, you start.
Speaker 5 (10:31):
Getting hits in the Wall Street Journal of Financial Time
Center shareholder value. Okay, then they start with executive pay,
stock based pay. That was already the longer history of that,
but that comes in in the nineteen eighties. That's aligning
the top executives with shareholder value.
Speaker 3 (10:49):
And then how do you.
Speaker 5 (10:52):
Create and I use creative quotes value for shareholders. Not
only do you pay dividends, but you buy back the
company's stock the stock buy back. You tell your broker
go into the market, buy back our stock. You're giving
their money away to get the stock price up, and
you're nactually not benefiting shareholders who get dividends. You're benefiting
(11:17):
share sellers who are using the opportunity to sell their shares,
including the top executives who pay is stock based stock options.
Now it's more stock awards, but also corporate raiders who
want to come in and say, get the stock price up,
do the buybacks, then we'll sell the shares. So this
(11:38):
becomes a massive phenomenon. Now, this was enabled by in
nineteen eighty two again the Security Exchange Commission, which has
said was set up to get rid of manipulation and
fraud in the market. It went from being a regulator
of the stock market to being a promoter of the
(11:59):
stock market. And to this day that's what the Security
Exchange Commission is. It is not a regulator of the
stock market, it's a promoter of the stock market.
Speaker 3 (12:09):
And what they did it was really under the radar.
Speaker 5 (12:13):
Usually in the US you have public comment on these issues.
They said, any company on any single trading day can
buy back twenty five percent of their average daily trading
volume over the previous four weeks without being charged with manipulation.
Speaker 3 (12:31):
It was a safe harbor.
Speaker 5 (12:32):
So didn't say if you went over that you would
be charged. It just said if you want to be
sure that you won't be charged manipulation, that's how much
you can you can do and buy backs.
Speaker 2 (12:42):
Now, so how does this lead to where we are today,
which is a death of innovation?
Speaker 5 (12:47):
Okay, So What that means is that a company like Apple.
I looked at the figures, they change a bit from
year to year, or sometimes quite a bit. They could
do about four billion a day day in buybacks, day.
Speaker 3 (13:02):
After day after day. They Apple just.
Speaker 5 (13:05):
Came out with his twenty twenty four annual report. They
did ninety five billion in buybacks. They had ninety four
billion of profits. Hugely profitable, but ninety five billion in buybacks.
Apple has done seven hundred and twenty six billion dollars
in stock buybacks over the previous twelve years, plus about
(13:26):
one about two hundred billion in dividends. The buybacks are
about ninety three percent of its profits. Now Apples hugely profitable,
but there are costs to doing that now. By the way,
when if you look on Apple's website, they call this
program of paying out dividends and doing buybacks, which really
(13:50):
only got going.
Speaker 3 (13:51):
Is a longer history to this.
Speaker 5 (13:54):
When Steve Jobs left in nineteen eighty five or was
pushed out of Apple, the executives there start paying doing
giving in the buyback almost drove the company into bankruptcy.
Jobs came back in nineteen ninety seven said we're not
doing that. We're doing what I call retaining and reinvesting.
And we know the history of that. They have the iPod, iPhone, iPad,
et cetera. Steve Jobs died in twenty eleven. Shortly before
(14:20):
he did that, he died, he gave the CEO position
to Tim Cook, who was claimed to fame. There was
outsourcing their manufacturing to China and.
Speaker 3 (14:30):
Courtually everything that operations guy, yeah, operation guy.
Speaker 5 (14:33):
And he got pressured by the hedge fund activists starting
in twenty twelve twenty thirteen, including Carl Icon, and they
started doing the buybacks. And once they started doing them,
they just kept doing more and more of them, as
I say, an average of sixty billion a year over
(14:53):
the last twelve years. Now they call it their capital
return program. But the only time Apple ever got money
from the stock market was in nineteen eighty and it's ibo,
so who is it returning capital too?
Speaker 2 (15:06):
But what I understand this is bad because it makes
it's basically just money going into the corporation's mouth from.
Speaker 4 (15:12):
It hand its hands. But how does this fuck up
the innovation economy?
Speaker 2 (15:15):
How does this stop people actually building more cool stuff,
all right, or useful things I guess, or at least,
how does it enable the bad habits.
Speaker 5 (15:21):
Yeah, okay, so first of all, again, sticking with a
company like Apple, they could be paying people in the
Apple stores maybe twenty percent more, maybe twenty five percent more,
making those even though they can might be able to
substitute a lot of those people fairly easily. But they
could have made those the best jobs that anybody could
(15:42):
have in the economy. It wouldn't just be in the
US all over the place, and that would have pulled
up wages for the kinds of people who work in
the Apple stores by other competitors, right, you know, and
this is not just Apple, there's a whole all the
big companies.
Speaker 3 (15:55):
Are doing this stuff. Okay.
Speaker 5 (15:59):
They could have invested in innovation that was not immediately
profitable or commercially profitable, but for public good like for
disabilities things like this. They did hardly any of that.
Speaker 4 (16:17):
Okay, they sornety billion.
Speaker 5 (16:19):
Year when they did try to move into new technology.
And I use all the Apple products you know out there,
but the ones they didn't produce, the you know, AI,
self driving cars, et cetera. They spent billions and failed.
But it's worse than that. The US is now engaged
in what some people call the chipwar with Samsung and TSMC.
(16:43):
Intel turned down the contract for Apple processors after the
iPhone was launched in two thousand and seven. That's because
Intel was doing massive buybacks at the time and they
had a financial guy running the company. But then they
gave the contract to Samsum. Sansum became a high end
(17:05):
producer fabricator of chips, the highest end by doing the
products for.
Speaker 3 (17:13):
Apple.
Speaker 5 (17:13):
Then they became a competitor, so they switched to TSMC.
And so basically the US is from a US point
of view, does not have a leading edge producer of
fabricator of chips now because in fact it was outsourced
by one of the leading companies that could have actually
(17:37):
sixty billion dollars away would build a state of the
art plant. That's that's that's what TSMC is spending in
Arizona now, and that's just the one year with Apple's
is spent on average.
Speaker 2 (17:59):
Maybe I want to take a step further out because
whiles stock buybacks are a major problem, there is a
much larger one as well, with the growth of all
coast row economy. As I call it, the idea that
every single company I mentioned matter earlier The reason my
bag on matter is because the average Instagram Facebook experience
is horrible, interfered with, it's full of aislop. In fact,
Mark Zuckerbot literally just said he wants to have a
(18:21):
channel just for AI. Slop makes you want a channel
a gun in my mouth. And the thing is, we
are seeing tech getting worse. And it's not just these buybacks.
It's if they had that money to spend, they probably
wouldn't spend it on an innovation. If we're honest, they're
not incentivized to innovate. So how do we change this?
How do we actually unfucked this system? Because right now,
(18:42):
if you look at Google, you look at Microsoft, these
products are getting worse as they get more profitable.
Speaker 4 (18:48):
How do you write this and what can be done
to them to change them?
Speaker 5 (18:52):
Okay, well yeah, so first, companies that prioritize getting this
stuff price up over investing in innovation and that, by
the way, that doesn't mean just spending money on our ID.
It means employing people, integrating them, getting the learning going,
and actually maintaining a stable labor force so that you
(19:14):
can actually produce those products serve as those products once
in the market. But companies that prioritize shareholder value get
involved in other kinds of all kinds of mysfils like
they price gouge, they tax avoid taxes, they layoff lots
of workers. When they're profitable, they'll basically shareholder value takes
(19:37):
over everything. Okay, so how do you deal with that? Yes, okay,
here's part of the problem that the people, a lot
of people understand that this is a problem, at least
the work I've done on this. On stock buybacks, I
had an article in Harvard Business Review ten years ago,
which was just an article I wrote, but because where
(20:00):
it appeared and because it had it was called profits
without Prosperity. The subtitle was the best part, how stock
buybacks manipulate the market at least most Americans worse off.
It shocked me that Harvard Business Review actually published that article.
Usually yeah, yeah, okay, so but the fact is that
it did get a lot of attention.
Speaker 4 (20:21):
Right, But.
Speaker 3 (20:23):
If you are in power.
Speaker 5 (20:25):
As the Democrats were for the last four years, they
gave it a lot of attention when Trump was in power.
Speaker 4 (20:32):
But I got to push back on that. I'm sorry,
did they because.
Speaker 5 (20:35):
Oh no, yeah, they did? Pal okay around the Trump
tax cuts. They had what it was called hashtag GOP
tax scam. It was all about stock buybacks.
Speaker 2 (20:47):
I know he's the thing, okay, the larger economic conditions
of the problem here. The tax thinks, sure, it's a
part of it. But the problem is that the incentive
is the dual company grows and continues for writing shareholder value, which,
as my listeners will know, into the audience here literally
just means what will increase stock price and increased dividends.
(21:07):
Very basic, Jack Welsh, bullshit. How do you change those incentives?
Because I don't think that true, and this is not
even a political statement. I don't think there's any movement
to stop that other than maybe Lena Khan and rip
very soon, probably sadly, an attempt to move away from
the monopolies. How do you actually breach this machine, because
(21:28):
the machine is breaking everything else.
Speaker 5 (21:29):
There is actually legislation, okay, influenced by the work first
introduced by Senator Tammy Baldwin, who won by a whisker
in Wisconsin, was reelected, called the Reward Work.
Speaker 3 (21:43):
Act, and it would ban buy backs.
Speaker 5 (21:46):
It would get rid of this rule from nineteen eighty
two that allows companies to do and without being charged
with manipulation, and so in effect, it would say that
if you do buybacks on the scale that you're doing
them now would man it also the other side of it,
which is that you would put worker representatives on boards.
(22:07):
I think you have to put representatives on boards. I
think they actually I want to be as a taxpayer
represented on boards if they're using my money, if Elon
Musk is using my money of apples, yeah, I mean.
Speaker 3 (22:20):
The boards boards, boards are a joke.
Speaker 5 (22:22):
I mean the notion of independent board members and given
given the money that board members are making went from
shareholder value.
Speaker 4 (22:31):
Yeah.
Speaker 5 (22:32):
We just wrote an article on Elon musk twenty eighteen
pay package.
Speaker 3 (22:40):
The so called independent.
Speaker 5 (22:43):
Directors have made hundreds of millions of dollars on giving
him that PayPal being around giving that and staying on
the board. Interestingly enough, there was one board member, her
name was Linda Johnson Rice, who actually made one hundred
and thirty five dollars from her stock based pay because
(23:04):
they didn't renew her her board seat after twenty nineteen
and she left. We calculate one hundred and seventy three
million dollars of options on the table, So that's what happened.
Then it came out that she had spoken out against
Musk Anyway, that's part of the problem is you have
a totally corrupt governance system.
Speaker 2 (23:23):
It's that, but it's also bigger. The market is incentivized
for growth. You can these are pieces of the puzzle.
But how do I realize that what I'm suggesting destroy
the markets, which is the markets are focused on growth.
They are five actually just one part of this machine.
And as long as that happens, innovation is going to
be stemy because if you're just trying to make more
(23:45):
money and not even more profit, just trying to grow
the stock value, you're not trying to make yeah, lots
of things.
Speaker 5 (23:52):
A company it's successful by producing a higher quality, lower
cost product.
Speaker 2 (23:57):
Then I'm sorry, look at me. I have to hate
to disagree that. Look at Meta, Look at Microsoft. The
Microsoft three sixty five is a product of realign't going
to little NSA.
Speaker 4 (24:07):
It's become a worse product.
Speaker 5 (24:08):
Oh no, I'm not saying that. I said it becomes
it gets into that position. Now what you call a
higher quality product, you know different people can have.
Speaker 2 (24:17):
Oh do you mean this in a higher quality selling
product that makes more money.
Speaker 5 (24:22):
It's one that can get customers. Okay, all right, and
now there is a problem I call it. Okay, companies
retain and reinvest when they when they are doing this,
they retain their money, they reinvest in the company. The
other side of that is they do what I call
downsize and distribute. They downsize the labor force and distribute
(24:43):
cast channel. There's most tech that are doing the big
bypass are in between. I call them dominate and distribute.
That's where Microsoft comes in. Yes, so they have a
dominant product. No one can get in there. Now, that's
where there's an element of monopoly there.
Speaker 3 (24:57):
Uh.
Speaker 5 (24:57):
And but but basically they they're they're pulling in the
cash from from that product, from their their their their
software suite, and uh they're using it to pump up
their stock.
Speaker 4 (25:08):
Price right and crushing crushing gold competition.
Speaker 5 (25:11):
Yeah and so, and not investing in things like Apple,
not investing in a fab Apple outsourced dolls, it's rechargeable
batteries to China and running.
Speaker 2 (25:23):
Because Apple, one of the best moves was when they
invested in their own silicon.
Speaker 4 (25:27):
It's probably been one of the best softest moves.
Speaker 5 (25:29):
Well, of course they put Tim Cook that was the
guy they put in charge there with you know, he
outsourced the Fox con et cetera. And okay, now, but
I think the bigger issue maybe that you're getting at,
is where did this whole idea of shareholder value come from? Right?
And you know, people often cite an article by Milton Friedman,
(25:54):
Chicago economists, who in nineteen seventy wrote an article in
The New York Times called the only responsibility or social
responsibility of a company is to increase its profits.
Speaker 2 (26:08):
This man is one of the most evil people alone.
Well he's dead now, he's bounding in hell. But he
just to be clear, he is.
Speaker 5 (26:13):
Like, yeah, now, okay, what's interesting about that? And off
and overlooked when people read the articles.
Speaker 3 (26:22):
Two things.
Speaker 5 (26:23):
One is he wrote that, in the context of a
what was called campaign GM against general motors to put
three public interests people on the board, right, Okay, they
wanted one person to be They wanted to deal with pollution,
they wanted to deal with safety, and they wanted an.
Speaker 3 (26:45):
African American on the board. They okay, okay.
Speaker 5 (26:49):
That came out of the consumer movement that was launched
in nineteen sixty five by Ralph Nator's book unsafe at
any speed. Al Ralph Nator's still around with his podcast
The Government. Yeah, okay that Actually many corporate executives, top level,
they wanted to do some of those things, but people
(27:12):
like Milton Friedman came along and said, this is what
he called it is pure unadulterated socialism. Okay, to put
those people on the board. Now we know the history
of what's happened in the auto industry since then. Okay,
if you didn't produce safer cars, you lost market share.
If you didn't produce more fuel efficient cars, you lost
my market share. Actually, what happened in the US automobile
(27:34):
industry that African Americans became a very important source of
semi skilled and skilled blue collar workers during the sixties
and seventies when immigration was low, So that was important
for them in terms of being competitive, having a blue.
Speaker 3 (27:50):
Collar day perforce.
Speaker 5 (27:52):
They should have put those people on the board, absolutely,
and they might have done better. So you get back
to this notion that it sharedholders who basically owned the company.
All those profits belonged to them, and that was what
shareholder value kind of legitimized. And it came out of academia.
I mean it's Milton Friedman won so called Nobel Prize
(28:15):
in economics. It's really a Swedish Central Bank Prize in economics.
But basically, and it was also in many ways that
whole movement was racist, sexist, et cetera. Why because the
world that I described of secure employment that existed up
(28:37):
to that time, and I think this had a lot
to do with it, was a white man's world. And
what happened is the labor force was changing. Women were
getting into the l African Americans both because of demand
and equal opportunity. Okay, And this was a backlash against it.
It was a backlash against Nator and a backlash against
the civil rights movement. So it has to be seen
(29:00):
in that context, although it was often disguised as you know,
mainstream economics, legitimate economic yes, yes. And by the way,
you know, of course it's called liberal and conservative in
the US. You know, the liberal counterpart of that was
a guy named Paul Samuelson. There was no difference really
ultimately between Paul Samuelson and Milton Freeman in terms of
(29:23):
their fundamental economics. They thought, just let the market work
and everything will be fine if it fails. In Paul
Samuels said, Okay, the government should intervene a little bit,
but basically what they missed was the role of the corporation,
for better or worse in the economy. I mean basically,
right now, there's about two thousand companies in the US
(29:46):
that employ five thousand or more people to average about
twenty twenty two thousand. That account for about thirty five
percent of total business sector employment in the US. And
those are the most profitable companies. They pay higher wages.
The investment decisions that they may drive the economy. They
determine what kind of jobs are availed in the economy.
(30:07):
They determine what kind of education we get, They determine
what kind of resources go.
Speaker 4 (30:12):
So if they if they decided.
Speaker 5 (30:14):
And so, yeah, and so, once those companies changed their
their their purpose, they they they they became a big problem.
Speaker 4 (30:25):
And so Friedman was successful in influencing.
Speaker 5 (30:29):
Yeah, it took time, but he was successful and he
was successful. Now here's where the tech industry comes in,
because the tech industry was much more dependent on the
stock market than those old economy companies. Okay, the old
economy companies. There's five functions of the stock market for
(30:50):
a company what they called creation, which is inducing venture
capital to come in. You create companies because you can exit.
Speaker 3 (30:57):
On the stock market.
Speaker 5 (30:59):
There's control that is separating ownership and control, which a
lot of the shareholder value people see as the original
sin of American industry. But it's actually necessary because once
you have owner entrepreneurs who want to pass on the company,
what they did in the United States, they passed on
on to professional managers. Yes, and this actually opened up
(31:19):
the growth of the company. When did that still happening, Well,
that was already come in, That was already by the
nineteen twenties.
Speaker 4 (31:25):
And how do we get rid of them?
Speaker 2 (31:26):
Is the thing because if you look at most major
tech companies, Apple included, MBAs, these people are right now.
Speaker 5 (31:32):
Yeah, but that's the problem, that's the way nbas are educated.
Speaker 3 (31:36):
Now.
Speaker 5 (31:37):
Basically, the people who are running companies in the twenties
and thirties were basic engineers. The thirties, even though the
Great Depression that was incredibly important.
Speaker 4 (31:49):
But the value multiplieres was so much smaller of us.
Speaker 3 (31:52):
Yeah.
Speaker 5 (31:52):
Yeah, but these companies for the US, and this is
true globally, these large companies and critical industries dominated and
you had to be they had to be run professionally,
and yeah, basically you got this separation, so that that's
the second thing control. The third is what it called combination.
(32:12):
You can use your stock to acquire other companies, right.
The fourth is compensation, you can use your stock to
pay people, and the fifth is cash. Most people think
that the role of the stock market is raised cash
for companies. That is not necessarily true, and it certainly
wasn't true historically. Okay, Now, what happened with the rise
of the what I call these new economy companies coming
(32:33):
up basically out of Silicon Valley is they started using
cash the stock market to induce venture capital, They started
using it to acquire other companies. They started using it
to compensate people deep down in terms of stock options,
and particularly in the biotech industry where companies go public
(32:55):
without a product, they raised tons of money on the.
Speaker 4 (32:57):
Side they effectively to so, so yeah, they pay.
Speaker 5 (33:02):
So once they start within that model, you basically are
looking at your stock price all the time, and so
it's hard to resist the shareholder value arguments, particularly when
they're self serving. Now, and once those companies became big,
they all started saying, oh, we got to keep our
(33:23):
stock price up, so I can trace when companies like Intel, Apple, Microsoft,
et cetera started going from just saying all that money
we're bringing in, we got to just put it back
in the company, to oh, no, that company that money
can go out and just boost our stock price. And
then you get a whole system of what called results
(33:46):
in predatory value extraction, which have to do with corporate raiders,
institutional shareholders, pension funds, everybody is trying to get their
yields out of companies and basically support this. And this
is based for the economy as a whole. This means
a huge increase in income inequality driven by the stock market,
(34:09):
making money in the stock market and then looking for
other ways to make that money through private equity, et cetera.
One figure, the top one tenth of one percent of
households in terms of net worth in the United States
about fifteen percent of their assets we're in the stock market.
Speaker 3 (34:25):
In nineteen ninety.
Speaker 5 (34:26):
Now it's about forty five percent of their assets. So
their wealth is very much tied up with the stock market.
The stock market is very hard to crash now because
there's so many people are making so much money out
of money that they have to put it somewhere. And
actually this number of listed stock the companies are shrinking
and through buybacks the shares out there.
Speaker 2 (34:48):
At some point this has to fall apart though, because
surely if everything is based on the value of the stock,
every single large company is effectively at the will of
the stock market, which will mean that the companies will
have eventually stop making things with the purpose of doing
anything of them. Than racing shareholder value does not lead Okay,
death of innovation.
Speaker 5 (35:06):
Yeah, okay, yes it does, but it doesn't happen overnight.
Speaker 4 (35:10):
We're watching it happen now.
Speaker 5 (35:11):
And and so, uh, you start seeing China has a
different model. They start out competing the United States, and
you try to block China. Right, this is a big
problem for the United States because tech companies are so
they're so integrally related with trade with China and manufacturing
and imparting from China.
Speaker 3 (35:30):
This is a total disaster.
Speaker 5 (35:33):
And but but basically what has happened is companies, and
I can have a whole bunch of them, have fallen
behind global competitors in the US because they stuck with
this shareholder value model.
Speaker 3 (35:46):
So the US is.
Speaker 5 (35:47):
Falling behind in a whole range of critical technologies. So
reasons there's no major EVY battery produced in the United States,
the problem of FABS, which I already mentioned. The problem
well Boeing they did forty three billion dollars in buybacks
from twenty thirteen to the week before the second crash.
(36:09):
Jack Welch Boys then yeah, and they had Boeing's Boeing
stock price was at a record level in March March first,
twenty twenty nineteen, ten days before the second crash, and
there was no doubt. I wrote an article on this
in May of twenty nineteen that the.
Speaker 3 (36:28):
Boeing crashes were the result of top.
Speaker 5 (36:31):
Management ignoring issues of safety because it would.
Speaker 6 (36:36):
Hurt the stockprist Right, So I have a theory.
Speaker 2 (36:52):
I'd love to run it by your school, the roll Coombubble.
Right now, I think the tech industry is reckoning with
the fact that they're all no big ideas. Sure the
audience will love this. I do not think general if
AI is the future. I think it is a ginied
up software product based on desperation. But what happens if
the tech industry stops coming up with hypergrowth markets because
(37:13):
they haven't had one for a while, what happens, like,
what happens to these companies stop having new things?
Speaker 5 (37:19):
Well, first of all, were reliant on these things still, Yes,
so even though they're not new things, we're still using
the whole ecosystem.
Speaker 3 (37:30):
You know.
Speaker 5 (37:30):
Again, I use the Apple products, and to Apple is
going to make money off of me because I'm.
Speaker 4 (37:36):
Standing by every iPhone.
Speaker 2 (37:37):
I'm just saying, what if this is I have the
new iPhone with me because I'm a little pig and
I own for Apple every time. What happens if this
is about as good as it gets, if each version
is more incremental, is just more and more incremental, If
it's faster but not that faster, because we're hitting a
wall on CPUs as well, More's lawa is falling apart.
Speaker 5 (37:57):
Well, we don't really have to. I mean it's easy
to answer that question. We get Donald Trump.
Speaker 4 (38:02):
I mean basically, well we have Donald Trump. What happens
off to that?
Speaker 5 (38:06):
Okay, well that will find out because you know this,
you know.
Speaker 2 (38:11):
Say sorry, but perhaps like me whil back, are you
saying that the death of innovation led to Trump?
Speaker 5 (38:16):
No, I'm saying the financialization of the economy. Oh yeah,
so so oh yeah.
Speaker 4 (38:20):
Also the corporate authoritisery.
Speaker 5 (38:21):
Say so, even here's the problem. Even when I put
more stress on, even when there is innovation, the wrong
people are going to grab it. Okay, and the economy
is going to become more financialized, you know, the people
who actually should be sharing in in the first instance,
employees of those companies. They can be laid off and
(38:43):
in some elon musk one hundred and forty thousand people
at Tesla the end of last year, just like that,
laid off twenty thousand people.
Speaker 2 (38:53):
Yeah. Yeah, But my point is if they have no
other vehicles for growth, because you look at Microsoft for example,
they are able to They've had I think a year
of a year growth of over lower ten percents.
Speaker 4 (39:04):
You these companies are slowing down.
Speaker 3 (39:06):
Yeah.
Speaker 5 (39:06):
Well, first of all, I don't think that the companies
themselves don't need to grow bigger and bigger. They could
spin off other companies, okay, And I think that that's
a model that works very well because you create incentives
for people in those companies to become their own bosses,
to become the head of other.
Speaker 4 (39:24):
If that's not their culture. Though, the reason I'm pushing isn't.
Speaker 2 (39:27):
Yeah, the reason I'm pushing on this is I'm thinking Microsoft,
I'm thinking Meta especially, I'm thinking I mean Cisco as well,
and even Oracle. I mean these companies don't have new innovations.
Oracles doing a ripe smokes up, became the largest customer,
they make data sentence, fine, but what if they stop
being able to grow revenue every year? Like that is
(39:47):
the real question.
Speaker 5 (39:48):
What happens, Well, they'll lay off some of their workers,
you know, that's that's the first thing that is not enough. Well,
then they might you know, they might go out of existence.
I mean this has happened to some companies who Sun Microsystems. Yeah, okay,
(40:09):
so you know there are companies that that that just
don't make it. And you know, but once once you
have made it, it's very hard to disappear in ten
years or twenty years, of course, because you have that
that that demand base, and you have the capabilities, you
(40:29):
have very very basically the barriers to entry. You have
a whole lot of advantages that allow you to dominate.
And the question is, you know, and then if you
take the global competitors and you try to just shut
them out, then you have a problem.
Speaker 2 (40:46):
I mean, the I think my bigger point is that
in the lost ten years, the tech industry has categorically
failed to find any hypergrowth movement that matches smartphones, that
matches clouds software. They've not had any of them to
create the level of value that those did. And they
are squeezing everything. And my concern is what happens if
(41:12):
they don't have anything left to squeeze Because they're all Microsoft, METSA,
all these companies. They've laid up tens of thousands of people,
they've tried that, and they could lay off more. And
now they're putting billions into a two hundred billion into.
Speaker 4 (41:23):
Capex into that to lose money. I just feel like
we're in a corporate psychosis.
Speaker 5 (41:27):
Well see the other Another way to answer this question
is is today, ultimately, what is the economy run for
the economy? Actually?
Speaker 3 (41:39):
Is this a normative?
Speaker 5 (41:41):
In my view, should be run to provide services to
people that are not profitable like healthcare, education, uh, you know,
care for all people whatever. That's what a prosperous economy
should do. Now, these goods producing companies, these innovative companies,
have a lot of capability produced through those markets. But
(42:04):
that means the government becomes a big source or it's
either governments or you're well paid employees, right become sources
of demand for those products. And that's the opportunity that's
been missed. Yeah, yeah, And and what you have now
(42:25):
is with all this financialization of the whole economy, with
all this money being funneled out of these highly successful
goods producing companies successful in terms of profits, you have
money looking money looking to make more money. And you
have the whole which has been written about a lot recently,
private equity moving into healthcare, for example, moving into areas
(42:47):
which would not be for profit at all, buying up
doctors office, thensince's office, you know, yeh, basically nursing, labor supply,
what have you. A lot of stuff being written about
that now, and a lot of it is kind of
under the radar because you don't even know who owns
these various companies that the corporate structures are so paid.
But basically what should have been happening all along was
(43:12):
that when you became prosperous, this was really taking some
of those profits, not just paying your workers better, creating
more stable employment upwards socio economic ability. We have downwards
socio economic ability for a lot of a lot of
big proportion of the population, into more education, into more
producing things that people need but aren't necessarily the next
(43:37):
big profitable product. Actually, some of those would become profitable
products if in fact you have enough government demand for
them and you are the companies as as in the military.
So that's what that's what should have been happening. That's
what's not been happening.
Speaker 4 (43:52):
So how do we make it happen? How do we
force them?
Speaker 5 (43:55):
Well, okay, so you have to change the whole way
in which companies allocate resources.
Speaker 4 (43:59):
So how do you do that?
Speaker 3 (44:00):
Well, so'm I.
Speaker 5 (44:03):
If you wanted to talk practically, you say, you cannot
do buybacks anymore.
Speaker 3 (44:07):
You're manipulating the market. There should be a need.
Speaker 5 (44:09):
This, this is a phenomenon. Buybacks are past dividends as
distribut starts of distribution shareholders in nineteen ninety seven. They're
much more volatile, but way bigger than dividends.
Speaker 4 (44:20):
But it's bigger than just by this.
Speaker 3 (44:23):
Well, okay, but that's the start. Okay.
Speaker 5 (44:26):
You stop tying executive pay to the stock market. You
tie executive paid to the success of the company in
terms of employing people, keeping people employed, innovative products. You
change corporate boards. Okay, you put people on corporate boards
who have a real interest in that company's position in
(44:48):
the economy. Okay, you change the tax system. The tax
system rewards value extraction rather than value creation. Uh. And
you basically, and this I think is the most important thing,
you figure out how to mobilize all the resources in
(45:08):
the economy, the human resources in particular, or what I
call collective and cumulative learning. When you get down to it,
innovation is about people getting together collectively.
Speaker 3 (45:19):
And learning cumulatively.
Speaker 5 (45:21):
That is, what you learned yesterday determines what you can
learn today. And what happens is when these companies stop
retaining and reinvesting, you just have all kinds of people
with capabilities who are not living up using those capabilities,
(45:43):
or in the end never even get those capabilities because
money doesn't go back through the education. I mean the
US at a point in time in the nineteen eighties
when it was necessary to everybody knew you had to
really up the educational system. And the US was absolutely
and still is ideally situated for that because of the
(46:07):
history of higher education in the United States, which goes
back to something called the Lion Grand colleges, which really
came out in the late nineteenth century and were the
bedrock of innovation in the US economy at that point
in time. The huge investments that should have been made
were not made. Public education was virtually in every state
(46:28):
free before then became expensive student loans. The interest rates
that extortionate in the US from the government. Basically it
was white people not wanting to fund other people.
Speaker 3 (46:40):
For upward mobilities.
Speaker 5 (46:41):
So that's definitely yeah, and that's when you now, how
was that resolved. It was resolved through the fact that Asia,
in particular in the tech industry, was educating people and
those people were in the United States and I think
to the benefit of them and benefit of the United States.
(47:04):
So I'm not saying that Asians in some case took
any jobs away from anybody they but they became an
available labor supply through what's called L one visas, H
one B VISUS permanent VISUS employee and preference visas. I've
got all the data on this. This is all encapsulated
in the Immigration Act of nineteen ninety and for the
(47:27):
tech industry, they were now off the hook in terms
of US economy for saying, oh, we have to ensure
that higher education is available for African Americans, available for
white families who are coming out of low income that
(47:48):
we have to be sure that this system is available
for upwer mobility. They took a walk on that, and
they were able to take a walk on that because
they were part of the global system.
Speaker 3 (48:01):
That's what I mean.
Speaker 5 (48:01):
It's very ironic now that United States is in this
conflict with things.
Speaker 4 (48:06):
It feels like we've gone yeah, socially regressive.
Speaker 5 (48:09):
Absolutely absolutely, And what you see is concentration on the
top downwards socioeconomic mobility for people particularly who have no
more than high school educations. And that's why I say,
that's why it leads to Trump. Basically, it's no big mystery.
Once you understand the concentration on the top, the money
(48:30):
that will go, and.
Speaker 2 (48:31):
I imagine to some extent, even if you don't understand it,
you look at the system, you look at the current
political apparatus. Why would you trust authority even if Trump
is a he's obviously not going to do a whole
bunch of stuff, and he's going to do much worse.
It's almost like you, I feel like people need to
realize everything you've discussed today, is just describing how the
(48:53):
system fucks regular people, how the system has somehow we
were more progressive in America in the seventy's corporate why
it's just it's very worrying. So I'm gonna end on
a nice note. What actually should give people hope?
Speaker 4 (49:07):
Where can people find it right now? In your opinion?
Speaker 3 (49:10):
Ah?
Speaker 5 (49:11):
Well, that's hard to say right now, I mean because
because I mean the you know, there was a notion
that with all the opposition before the election and before
before Biden had that disasters debate. Okay, you know, he
(49:32):
had tried to push policies in a much more progressive way,
and I think it's true.
Speaker 3 (49:35):
Yeah, they were trying.
Speaker 5 (49:36):
They couldn't get any of the family stuff passed, but
they were trying to do it. They got the infrastructure
infrastructure Builds pass, et cetera, Inflation Reduction Act, starting finally
to to try to negotiate health care prices. Basically, they
were trying to do some things that got a resounding
no from the electorate. And in fact, that part of
(49:59):
the regressive policy was not part of the campaign. And
certainly Joe Biden was a big fan of this stuff
on binding buybacks back when he was vice president. I'll
tell you a little story about that. We can end
on this, which is not that. Basically, in twenty sixteen,
(50:21):
when he was still vice president, he wrote an op
ed in the New York Times in the Wall Street
Journal about stock buybacks executive pay and said, we have
to rain all this stuff in. This is really screwing
up the economy. The future of the economy depends on it.
In that article he named one person that was me.
It said, according to economist, William was on at Comma,
(50:42):
and then he had data from the article I mentioned
in twenty fourteen. I looked at it a couple of
years ago when a journalist contacted me and I said, oh, Biden,
when he was vice president was I really thought this
was a problem. Now he's not saying anything about it.
And I said, look at the article. I looked at
the article and it said, according to economists, blank space Comma,
(51:04):
someone had actually hacked out my name.
Speaker 2 (51:07):
Yes, it feels like it. We need a populist movement,
then straight up pro no.
Speaker 5 (51:12):
Basically, Basically, the when the Democrats got into power, and
this happened under Obama, It's happened.
Speaker 3 (51:22):
It was happened under Clinton.
Speaker 5 (51:24):
Uh, they have just cosied up to Wall Street, cosied
up to rich people. Basically, they do not have a
critique of shareholder value. There is nothing coming out of
the of from the Democrats when they are in power
in particular. Uh, and that that is that it's confronting
this and I think it's now basically comfortull circle in
(51:47):
terms of the people being affected by the lack of
upward mobility, the lack of job security, living people living
paycheck to paycheck while other people are getting richer and richer.
Finding Okay, we'll just take someone who you know with
a hope that they're going to do something different. Of
course they're not. So yeah, So what's what's the where's
(52:09):
the optimism of courts? We need, we need a progressive movement.
Speaker 3 (52:13):
But but it is, Yeah.
Speaker 2 (52:15):
I feel like you can find hope in the fact
that these ideas will become more prevalent because at some point,
we mean, we need to review these systems. We need
to also realize that worker power will make cooler shit,
it will make more innovation. William, thank you so much
for joining me, and everyone, thank you so much for
joining us today for the first live episode of Better Offline.
Speaker 4 (52:34):
From the beautiful country of Portugal. Websummit.
Speaker 1 (52:37):
Thank you everyone, Thanks, thank you for listening to Better Offline.
Speaker 2 (52:49):
The editor and composer of the Better Offline theme song
is Matasowski. You can check out more of his music
and audio projects at Mattasowski dot com, m A T
T O.
Speaker 1 (52:58):
S O W s ki dot com.
Speaker 2 (53:02):
You can email me at easy at Better offline dot
com or visit Better Offline dot com to find more
podcast links and of course, my newsletter. I also really
recommend you go to chat dot where's youreaed dot at
to visit the discord, and go to our slash.
Speaker 1 (53:14):
Better Offline to check out I'll Reddit.
Speaker 4 (53:17):
Thank you so much for listening.
Speaker 1 (53:19):
Better Offline is a production of cool Zone Media.
Speaker 3 (53:22):
For more from cool Zone Media, visit our website cool
Zonemedia dot com, or check us out on the iHeartRadio app,
Apple Podcasts, or wherever you get your podcasts.
Host
Ed Zitron
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