 I was sad to hear about Deet Sings passing. He was a great economist. Mike knew him, my friend Mike here. A lot better than I did, but I saw him all over the world actually, even when he was, you know, he wouldn't think he could travel anywhere. He was quite a person. Okay, what I'm going to try to do is, there's a lot of material I'm going to cover, and I'm going to go over it some quite quickly, because there is a theoretical framework that I'm going to present very quickly. There is a methodology, which I call integrating theory and history, so that you have to kind of use theory to understand the changing world. And basically what we want to do in this integration of theory and history is something that I started calling catching up with history. Actually, I'm an economist. I was never trained as a historian. I was at one point president of the Business History Conference in the United States, which is a conference of business historians. But I got into looking at history simply because we live in a world of change, and if we don't understand how things are changing, then we don't understand the world. And catching up with history is trying to sort of go back in time, not to zero AD or whatever, but go back in time to see how things are evolving so that when the world starts to change and we see it happening all around us, we're not just sitting there dumbfounded. We can at least enter into debate fairly quickly, learn what we need to learn in order to have something significant to say. Now, it starts with the economic development challenge, and probably most economists would agree that you want to get stable and equitable growth. And then the question is how do you achieve this? I started calling this sustainable prosperity at some point. We don't seem to have it now. We had a period after World War II where there was a promise of sustainable prosperity. Some people called it the Golden Era. And by the 1960s, which is when I started studying economics, there were a lot of economists who actually were much better in general than the economists who are in economics departments now, I should say, who thought that the advanced countries offered some lessons to the less developed countries. And development economics was a big field. It's something that I studied at that time as an undergraduate and is a grad student here at London School of Economics. But it then faded in the 1970s with the stagflation of the 1970s and people were saying, well, what are we trying to emulate? What is going on in these advanced economies? And I came to the conclusion that economists, even the good ones, didn't really have that much of a right to talk about economic development because they didn't understand how the advanced economies had become rich and that this was the task. And it wasn't just because we wanted to understand how advanced economies became rich. We wanted to understand the whole problem of economic development. In the 80s and 90s, then, people were surprised what they call the East Asian miracle. And I started doing a lot of work on Japan and I'd go to Japan and talk to people, particularly who were doing the history of business in Japan and they would say to me, we don't like this term miracle because it's something you can't explain and I agree with them entirely. The very use of the term is saying it's something you don't know what you're talking about. An economist, as we know, if you follow that debate coming out of the World Bank didn't really know what they were talking about. Then, meanwhile, by the 19th, by the turn of the centuries, China appears on the scene and as people have talked about China in its three decades of very high-speed growth, somehow they forget that this is a communist country that they're calling the most dynamic capitalist country in the world. I also forget the fact that it seems that the former Soviet Union was supposed to be a superpower when we kind of grew up seeing the United States in the Soviet Union and competing, at least politically and also potentially economically in the world as a paper tiger. I mean, there are no major companies that have come out of the former Soviet Union other than commodities companies in the world today. You can go look at the global 1000. You won't find any. China has some. There's a big difference here in the nature of dynamic development. Then when we come to the current decade, as it's unfolding, we see that the advanced economies aren't doing too well. They really don't know where they're going. Even though, as a point I make in the United States, the United States is twice as rich now on a real GDP per capita basis than it was 40 years ago, people don't feel that way. That's for sure. The increase in income inequality, the loss of what we call middle class jobs just goes on and on and it needs explanation. Now, here's the bad news from well-trained economists, although they didn't really pay that much attention to this book. But the problem is, if you're really well-trained as an economist and really believe what you learn, you won't understand the modern economy, any modern economy. Because modern economies are social phenomena based on organization and markets are the outcome of successful capitalist development. That's really one of the main messages. There's three types of social organizations, of organizations that invest in the economy, government agencies, household families, which make huge long-term investments in the face of uncertainty, and business enterprises. If you have government agencies putting in all this infrastructure, all the knowledge base in place, and you don't ultimately get products that people want, the prices they can afford or need, the prices that they have the money to spend on them, then you're not going to get higher standards of living. I think the ability of families then to invest in the labor force is part of a dynamic, but that's really driven very much by the ability to basically get the government to help subsidize that process. So every government in the world and every country in the world where you have a decent development has had huge investments in education often way ahead of demand. To the point you have brain drains and then they get reversed in some cases, in some cases not. But also families need to have good incomes coming from some employment and most of that employment comes from the business sector. And one of the things that I focused on quite early on was the importance of understanding business to this process. And so this goes against even a lot of people in political economy who talk about states and markets and somehow forget that there are business enterprises that really dominate the economy and often there's size of whole countries. I mean some of the business enterprises that really at some point either generate a lot of innovation or at some points if they don't start keep investing we get into real trouble. And that's where I get into some of the recent work I've been doing on the failure of American companies, the most dominant companies often got to their positions by being very highly innovative in the past to continue to make investments in innovation. This is about economics. So economics is about resource allocation but it's one where it says who actually makes those decisions about allocating resource are very important. So there's people who are making strategic decisions and we have to know who they are and matters. It's not just people allocating capital to the most profitable uses. They have to actually create those profitable uses. To do that we have to know what kind of investments they make and they have to understand what kind of investments they make. It's often the most important investments are in human capital and how the returns from those investments are distributed. So this is all about economics. It's not about something else. The theory of the market economy which is neoclassical economic theory basically assumes all these questions away because it really doesn't matter. The notion is you run a company to make a profit. You have their capabilities out there. You employ those capabilities. You pay the market price. In the end all firms are the same basically because nobody does anything to make them different. That's not the economy we know. So we have to think about organizations not markets. And so every time I hear the term market imperfection often by people who have the same problem with the lack of sustainable prosperity in the economy I kind of cringe a bit and say are you saying that there's something out there called perfect markets? That's a benchmark even if it's impossible. No, that's wrong. You've got to understand organizations or when I hear people talk about market failures is if the market could achieve some equitable distribution of income. No, it doesn't do that. It's organizations actually when they work well that I would say are the foundation of having equitable and stable growth. So this is what we need to understand. And by the way I come from a very critical tradition in economics but I think in this again my friend Mike here thumb we have in common we'd be seen as pro-business. Which is actually I think very important because you have to understand being pro-business that if you don't have business operating properly in the economy you've got a big problem. Okay, now here are all the people you kind of know. They are all too old for me to have met any of them are going to show you two people coming up who I did know were not with us anymore. But there are different ideas out there about what drives the capitalist economy and it's very important to kind of consider these ideas. But in the end after having actually taught history of economic thought in many cases a long time ago I taught it at Harvard University. The PhD students hadn't been taught there for 10 years you can believe it or not even in the 1970s. I came to this conclusion that the people who were talking about the growth of the firm were probably the most important social scientists of the 20th century from the point of view of what I was doing and there's one person here Edith Penrose who we had a conference that so as last November was I think a very successful conference. She had wrote this path breaking book The Theory of the Growth of the Firm and as I say here she actually didn't see it as necessarily central to the whole corpus of economics but she should have because I think if you don't understand how firms grow you don't understand the modern economy. Capitalist, communist, whatever you're talking about. And this guy Alfred Chandler who I got to know very well in the 1980s I was never a student of his but I found him at Harvard Business School and I was around there for a long time I learned a whole lot about him he was a capitalism, American business you can sit down with him he knew what he was talking about and he inspired a whole bunch of people to do really serious research that's out there that I've drawn on and synthesized in many cases. Now in doing this I came to it as an economist saying okay we need theory but we need theory both as a summary of what we think we know now and as a guide what we need to know. This is very different than what I was taught as an economist even starting in the 1960s because what dominated then dominates now is Milton Friedman's notion of positive economics that doesn't matter what your assumptions are as long as your predictions are correct the problem is most of the time economist predictions aren't correct and then they don't know why they're not correct because they don't know where the assumptions came from they came from the fact that some other economists had made some assumptions and they just are following on. So they have no methodology for understanding the economy and it's not surprising that they don't. So that's the main thing we want to understand the economy. We need to understand the innovation process because getting higher quality products that then you get a large market share that's what drives productivity growth in the economy that's what allows people to get higher incomes being part of that process that drives a robust middle class and if you don't have what I call innovative enterprise you don't have a successful economy. There are certain characteristics of innovation uncertain it can't be done optimally so anytime economists say that optimal this and optimal that people even talk about optimal innovation well that's oxymoron you don't know when you go into something what the outcome is going to be you just have to do it. When you actually are successful in innovation it generally is a collective process it requires a division of labor and people working together to achieve a certain end and it takes time. In what you learned yesterday it allows you to determines what you can learn today. When it's successful you actually can potentially make everybody better off and I won't go through this but you can have a lot of stakeholders in the economy a lot of participants in the economy sharing in the gains of innovation that doesn't necessarily happen but it can happen. Now here is the way I talk about this and this should be in every introductory economics textbook because I've been talking about this for I don't know how long but basically you start with the economist notion that there's a limit to growth by the firm buying inputs on the market and even though it's spreading out at fixed cost the cost curve becomes U shape economists love this because it gives them equilibrium and there's a defined size of the firm and a lot of other things follow it then we'll get into here what's on the left-hand side or I guess your right-hand side is is disrupting that. It's a firm that comes along and says we're not going to do things the same way everybody's doing and basically here is the way we can understand how innovation over competes optimization and obviously in this context optimization becomes an ideologically loaded world. So somebody has this idea that they're going to make an investment and they're going to out-compete the optimizing firm. Now it tends to be at low levels of output high fixed cost for two reasons. You have to integrate more activities and it takes time. Fixed costs are also a function of time so that if you take from here two years, three years, four years you're building up the fixed cost of this investment strategy. Okay and so you make this investment but the reason I have a dotted line is you can't say nobody can say whether it's going to be successful. Okay so after a period of time, let's call it a year whatever, you see that in fact your costs start increasing and there's a limit to your growth. And let's say there's an entrepreneur who really believes in this process and a financier, a venture capitalist home who is funding this thing and a venture capitalist said hey I thought you were going to compete the existing firms and you're not doing that what's going on here and you say well we got a problem because as we try to integrate and not invest in certain things and just buy them on the market our costs are going to rise. I would say that insofar as that happens it's usually not labor but it has to do with materials particular materials that are in short supply. So that's the bad news but the good news is that we learn something in doing this that we have to invest in that input bound and that U shaped cost curve and the good news is that we know we have to do it the bad news we've got to put more money into it and basically so you start at being at a competitive disadvantage after one period but then you continue to make these investments it may never be successful you may have to go through 100 iterations of this process and before it's successful may as in many pharmaceutical drugs take 20 years before it's successful but there's a learning process going on here and that's basically innovation I think this would have been what Schumpeter had in mind in talking about innovation now there's three things that are going on here strategy organization finance someone has to make a decision to confront that uncertainty and it's not going to be just anybody it's going to be someone who knows the industry and who believes that they can produce a product that doesn't exist you're going to have to put together an organization and that organization is one of the things I learned from Chandler that's part of the high fixed cost is keeping that organization intact keeping the people employed keeping not just the plant and equipment which is what economists usually look at there's an organization of people and you're going to have to sustain that process with finance that at the beginning is fungible you can put it here or there but has to be tied up until success so what many people call page and capital so I get from this framework of the innovative enterprise three social conditions of innovation enterprise strategic control and matters who is making these decisions their incentives and abilities in the face of uncertainty organizational integration you have to integrate and mobilize the skills and effort of people in a hierarchical functional division of labor create incentives for them to be involved in this process and financial commitment in a context where finance money is liquid you have to get it committed to this process and so that's when I look at innovation process in particular context particular times places even in terms of national economies as I mentioned briefly in a minute I look for these social conditions of innovative enterprise now I have also I can send these slides around I have a lot of questions here that we ask in looking at these these social conditions about who makes investments what kind of people you're investing in etc what sources of finance industries matter a whole lot investing in a software application for say an Apple computer our device is very different than a biopharmaceutical drug or investing in the industrial industry there are different technologies different dynamics of technological change different market conditions sometimes it's a government that is your main source of market which I'll come to in a minute and there are different competitive editions of who you're competing against and those have to be taken into account so we look at that whenever we look at particular industries in different different times and places okay so this kind of summarizes this in the demand side and this is the way I have looked at it basically in advanced countries and I would say the United States is foremost among them mainly because the state is always there investing for decades in new technology before they actually businesses pick them up and get commercialized in high tech fields at least and also the investment of the United States in education goes back to the 19th century in relation to public education there's a whole lot of examples of this and but the state also stands there in many cases usually through the military as a source of demand when you're at an early stage in development of a technology and you need a high income price and sensitive market if I had time I could go through other examples that don't involve the state calculators is a good one at some point how those technologies get developed and some companies take them to a middle income price matters market and at a later point they become commodities and actually innovative companies get out of them and they might end up going to a low wage country which starts investing in that particular product now a lot of the East Asian development including Japan even though people started with Chalmers Johnson particularly his book meeting in the Japanese miracle talked about the developmental state in Japan the United States was Japan's developmental state but Japan and other countries like Germany Japan in the late 19th century learned to transfer technologies and it was actually companies that sent people abroad often for years and they all came back there was never a brain drain came back and developed and brought a lot of those technologies back to Japan Japan then started really at the low end bringing the technologies back for an income constrained country actually when they tried to do this with the military of course in the 20s and 30s they ran a disaster but after World War II you can think of this in terms of cars and consumer electronics they were perusing for a very income constrained country they had a reputation for low quality and that was kind of ironic the story that which you still heard in the 1970s they said there was some place in Japan that named itself USA so they could say made in USA so in the 60s Japanese goods were shoddy goods by the late 70s early 80s and cars and other things they're high quality goods that didn't just happen overnight there's actually the research many people have done including some that I've been involved in looked at that process building up this the ability to do quality production including exporting the management methods that they did in the Kaizen, Just in Time, Inventory Systems etc. in the 1980s and it had a long history but it was constrained by the incomes of the Japanese which were in the 60s still about a fifth in per capita basis of the US once they got the foreign markets they started moving up and got into these middle income price matters markets with their small cars and then quickly saw that people would pay a little extra for quality they didn't want their cars rusting out they wanted the cars to last longer etc. and by 1989 Nissan and Toyota came up with cars that caused the Germans a lot of problems with the infinity and Lexus and they could move up in terms of quality so that's kind of the example and this is happening all the time in countries where you don't have actually a very strong developmental state I think Korea actually South Korea has a stronger in terms of technology developmental state than Japan ever had and China is developing such a diverse country but there's different paths to development but they often are going in this direction at least that's what's happening in East Asia now this is something we talked about this afternoon this picture that I showed you about innovating firms outcompeting authorizing firms that can be used to explain the conditions why you need to support infant industries why at a low level of income output when you're just starting to develop an industry you have to subsidize industry or create tariff barriers for good countries that are already developed there those products that don't just flood your market and then the question is what do you get out of that and you can't just say well it's going to work you have to have a theory of innovative enterprise to see how innovation actually occurs and in the early 90s really talking about Japanese development we started using the term indigenous innovation I'm not sure where I got the term from but this seems like an important phenomenon in Japan that borrowing or transferring really technology from broad improving it coming up with better products which even happened in the early 20th century in things like engines for ships that this was an important phenomenon we started studying this in the case of China and there was a fellow named Qiwen Liu this book came out but this is really a pioneering book never got translated into Chinese but it was about indigenous innovation in China and actually in 2006 the Chinese government adopted the policy official policy through the Ministry of Science and Technology of Indigenous Innovation and I won't go into it but there is actually a line from his work to adopting that policy I think academic work can have some influence the developmental state again I think the notion of eastern east Asian developmental states has been overdone in turn from a technology point of view from a finance point of view it's very real but from a technology point of view it was transferred much more from the United States which of course there is a notion the United States that's just ignorance total ignorance in the part of most people anybody would argue that there is an interaction we have to understand between innovative enterprises and developmental states there is a partnership but ultimately if the innovative enterprise doesn't carry through in generating the products and in getting a large market share you are not going to have high standards of living you can't do it without the innovative enterprise there is a lot a lot of the history of economics basically including the people I showed before that has gotten left behind by neopascal economists including the work of Marx but one of the things I learned in the 70s when as a radical economist what Marx has to say in my view is let's not start with what Marx has to say for today let's see what he had to say for the 19th century did he get it right back then let's look at theory and history in the 19th century and I found that in fact Marx got it wrong I wouldn't have gotten to why he got it wrong if I hadn't had Marx's framework so it was this interaction of theory and history and then when you come to the 20th century you have penrose having a much more modest agenda actually got it right not universally but in its leading sectors workers share in the gains capitalists need the workers they need to train the workers or they need to workers even in the case of 19th century Britain train themselves and they need to share the productivity gains in order to become world leaders and everybody is better off now this was a paper that was published in 1979 on Marx and technology in the 19th century where Marx argued that technological development reproduces a domination of capital over labor on an ever more oppressive scale and this is basically a basic tenet of Marxian economics of technology being used to dominate workers forcing workers to become commodities and just getting surplus value out of that intensification of labor and Marx to his credit tried to say there's a lot of history in Marx a lot of Marx's skip over the history but if you read it you can say did that actually happen so this is one of the statements he says it would be possible to write quite a history of the inventions made since 1830 for the sole purpose of supplying capital with weapons against the revolts of the working class and ahead of these I don't know if you've heard of self-acting mules but you'll see I became a kind of world expert in self-acting mules because of this statement because it opened up a new epoch in the automatic system so I started to say well what happened with self-acting mules now I can't go into all that except to show you this picture this is a mule spinning room there's actually a fairly complicated technology these machines made Britain the workshop of the world in the 19th century they used the mule spinner they called them the minder with the self-acting mule hired these people there's actually three people there one is kind of shadowy there are pieces and this guy here is a cleaning underneath it's called a doffer and it turned out that Marx was just wrong capital this machine did not commoditize labor the division of labor in which labor actually the minder hired people remained well into the 20th century this became a way in which you got high productivity out of the machines and Britain Eric Habsbaum wrote the book Age of Empire if you want to understand Britain in the 19th century you have to understand cotton and he was right now it happens right here I guess it was about 36 years ago I presented this research at Eric Habsbaum's seminar at the Institute of Historical Studies and a few years later Eric Habsbaum had this statement in his book because he wrote about the labor aristocracy and the fact that by the late 19th century a lot of British workers were actually doing pretty well and this became a kind of a puzzle for Marxist historians and Marxians who paid attention to history and he made this statement about what Lausanne said it actually wasn't quite right because if you look at it, he said that in the 1930s this group of workers lost their original privileges that didn't happen they never got rid of the skilled workers they never got rid of the way in which they organized production and then he says that in the long term it was very costly to British capitalism you didn't get modern management methods because too many skills were on the shop floor which was actually something I think quite insightful for a Marxian historian to be saying but it was very long term in the late 19th century there were huge productivity benefits of having the workers organize production and sharing the gains with them this was true also and shifted much more the advantage to the United States when you had the managerial revolution in American business and go back to Chandler's book The Visible Hand if you haven't read it, you should read it the managerial revolution in American business that ended around 1920 the capitalists basically were not there and the capitalists who were still there trying to run the show like Henry Ford they almost drove their companies into the ground it was professional managers who were running American companies reinvesting in their companies and helping with the growth of the American economy so by the 1950s you have people talking about this including Penrose and these kind of books which this popular book he became an urban sociologist William H. White and a well known sociologist C. Wright Mills about this middle class in the United States and this was the foundation of American prosperity the large corporations sharing the gains with these organization men and they were largely men they were also not just white color they were white male that is it was a particular group of people that shared in the gains but it was what drove the United States to be the world's largest economy I have a more general framework in which I talk about this in terms of institutions and the social conditions of innovative enterprise and all I'll say about that is that we can look at the national economies what we call governance institutions the way in which you have the rights and responsibilities of running companies and map that on issues to do with strategic control we can look at what are called employment institutions ways in which people are hired rules about hiring and firing and we can map that on issues of organizational integration and we can look at investment institutions how finance is allocated in the economy and the rules about that and what you can do and cannot do with finance and map that on issues of financial commitment so there's a framework in which we can look across countries over time and I haven't done all this research myself but you can actually integrate a lot of research in different times different places on what actually is going on in economies and rise and fall leadership and ultimately issues of economic development from this framework I can't convince you of that here I can just say that I found it very useful now in all this you've got to actually look at large firms at least if once you see the economies that have become successful I don't care where it is and even in a place kind of exception is a third Italy where you have lots of small firms but ultimately there's a coordinating mechanism for those districts and there's certain industries where small firms can survive and also when there's certain ideology but even then there's a lot of large firms like Fiat and some of the big oil companies etc that you find in a country like Italy but it's not that you only look at large firms but if you miss them and you don't understand how they became large you have a problem now these are data they no longer put these out and you see here if you just take even 5,000 or more I mean 500 or more employees is already a large firm and that's 50% of business employment in the United States 56% of payrolls and 62% of revenues lots of smaller firms are going to depend on what those investment allocation resources by those larger firms now this is getting into a particular application of this area that the US economy and saw it go from what I call retain and reinvest regime where you were building up the economy large firms grew large by reinvesting the economy and that was the norm to a regime of down size and distribute these are terms that I kind of came up with work with Mario Sullivan in the 1990s and unfortunately it's a very good framework for understanding the US economy and I say unfortunately because this is a graph many people have used this looking at wages and productivity and in the post-war two decades wages tracked productivity in the United States and then there was this divergence which has gone on and this divergence is reflected in things that Thomas Piketty has talked about of concentration of income at the top and things that people have noticed who were worried about labor since the 1980s the erosion of middle class jobs and I would argue that what was going on when wages were tracking productivity is workers were sharing in the gains of large corporations and companies in general if you retain people and retain them and you got a higher standard of living that drove wages up in the economy anybody who wanted that kind of labor had to compete with what the leading companies were doing for that labor and if they couldn't they couldn't just stay in business that changed quite dramatically in the 1980s and here economics played a role at least Penrose didn't her work summarize that what was going on but this guy actually Michael Jensen he played a role in not obviously there were lots of other things going on in terms of the way the economy had changed in at least legitimizing what I call the down size and distribute regime this article that graph is from is published in Harvard business review last September I can tell you that it was the first time I ever even tried to get an article on Harvard business review they approached me went through over a year and a half of working on the article and I think it came out very well and it got published and it had an impact and much more impact than everything in my whole career but I got interviewed this is someone I know very well in Paramore did an interview with me where she said you've been studying stock buybacks which is the thing I focus on in that article for the over the last year what exactly are they and why are you so interested in them so I responded at least being in my responses let me start by answering the second part of your question that's why I'm interested in them because I've just been studying stock buybacks for the last 30 years I'd be bored out of my mind and I then went on to talk about my involvement particularly at Harvard business school with business history group really consolidating my understanding of the role of big business in driving the growth of the US economy and a trend toward somewhat more equality after in the post-war two decades and then I saw and I learned some crucial lessons about this which I then went on to enumerate and but basically the stock market was not important in the rise of capitalism it never has funded really on any significant way even back in the early 20th century the rise of big business the critical constraint was managerial capability and it was a separation of ownership control which of course documented in 1932 by Burley and Means in a classic book it's like Penrose book is a classic book everybody cites but nobody's read it was documented at time as a separation of ownership control Burley and Means if you know that book they thought it was the rise of big business because one person didn't have enough money to invest in this business that was not the reason it was because you needed to have professional managers running these companies if they were going to surprise and a set of institutions responded to that in the United States in a sense quite unexpectedly because the people who became the dominant people in companies by the 1920s were white angle sacks and Protestant males who had been kind of the Tocqueville when he had gone to the United States in the early 19th century these were the young men of the individualists and somehow they became the organization men and they drove the development of the economy the other thing however just as I was really consolidating my understanding of this and was that I saw shareholder value ideology a witness that come into Harvard Business School it was not there in 1984 it was there in 1986 and by 1990 it was totally dominant in the teaching of MBAs and executives the vast majority of Harvard Business School professors did not believe it I still meet some of them now who said how did this happen I said how did you let them hire Michael Jensen and let this kind of ideology become dominant Harvard Business School maybe they couldn't have controlled it because of the broader financialization of the economy but it happened the manifestation of this is what you might call the buyback binge and for the past decade it's minus net equity issues in the United States are minus of almost 400 billion dollars this is from federal reserve flow funds data so about 4 trillion dollars net has flown out of companies on the stock market and ultimately fund a lot of gambling in the financial sector and these are basically people going to work everyday producing value and the money is coming out going to people generally have had nothing to do with building up those companies and using it to enrich themselves and to actually go up after more money so I go through this change this is actually the same same companies back in 1981 and I could trace through the growth of buybacks from being insignificant in the early 1980s to become surpassing dividends as a form of distribution to shareholders in 1997 much more volatile but dividends have not gone down both have gone up and the result is that for many large companies in a variety of industries for the decade 2004 2013 the 25 largest repurchasers in the United States for most of them it's more than 100% of their profits are going into distribution to shareholders they're selling off assets they're now borrowing money to do this they're firing workers to do it there's a lot of ways you can get over 100% and well over 100% this has become systemic so very quickly what are they these are mostly open market repurchases that the executives say we want to go buyback our stock on the market there's a difference which is important to understand between companies announcing a program that are going to buy back so much stock over a certain period of time and then actually doing the buybacks which is the actual manipulation of the market because we don't know when they do it this security exchange commission the so-called regulatory agency doesn't know when they're doing it there are some people to know the top executives know I think the hedge funds can figure it out and wherever you see buybacks there's some hedge funds there egging them on sometimes with people on the board but that's the way it worked and it's allowed by the SEC in fact in November of 1982 this rule 10B18 which is probably the most damaging let's say regulatory rule or deregulatory rule that was ever passed in the United States that no one ever heard of until I think I brought it to light through this research basically says that companies can legally manipulate the market so they can do up to 25% of their average daily trading volume for the last four weeks for ExxonMobil which is the top of the list that would be about 250 million a day and they can do it day after day after day Apple can do 1.5 billion a day and nobody knows when they're doing them and if they go over that amount this notion of a safe harbor there's no presumption that they're necessarily manipulating the market now this turned out when we looked at the history of this to be what some people end up calling a regulatory about face I'll come to that in a minute and what I do in the Harvard business review article the SEC how it changed is I go through some of the reasons that are given for buybacks and they just don't hold water so one is that stock is undervalued this is a great investment we believe in the company but all the data show that companies are buying stock at high prices also if a company does that and is making that argument the minute it tries to cash in for the company it's going to be telling the market that stock is overvalued so no one's ever going to do that it's an argument that's made by all the financial economists but it's a totally phony argument it's in the financial statements of many companies that they're doing this to offset exercise of stock options so if you have a company like Cisco very broad based stock option systems a lot of stock options exercise even if for a company like that the buybacks are multiples of what is being exercised as stock option and anyway it's a phony argument so you're going to give people stock and you say okay work harder and smarter for the company let's get our stock price up well just wait do you have successful products and you'll have more profits your stock price should rise because of innovation not because of manipulation and people should be able to sell their stock at higher prices you don't have to manipulate it with stock buybacks it's a phony argument the third argument they're just made more by economists because most self-respecting CEOs sometimes wonder how many CEOs now in the United States are self-respecting but in any case is that we're a mature company and there's nothing to invest well that is total nonsense I mean if you're running a major U.S. company there's plenty of things to invest in and there's plenty of ways in which you can share the gains which go beyond the company that if you understood where government spending supported you how the company got to where it was you would be allocating resources differently but on the basis that you should maximize shareholder value now that ideology is a totally flawed ideology it comes from the theory it's directly from the theory of the market economy it's basically as everybody gets a market return except one group of people common shareholders will have no guarantee of the return and so if there's a loss they'll bear the loss if there's a profit they'll get the profit well in fact anybody who goes to work for a company and is doing anything significant is taking a risk that in the future they won't get the returns that they're helping to create and companies don't want to just hire good companies people who are just paying for doing the work today they want people who are involved in this collective and cumulative learning process and they're going to show up tomorrow and so when in fact companies had this retaining reinvest system the thing that Penrose talked about well in fact they were delivering on that kind of promise and it was part of the success of the company when they stopped doing it with the ideology of shareholder value that only the shareholders take risk then in fact people who created value see their value they created disappear taxpayers are constantly making investments that firms are taking are using now if there's a tax regime that recognizes this and there's a reasonable tax rate and the firms actually generate revenue so we're taking a risk that we might make huge investments in the biotech industry but it might not be successful ok we should get the return as taxpayers but of course the ideology of shareholder value has been part and parcel of saying there's only this group of people who create value have to cut tax rates in order to support this you can see this particularly in the bush cuts in 2003 but it goes way beyond that and people who create value do not get it and in fact common shareholders they play virtually no role in general in funding these companies they buy and sell shares that are existing on the market money does not go into companies because of this and we have a lot of case studies which go into this process which which I'll kind of indicate in a few minutes but basically a while no one actually I was right here that a few years ago Mike was there I gave a talk on a conference on Apple's business model and I gave a talk about that and I wrote an article about this and then I wrote something after my Harvard business review article last September on their blog about when Carl Eich I thought it was kind of nice because Carl Eichon who was one of the biggest predators in the United States been around a long time took a five billion dollar stake in Apple and is now trying to drive that up to ten billion dollars by doubling Apple's stock price which is already at record levels last September and it's all based on just pumping all that money out of Apple for his sake and the sake of other people who have these large stakes and then who use that extra five billion to add to what he has to go after some other company okay the only time Apple ever raised money from the public stock market was in 1980 with 97 million dollars in its IPO and so there's no other contribution that shareholders have public shareholders have made to that company since that time okay here looking at the institutions why is the regulatory agency allowing this to go on and I'll just talk about this for a few minutes and then end where I think there's some little impact coming from this research it's kind of unfolding right now the SEC on its website says that it protects investors, maintains market integrity and facilitates capital formation this rule 10 be 18 certainly does not facilitate capital formation it also wants you to get into how buybacks are done in time and the fact that only some people know about it certainly doesn't maintain market integrity and a lot of investors including pension funds and I've been convincing some of them that they should be dead set against stock buybacks if they can't get in there and manipulate the markets along with the hedge funds even though I'm not saying they should but they this was a change in the SEC rules that came about after the election of Ronald Reagan and this guy here was the previous head of the security exchange commission this is the last address he gave his name was Harold Williams he was a businessman at the University of Southern California business school and he basically this was all about a stakeholder argument about the corporation and at that time he wasn't talking about shareholder value he wasn't talking about buyback so many people were dividends might be too high to get proper re-investment adequate re-investment in the U.S. economy he resigned a year and a half before his term ended because Reagan got elected and on a deregulation platform and this guy John Chad came in he was the first Wall Street guy to be head of the SEC since Joseph Kennedy was when it was first founded for six months he was the father who was a big stock market manipulator and they put a big supporter of Roosevelt and they put him in charge and then lawyers took over okay so they put Chad in there Chad really believed the more money that came into financial markets the more capital formation somehow you had and he actually one of the other things he pushed right from the beginning was derivatives and one of the first things he did when he came the head of the SEC was he created a position for chief economist and he put this guy Charles Cox there who was Chicago trained PhD who was doing work on derivatives and you know our derivatives led us and then there was a guy who was actually a Nixon appointee named John Evans who was against this new rule instead of might be manipulating the market from the information we have and he was and then Chad got rid of him put Cox in his place as a commissioner and put an even more rabid Chicago economist in this chief economist post when Chad retired there was a lot of insider trading going on the Bosque thing milk and stuff was going on and he actually wasn't all that wealthy this might have been to some total of as well he went to Harvard business school to teach about business ethics because his notion he was being sincere about this all this insider trading this was kind of rooting the notion that the market was fair in fact he helped make it unfair through these rules but Harvard business school at the time couldn't figure out how to use this money so they built this posh fitness center which was a process of competing for executives to learn about maximizing shareholder value and I must say that it does not say in shareholder value we trust at the top I put that up there but it might as well okay people have been talking about excessive executive pay for some time since the early 90s it remains highly excessive even more than if you look at the AFL CIO the unions executive pay watch website where they look at the executive pay the average worker actually their estimates are way too low mainly because they don't look at realized gains which is what they should look at the average pay of talk executives which I just showed you 2013 500 highest paid executives about 32 million dollars 84% of that in this previous graph table was from stock based pay the hedge fund would make them look like they're just getting chump change here and this is recently from the financial times that the top 25 hedge fund managers their total was down they only averaged 11.6 billion in 2014 down from about 25 billion almost 900 million slightly less than that so here you can see these people we don't know how much buybacks but they're all over buybacks okay so we this is the pickety data which reflects some of this stuff I have some stuff on what's happened to middle class jobs that I want to have time to get into but this is really where the expenses of the cost of buybacks is that they're not retaining people they're not passing on higher wages to people people are not being engaged collective cumulative learning process even when you have the state making huge expenditures now and this is the national institutes of health $30 billion a year studies we've done of the industry this is actually exacerbated financialization because scientists universities who have stakes in companies are getting these grants they're actually doing a lot of stuff with the NIH money that should be done by the companies like clinical trials and there's all kinds of biotech companies a lot of them are near where I live in Cambridge, Massachusetts they're making lots and lots of money without a product ever being produced and the taxpayer is putting out $30 billion a year to allow this industry to exist I have a number of case stuff which I don't have time to go through about the cost of buybacks stuff about international competition IBM is one of the worst companies in terms of this HP is another one Microsoft is another one there's a story I could tell about Apple when Carl Icahn demanded it turned out he wanted to do another $100 billion buybacks after doing $50 billion the editors of Harvard Business Review got in touch with me and they said we need you to respond to Carl Icahn so I wrote on their blog I had written a number of things on the Harvard Business Review blog that they love because it's promoting the article but I said Carl Icahn had written this as an open letter to Tim Cook the CEO of Apple to do these buybacks and I said well I'll do it if you give me two articles that I can write one respond to the icon and one open letter to Tim Cook so I won't go into it that's in the slides on this online but basically the first one I critiqued Icahn what did he have to do with the company what I said before and in the open letter to Tim Cook I go through all the ways in which a company like Apple could not possibly use all the money it has to reinvest in the company could be using its money at least providing some leadership in the US economy and in the case of Tim Cook who's actually given away his whole fortune already why is he doing this a week I talked to a reporter just after I wrote these things a comment up about it a week after I put up this open letter and I hadn't heard from Tim Cook he announced was the first CEO announced that he was openly gay you know so I said well he could have done that last year he could have done it next year but I think he just wanted to distract the attention from having to respond to my open letter anyway I have not heard from Tim Cook and I don't expect to but I think he should hear what I have to say there are other cases I was talking about this this afternoon GM an interesting case we got involved in with the union the servers employees international union that has gotten interest in buybacks where the top leadership has come out against buybacks this just happened about two months ago so we did a study of McDonald's where we show that what's happened with McDonald's about three billion a year in buybacks the real people paying the price in the first instance are the franchisees and so the franchisees who are kind of tea party type people I think but small business people with million dollars invested in the McDonald's outlet they are getting totally screwed by this and then putting pressure on the workers who are fighting for a minimum wage and actually what the SEIU is doing they are doing a lot of stuff supporting the franchisees and they see the buybacks issue as an issue that can unite the franchisees and the workers together whether that will happen is another question in the context of that this was four this was a controller of New York City the controller of New York State the treasure of Chicago and the controller of the state of California representing about 840 billion in pension fund assets wrote this letter as the first time against buybacks it was in the context of protests at McDonald's and they actually in some of the newspaper articles they actually quoted workers as saying no more buybacks which is totally unprecedented Brookings published a paper on this and there is a senator in Wisconsin who has actually gone for the first time after consulting with us about buybacks and helping them shape the letter after the SEC about what you are doing with these things this has also been done raised by Elizabeth Warren who is another very well known senator from Massachusetts in the United States has started talking about stock buybacks for the first time a commissioner there is only five of them on the SEC has come out against buybacks I was told that this was something that she really didn't know about much about six months before and then they got the picture I have to say it actually is no doubt because it is documented in a lot of different even in some of the things they say in their footnotes etc so this is kind of gratifying to have the stuff you have been doing for 30 years I didn't get bored out of my mind at least I kept from getting bored out of my mind that have this impact there is a guy running for president who is shaking up the Democratic party nomination process Bernie Sanders from Vermont who has now come out against stock buybacks and I am trying to educate the campaign a little about this so this is from LaMonde the Goshi stew is shaking up the Democratic process and Elizabeth Warren had come out with these statements recently about stock buybacks and has also made other statements based on my research and here I will end this talk with this two minute clip from Richard Trumpka who is the head of the AFL-CIO I have been talking to people at the AFL-CIO since the late 90's saying you should be dead set against this stuff we don't have sound here but basically the reason I put how do you spell that name at the top is that he had been talking to a breakfast meeting of the Christian science and monitor for about an hour about labor issues and then right at the end he said can I just drop one more thing in your lap and they said okay go ahead and he asked Lola who is doing this stuff on buybacks and if we ask for a $2 raise we are being greedy etc so he kind of recited this stuff in the article and then right at the end after about two minutes talking about the article quite capturing what a lot of the stuff I said particularly about CEO pay you hear a voice say how do you spell that name and he says L-A-Z-O-N-I-C-K and then there is a pause and he says it's in the Harvard Business Review okay thank you that's how we to the force started with the economic theory up to this recent development just to announce that we are recording this because it's illegal otherwise to start the debate without that we are here now to collect questions lots of the people who are in the room were also in our workshop so we've been discussing these things all day but I'm sure there is going to be still lots of questions I just want to go back to the graph you had about wage productivity you know you have this long secular period for 1980s the government I mean one interpretation of this this is my materialist reading that because of technological reasons like the power of the power etc wage productivity then these companies get a lot of excess capital what to do then these ideas come shared with the money and that's one way of looking at in terms of causality the other way that you are saying is that it is nearly the ideal of your buyback which led to that divergence I skipped over some stuff and so there is a more that is a sophisticated argument here so let me go to hear it so basically the stuff that I had to skip over in the time is that there are real changes going on in the economy and the thing is business do need to respond to these changes so I call rationalization, marketization and globalization basically in the early 80s layoffs of blue collar workers and the first time companies would close plants permanently not plan on hiring the workers back by the way it really hit the African American population more than anybody else at that time because they were the last hired first fired and this was because of Japanese competition so this wasn't necessarily because of shareholder value ideology but then rather than respond and say we have to figure out how to upgrade education and training of the labor force we have responsibility to keep people employed and to actually compete against the Japanese which for example in the car industry even though they still exist there they never really have done they became financialized and I could give the example which I gave this afternoon you heard about General Motors how that happened from about the mid-1980s so basically then often plant closings throughout the 80s and beyond just were done just to get rid of heavy assets and get their stock price up but without any notion that people have contributed to the success of the company and there was anyone else the marketization IBM took the lead in this in the early 90s after having a policy without any unions of never firing anybody involuntarily from 1990 they went they had 374,000 employees 1994 220,000 they purposely got rid of lifetime employment they took huge losses which were the cost of severance pay they brought in Lewis Gersner who then wrote a book which was all about just getting rid of lifetime employment now there was a rational, productive rational they had moved from a technology system to open systems with the PC revolution and so they didn't need experienced workers as much anymore and there's a whole decline precipitous decline of research labs at this time but rather than recognize that the world had changed but you still needed to have these companies or some consortium of these companies or in collaboration with the government and through taxation going from these companies to the government investing you know capabilities that could fund the next round of innovation which they themselves benefited from they stopped doing that or they as I put one of the things I argued in the Harvard business review article they start lobbying the government to do this stuff even as they're just doing billions and billions of buybacks so they don't see themselves as having any responsibility to fund some of that public research from their profits and then globalization well there's nothing wrong with globalization because we need the rest of the world to develop but what's happened with globalization and in fact it's reinforced by certain tax concessions that were made way back in 1960 that they now these companies take as a right they don't pay taxes on their global profits and until they repatriate them so they don't repatriate them they borrow money companies like Apple are borrowing money to do buybacks well they're keeping the profits abroad and company like Intel two weeks ago they announced they're going to lay off 5,000 people to have a billion dollars a year in savings in the United States particularly in Oregon where they have their microprocessor center this is the biggest area for employment of Intel in the world and then they're doing 5 billion dollars a year in buybacks so it's kind of they just have gone although you could say and originally you know yeah if you have better qualified people or equally qualified people or lower wages in China or India why not invest there but then take the profits from that and put it back into the place that supported your growth and of course the ideology is well that has nothing to do with us we are running this company for profits to shareholder value etc you know where we came from has nothing to do with the success of our company it was just a total garbage but it's totally believed so that's the problem that there have been these real structural changes in employment that have changed so I wouldn't advocate going back to this system of a career with one company and also it was for actually a select group of people who then were in the majority white males but you do need to worry about what I call collective and cumulative careers and so that's really the cost of this and I think it actually you need to take a lot of the technology that's coming out as part of the open letter Tim Cook that's coming out of a company like Apple and looking for ways of using that to meet social needs and if you look at history including using that you know capabilities for military purposes but also things like the orphan drug act and pharmaceuticals you do things that originally are not profitable and are done for social needs or the government makes it profitable through subsidies at some point you're going to have in your possession technologies that are going to open up whole new doors and so I argue that in not doing that a company like Apple is actually deviating from an innovative business model so it's a lot more kind of sophisticated argument about what's changed in the world than how companies have to adapt to change and it's no longer the American century and under any circumstance Let's go like two, three questions Okay so Bill it was really interesting I'm not sure that you're going far enough because in a sense what you're saying is that real value in organizations is added by the workers on the government and I agree with that but if that's the case then isn't there something fundamentally wrong with the property rights structure of modern capitalism which is completely different So in a sense just getting shared buybacks isn't enough you have to go back to Marx in a sense capitalism might help live a purpose in some sense that the property rights structure which gives you that long-lasting facial capital is missing and so that contradicts with your 2000s globalization because if the working class is globalized then who are the owners of this technology so in a sense I would like to push you No but I think this relates to the kind of work you were talking about because nevertheless you have a global company so it's going to deal with governments in a lot of different places maybe we need global governments too but nevertheless okay they are global but yet they do lobby for special privileges in the United States they lobby for governments funding for the technologies they need so if they're going to do that then say okay then you know let's are you getting back for this and how are you going to be governed for that only one of the things I put in the Harvard Business Review article which they never questioned was that since it's workers and taxpayers who are creating value or putting money at risk that it's creating value or effort at risk in the case of workers then they should be on boards and actually in the Brookings paper I quote Robert S. Brookings who in a book called Industrial Democracy America's Answer to Socialism and Communism written in 1929 said the money capital is just a commodity you should get a market return and labor creates value and should have liberal representation on the boards of companies well that does not exist of course it does exist in Germany and I think the Germany's benefit so there are different governance process it still needs to be done at this stage you know at a national level things like this security exchange commission they can be changed and actually if you can push that debate further and say what what is this security exchange doing this contradicting its own mission you open up that debate but no I would certainly push it further now I would say there is a difference between dividends and buybacks okay once you recognize that there's a lot of savings in the economy we have pension funds we have lots of savings we want to get a return I don't think there's anything inherently wrong with saying okay there's shares on the market you can put your money into those shares maybe they'll rise in price but you don't want to do it through manipulation through innovation maybe there's some speculation and some people you know that isn't the big problem here but those dividends have to be reasonable and what's happened as I said that was the debate in the 70's even Fisher Black you know Black Shoals he wrote an article the dividend puzzle and why are companies even paying dividends and he couldn't resolve this but he recognized that there was some something gained by reinvesting money you know he didn't have a theory of this of innovative enterprise but at the same time what I've been talking to institutional investors about this okay if you have all the savings of let's say workers and you want to get a return well yeah there's these public companies and they can pay some dividends that's one way you can get a return it's riskier than putting it into treasury bills or other things but it's one way you get a return but without that return to be there over the long term and actually at the point where you're not timing where you have to sell some of the shares you would like the whole stock market to be up you should be absolutely against buybacks because they're not going to benefit someone's taking money out now and you're not timing the market you're not that's not the business you're in so I draw a big distinction between that form of payment to shareholders it's not a property right originally in the early 20th century when you had the separation in order to control it to get people to hold shares they had preferred shares that gave you a legal right to profits if they're ever made that then once the stock market it was really only when you had the rise of big business of consolidation of big business in the 1920s spread distribution of shareholding and companies said okay we can issue common shares and people will buy them on the market in the hope that they'll go up in price and if they want an income we'll pay them some dividends at that point shares did not necessarily have voting rights it was only, it was a guy from Harvard named Ripley who wrote a book on Main Street and Wall Street who kind of believed that the shareholders were still should have a responsibility for running these companies recognize the separation in order to control he started raising this thing why don't they have voting rights the New York Stock Exchange said okay any listed stock now has to have voting rights but at that time they knew that shareholding was so widely distributed that voting rights didn't really matter and so and it didn't matter until you actually even with the institutional investors until you got the hedge funds there who now actually can 3% of the shares demand a seat on the board somehow this is enough of an interest for them to see to this there is this notion of rights there are no rights you're a portfolio investor the money is a commodity you have limited liability you have a highly liquid market so it's very low cost unlike a worker you can put your money in and take it out but I wouldn't argue against dividends because we have savings and why not get some of the money out of companies that can go to the general public as a return on their savings if it's reasonable you know so that kind of but buybacks are a totally different phenomenon is there any other question okay I think we have a pretty time that we deserve a glass of wine thanks a lot just a small announcement we are going to have other lectures during the next academic here and in particular we're going to have professor Andy Sterling from Sussex in the first term and then professor Rafa Kaplinski again it's true and Christos Pidelitz from University of Bath and we're able to have other activities connected to this cluster so I invite you to follow some of these activities on our web page all these activities will be video recorded so it's possible to follow thanks again wow it was a 34