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How The World Lost Its Mind with Author Dan Davies · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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Speaker 2: Welcome to Maren Talks Money, the podcast in which people
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Speaker 2: who know the markets explain the markets. I'm Meren thumset
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Speaker 2: web with me for this week's interview. Unusually, but happily
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Speaker 2: is John Steppek, senior reporter and author of the Money
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Speaker 2: Distilled newsletter.
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Speaker 3: Hello.
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Speaker 2: John, hi'ml You know where you're.
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Speaker 1: Here, right, Yes, I've actually read the book.
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Speaker 2: That's right. We are talking today about the unaccountability machine,
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Speaker 2: why big systems make terrible decisions, on how the world
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Speaker 2: lost its mind, something I think we can all agree with.
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Speaker 2: This is written by our guest Dan Davies, and John
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Speaker 2: has read the entire thing. I've only read little bits
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Speaker 2: of it, which doesn't mean I don't have opinions, but
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Speaker 2: does mean that I'm going to defer to John quite
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Speaker 2: a lot during this interview. Davi's worked as an economist
0:51
Speaker 2: at the Bank of England and a bank analyst before
0:53
Speaker 2: moving to consulting and writing. He's also the author of
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Speaker 2: Lying for Money, which is obviously about financial fraud. In
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Speaker 2: this conversation with Dan, we fogus on the unaccountability machine
1:01
Speaker 2: and it's look at why so many of the world's
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Speaker 2: systems are failing now. The other reason I wanted to
1:07
Speaker 2: get John on this podcast, apart from the fact that
1:09
Speaker 2: he's actually been good enough to read the book, is
1:11
Speaker 2: because lack of accountability drives him crazy, and we've talked
1:14
Speaker 2: about it on and off on this podcast over the years.
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Speaker 2: So it drives us mad that the NHS doesn't work,
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Speaker 2: and nobody knows why. It drives us mad. We can't
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Speaker 2: build anything in the UK, That infrastructure simply doesn't appear,
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Speaker 2: despite the fact that everybody agrees that it should be.
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Speaker 2: That's mad, that our transport network doesn't work, that productivity
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Speaker 2: doesn't go up. All these things that we all know
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Speaker 2: aren't working, that we all want to fix, every politician agrees,
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Speaker 2: yet nothing ever happens in the NHS. Is the classic
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Speaker 2: of this. John and I think we've talked a lot,
1:46
Speaker 2: haven't we, Johne, about why is it that we never
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Speaker 2: see Amanda Pritchard on the Telly or listen to her
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Speaker 2: on the radio. In fact, does anyone know who Amanda
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Speaker 2: Pritchard is. She's the CEO of the NHS. She's the
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Speaker 2: person that should be up there, I feel should be
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Speaker 2: up there on the race on the Telly every day
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Speaker 2: explaining to us why it's so absolutely appallingly useless. But
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Speaker 2: she's not their accountability deficit. Dan, Welcome to Maren Talks Money.
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Speaker 2: I'm so glad you're here because you're going to explain
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Speaker 2: all this to us, right.
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Speaker 4: Thanks, thanks very much, Thanks very much for inviting me,
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Speaker 4: and you know I will have a go brilliant.
2:22
Speaker 2: Well, I tell you what, why don't we start bre
2:24
Speaker 2: you just giving us a big overview of what the
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Speaker 2: book's really about. I may have jumped your gun slightly
2:30
Speaker 2: with my introduction, but what is it actually about? What
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Speaker 2: the main message here?
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Speaker 3: The main message is exactly the kind of thing that
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Speaker 3: you were talking about, Maren, which is that personal accountability
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Speaker 3: for decisions is just in many ways a thing of
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Speaker 3: the past for lots of the kind of systems and
2:49
Speaker 3: institutions that we interact with. There is just no individual
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Speaker 3: person who feels like they're accountable for these decisions. But yeap,
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Speaker 3: the strange thing is that I started out wanting to
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Speaker 3: write a very different book from the one that ended
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Speaker 3: up published, and the book was actually pretty much delayed
3:10
Speaker 3: by a year in being delivered because I'd begun by
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Speaker 3: thinking that this was a straightforward issue of weasily responsibility.
3:21
Speaker 3: Ducking managers just trying to create systems so that they
3:26
Speaker 3: could avoid having to take any kind of accountability for
3:29
Speaker 3: their decisions. And by the time I was halfway through it,
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Speaker 3: I started thinking, maybe that's not entirely fair, and that
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Speaker 3: maybe the reason that these people don't take accountability for
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Speaker 3: the decisions is that they don't feel like they made
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Speaker 3: the decisions. So Amanda Pritchard as chief Executive of the NHS,
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Speaker 3: she's got that title, she's in a role where you
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Speaker 3: would expect to see someone controlling the system, but actually
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Speaker 3: she's just kind of the operator of a huge, great
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Speaker 3: industrialized decision making machine. Most of the important decisions that
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Speaker 3: cause the NHS to dysfunction just arise out of a system,
4:16
Speaker 3: and they don't have any individual human being owning them.
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Speaker 3: And this is a very weird, kind of new way
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Speaker 3: to live our life in the industrialized world. It's not
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Speaker 3: like the good old days of the nineteen twenties when
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Speaker 3: John Paul Getti could get a report from all of
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Speaker 3: his rigs every single morning and make decisions about all
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Speaker 3: of his rigs in the afternoon. Everything these days is
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Speaker 3: just so complicated that there's no one human being that
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Speaker 3: can hold the whole system in their head and make
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Speaker 3: decisions about us.
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Speaker 2: So it's a function of complication, and the complication driven
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Speaker 2: presumably by both size and also by interaction between say
4:59
Speaker 2: that corporation in the state and regulation and accounting rules
5:05
Speaker 2: and all these kinds of things. So you no longer
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Speaker 2: have a system where say the ceover company has a
5:10
Speaker 2: direct line of power across the company, because they have
5:14
Speaker 2: to interact along the way with endless levels of regulation
5:18
Speaker 2: for example.
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Speaker 4: Yeah. Absolutely. When I was an analyst, Fred Goodwin, or
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Speaker 4: as he was then called, Serf Fred Goodwin once said to.
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Speaker 3: Me, you know, some things are big because they're complicated,
5:31
Speaker 3: and some things are complicated because they're big. And Royal
5:35
Speaker 3: Bank of Scotland is books. It's just as things grow,
5:40
Speaker 3: they have to deal with more things. But the killer
5:42
Speaker 3: thing is that they have to deal with more combinations
5:45
Speaker 3: of things. So you get in this horrible kind of
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Speaker 3: arms race, because as something grows, the complexity grows exponentially,
5:55
Speaker 3: because roughly it grows as the square of the object.
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Speaker 3: The network and the capability to manage that complexity only
6:05
Speaker 3: grows linearly, and you know, exponential versus linear is a
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Speaker 3: race that they ever has one winner, and so after
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Speaker 3: a time the system gets completely unmanageable in the literal
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Speaker 3: sense that it cannot be managed, it cannot be regulated,
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Speaker 3: and then something has to happen. And what I argue
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Speaker 3: in the book is that over a lot of the
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Speaker 3: industrialized world, a lot of our most important systems are
6:32
Speaker 3: reaching that something has to happen stage where some kind
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Speaker 3: of reorganization is just absolutely necessary, because the complexity is
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Speaker 3: now completely beyond the ability of anyone to make remotely
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Speaker 3: sensible decisions that have any connection with the world of
6:51
Speaker 3: their consequences.
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Speaker 2: Yeah, but interestingly, on the way to this point, it's
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Speaker 2: been rather brilliant, right, And the state says, right, back
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Speaker 2: to Adam Smith andvization and everyone doing different things, back
7:02
Speaker 2: to the making of pins, isn't it and Adam Smith originally,
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Speaker 2: and all these other things where no one knows how
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Speaker 2: to make the entire thing. Everyone knows a tiny bit
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Speaker 2: of it. And that's been phenomenal for us. And I
7:13
Speaker 2: spent a lot of time earlier this year reading books
7:15
Speaker 2: by Joseph Heinrich, which was all about how this hive
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Speaker 2: brain effectively creates things that would be impossible for us
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Speaker 2: to create alone, for example. So until relatively recently, this
7:28
Speaker 2: complication that meant that everybody specializes in together we can
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Speaker 2: create significantly more than anyone could ever create alone, has
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Speaker 2: been rather brilliant. So your suggestion that we've now reached
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Speaker 2: a tipping point of a level of complication where it
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Speaker 2: no longer works anymore.
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Speaker 3: Well, we've reached a crisis point, which is not necessarily
7:46
Speaker 3: the same as the end of the road, because one
7:48
Speaker 3: of the really fantastic things about the market economy and
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Speaker 3: about the way that human beings work together is that
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Speaker 3: we're capable of reorganizing ourselves in these kinds of things.
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Speaker 3: You know, it's the mark of a viable system that
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Speaker 3: they can reorganize to meet challenges that weren't anticipated when
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Speaker 3: it was designed. There's really fast, fascinating book, one of
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Speaker 3: the only management science books that economists have any respectful,
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Speaker 3: called Strategy and Structure by Alfred Chandler from the nineteen
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Speaker 3: forties fifties, when he's looking at the history of DuPont's,
8:27
Speaker 3: General Electric, General Motors, or the big US corporations, and
8:32
Speaker 3: what he discovered is that this phenomenon repeats itself over
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Speaker 3: and over Again, the reason he called the book Strategy
8:38
Speaker 3: and Structure is that the structure of those companies kept
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Speaker 3: on changing because they would grow, they would get more complicated,
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Speaker 3: they would become unmanageable based on the reporting lines and
8:51
Speaker 3: the reporting systems that they had. Then they would either
8:55
Speaker 3: invent new technology to improve the communication and improve them capacity.
9:01
Speaker 3: And so obviously you know you have telegrams, but also
9:06
Speaker 3: you know accounting systems, cost accounting, even the humble filing
9:10
Speaker 3: cabinet was a huge piece of information technology in its day.
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Speaker 3: And then when that didn't work, they would reorganize, they
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Speaker 3: would restructure, they would develop the multidivisional company model, they
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Speaker 3: would deconglomerate. So what you end up doing, and what
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Speaker 3: I think we are going to end up as a
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Speaker 3: society doing, after we have tried all of the other possibilities,
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Speaker 3: is reorganizing, devolving, restructuring our institutions so that we're not
9:40
Speaker 3: trying to manage so many things from a big central
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Speaker 3: command center with one person having the title of chief
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Speaker 3: executive of the NHS or whatever, because that's just not
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Speaker 3: a viable way to go on managing these things. It
9:55
Speaker 3: means it has to be reorganized, not necessarily that it's
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Speaker 3: the end.
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Speaker 4: Of the road.
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Speaker 2: So no more centralized services, no more giant companies.
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Speaker 3: There's always a cycle of conglomeration and deconglomeration, there's all.
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Speaker 4: You know.
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Speaker 3: The kind of the history of quoted companies has always
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Speaker 3: been that they're either in acquisition and consolidation mode or
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Speaker 3: they're in spin off and deconglomeration mode. You know. That's
10:22
Speaker 3: why investment banking is such a profitable industry. Companies are
10:25
Speaker 3: always trying to do one of those two things. And
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Speaker 3: so I just think we must be moving into a
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Speaker 3: cycle of spin offs and breakups and companies deciding to.
10:39
Speaker 4: Do less but do it better.
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Speaker 2: Huh. That could be incredibly lucrative for investors. Lots of
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Speaker 2: small spin off companies that then as a whole perform
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Speaker 2: better than the original conglomerate. So we'll keep an eye
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Speaker 2: on that. John, you've read the book over to you.
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Speaker 1: I thought what was really interesting, Diana, is you can
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Speaker 1: lousy very it can intriging ideas like the accountability sink
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Speaker 1: and this idea of looking at systems in particular as
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Speaker 1: being you look at that outcomes rather than their intentions
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Speaker 1: to see what's going on in the poissy where the
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Speaker 1: products of the system is what it does rather than
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Speaker 1: what it's kind of meant to do. When you say
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Speaker 1: we're reaching a tipping point, where do you think that
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Speaker 1: that sense comes from? What is it about the present
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Speaker 1: day that makes this a particularly chaotic moment?
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Speaker 3: I think that it's a growing gap between the stated
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Speaker 3: purpose of systems and their actual purpose. So you mentioned
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Speaker 3: that one of the things I discussed in the book
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Speaker 3: is a great old kind of scientist from the nineteen seventies,
11:45
Speaker 3: a hippie management consultants There really were such things in
11:49
Speaker 3: the seventies called Stafford Beer, who coined this fantastic phrase,
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Speaker 3: the purpose of a system is what it does, which
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Speaker 3: is kind of known by the acronym positive wood in
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Speaker 3: the kind of in the jargon. And what he means
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Speaker 3: by that is that to understand a system, you have
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Speaker 3: to respect the fact that the behavior of that system
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Speaker 3: is going to be defined by the way it's set up,
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Speaker 3: by the information that it pays attention to, and by
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Speaker 3: the way that it converts that information into decisions, not
12:23
Speaker 3: necessarily by the actual kind of goals and aids of
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Speaker 3: any of the people involved in it, even the ones
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Speaker 3: who've got titles like chief executive officer. I'll give you
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Speaker 3: a more concrete example of this, I think, because that's
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Speaker 3: kind of a bit abstract. A system, dear to all
12:44
Speaker 3: of our hearts is the British railway network. Now, the
12:48
Speaker 3: British railway network might say that as its purpose is
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Speaker 3: to provide comfortable and convenient travel for everyone as a
12:58
Speaker 3: reasonable price, and Stafford Beer would argue, you cannot say
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Speaker 3: that is the purpose of that system, because you cannot
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Speaker 3: say that a system has a purpose when it's structurally
13:12
Speaker 3: and systematically provides a different result. And so you think, well,
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Speaker 3: let's look at how the purpose of the British railway
13:22
Speaker 3: system evolves. And individual people in the system might have
13:28
Speaker 3: kind of purposes like drive this train from London to Edinburgh,
13:33
Speaker 3: or they might have purposes like cel tickets at a station,
13:37
Speaker 3: but they're embedded in a wider system that has to
13:40
Speaker 3: run an overall timetable. That timetable is embedded in a
13:45
Speaker 3: system that has to make best use of the trains
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Speaker 3: and rails kind of provided, which in turn is embedded
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Speaker 3: in the overall system of governments, which has to make
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Speaker 3: decisions about how much it's going to subsidize a rail network,
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Speaker 3: and how much it's going to spend of taxpayer's money
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Speaker 3: on investing in capital as sets for the railway network.
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Speaker 3: So you end up thinking, well, this system is a
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Speaker 3: compromise between all these different levels. What's its actual behavior.
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Speaker 3: Its actual behavior is that this is not a railway
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Speaker 3: transport providing system. It's a rationing system. So if you've
14:28
Speaker 3: kind of sitting on one of those trains from Euston
14:32
Speaker 3: to Glasgow or from King's Cross to Edinburgh and everything's
14:36
Speaker 3: broken down, everyone's sitting in the gaps between the carriages,
14:42
Speaker 3: the train's delayed, and you start thinking, is the purpose
14:45
Speaker 3: of this system literally to make this experience as unpleasant
14:49
Speaker 3: and demoralizing for me as possible. Then, to a certain extent,
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Speaker 3: the answer to that question is yes, because this is
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Speaker 3: a rail rationing system and one of the ways that
14:58
Speaker 3: it rations these journeys is by making the experience less
15:04
Speaker 3: pleasant compared to driving or flying, so that the number
15:09
Speaker 3: of people trying to get on the trains can be
15:11
Speaker 3: reconciled with all those other priorities about long term investments,
15:16
Speaker 3: running a safe time table with the rolling stock provided.
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Speaker 3: And so what I'm arguing in the book is that
15:24
Speaker 3: all across so many of our systems. This gap between
15:29
Speaker 3: what people want the system to do and the emergent
15:33
Speaker 3: behavior of the system is getting bigger and bigger. And
15:37
Speaker 3: you know, getting back to the title of the book,
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Speaker 3: the Unaccountability Machine, there's no real feedback mechanism from the
15:45
Speaker 3: people at the bottom of the tree, for the people
15:49
Speaker 3: who are actually kind of affected by the consequences of
15:53
Speaker 3: all these decisions, to get their voice heard and to
15:56
Speaker 3: feed back into the system that it's got to change.
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Speaker 1: That's a really interesting point, and that's really perceptive looking
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Speaker 1: at the system and saying that's a rationing system. But
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Speaker 1: one of the things I found interesting was that when
16:08
Speaker 1: I've read reviews of your book or even some of
16:10
Speaker 1: the interviews, one of the frustrations people often bring up
16:12
Speaker 1: is the scenario where you're at an airline boarding desk
16:17
Speaker 1: and you get there a wee bit late and the
16:19
Speaker 1: person that there says, well, I'm afraid you're going to
16:21
Speaker 1: have to go away, and I can't say or ask
16:24
Speaker 1: anyone anything, and if you go in, basically the computer
16:28
Speaker 1: says no sort of scenario. But what occurred to me, though,
16:31
Speaker 1: is that if you look at airlines as a whole
16:34
Speaker 1: then on almost any metric that's actually important, they've vastly
16:39
Speaker 1: improved over recent decades in terms of, you know, safety,
16:45
Speaker 1: level of pollution per plane, costs, the number of flights
16:49
Speaker 1: being done. So I think it's interesting that you take
16:51
Speaker 1: this sort of the rail as a contrast to that
16:53
Speaker 1: where the rail is actually rationing system, whereas were the
16:56
Speaker 1: frustrations of the airlines are relatively petty. Accountability thinks relative
17:01
Speaker 1: to the connect in the you know, the advances that
17:04
Speaker 1: that partailer industry has made. So I suppose I'm just
17:07
Speaker 1: point on other I guess because accountability sinks are there
17:11
Speaker 1: to manage the chiost partly on they it's about it's
17:14
Speaker 1: about getting read of things that you don't have the
17:18
Speaker 1: ability to attend to or pay. It's kind of like
17:21
Speaker 1: taken excess information. Now the system is that? Is that right?
17:25
Speaker 3: Yeah? I mean basically, an accountability sink is my word
17:29
Speaker 3: for the kind of system that managements create as almost
17:34
Speaker 3: a survival mechanism. And they have all of this information
17:39
Speaker 3: coming into them, lots of it quite hostile information, and
17:45
Speaker 3: they've got more of it than they can handle. So
17:48
Speaker 3: what you do in that situation is you have to
17:52
Speaker 3: cut off some of it. You have to kind of
17:57
Speaker 3: reorganize your inputs so that you can handle them with
18:01
Speaker 3: the management ability that's available to you. And the easiest
18:06
Speaker 3: link to cut off is always the link to the customers,
18:10
Speaker 3: because the customers are the ones causing the problems. The
18:15
Speaker 3: customers are complaining to you, And if you cut off
18:18
Speaker 3: that feedback link, you can then start to manage all
18:22
Speaker 3: of the rest of the system. And you know, you
18:26
Speaker 3: can deliver a product. The customers might like it or
18:29
Speaker 3: they might not. They but as long as they their
18:32
Speaker 3: kind of displeasure with it doesn't reach a threshold where
18:35
Speaker 3: they stop actually buying it, you've made your business manageable again.
18:39
Speaker 3: And I think that's kind of almost the difference between
18:44
Speaker 3: the airlines and the railways. You know, the airlines will
18:49
Speaker 3: cut off some kinds of customer feedback, but they have
18:53
Speaker 3: to pay attention to the kind of signal of people
18:57
Speaker 3: either buying the flights or not at the price that
19:00
Speaker 3: they're willing to set. And they've got enough freedom and
19:04
Speaker 3: capacity to manage their airline to keep on delivering that
19:08
Speaker 3: service and to keep on meeting, as you say, all
19:11
Speaker 3: of their other constraints. The railway network has somehow got
19:14
Speaker 3: itself into a situation where it's not got the capacity
19:20
Speaker 3: to manage all of the complexity that it's embedded in,
19:24
Speaker 3: and as a result, it just seems to have become unregulated.
19:29
Speaker 3: It's not really kind of managing itself towards a goal.
19:33
Speaker 3: It's just responding to immediate stimuli, you know, like you know,
19:38
Speaker 3: like some creature in some horrible experiments. It's not able
19:43
Speaker 3: to make coherent plans and carry them out with.
19:46
Speaker 1: It going to be overly ideological about it, but the
19:50
Speaker 1: airlines are basically kind of I mean about with free
19:52
Speaker 1: market competition at the end of the day and consumer choice,
19:56
Speaker 1: which as yeah, I mean I only had a choice
19:58
Speaker 1: of one train to get this morning, and you know,
20:02
Speaker 1: I can't think of, you know, an easy way to
20:06
Speaker 1: be able to get a different kind of train. I
20:08
Speaker 1: suppose what I means, how much of this is down
20:10
Speaker 1: to any specific form of because for example, you told
20:15
Speaker 1: about kind of Milton Friedman as an element of where
20:19
Speaker 1: things went wrong. But I suppose I don't quite see
20:23
Speaker 1: the connection between Freedman and a rationing system, is what
20:27
Speaker 1: I'm getting.
20:28
Speaker 2: That is this about shareholder value? Yeah, and about the
20:32
Speaker 2: idea that it is this shift to shareholder value as
20:35
Speaker 2: opposed to what we now call stakeholder value. That is
20:37
Speaker 2: part of the problem.
20:39
Speaker 3: Yeah, I mean, I talk about Milton Friedman or what
20:41
Speaker 3: in the book, and I even kind of ended up
20:44
Speaker 3: writing so much about him. I had to put an
20:46
Speaker 3: author's note at the start saying I realized I was
20:48
Speaker 3: being unfair in some places and that wasn't really all
20:51
Speaker 3: about him. But on that point, I think it's not
20:55
Speaker 3: really ideological, and it's one of Friedman's other insights that
20:59
Speaker 3: isn't much to do with shareholder value, which is that
21:03
Speaker 3: airlines go a bust. Airlines are exposed to the market,
21:08
Speaker 3: and they're exposed to the free market in such a
21:10
Speaker 3: way that there's a way for a failing aircraft airline
21:14
Speaker 3: company that can't manage its complexity to get out of
21:19
Speaker 3: the game, have its physical and some of its intangible
21:23
Speaker 3: assets taken over by someone else, and then for the
21:26
Speaker 3: overall system to reorganize itself. The entire problem in the
21:30
Speaker 3: railway system, to my mind, is that it's not got
21:34
Speaker 3: any mechanism of reorganizing itself, and because of that, it's
21:38
Speaker 3: going to always end up dealing with a changing situation
21:44
Speaker 3: being unable to reorganize itself quickly enough and consequently becoming
21:48
Speaker 3: unregulated in that way. And where I think that ties
21:53
Speaker 3: up with Milton Friedman in shareholder value is that, unfortunately,
21:59
Speaker 3: when you get a company that is overly concerned with
22:05
Speaker 3: accounting metrics, then it starts losing that connection to the
22:10
Speaker 3: real world and losing that ability to reorganize itself because
22:15
Speaker 3: you know kind of share hold the value is great.
22:17
Speaker 3: You know, who doesn't like shareholder value. But unfortunately, when
22:21
Speaker 3: managers start talking about shareholder value, firstly, they start paying
22:26
Speaker 3: attention to short term quarterly earnings and accounting metrics, which
22:32
Speaker 3: is immediately, you know, it's just immediately giving yourself a
22:35
Speaker 3: cognitive impairment. It's just immediately putting a huge information reducing
22:40
Speaker 3: filter on your environment. And secondly, when people start moving
22:46
Speaker 3: in that direction, they start thinking too much about leverage buyouts,
22:51
Speaker 3: and they start thinking too much about taking on debts,
22:55
Speaker 3: and I think, you know, we should probably talk about
22:58
Speaker 3: that in some more detail.
23:00
Speaker 2: I don't think I'm going to slightly interrupt, because that's
23:03
Speaker 2: I think that I know you said yourself that you
23:05
Speaker 2: were a bit on fair to Milton Friedman occasionally, but
23:07
Speaker 2: I do think that's a fairly, fairly extreme interpretation of
23:12
Speaker 2: what people mean by shareholder value. And this is the
23:15
Speaker 2: idea that if you if you think about profits, you're
23:17
Speaker 2: immediately thinking short term. And that's simply not true because
23:20
Speaker 2: the you know, the best companies in the world, the
23:22
Speaker 2: ones that have lasted the longest and done the best,
23:25
Speaker 2: definitely think intently about shareholder value, but they think about
23:28
Speaker 2: that over the longer term. And you provide excellent shareholder
23:32
Speaker 2: value if you provide stakeholder value at the same time,
23:35
Speaker 2: you know, we know that. So you can't really separate
23:38
Speaker 2: these things, I think in that in that rather dramatic way.
23:42
Speaker 3: Phill, yes and no, because the in principle you're right,
23:48
Speaker 3: but in practicable way that the shareholder value movement started
23:54
Speaker 3: to as it were enforced discipline on corporate managements was
23:59
Speaker 3: through left ridge bias. So the trouble is that if
24:04
Speaker 3: you have a company which is kind of planning in
24:10
Speaker 3: the long term and not kind of delivering short term
24:17
Speaker 3: returns to shareholders or not delivering short term cash flow,
24:20
Speaker 3: then it tends to get taken over, and it specifically
24:24
Speaker 3: tends to get taken over and loaded up with debt.
24:27
Speaker 3: So really, with respect to Muslim Freedman's shareholder value. The
24:32
Speaker 3: problem is not so much that as the fact that
24:35
Speaker 3: it was the ideological justification for the LBO boom, and
24:39
Speaker 3: the LBO boom, I would argue, has been incredibly destructive.
24:44
Speaker 2: That I will give you.
24:45
Speaker 3: I'll give you that, you know, And I think it's
24:48
Speaker 3: it's kind of a way you can talk about it
24:50
Speaker 3: in terms of companies as information processing systems, because it's
24:54
Speaker 3: just simply that a company that's unleavered can have all
24:58
Speaker 3: sorts of priorities and cannot all sorts of plans and
25:01
Speaker 3: goals and all sorts of ways to respond to its environment.
25:05
Speaker 3: A company which has debt has to have servicing that
25:09
Speaker 3: debt as one of its priorities, and a company that
25:13
Speaker 3: is very indebted can't have any priorities other than generating
25:20
Speaker 3: en off nears and cash flow to service the debt,
25:23
Speaker 3: because that's you know, that's not one priority among others.
25:26
Speaker 3: It's a survival condition. And so I argue this at
25:30
Speaker 3: length in the book. I think some people, including there,
25:34
Speaker 3: as far as I can tell, John, think I was
25:37
Speaker 3: still a bit too unfair. But my argument in the
25:40
Speaker 3: book is that the way that Friedman's argument was picked
25:45
Speaker 3: up and taken ended up being the ideological foundations of
25:50
Speaker 3: the LBO boom, and that's actually been kind of a
25:54
Speaker 3: disaster for companies because it's caused this kind of fixation
26:01
Speaker 3: on short term, short term cash flow actually not even
26:04
Speaker 3: short term megantic profit. Yeah, I mean I do.
26:07
Speaker 1: I don't think that's unreasonable, by the way, and also
26:10
Speaker 1: in terms of debt and favorable treatment and debt relative
26:15
Speaker 1: to equity in the tax system. And also I thought
26:18
Speaker 1: you make some good points about private equity and how
26:24
Speaker 1: essentially they it needs to be more accountable for the
26:28
Speaker 1: debt that it ends up bailing ointed companies. Actually, from
26:32
Speaker 1: that point of view, what are your feelings about the
26:35
Speaker 1: current I guess interest rate related lull in the private
26:40
Speaker 1: equity world. Do you see an opportunity for things to
26:43
Speaker 1: change there?
26:45
Speaker 3: To be honest, I would be lying if I said
26:47
Speaker 3: I was optimistic on that lot. The private equity boom
26:52
Speaker 3: was to a certain extent a low interest rate phenomenon.
26:56
Speaker 3: But you there were plenty of leverage biots in the
27:01
Speaker 3: seventeaes and eighties. You know, we've had leverage biots and
27:06
Speaker 3: corporate raiders in periods when interest rates will weigh up
27:10
Speaker 3: in double digits. The pool of money might not be
27:15
Speaker 3: quite as big going forward, but realistically there's always going
27:20
Speaker 3: to be leverage buyouts, not least because you know, it's
27:24
Speaker 3: actually pretty difficult to stop someone from buying shares in
27:27
Speaker 3: a company if they think they can run it better.
27:30
Speaker 3: And there's always going to be that disciplinary effect on
27:36
Speaker 3: managers that, even if they don't have all of the
27:41
Speaker 3: problems associated with high leverage and private equity ownership, they're
27:46
Speaker 3: always going to be thinking that they've got to have
27:50
Speaker 3: that kind of person looking over their shoulder.
27:53
Speaker 4: You know.
27:53
Speaker 3: It's takes a very strong corporate culture and a very
27:58
Speaker 3: strong ownership structure to resist that. And I think it's
28:01
Speaker 3: not a coincidence that when we look at the really big,
28:05
Speaker 3: really successful companies that are making huge long term investments
28:11
Speaker 3: that are in raised as counter examples, they're things like Amazon,
28:16
Speaker 3: They're things like Tesla, they're things like kind of Facebook, Meta,
28:20
Speaker 3: and what do.
28:21
Speaker 4: They have in common.
28:22
Speaker 3: What they're in common is very strong hands ownership structures
28:26
Speaker 3: with a controlling party that is able to regard external
28:33
Speaker 3: shareholders and the stock markets as one priority among others
28:37
Speaker 3: rather than as their only priority.
28:40
Speaker 1: That's interesting, obviously one of the things that has divided
28:45
Speaker 1: the UK in the U S secuity markets is the
28:47
Speaker 1: fact that in the US it's possible for founders to
28:50
Speaker 1: effectively stay in control and lest that companies, but is
28:55
Speaker 1: overhere up until very recently with some of the tweaks,
28:58
Speaker 1: it's been harder for does to maintain that voting control.
29:04
Speaker 1: And a lot of people obviously have said that's a
29:06
Speaker 1: that's a that's a bad thing that shareholders don't have
29:09
Speaker 1: that ability to change things. But I guess if sheerholders
29:13
Speaker 1: are not going to engage in that way, and you
29:17
Speaker 1: do have a strong founder, we have a strong version, then
29:20
Speaker 1: perhaps that actually is something that's a better model. So
29:24
Speaker 1: that's interesting that you kind of like that.
29:27
Speaker 3: Yeah, I mean, don't get me started on corporate governance
29:30
Speaker 3: rule books, so it will be kind of here. It's
29:34
Speaker 3: in my last book actually about financial fraud. While I
29:37
Speaker 3: was doing the research for that, okay, up with fantastic
29:39
Speaker 3: statistic which is in the high period of the Victorian
29:44
Speaker 3: Areas stock market, so about eighteen twenties to eighteen fifties,
29:49
Speaker 3: roughly one sixth of the companies that were floated on
29:53
Speaker 3: the London Stock Exchange were frauds. One third of the
29:58
Speaker 3: companies floated on the London Stock Exchange were bankrupt within
30:02
Speaker 3: two years of flotation. And the thing is that if
30:05
Speaker 3: you look at that, you go, you know, my god,
30:07
Speaker 3: that place was worse even than the present day aim.
30:13
Speaker 3: But the railways got built. There was a huge amount
30:17
Speaker 3: of wealth created during that period. And it really let
30:21
Speaker 3: me think that you can write down all sorts of
30:25
Speaker 3: corporate governance rules, and every corporate governance rule has its
30:29
Speaker 3: roots in some scandal or other that someone wants to
30:31
Speaker 3: prevent from happening again. But you end up throwing the
30:35
Speaker 3: baby out at the bath walls. You end up having
30:38
Speaker 3: a huge box ticking culture which is meant to prevent
30:43
Speaker 3: all kinds of bad practice, which also ends up putting
30:47
Speaker 3: so many constraints that you don't get the good practice either,
30:50
Speaker 3: you know, at the end of the day, And this
30:52
Speaker 3: is probably the form of financial regulator in me talking.
30:57
Speaker 3: You can spend your whole life come up with rules
31:02
Speaker 3: and checks and kind of incentives to try and make
31:07
Speaker 3: sure that someone's going to act honestly. But basically, if
31:11
Speaker 3: you don't trust someone to act honestly already anyway, that's
31:15
Speaker 3: your problem right there. At a rule book is not
31:18
Speaker 3: going to help you solve it.
31:19
Speaker 1: Yeah, And you're always closing the stable door after the horse,
31:22
Speaker 1: that last horse is bolted, then find in another one
31:25
Speaker 1: somewhere else that you didn't think of.
31:27
Speaker 4: Yeah. And often you're actually providing a templates because everything
31:30
Speaker 4: that you check up on, you're also making a decision
31:33
Speaker 4: about what you're not going to check up on, So
31:35
Speaker 4: you're often actually providing a design template for the next
31:38
Speaker 4: round of fraud.
31:39
Speaker 2: Dan, can I ask you about the impact of this
31:42
Speaker 2: on democracy? I wrote and asked garously about tax morale,
31:46
Speaker 2: and you were talking earlier about you when you get
31:48
Speaker 2: to the point with an accountability sync where people don't
31:51
Speaker 2: want to pay anymore? And do you feel that we're
31:53
Speaker 2: reaching that in terms of government as well. I mean
31:56
Speaker 2: in the UK, you look at everything and everyone and goes,
31:58
Speaker 2: as we discussed at the very big nothing works, nothing
32:02
Speaker 2: happens anymore. I don't want to pay anymore and that
32:05
Speaker 2: has an effect on democracy as a whole. Have we
32:08
Speaker 2: reached a dangerous point there too?
32:10
Speaker 3: There's certainly that kind of feeling that people don't kind
32:14
Speaker 3: of understand any particular connection between what's demanded of them
32:21
Speaker 3: and the decisions that people are taking and you know,
32:25
Speaker 3: you know, tax morale is certainly one part of that.
32:28
Speaker 3: The thing that always comes back to me is the
32:32
Speaker 3: way that the government handles kind of climate regulations and
32:38
Speaker 3: EPCs for buildings, for things like that, which always seems
32:43
Speaker 3: to be to announce really kind of restrictive and really
32:49
Speaker 3: difficult standards, wait a couple of years, and then say
32:54
Speaker 3: that this is too tough and we are relaxing them,
32:58
Speaker 3: which always, to me has the effect of making anyone
33:01
Speaker 3: who tried to comply with the law feel like a fool.
33:05
Speaker 3: And that sort of thing is incredibly corrosive of trust
33:10
Speaker 3: in the long term. And you kind of see across
33:14
Speaker 3: the world that people are turning towards politicians that promise
33:21
Speaker 3: simple solutions to the problems. And a lot of this
33:25
Speaker 3: is simply that people are just tired of dealing with great,
33:32
Speaker 3: big systems in which there's no way to communicate back
33:36
Speaker 3: to them, but where you're still expected to pay for
33:39
Speaker 3: the whole thing. So I wouldn't necessarily be talking about
33:44
Speaker 3: imminent crisis, but there's a definite downward slope there. There's
33:47
Speaker 3: a definite kind of gap opening up between what people
33:53
Speaker 3: are prepared to put up with and what's being kind
33:55
Speaker 3: of asked of them, and that's something which can only
33:58
Speaker 3: end up in reorganization of some sorts.
34:00
Speaker 1: Where do you think that feeling stemmed from. I mean,
34:03
Speaker 1: I would say that the kind of the wake up moment,
34:06
Speaker 1: and I think you'd probably agree, judging by the book,
34:11
Speaker 1: was around two thousand and eight and the financial crisis,
34:14
Speaker 1: and that's the point where all of this tension, if
34:18
Speaker 1: you like, sort of crystallized. And obviously the actual system
34:21
Speaker 1: did collapse, but presumably, I mean clearly it's been going
34:25
Speaker 1: on for longer because the ymbie you know, yes, in
34:28
Speaker 1: my backyard kind of people keep talking about things like
34:31
Speaker 1: the nineteen forty seven Town Planning Act as being the
34:34
Speaker 1: root of all of our kind of woes. And I'm
34:37
Speaker 1: just curious as to do you do you see a
34:42
Speaker 1: way forward? I know, the end of the book doesn't
34:44
Speaker 1: have a lot of you know, easy solutions, which you
34:49
Speaker 1: wouldn't expect it to have, But like I mean, if
34:52
Speaker 1: Rachel Reeves at the end of October was to stand
34:54
Speaker 1: up and say one thing, is there one thing that
34:57
Speaker 1: you would like to hear from it, that'd be quite
35:00
Speaker 1: a lot of people, you know, since publishing the book
35:03
Speaker 1: about kind of possible solutions, and I think my guess
35:09
Speaker 1: at the whole cause of the whole crisis is that
35:13
Speaker 1: people don't feel like they're being listened to, you know,
35:16
Speaker 1: and not being listened to is absolutely intolerable. You know,
35:21
Speaker 1: everyone has been in a bad relationship knows that the
35:24
Speaker 1: worst kind of thing that you can do to someone
35:28
Speaker 1: is to just pointedly not pay any attention to anything
35:32
Speaker 1: that they're saying. And kind of the relationship between the
35:36
Speaker 1: government and the people seems to have kind of gone
35:40
Speaker 1: in that direction. You know, we decided in the nineteen
35:44
Speaker 1: nineties that monetary policy was something in which it was
35:49
Speaker 1: a good thing to never to listen to where anyone
35:53
Speaker 1: outside the central bags, which might have been right from
35:56
Speaker 1: an economic policy point of view, but you're adding a
36:00
Speaker 1: little bit of emotional and cognitive burden there because now
36:04
Speaker 1: there's something that people used to think was they had
36:06
Speaker 1: a vote on and they don't anymore.
36:08
Speaker 3: Then we bring in the Office of Budget Responsibility and
36:12
Speaker 3: Fiscal Rules, so there's even less space of these things.
36:16
Speaker 3: Most of our big institutions kind of listen less and
36:21
Speaker 3: less because they've got less resources to listen. What we
36:25
Speaker 3: actually need is to bring bad customer service into government.
36:31
Speaker 3: You know, we need like to hire one thousand more
36:36
Speaker 3: local onboards men. We almost need to have a whole
36:40
Speaker 3: cadre of the civil service that's dedicated to listening to
36:45
Speaker 3: people's complaints and doing something for them, to kind of
36:50
Speaker 3: almost helping people to navigate through this system, and more
36:55
Speaker 3: importantly than that, to feel like the system is paying
36:58
Speaker 3: attention to them and to their problems. That to me
37:03
Speaker 3: means that you've got to have devolution, smaller government, more
37:08
Speaker 3: local responsibility, because I don't see how you can do
37:12
Speaker 3: that that sensible resource cost in the huge monolithic structures
37:16
Speaker 3: that we have today. And maybe I'm wrong about that.
37:19
Speaker 3: Maybe kind of technology and kind of larger language models
37:25
Speaker 3: can help do that at large scale. But I think
37:27
Speaker 3: the crucial thing is that unaccountability is the name that
37:34
Speaker 3: we give to a broken communication channel between the bottom
37:39
Speaker 3: and the top of the organization, so that there's no
37:43
Speaker 3: feedback from the consequences of the decisions to the people
37:47
Speaker 3: making them. And you know, for most of the time
37:52
Speaker 3: since the Second World War, we've been moving in the
37:55
Speaker 3: direction of breaking those links because things have been getting
37:59
Speaker 3: more compon located, and breaking that link seemed like the
38:03
Speaker 3: only way to keep things manageable, and that's that was
38:08
Speaker 3: a mistake. That's the communication link that we've got to
38:10
Speaker 3: build back.
38:11
Speaker 1: You're obviously very interested in artifessional intelligence and panalt of
38:14
Speaker 1: attention to that area. Yes, and you clearly aren't a skeptic,
38:18
Speaker 1: as in you don't think it's all annoy instance, where
38:21
Speaker 1: do you see that being in helping out in maybe eight,
38:24
Speaker 1: a couple of years time, five years time, Where do
38:26
Speaker 1: you see it going from here?
38:28
Speaker 3: It's a communications technology, it's an information handling technology. You know,
38:33
Speaker 3: if something like the filing cabinet was such a huge
38:38
Speaker 3: revolutionary improvement to the management of the American railroads, and
38:42
Speaker 3: it was, then this is, you know, many orders of
38:47
Speaker 3: magnitude more important than the filing cabinets. The thing is, though,
38:51
Speaker 3: that if you're going to use those information and technologies,
38:56
Speaker 3: all of the evidence of history suggests that there's got
38:59
Speaker 3: to be very relarge reorganization in order to reorganize the
39:05
Speaker 3: kind of whole system to take advantage of the much
39:10
Speaker 3: more effective and broader communication links. My guy Stafford Bier
39:14
Speaker 3: had this great joke of the nineteen seventies which he
39:17
Speaker 3: said that the corporations of the time installed mainframe computers,
39:24
Speaker 3: but all they really did was to use them to
39:27
Speaker 3: automate the same accounting and payroll systems that they had beforehand.
39:32
Speaker 3: And he said it was like having the ability to
39:36
Speaker 3: hire Shakespeare, Galileo, and Einstein and then just putting them
39:41
Speaker 3: to work memorizing the phone book so that you could
39:43
Speaker 3: make calls a bit quicker. And we've got this technology now.
39:48
Speaker 3: I don't necessarily think it's like human intelligence that's going
39:52
Speaker 3: to replace us all, or it's conscious or anything. But
39:55
Speaker 3: it's a fantastic way of summarizing huge, complex fields of
40:01
Speaker 3: information to an understandable level. And it's a fantastic way
40:05
Speaker 3: of borrowing up simple instruction sets to rich large kind
40:10
Speaker 3: of communication products. That's amazing, and it will be such
40:15
Speaker 3: a missed opportunity if all we ever use it for
40:18
Speaker 3: is to send more emails, which is probably exactly what
40:22
Speaker 3: we'll do. Cheerful, Yeah, ever, cheer for end.
40:32
Speaker 2: Thanks for listening to this week's Meren Talks Money. If
40:34
Speaker 2: you like our show, rate review and subscribe Wherever you
40:37
Speaker 2: listen to podcasts and keep sending questions or comment. It's
40:39
Speaker 2: to Merorn Money at Bloomberg dot net. You can also
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Speaker 2: follow me and John on Twitter or x I'm at
40:44
Speaker 2: mariness w and John is John Underscore Stepic. This episode
40:48
Speaker 2: was hosted by Me Maren Zumset Web with questions and
40:50
Speaker 2: insight mainly from John Stepek. It was produced by Semasadi,
40:54
Speaker 2: Production support and sound design by Moses and and special
40:57
Speaker 2: thanks to Dan Davis. Thank you so much for coming
40:59
Speaker 2: on today, Dan. We really enjoyed having you mhm