How Buybacks Have Warped the Stock Market & Boeing (w/ Dr. William Lazonick)
MAX WIETHE: Hello, everybody. Welcome to Real Vision's Interviews. I'm Max Wiethe, sitting down with Dr. Bill Lazonick of the Academic-Industry Research Network. As well, Bill has been an economics professor at many different academic institutions over the course of his career. We're here today to talk about your recent book that you're publishing, Predatory Value Extraction, and to understand how stock buybacks and the warping of the stock market has really disrupted what is actually driving stock gains over the past three to four decades. Thanks for coming in today, Bill. WILLIAM LAZONICK: Okay. My pleasure. MAX WIETHE: Why don't we just start out with what you do at this? It's a nonprofit organization, which focuses mostly on economic research, if I'm not mistaken. WILLIAM LAZONICK: Yeah. Basically, I've had a career as an academic, been a professor at various universities, as you mentioned, and I set this nonprofit up, this 501(c)(3) nonprofit up almost 10 years ago, to do research outside the university for a variety of reasons, and I've been working with a number of people, now it's about 15 people who I'm working with regularly who are in various parts of the world who have worked with me, some for as long as 20 years to do research on how companies become innovative, how they create products that people want to buy at prices that they are willing to pay, and can compete on national and global markets. What happens once they actually become successful to the profits that they make, so the profits are really outcome of some value creation process. That makes these companies successful, which I can get into how that works. Basically, once they are successful, there is a huge pot of gold there in these companies, and if someone can say, that's mine, and take that money, they can become very rich. If it's not theirs, someone's got to talk about that. That's what I do. A lot of the changes that I talk about from going from companies retaining their profits and reinvesting them in their organizations to what I later, in the '90s, called downsizing the companies and distributing cash to shareholders not just as dividends, but stock buybacks, a lot of that transition took place in the 1980s when companies started articulating and imbibing this idea that company should be run for shareholders. I was at Harvard Business School in the mid-1980s when that ideology came in in 1984, no one was talking about that at Harvard Business School. 1986, they were. There was an easy explanation for that. 1985, Harvard, went out of its way to hire the guru of maximizing shareholder value, a guy named Michael Jensen. I came out of economics by that time. I had been in the Harvard Economics Department for over a decade and a half, I was now at Harvard Business School. I saw that no, those aren't the people are creating value. Shareholders are just buying and selling shares on the market. People have gone to work for these companies, often for decades. They are the ones who create the value. We as taxpayers, have supported these companies with the infrastructure and knowledge, we should get a decent tax rate back. This ideology is not an ideology that's being put forward or it's being put forward as an ideology of value creation, but it's actually an ideology of value extraction. I started researching that and learning about how that was going on and did that, within the university structure, often with collaborations on people not just looking at the United States, but places like Japan, Korea, various countries in Europe, then got into looking closely at China, India, and trying to understand basically, what we're talking about is capitalism. How countries get rich and what happens when they get rich and whether there is a way in which we can explain, particularly what's going on in the United States, of this extreme concentration of income at the top and the loss of middle class jobs, extreme income inequality. I started this organization outside the university for various reasons. In, I think it was 2010, there is an organization that started up which has its offices probably about a 10-minute walk from here, called the Institute for New Economic Thinking which started it up and I've gotten through this organization, the Academic-Industry Research Network. Various grants from them to do research, they've been one of the one of the main funders of the research. I pulled together, this group of people, many of them who are doing PhDs, now have academic jobs. Some of them are mid-career, who were in touch with basically all the time. It's almost a virtual organization but we can write about things that have been going on historically, can write about things like, let's say, the Boeing crashes that have occurred more recently. We have a certain level of expertise that I don't think actually is things quite unique in terms of academics and really digging critically into business and saying, not just the dark side, but the bright side. How businesses become successful. That's what we're mainly interested in, is how you can understand the way the central institution in our economy, the business enterprise, some which grow to be bigger than whole countries, small countries, how they actually can create value, share the value with their employees, not just because they wanted to show the value of in place, because it helps those employees get some incentives to be more productive. It's the result of them being more productive, how you get this positive dynamic going on in these companies, which we call retain and reinvest and how we can all be better off as a result. Then critiquing a lot of what's going on in the last particularly last 30, 40 years, in people who have often very little role, if any, to play in these companies claiming those profits of theirs, and even more being able to lay off 5,000, 10,000 people and claim. The stock price goes up and they gain, how that can happen. The book that just came out this past week, which with a colleague of mine, Jang-Sup Shin, who is a professor of economics in Singapore, he's originally from Korea, it's called Predatory Value Extraction as you mentioned. The subtitle summarizes the book, it's How the looting of the business corporation became the US norm, and how sustainable prosperity can be restored. By sustainable prosperity, it's a shorthand for stable and equitable growth that we want. Growth, it's stable employment, equitable distribution of income, which we have neither of those. We want to get productivity growth, which can support those things. Right now, we have sagging productivity growth problems, real problems of many US companies competing in global competition, partly the because of what I call the predatory value extraction, this looting of the business corporation. That has been something that we've been doing a lot on this group of mine and getting a lot of visibility for that research through various outlets because it strikes a chord with a lot of people who are saying, where's all this inequality coming from? MAX WIETHE: Well, that visibility, I came across your New Yorker profile, and I got to read about some of the research you had done and it really sounded like something that I felt would resonate with a lot of our viewers here at Real Vision. We've covered buybacks, and we're very interested in what's driving the stock market. You mentioned briefly before that you're not just looking at the bad, looking at the predatory value extraction, you are also looking at what makes these companies good. That's really how you started out your book, was looking at the theory of the innovative enterprise, as you call it. I think that's a great place for us to start. WILLIAM LAZONICK: Well, yeah. Trying to summarize in a 30-second something, that's going to be another book because there actually is a real problem if you're trained as an economist as I was. I'm a PhD economist, got my PhD at Harvard early 1970s. Things have basically in this regard have gotten worse since then. Economists generally, PhD economists, do not understand how business enterprise operates. They see the states, they see the markets and in fact, what is being taught in introductory economics courses every year and it's been taught to millions and millions of people since a guy named Paul Samuelson wrote his introductory textbook in 1948 is-- and I'm not going to get into this other than just state it because as I stated, it'll sound totally absurd-- it's actually being taught that the most unproductive possible firm is the foundation of the most efficient economy. They call that perfect competition, of course, then they say, well, that doesn't really exist. Then the whole mindset of economists is that oh, competition is imperfect so we have to move through policy, through business, what business does and make it more perfect, so that we get rid of monopolies that we just have lots of competitors out there who are all competing the same way, producing commodities. Now, if we actually had that state of affairs, we'd be living in poverty. The reality is that well, first of all, that building even a small business enterprise is in many ways, a heroic feat. I would tell students when I'm teaching students if you can start a company and can keep people productively employed, pay them a decent wage, let's say for 10 years, that must mean you have something that people is buying, some product that people out there are buying. You're probably going to do quite well, you're going to do quite well for you, and they're going to what? Profitable employees. How do you get to that point that actually you can be around for 10 years? You can't do it by doing what everybody else is doing. You can't do it just by saying, well, here with the market says you should do in terms of technology prices, you have to make an investment in learning. Now, obviously, in some companies that we can see that on their financial statements, it's called R&D. That's not the only type of learning that goes on. In fact, if you take the S&P 500 and you look at how many of those companies is one of the 500 largest companies United States, only about 210 of those do any R&D at all. About I think it's something like 38 of those companies do about 75% of all the R&Ds so it's some pharma companies, aerospace companies like Boeing, companies like technology like Apple, etc., but any organization, including your little organization here, people are learning how to make the product, how to do it better. If you're going to survive, it's because you have might be a neat short, might be a mass production market, but you're going to be able to produce a higher quality product and you're going to get a larger market share, you're going to then cover the costs of the people and which are often the fixed costs that you're investing in, not just buildings and get up competitive advantage. That's what I basically study how companies do that. It's when you're talking about companies that grow to be 10,000, 20,000, 30,000, hundred thousand people, you're talking about credibly complex social organizations. When they work well, when they're actually over a sustained period of time, generating a high quality product that they can get economies of scale and get the low unit costs, even as they're paying their employees more, and they're giving them employment stability, you're getting productivity growth, it has a big impact on the economy, particularly if lots of companies are doing that. If we look at a time historically, when American companies were really very good at this value creation, innovative enterprise, it was a fast forward two decades, when there was much more set of norms that prevailed that once you hired people, you kept them employed over their career, it wasn't a contract, but it was basically in practice, you could see it by defined benefit pensions that were not partible that had to do with how long you stayed with the company. You could see it at the blue collar level with collective bargaining and sometimes enforced by unions but this was so that you would get a labor force that showed up every day and cooperated in mass production, but you also saw it at the white collar level without any unions, that companies crane people, and they want to retain them. We had that system, which actually made the US the world leader in the international economy, the US got the challenge by that in the early 19, late in the '70s and '80s by the Japanese, but the Japanese actually did that, perfected that system. Now, that system doesn't work quite as well anymore in any case, because we live in a much more open system environment, much more global value chains. China's not really competing with the same thing as the Japanese system but this way in which you understand innovative enterprise, not just the level of the enterprise, but the whole ecosystem that supports it is changing all the time. We're talking about a moving target. Just that part of the research and that part of the documentation, that part of the argument that that's a real challenge for anybody who is looking at these things seriously, and we look at them seriously because we're academics. We looked at seriously, as I do, coming out of a training in economics where I know that most economists actually don't have the slightest idea how to do that research or were doing because they think the market should just be allocating resources. I just thought at this point that just by making one more comment, because one of the markets that of course is looked to allocate resources to alternative uses, is a stock market. The fact is that historically the stock market, that's not been the role of the stock market in United States. The stock market has been the way for private firms to allow their owner entrepreneurs or their venture backers, capitalists backers or private equity backers, to exit from having the money tied up in the company. You do that by going public on the stock exchange. If the stock exchange is liquid enough, then you have no problem capitalizing your investments, and that's the main function of the stock market. The other side of that, historically, is that you can then use the stock markets to separate ownership control, you can break the link between the original owners who build up a business and the ongoing management of the business. Here, I'm very highly influenced by a business historian who I got to know after I had done my PhD, he was at Harvard Business School, named Alfred Chandler wrote a book called The Visible Hand, The Manager Revolution in America Business, which was published in 1977, won the Pulitzer Prize in history, and really ended at 1920 as a historical book and said, by 1920, or in the 1920s, you had people who were not the founders of business running companies, they were managers. What made those companies strong is that those people came up through the business through the stock market, the old owner entrepreneurs got out of the way and now, you could move up to the company, to the top of the company being an employee, which is basically this situation today, except now some companies go public much quicker and the founder stay around. Basically, the stock market's rule is really fundamentally historically to separate ownership control, not to fund company. That's one of the implications, or big implication of the research we've done. MAX WIETHE: There was one exception that you mentioned in your book, which I thought was just too interesting not to bring up here, just in that late '20s, where the companies that realized that the stock market had gone too far, actually sold stock and it was one of the only occurrences ever that a company had a secondary issue of stock on the market and they had a cash surplus that they were able to weather the Great Depression with and it actually worked, but since then, you don't see it at all. WILLIAM LAZONICK: Well, you see it-- because we don't get into much of the details of some of the research we do, you see them in biotech. Certainly companies are going public on the stock market around where I live in Cambridge, Massachusetts. There's a lot of them, we call them product list IPOs. They do an IPO. They're a research entity. They might have some investment from Big Pharma. What happens there is people make lots of money in those companies they want, they never produce a product. It's not that you can't use the stock market that way, although, and we saw it also in the internet boom of the late '90s, the dot-coms, often it's very speculative. If companies are sound companies, they can generally grow organically, not be exposed to the stock market until they actually have that growth secured through their own profits and then can control their own growth because they have as long as they can control the profits and reinvest them a significant amount. They can then leverage that with debt, by the way, the world-- I won't get into this, but it also totally says throw up my Danny Miller because debt and equity are not substitutes, debt is a compliment to the equity that you retain in a company. What you're referring to there is probably the biggest period or a period of '28, '29 when companies actually sold shares on the market is that all the speculators were out there, the companies that had become dominant on the New York Stock Exchange in the 1920s now had a lot of profits. They were paying their workers better, but they were just awash with cash. They actually started lending that money out on the New York call market for 10% to 15% for people by their stocks on margin speculating up, and then they sold the shares at the higher prices and paid off their debt. The Japanese did the same thing in the 1980s. It's financial engineering, but it's actually to solidify the corporate Treasury to pay down debt or to just put money in the corporate Treasury which then became very useful once you get slow demand in the Great Depression, just to say right now, we have an article-- hadn't been published yet but it's on debt finance buybacks is just the opposite. You're actually using debt to finance buybacks that don't-- so now, not only do you not have productive investment that is going to generate returns related to the buybacks, but you have debt on your books that you have to pay off. There was actually a very good article in CNBC yesterday on Oracle and Larry Ellison and them getting into trouble. Actually, it's an article that fits everything we say about companies getting into trouble by just trying to boost their stock price through buybacks and not investing in the products of the future. MAX WIETHE: Well, you mentioned a period of time when we did have innovative enterprise, which was that that post-World War II era, the decades following that we as America, we grew at an astronomical rate. What was different about that time that allowed that innovation to occur that we haven't seen today? WILLIAM LAZONICK: Yeah, well, so first of all, I think it was the financial sector was highly regulated. They used to talk about 3-6-3 banking, 3% was what you got if you put your money in the bank and let that out to its prime customers, corporations at 6% and the other 3% was when the time of day when the bankers went to play golf. That's actually what prevailed into the 1970s. The '70s changed a lot of this in terms of the financial sector. In terms of the companies themselves, there was a norm that set in that once you employed people, if you just started laying those people off, you're not going to get good people to join your company, that you are building this company by investing a lot of vertically integrated activities. It could take decades to build a company you would invest in research, if you're a research oriented company, not just in research and development of corporate research labs, very long term research that could result in products in the future, but no one really knew when they were doing the research, even what closed products will result in. In companies more generally, you just treated your workers better because you wanted those workers to show up every day, give the customers good service, and that became the norm. Companies that didn't do that are not company people would want to work for. Unfortunately, that was mainly a white man's world. Even up until the Civil Rights Act, companies had marriage bars where they could tell women to leave quite legally from the company if they got married. Harvard Business School didn't admit women to the MBA until 1964 when they saw the writing on the wall with the Civil Rights Act, that's now over 50 years old but that's not that long ago. Also what-- we have a book coming out on what's happened to African-American employment over the last 50 years. One of the things that happened in the 1960s and 1970s, there's still a big demand for blue collar labor in the US. This is just before the Japanese impact started to occur. There's expansion, particularly the automobile industry of blue collar work. If you could get a semi-skilled blue collar job, that meant you're on the assembly line and you're represented by union, you had very good pay. Well, whites were the children of blue collar whites were moving, going to university, often free tuition, or very low tuition and moving into white collar work. Blacks who had been, of course, in a less privileged position in the United States or much more disadvantaged position, there was a big push helped by also by the setting up of Equal Employment Opportunity Commission, to move those people up in the companies from unskilled jobs to semi-skilled jobs. That started to work. Unfortunately, I think one of the reasons why the system was not maintained in the 1980s was because, in fact, as those jobs get challenged, I think of it had been more still a white male society, the companies might have-- there might have been more of a consensus, but we need to retain and reinvest. It fed into it. Well, no, we can buy take responsibility for people we don't care about. I think in the end, we can see what's happened to the white blue collar worker now downward mobility, lower life expectancy, opioid crisis. It hurt everybody, but I think that that fed into it. What I'm trying to get at here is there are lot of social influences on what companies do and how they act and what the norms are. Those norms changed. Then they changed dramatically in the 1980s. As I said, what I saw at Harvard Business School that Harvard Business School went away from this notion, which they really had retained and reinvested and call it that, to yeah, it's good to downsize and distribute. That's what they started teaching the students. That's what the students started getting jobs on Wall Street and be able to make a lot of money by participating in that, as if it's all about value creation. That's when things went from really changed. That's when you went from having stable and equitable growth coming out of the practice of these companies, these companies to contributing to unstable employment in equitable incomes, and actually in the end, in many industries, say in productivity growth, loss of international competitiveness. MAX WIETHE: You talked about the maximizing shareholder value, but also it was coupled with changing regulations. You really think it was more of the changing regulations or this new economic theory which really was the driver, or obviously, it was a combination of both, but they're both major factors. WILLIAM LAZONICK: Yeah. There was a lot of changes in the institutional environment which are often regulatory that fed into this. The creation of NASDAQ in 1971, out of basically the National Association of Security Dealers automated system, you had all these security dealers around the country trying to sell small shares and small companies. There was no national market nor liquid market. The Security Exchange Commission in 1963 had a special study of the potential of companies being able to go public more quickly if there was a national market for more speculative companies. The impetus to that was that there were a number of companies which were called glamour stocks, which they get on the market in the late '50s and '60s coming out of military technology that started catching people's attention that you could use this for commercial purposes. Of course, then you had the rise of Silicon Valley. Silicon Valley, actually got named that name the same year that NASDAQ was started in 1971, where you had all these things startups going and taking a lot of the technology. They've been done in corporate research labs, and developing, in this case, semiconductor chips and people leaving one company to another and then being able to get listed on the stock market, Intel, which was founded in 1968, was listed in 1971. By comparison, Hewlett Packard, which was founded in 1938 in Silicon Valley, the heart of Silicon Valley was really an old economy company right into the '90s. The HP way was you never laid people off. That's how you got innovation. They didn't go public until I think it was a 1957. I think that one of the reasons they went public in 1957 was precisely Hewlett Packard were now looking at not just being the only people who control that company, brought managers up. There wasn't so much finance at that point. They were still a very careful company in terms of growth. You started getting this market where you could put companies on Stock Market Watch more easily. That then meant that you could get things like the dot-com boom, you could get things like these biotech startups that I've talked about. MAX WIETHE: It changed the reason that people own stocks. Was that owning stocks now-- WILLIAM LAZONICK: Yeah. Then the other thing was that if you held stocks in the 1970s, you had a problem because there's no inflation. Then people started saying, and also there was global competition. There's a question, can you pay dividends? The stock market was not doing very well throughout the 1970s. There was the change into fixed commissions, which was actually forced upon the New York Stock Exchange by-- in 1975 by NASDAQ, there was very important was the Employee Retirement Income Security Act, ERISA, which was 1974. Now, that was actually impetus to that was a bankruptcy, and a particular case, Studebaker, the auto company got bankrupt in the '60s, their employers were left with their defined benefit pension so there was a movement for defined benefit pensions to have some backup by the government. That was the impetus behind it. However, you had the other side of that, how were the fund managers in this case, mainly the companies that ran the pensions like GE's pension. How are they going to get enough yield to fund the pension when you have all this inflation? There was lobbying basically to clarify under what was called the prudent man rule, which was part of a risk of what a fund manager could invest in without being liable for if they lost money for being too risky. On July 23rd , 1979, the Department of Labor which was overseeing ERISA clarified that you could put a certain proportion of your pension fund into risky assets like venture capital, and not violate the prudent man rule and not be held liable for taking undue risk with your-- MAX WIETHE: Other people's money. WILLIAM LAZONICK: Yeah, other people. From that moment, there has never been a shortage of money for venture capitals in the United States. It's always been a question of what are good companies to invest in. We always find things like the dot-com boom, it happened actually in the mid-1980s. They call it vulture capitalism, venture capital just setting up companies just to go public in then not being worth much. You had a lot of that going on. The problem really has not been any lack of money. The institutions made the money flow more easily through the system. There's certain amount of that that you want money to be able to flow through the system but how it flows through the system is another question. Now on that particular issue, because what happened at that point, buybacks we're not being done. If you are a company, you are paying out dividends. You were-- the last speech by a guy named Harold Williams, who was the head of the SEC when Ronald Reagan got elected and then he resigned, he had some time to go in as the chair of the SEC was to security dealers, this was called the corporation as a continuing enterprise. This was 1981. He said, corporations are paying up too much dividends, they have to reinvest more. That was before stock buybacks became a problem. Now, companies have been doing stock buybacks, which is something that I spent a lot of time researching over the last decade. There's a major regulation that actually just led to what I call the looting of the company, company tried to do stock buybacks. Sometimes they did through tender offers, I'm not talking about it but sometimes, they just went to the open market and did repurchases. The Security Exchange Commission, their lawyers said well, is that manipulation of the market? It looks like manipulation of the market to me. There was a rule proposed that would have tried to limit-- not ban them, and they were never really illegal, but limit them. It was proposed three times, but never adopted. Then once the Security Exchange Commission changed under Reagan, they put a guy named John Schad from Wall Street as the head of the commission. He believed in Chicago economics, efficient markets, the more markets sloshing around through this system, the better of what as he stills says today, capital formation. That's not capital formation, it's the money sloshing around through the system. They adopted really under the radar without public comment in 1982, in November of 1982, a rule called Rule 10 B18, which was totally obscure until some academics written about it, but until the research that we did say this is when you allow buybacks to occur on a massive level, and we call rule 10 B18 a license to loot basically. It now said you can do massive amounts of stock buybacks with a safe harbor against being charged with manipulation. Even if you exceed that safe harbor, you won't necessarily be charged with violation. It turns out right to this day, the Security Exchange Commission doesn't know whether you're ever exceeding it because they don't collect the data on the days of buybacks, but some people do. Then that was a regulation which basically created a whole new instrument, on top of dividends. Not instead of dividends, because they haven't been instead of dividends, but on top of dividends, our data shows this to take money out of companies, and it's one that's favored by people who want to go into the company, get the stock price up, and then cash in because if they can time the buying and selling of shares, they can make more money than they would otherwise. In the book, we have a framework for looking at this looting, which, so it's the core of the book after we get through the theory of innovative enterprise, the critique of shareholder value and ideology, the role of the stock market, not what people think it is. We get into how is this predatory value extraction occurring? We have a framework where we talked about one chapter is the value extracted insiders. There are the CEOs and top executives who are motivated by the way they're paid, stock based pay, stock options, stock awards, which are structured in a way as a stock price goes up, you cash in. There's a long history of stock based pay, it goes back really to 1950 in the United States, that we've gone through that history. I won't go into it now but then we talked about it a bit in the book, where basically it was a capital gains tax dodge up until it was eliminated in 1976. It really came back in the 1980s. Stock based pay, actually, not because of the large corporations, but because of Silicon Valley startups that were now using stock not simply to separate ownership control, but also to pay people as a mode of compensation and not just people at the top, they were paying people down through the organization and actually, what the reason they're often paying people in stock was because they want to lure them away from in the '80s and even in the '90s, from secured employment in the old economy companies. MAX WIETHE: Like the HPs and IBMs-- WILLIAM LAZONICK: If you think of pharma, Big Pharma, one of the reasons Big Pharma started having problems with their corporate research labs and doing really invest original research and new drug development was not just shareholder value ideology, but a lot of their best people now, there was an institutional framework for startups, for products that take billions of dollars and 10, 20 years ago through, it wasn't really appropriate but there's a way of just going to a startup, getting lots of money, making a lot of money, much more money that you can make as a research scientist in, well, in the pharma or at Lou Center, HP or IBM, etc. These companies started themselves trying to change to that new model of stock based pay. This then, at the old economy companies often, when they weren't paying stock based paid down through the organization, this then led them to adopt that as the main way in what they were paying top executive. Then one by one, these companies changed their own internal ideology. Later, we're going to talk a little bit about Boeing, but Boeing did that in 1997 when it merged with McDonnell Douglas and brought in a lot of people who were much more imbued with shareholder value ideology as a way of running a company than the existing management of Boeing. It changed in different ways, different places. Hewlett Packard, it lasted the old economy model into the late 1990s. Even though Hewlett and Packard who had founded the companies were no longer active in managing it in the 1990s, David Packard, the year before he died, published a book called The HP Way, which said, we don't fire people here. We keep them employed, we find other work for you. Then at the back of the book, he had looked at all the innovations we did over the decades with this model. That then gave it some legitimacy until they brought in a new CEO. Her name was Carly Fiorina in 1999. She went with the flow and turned it into IFR company, a company that's shareholder value oriented. You had these changes going on that. If you hadn't had that change in the regulation at the Security Exchange Commission in 1982, well, you would have had to have at some point, but that's when it occurred and what happened then is that the agency itself turned from being a regulator of the stock market, in this case to being a promoter of the stock market. It started being promoter of the stock market by allowing companies to do something that was contrary to the original mandate, and supposedly, the current mandate of this SEC, and that is to eliminate fraud and manipulation in the stock market. Open market repurchases, I would argue are nothing but a manipulation of the market and they're legal. Hence the license the looting, legalized looting of business corporation and they're massive, which I could go into. MAX WIETHE: Well, we'll get into that with the example of Boeing later. I think it's a fantastic example. It's really visceral, especially with what's happened recently. I wanted to get into some of the accomplices that these value extracting insiders have you bring up to, which are the value extracting enablers, and then also the value extracting outsiders. I think both of them are equally implicit in this process. Why don't we start with these enablers? WILLIAM LAZONICK: Beyond the value extracting insiders, then the framework of the book, we then look at the enabler. We put our money into securities to a certain extent, increasingly not as individuals but indirectly through pension mutual funds, and they hold about 60% or 65% of all the stocks outstanding, stocks still tend to be concentrated among the top 10% of income earners in the population, not everybody holds stock, but a lot of our stock is controlled by pension funds and mutual funds. Let's say the case of pension funds, I would argue if you're running a pension fund, just from the point of view of those 2,000, 4,000 stocks or whatever you have in your portfolio, first of all, you're not going to know what's going on with those shares, you can't possibly know. What you should want in general is a set of rules that say okay, when companies can afford to pay dividends, they should pay dividends and then under the rules for savings that we have, they'll accrue tax deferred until people want to make use of that money, pull the money out if you have a pension that's accumulating through dividend payments coming into the pension. We don't want buybacks because buybacks are people who are timing the buying and selling of shares now, and what we want is them to pay out a reasonable amount of dividends and reinvest in the company so that if and when we sell the shares in the company at some future date, change our portfolio, those shares are likely to be worth more rather than less. From an individual point of view, that should be the same. If I have hundred thousand dollars and then putting it into the stock market, I should put it in-- unless I think I have some particular insights on when companies are manipulating the market, I should put it into dividend stocks and I should look at companies that are reinvesting and I should have a notion of what an innovative enterprise looks like, which I'm not going to get from studying economics generally, but from understanding the fact historically how businesses become successful and put it into those companies. Now we could make mistakes, but I would say if you had a portfolio of those shares, you would do better. Now, of course, one of the reasons we don't do it ourselves is because we can get diversification and expertise, etc. from the fund managers, but that's how fund managers should be behaving. In fact, what turns them into enablers is the fact that they're being judged by the yields that they can get. In here, you can say quarter to quarter, I don't think everything is quarter to quarter, but it often is in this world. If someone else is getting a higher yield, and you're not getting it, you might not be the fund manager for all. Everybody is looking to get those higher yields so they start trying to figure out where are the companies that are going to get this price boost and they stop thinking or even trying to understand of course, because of the way they're trained, not just now in economics department, particularly business schools, they're just going to be thinking about how you diversify, get a high yield, etc. They'll just go with the flow. They become enablers. Now, here's again regulation that made them more powerful enablers is that in the 1980s, there was a movement in the name of shareholder democracy, for shareholders to not only have votes but exercise more power in companies. Now, on some level, you might think that's a good idea but if shareholders are just people who buy and sell shares, it's not such a good idea from my point of view. In fact, at the time, the push really came not because more and more people were holding shares, but because shareholding was becoming concentrated among a few big asset managers, which has become quite extreme now. You then have the question, well, what do those asset managers do with the proxy votes to those shares? Now, an argument can be made that they're just holding the shares for you, why should they get to vote the shares? Well, it was ruled basically, yeah, they get the vote the share, but in 2003, the SEC sanctioned a rule that says not only they vote the shares, they have to vote the shares. That gave rise to two companies that want to exist, that ISS, [indiscernible] shared services, the other, Glass Lewis that divide up the market in proxy advising and have very small number of people working for them and advising on massive numbers of proxy votes and then shareholder proposals. They then became part of a system where if you could get them to advise in a particular way, then you could actually with a very small percentage of the shares of a company have an outsized influence on the shares, and that's where the outsiders come in. They're the shareholder activists. The one we write about in the book is Carl Icahn has been around since the late 1970s. People like Paul Singer, Nelson Peltz, William Ackman, there's about a dozen of them, and I wouldn't say in every case, they go in and do damage. There's a few of them who tried to get into companies and cooperate with the companies in investing for the future, but in general, the way they're going to make their money is by getting them to pump money out of the company and figure out when to sell their shares. That doesn't mean they're going to hold on just for a month or two. They might hold it as we show with the case of Icahn on Apple for 30 months and took out $2 billion in 3.6 billion in just buying shares on the market. In that period of time, Apple did the highest amounts of buybacks of any company in history. This was in 2014-2015 when Icahn was holding in the shares, 45 billion in one year, 36 billion the next year. Apple actually is far outstripped that since then. That was a game changer because now you take an iconic company that actually, we document in the stuff we wrote when Apple had previously gone to this shareholder value mode which was between 1985 and 1997 when Steve Jobs wasn't there. They almost drove themselves into bankruptcy. Jobs came back, it was retain and reinvest. We know the story. Now they have lots of money. He died and Tim Cook became the CEO. Since 2013, they've done 288 billion in buybacks. Just in case anybody thought that Warren Buffett, who built up Berkshire Hathaway by protecting all those companies from the stock market is a patient capitalist, he's not. He's now is the biggest, by far biggest, about 10 times the stake that Icahn has and he's just a rabid cheerleader for stock buybacks to increase his stay. What that means is you're not going to replace an Apple. It means that Apple is not taking money. It's 288 billion just in buybacks since 2013 and investing in the Tesla's and other companies of the future that it could be investing and this is even with someone like Al Gore on the board, one of the longest standing board members since 2003 who is, of course, we all know, not just the former Vice President, but one of the main advocates for climate change. What Apple have done with $288 billion in saying, we have a company that can hire the best people, that has an iconic brand name that can compete globally and can move into new technologies if it had gone into green technology, if it had gone in that direction, which it could have, it hasn't. That's a lost opportunity and you don't just recreate those companies to be in that position to have all this money, to have the ability to track people, all that learning that's available. We then get to these outsiders who have become much more powerful, and were made much more powerful by this rule in 2003, this proxy voting system where you can hold a very tiny fraction of the shares, still a couple billion dollars, maybe of a company like Nelson Peltz at GE with never more than .8% or 1% of the shares but get that company just pump all kinds of money out of the company for the sake of shareholder value, and cease to have any potential to be that it had to be the innovative company. It's in the case of GE, it's we rely on GE as US as it's the main-- the really the big company in energy. What damage does that do to its ability to compete? Actually, it's losing markets, even in the United States, so a Danish company investors. That's the thing we look at it and we see it again and again but we see that there's now this whole configuration of the insiders, enablers, the outsiders all focused on getting stock price up. Buybacks are the tool in which they do that and we're saying, hey, let's stop letting them do this. Let's change the rules, so that we have a system that doesn't allow this predatory value extraction and allows the value creation, sharing the gains with the employees, paying us as taxpayers who help support this infrastructure of knowledge, a decent tax rate so we can not only get a return on that, but invest in the next round of innovation without the government going more into debt to support the companies in innovation. That's the model we have and well, that's the model we put forward but it's not the model we have. We have this model, which is really deeply entrenched now in what we call predatory value extraction. MAX WIETHE: Well, and I thought, also a really interesting transition you did was from Carl Icahn as the corporate raider where he's taking 25% stakes and now he only has to take less than 1% stake and people would suppose maybe that that's because they're afraid of him becoming the corporate raider, but really, all the incentives are aligned. He doesn't have to, it's really that he doesn't have to, not that they're afraid. WILLIAM LAZONICK: Yeah. It was because of him that the term green mail got coined. It actually only looked at it, only that he puts [indiscernible] around 1982, '83 and he went after a small number of relatively small companies in that were locally based. He started getting control and/or threatening control. All he had to do was threaten and then they would buy him out green mail. They were doing that even before it got turned green mail. Now, what is fine? We've looked at a few of these cases is that within those companies, there were some people, there was actually-- should we try to fight him off? Should we let him in? There are some people who said no, okay, let's do this, we'll get our stock price up and offered then their own stocks. You start getting this aligning, but sometimes it was called hostile takeovers at the time because often, it was seen as hostile. The people who are running the company do not want these outsiders so they say, well, they're incumbent, they're just protecting their own interests. It could be that those companies are not being run properly, but it's not going to help to have someone come in whose only purpose is to get the stock price up and using the ideology of shareholder value as to legitimize this, you have to understand the principles of innovative enterprise. I think good executives do understand that. The only one case that that occurred relatively recently that everybody probably knows about is Whole Foods. Whole Foods was known as now owned by Amazon, but known as being a really good employer, charging high prices, but it was getting-- yeah, people going there, shopping there. In the fall of 2015, I was asked, actually by someone in one of the presidential Democratic presidential Bernie Sanders campaign actually, someone asked me why is Whole Foods, because I've been saying Sanders should talk about buybacks. Why is Whole Foods, they've done about a billion of buybacks? Why did they do that? I looked at it, I saw that in fact, in September of 2015, Whole Foods had laid off about 7% of its labor force, about 1400 people. The stated purpose was that so they could charge somewhat lower prices to compete with Trader Joe's other premium brand. I thought unreachable, that means the other 93% of the people are going to have to work harder and I then did a calculation of what they did in terms of buybacks per laid off employee, it turned out $727,000 per employee. If they hadn't done the buybacks, they could have kept those people employed, what their benefits if they're 60,000, which is probably high, they could have kept those people employed, and they would have had plenty of money to lower prices, and they wouldn't have forced people to work harder, who are the main people that would have been much more rational thing to do. The reason they didn't do that was because they were being attacked by hedge funds. Now, when just before or just after they sold to Whole Foods, the CEO of Whole Foods who was on the record of saying, and it's one of the few times I've ever seen this, calling those activists, a bunch of bastards, a bunch of just-- hardly anybody will speak out against him, he actually did. The reason he sold to Amazon which what they used to call a white knight, there was someone there who could at least protect the company then there was a logic in their business model. We see that going on still to some extent. Now, the other thing that changed with someone like Carl Icahn, although he was making lots of money, he actually-- when he ended up having to take run TWA because the green mail didn't work. That was he lost a lot of money in that. The notion is you get in, you get out. The other thing that changes as he became wealthier, he didn't have to rely on other people's money so in 2011, Icahn Enterprise is just his own money basically. That gives them even more power too because he doesn't need to keep his own investors aligned with the raid or whatever he's doing. He always, right from the late '70s when he started doing this, called this money is a war chest. The more he has, the more the value he extracts, the more of a war he has, the more power he had. I think the other thing that's going on is that on the boards of companies first of all, I think there are a lot of people just believe in shareholder value. A lot of people on boards who don't have the slightest idea what those companies are really doing in many cases. You often can, without a proxy fight, just influence people on the board to say, yeah, back doing more buybacks, back pumping more money out, back things that are-- do a merger or do an acquisition but do the acquisition so we can get control of the money in that company and pump the money out rather than do the acquisition so we can spend a lot of money to build that company up. You don't really know what's going on, the bearing point, it's like I can talk about an era back then when it was more retain and reinvest, that's still going on in some companies now. I think this conflict is still going on now. We talked about a tension between innovation financialization, and you don't really know how it's being played out until you look at these companies, but there's much more forces are aligned for being played out on the financialization side than on the innovation side. MAX WIETHE: We touched on a few examples of places where stock buybacks and insiders, outsiders enablers have allowed predatory value extraction to take over the place of reinvest and innovation. I think one of the most the best examples right now that you can see, because it's one thing to say the company isn't innovating anymore, or they're not making as much money as they could be, but Boeing people are actually dying because of this process of the financialization of what was really an engineering company for so long, and I actually had a conversation with my father. He said they kicked the engineers out of the boardroom. You brought it up earlier, I think it was 1997, they had that merger with what was the company? WILLIAM LAZONICK: McDonnell Douglas. MAX WIETHE: McDonnell Douglas, and I think really just starting with that, and moving forward, what happened at Boeing, and how did we get where we are today? WILLIAM LAZONICK: Yeah. Boeing was founded in 1916. It was a beneficiary of a lot of government subsidy, including the couple of acts from the postmaster general office at 1925, 1930 that created subsidies for airlines to buy more advanced planes-- I've written about this in Boeing Emerged Along with Douglas as the innovators in-- it was integrated wing, all-metal fuselage planes in the depths of the pressure between 1930, 1932. Actually Douglas ended up doing better as a commercial company in the 1930s and beyond. Boeing was much more oriented towards the military side. Boeing then with their jumbo jets, was able to emerge as a stronger company. That was lucky, there was a few other companies and was able to then consolidate as the main, really the only big aircraft manufacturer in 1997 when it acquired McDonnell Douglas. At that point, you had Airbus which had been created from a consortium of European companies to be a competitor to Boeing which was rising as competitors. It's well documented that there were a lot of financially oriented people who came into Boeing with the merger, some of them had come from General Electric and they started pushing shareholder value. That year actually, 1997, significant to other ways. That was the year in which the Business Roundtable declared that shareholder value would be the primary purpose of companies. This is an organization of which CEOs are members of major companies. People might know, recently this few months ago, they changed the tune on that. They said, now, we're run for stakeholders, but Boeing at that point actually turned to being a shareholder value company. The other thing that happened in 1997, it was the first year that dividends-- that buybacks surpassed dividends in the form of distribution of shareholders and you had the stock market boom going on and many companies trying to keep up with companies that had high flying stocks by doing buybacks. Let's say Cisco, which ended up having the highest market capitalization in the world in 2000, March of 2000, didn't do buybacks. Other companies tried to keep up like Microsoft and Intel by doing lots of buybacks, so this was increasing. Now, at Boeing by 2001, the top executives said we don't want to be too close to the engineers here in Seattle, which was the original birthplace of Boeing and they have been for since 1916 so they moved their headquarters to Chicago specifically to be away from the engineers and said, okay, you can do the hinge. Now, you started having lots of business. Their business is producing major aircraft, their large aircraft under that time, there still is the case, or two companies capable of doing it. The Chinese are on the horizon, maybe the Japanese in the future. They needed a new long haul plane, they needed new mid-range plane, and partly it's because of advanced materials, avionics and fuel efficient engines. They built the Dreamliner, which was what they call a clean sheet, it was a wholly new plane really. It wasn't even a replacement, it was just a new plane. They had a number of problems with that in terms of the outsourcing of stuff, they were doing a lot of outsourcing of the capabilities, but they were doing that from the early 2000s. Then they knew they had to have a replacement for the 737 and gee, and the 737 series was a single aisle narrow body plane for mid-range flights, which they call the workhorse. This is the one who would be biggest selling plane, and it would be one where they would be used for a lot of longer domestic flights, some shorter international flights. They had this architecture from the 1960s for the 737. It had been reengined two or three times. The last one was 1993, which was called at 737NG, reengine just meant they kept the same architecture and put in a new engine. Already with the NG which meant New Generation, they, which was a big selling plane and their main competitor is the product in terms of these narrow body mid-range plane, they had a problem because of the wing being too close to the ground, which Airbus did not have, because they're series 320 originally in the 1980s, when you were using the loading equipment and you built the wing higher up from the ground, so you could put more of an engine, a bigger engine underneath. The fact is that the bigger the engine, the higher the fan diameter-- the longer the fan diameter, the higher the bypass ratio, the more fuel efficiency, generally, all other things equal. This had already become a problem with the NG, it's actually doesn't have a purely round shape. It's flat at the bottom to give a bit of extra space between the wing and the tarmac. The fact is when they were thinking of what to do in the-- probably about 2003, 2004, 2005, they actually had a project called the Yellowstone Project One to think about what they were going to do to replace the 737NG. What they should have done, there's no doubt in my mind, what they should have done is done what they call is clean sheet replacement. They would have been enough to take advantage of all the modern avionics, all the modern materials, and have plenty of space for the most fuel efficient engine. That was on the books. Apparently, apparently, it was still a possibility even up until the spring of 2000 or summer 2011 when they announced that they would do a re-engine plane, the 737 Max. They did that also in reaction to the fact that in December of 2010, Airbus had put out the 320neo using their company CFM, which is a joint venture between GE and Saffron, a French company. Leap engines which were much more fuel efficient. Actually, the fan diameter on the leap engines that Airbus uses are 78 inches. Now, this was a problem for Boeing because they're already had reached the limits. There was then a debate at Boeing which I've been able to find out a little information about, of how big those engines could be. There was never even an issue that they could possibly be 78 inches so it was a question. On the NG, they had been 61 inches the fan diameter, they may be up to 68 inches, in the end, they put some extra height on the front landing gear and they got it up to-- well, first supposed to 68 inches, actually 69 inches so they reached the limit. If they hadn't done that, they would have been subject to a critique, as they were, in fact quite vocal from Airbus is that you weren't going to get the fuel efficiency on the Max to compete with the Neo. That would have been a big problem so they were trying to figure out how to get these fuel efficient engines on there, given an architecture where you had to reposition them more forward, more upward. Now, here's something where a lot of people have opinions but the investigations really haven't been done to really say what's going on and that is that the opinion, there seemed to be a widespread opinion that that repositioning of the engines created a tendency of the nose to pitch up during takeoff when-- it's on manual before you get up to your cruising speed. If it peaked up too much, the plane could enter a stall and so often, you want to get back to a safe what they call angle of attack. This is something that pilots to be aware of and will be looking at readings from two sensors that are on the exterior of the fuselage. If they agree, then they just see what the angle attack is. If they disagree, they would get a lightness on the NG and say disagree and then they would just shut the system off, they would just figure out how to get the angle of attack. They would-- MAX WIETHE: Fly manual. WILLIAM LAZONICK: Yeah, but what was happening here was that this, they put on a system which later became known as MCAS, maneuvering characteristics augmentation system, that was doing this for them and they didn't even know about it until after the Lion Air crash which happened in October of 2018. The timeline is the planes launched in 2011, the end of 2012, they have 2500 orders. It just before the second crash of the Ethiopian Airline's plane, that was in March 10th of this year, 2019, they had just over 5000 orders, 387 delivered. The plane had been certified in March of 2017. The first delivery in 2018. Now, a year and a half later, you have this crash. Immediately, it's well, suspected that it was a faulty sensor. Then Boeing was forced to reveal when American Airline's pilots went after them, what's going on here that they had this MCAS system on there. They didn't call it that at first, but then it became known as that and they hadn't put it into the flight manuals, and there's all kinds of issues that have been written about whether they let the FAA, the Federal Aviation Administration know about the system or know how more powerful the system had become. There's a whole lot of issues of concealment that are there and still being investigated in Congress and an issue right now because as of today, what's today, December 6 th , 2019, those planes have not flown since last March 13th around the world and nobody knows when they're going to fly. The issue is, are they going to fly? I wouldn't know whether I should bet on this because I don't bet but I'd say the odds are, in my view, that they won't ever fly again. That would be true if they have this structural defect and there's been more evidence that there is this defect, that it's not just a software fix, and it's going to-- the deal with it is not a software fix and now, pilots know about it. If it was, you would think that plane would be up in the air again. The other thing is, you would think that Boeing would have come and rebutted the notion that it had this structural design flaw, because obviously that's out there, everybody's talking about it. You just see it on the chat on an article, people think of it as a structural design flaw. If that's not the case, come out and say no, that's not the case. Now, obviously, if they-- here's the crux of it, if they had built a plane they should never should have built back when they had the choice 2011, when they launched the Max and they could have gone to the clean sheet replacement, by some estimates, it would have cost them $7 billion more, maybe $8 billion more to do that, rather than the re-engine plane, it might have taken a year or two longer, but this is one of the greatest engineering companies in the world. There was every reason to do it in terms of material avionics, fuel efficiency in the planes and they actually still have it on their books that they're going to do it, that they should have done it then, they didn't. Why didn't they do it? Well, we don't know for sure. We have some possibilities. We do know that Southwest Airlines, which was the biggest purchaser of 737 planes wanted a plane that would fly just like its previous plane, so it didn't have to retrain the pilots. The pilots were in an airport, they're going from an NG to a Max, it would be not going to a different type of plane. That might be a part of it, but they could have paid a million dollars for pilot to retrain them or give him a- - they could have figured that out financially. It may be it's more speculative that they already are having problems with the Dreamliner with all the outsourcing they had done, which was part of their business model and they didn't want to start that whole process anew at the same time with the mid-range plane. That's possible. Then there's also possibility that's where the financialization comes in, but it's not the only reason. The fact is the period when they should have been thinking, how do we mobilize all our resources to build the planes of the future, between 2004-2011 and on top of paying very ample dividend, they paid $11 billion out in buybacks and so when you come to 2011, most companies stopped doing buybacks and a lot of them in 2009 in particular, the financial crisis or a little reticent in 2010. MAX WIETHE: When you actually should have done that. You ever actually should have done it. WILLIAM LAZONICK: When I was buying stock with the high prices, but that money would have come in handy, that money plus interest that if they had had it, we don't know if there is. I think there really should be an investigation into why they didn't build a clean sheet replacement at that point. Once they went the route of the reengined plane, if it's true, and this, we don't really know but there are congressional investigations that could find out that this plane had a design flaw that made it inherently unsafe, and they didn't want their customers to know about this so they tried to fix it with the MCAS, and they didn't tell anybody about it. Oh, that's pretty serious. Now, where does financialization come in beyond that? They didn't do much in the way of buybacks. I didn't do buybacks up through 2012, but in 2013, right at the beginning 2013, they started doing them. By that time, it was clear that in terms of sales that the Max was a success. It's the fastest selling plane they've had in history. I think the NG might have sold more than they've sold so far, but any case the fastest selling plane and this looked pretty good. Airbus was doing very well with its planes so it wasn't just that it was huge demand for planes, which also particularly why Lion Air is one of the biggest purchasers, it means that you're also getting huge demand for pilots. You're not going to have every pilot being trained as a military pilot so we need planes that we need competent people, pilots, but when we get on a plane, we can't assume that solly is on their [indiscernible]. Any case, at that point, we don't really know what they do, or they didn't know but we do know that they started propping up the stock price. Between January of 2013, and the week before the Ethiopian Air crash, they did 43 billion in buybacks, including about a little over 9 billion in 2017, 9 billion in 2018. Less than two months after the Lion Air crash, they increased the dividend by 20%. They authorized a new $20 billion buyback program but it hadn't been for the Ethiopian Air crash in March, they probably would still be doing buybacks and another plane didn't crash. We're not sure, but I would have said they probably would have done 12 billion this year or something like that. March 1st , 2019, which is when the new dividend went into effect, they hit their all-time peak in stock price. The Ethiopian Air crash 10 days later. Now, here's think that this might have occurred if they hadn't been focused on their stock price. You might have had, I use the example of like Volkswagen with the diesel emissions, not a particularly financialized company coming out of Germany but if you're at the top of the company, and you're trying to meet regulations, and you can fake the data, and you can sell your cars, there might be some executives who are tempted to do that. Actually, I think there's some in jail now because of that. It's not that it's only going to happen in a company where you have all these buybacks going on and you're focused on your stock price, but it certainly supercharges the incentive to do this. If the public is buying into the notion that a high stock price means a company is doing fine, then it creates a certain aura of success of the company. That it's got its high stock price, it must be okay. Even what's-- the frightening thing is that even after the Lion Air crash when they knew that this may have been-- they started discovering why this may have occurred, there was still an attempt by Boeing to blame it on the pilots to say that one particular plane was not air worthy and they doubled down in a sense on trying to get their stock price up. Meanwhile, the executives are doing very well in this. McNerney who had been the CEO from 2005-2015, I think we had something like $257 million went into his pocket, his actual pay, a large percentage of it stock based and other related to higher profits, which of course come from having all the order for the plane. For Muhlenberg, the current CEO, then now stepped down as chairman, but he was between 2015, summer 2015 when he became CEO and the end of '18, for which you have the data, it was about $2 million a month falling into his pocket. Now that's a lot of money, even if you are successful in producing a safe plane because it's really the engineers-- the whole, but if in fact, you're not doing what you basically should do is produce a safe plane, then it's a big problem. Now, one last thing I'll say about this is that a lot of the-- and we have this an article in American prospect group published last May, which talks about this, a lot of the notion, the ideology behind shareholder value is traced back to an article by Milton Friedman, well known as Conservative Economist of Chicago School in 1970 in the New York Times Magazine, where he said the only social responsibility of a company increases profits. This was actually came out in direct response to Naderism and Ralph Nader and the push for more fuel efficient and safer cars and in fact, the context was that there something called Campaign GM that wanted to put three public interest people on the board of General Motors to push for more fuel efficient and safer cars. Friedman publishes articles solicited by an editor at the New York Times and called this and it was repeated in some editorializing opinion of that article by the editor. Pure unadulterated socialism. Now, we know the future of the auto industry. They should have had people on there who were pushing for producing safer cars because that's what went out in the auto industry. The only social responsibility of a company is, you could say, is to produce fuel efficient safe cars. It's not a social responsibility. It's an innovative strategy so he was basically telling people, saying there's pure unadulterated socialism, don't be an innovative company. It comes full circle back to what the start of the book is about what the value creating company is, what innovation is, where it comes from. It doesn't come from saying we're going to increase our profits. It comes from producing a high quality product that people want, in this case, fuel efficient cars, safe cars, in the case of Boeing plane, first and foremost, obviously a safe plane and then getting a large market share to spread out the fixed costs and get economies of scale and make it more affordable. That's where we get productivity growth, that's where we get a basis for paying people higher wages, paying higher taxes. That's where we get the posit of some scenario in the economy as a whole. The Milton Friedman article was really putting the cart before the horse and we say you want the profits, no, if you want the profits, produce the product that the market needs. MAX WIETHE: They actually want. Well, I think you make a very strong case and I was hoping today, we'd be able to get into your last five points. I don't think we have the time so we'll leave it to everybody. If you want to hear Bill does lay out, he doesn't just lay out the problem, he also does give five points as to what he thinks will be the way to fix this problem of the lack of innovation in major corporations in America but also across the globe. Bill, I just want to say thank you for coming in today. It was really fascinating. WILLIAM LAZONICK: Yeah. My pleasure. Thanks.