William Lazonick on How The Stock Market Killed Tech

28:05Very basic Jack Welch bullshit. how do you change those incentives because i don't think the demo i true and this is not even a political statement i don't think there's any movement to stop that other than maybe lina khan and our rip very soon probably sadly an attempt to move away from the monopolies how do you actually break this machine because the machine is breaking everything else there there is actually legislation okay uh influenced by the work uh first uh introduced by senator tammy baldwin who won by a whisker in Wisconsin was reelected called the Reward Work Act. And it would ban buybacks.

28:44It would get rid of this rule from 1982 that allows companies to do them without being charged with manipulation. So in effect, it would say that if you do buybacks on the scale that you're doing them now, you're banned. The other side of it, which is that you would put worker representatives on boards. I think you have to put representatives on boards. I think they actually, I want to be as a taxpayer represented on boards if they're using my money, if Elon Musk is using my money. They should just have a random low-level worker out there. I mean, boards are a joke. I mean, the notion of independent board members, and given the money that board members are making from shareholder value.

29:29We just wrote an article on Elon Musk's 2018 pay package. The so-called independent directors have made hundreds of millions of dollars on giving him that pay package or being around and staying on the board. Interestingly enough, there was one board member, Her name was Linda Johnson Rice, who actually made$135 ,000 from her stock-based pay because they didn't renew her board seat after 2019. And we calculated$173 million of options on the table. So that's what happened. Then it came out that she had spoken out against Musk. Anyway, that's part of the problem is you have a totally corrupt governance system.

30:21It's that, but it's also bigger. the market is incentivized for growth. These are pieces of the puzzle, but I realize that what I am suggesting would destroy the markets, which is the markets are focused on growth. Buybacks are just one part of this machine. And as long as that happens, innovation is going to be stymied because if you're just trying to make more money and not even more profit, just trying to grow the stock value, you're not trying to make better things. A company is successful by producing a higher quality, lower cost product. No, they're not. I'm sorry. I hate to disagree there.

30:59Look at Meta. Look at Microsoft. Microsoft 365 is a product. I realize I'm going a little niche here. It's become a worse product. Oh, no. I'm not saying that it – I said it becomes. It gets into that position. Now, what you call a higher quality product, you know, different people can have it. Oh, do you mean as in a higher quality selling product that makes more money? It's one that can get customers. Okay? All right. All right. And now, there is a problem. I call it, okay, companies retain and reinvest when they are doing this. They retain their money. They reinvest in the company. The other side of that is what I call downsize and distribute.

31:39They downsize the labor force and distribute cash shareholder. Most tech that are doing the big buy-bass are in between. I call them dominate and distribute. That's where Microsoft comes in. So they have a dominant product. No one can get in there now. That's where there's an element of monopoly there. But basically, they're pulling in the cash from that product, from their software suite, and they're using it to pump up the stock price. Right, and crushing all competition. Yeah, and not investing in things like Apple, not investing in Fab. Apple outsourced all its rechargeable batteries to China.

32:20Which is so ironic because Apple, one of their best moves was when they invested in their own silicon. It's probably been one of the smartest moves. Well, of course, they put Tim Cook. That was the guy they put in charge. He outsourced to Foxconn, et cetera. But I think the bigger issue maybe that you're getting at is where did this whole idea of shareholder value come from? Right. And, you know, people often cite an article by Milton Friedman, a Chicago economist, who in 1970 wrote an article in The New York Times called the only responsibility or social responsibility of a company is to increase its profits.

33:06This man is one of the most evil people. Well, he's dead now. He's burning in hell. But just to be clear, he is like dictator great. Now, okay, what's interesting about that and often overlooked when people read the article is two things. One is he wrote that in the context of what was called Campaign GM, General Motors, to put three public interest people on the board. Right. Okay. They wanted one person to be, they wanted to deal with pollution. They wanted to deal with safety. and they wanted an African-American on the board. Okay. That came out of the consumer movement that was launched in 1965 by Ralph Nader's book, Unsafe at Any Speed.

33:55Ralph Nader's still around with his podcast. Still going. Yeah. Okay. That, actually, many corporate executives, top level, they wanted to do some of those things. But people like Milton Friedman came along and said, what he called it is pure and unadulterated socialism. To put those people on the board. Now, we know the history of what's happened in the auto industry since then. If you didn't produce safer cars, you lost market share. If you didn't produce more fuel-efficient cars, you lost market share. Actually, what happened in the U.S. automobile industry, that African Americans became a very important source of semi-skilled and skilled blue-collar workers during the 60s and 70s when immigration was low.

34:43So that was important for them in terms of being competitive, having a blue-collar labor force. They should have put those people on the board. Absolutely. And they might have done better. So you get back to this notion that it's shareholders who basically own the company. All those profits belong to them. And that was what shareholder value kind of legitimized. And it came out of academia. I mean, Milton Friedman won the so-called Nobel Prize in economics. It's really a Swedish central bank prize in economics. But basically, and it was also, in many ways, that whole movement was racist, sexist, etc.

35:28Why? Because the world that I described of secure employment that existed up to that time, and I think this had a lot to do with it, was a white man's world. And what happened is the labor force was changing. Women were getting into the labor force, African Americans, both because of demand and equal opportunity. Okay, and this was a backlash against it. It was a backlash against Nader and a backlash against the civil rights movement. So it has to be seen in that context. Although it was often disguised as, you know, mainstream economics, legitimate economics. Yeah, yeah. It's just racism and sexism.

36:09And by the way, you know, of course, it's called liberal and conservative in the U.S. You know, the liberal counterpart of that was a guy named Paul Samuelson. There was no difference really ultimately between Paul Samuelson and Milton Friedman in terms of their fundamental economics. They thought, just let the market work and everything will be fine. If it fails, then Paul Samuelson said, okay, the government should intervene a little bit. But basically what they missed was the role of the corporation, for better or for worse, in the economy. I mean, basically right now there's about 2 ,000 companies in the U.S.

36:44that employ 5 ,000 or more people. It's an average about 20 ,000, 22 ,000 that account for about 35 % of total business sector employment in the U.S. And those are the most profitable companies. They pay higher wages. that investment decisions that they make drive the economy. They determine what kind of jobs are available in the economy. They determine what kind of education we get. They determine what kind of resources go to the government. So if they decided to not be evil. Yeah, and so once those companies changed their purpose, they became a big problem. And so Friedman was successful in influencing.

37:27Yeah, it took time, but he was successful. And he was successful. Now, here's where the tech industry comes in. Right. Because the tech industry was much more dependent on the stock market than those old economy companies. Okay, the old economy companies, there's five functions of the stock market for a company. What I call creation, which is inducing venture capital to come in. You create companies because you can exit on the stock market. There's control that is separating ownership and control, which a lot of the shareholder value people see as the original sin of American industry. But it's actually necessary because once you have owner entrepreneurs who want to pass on the company, what they did in the United States, they passed it on to professional managers.

38:15Yes. And this actually opened up the growth of the company. And when did that start happening? When did the managers come into power? That was already by the 1920s. And how do we get rid of them is the thing, because if you look at most major tech companies, Apple included, MBAs, these people are everywhere now. Yeah, but that's the problem. That's the way MBAs are educated now. Basically, the people who are running companies in the 20s and 30s were basically engineers. The 30s, even though the Great Depression, that was incredibly important. But the value multipliers were so much smaller. Yeah, yeah.

38:51But these companies, for the U.S., and this is true globally, these large companies and critical industries dominated. And they had to be run professionally. And basically, you got this separation. So that's the second thing, control. The third is what I call combination. You can use your stock to acquire other companies. Right. The fourth is compensation. You can use your stock to pay people. And the fifth is cash. Most people think that the role of the stock market is raise cash for companies. That is not necessarily true, and it certainly wasn't true historically. Okay, now what happened with the rise of what I call the new economy companies coming up basically out of Silicon Valley is they started using cash, the stock market, to induce venture capital.

39:39They started using it to acquire other companies. They started using it to compensate people deep down in terms of stock options. And particularly in the biotech industry where companies go public without a product, they raise tons of money on the stock market. So they effectively tied everything to stock value down to how they paid people and bought things. So once they start within that model, you basically are looking at your stock price all the time. And so it's hard to resist the shareholder value arguments, particularly when they're self-serving. And once those companies became big, they all started saying, oh, we've got to keep our stock price up.

40:22So I can trace when companies like Intel, Apple, Microsoft, et cetera, started going from just saying, all that money we're bringing in, we've got to just put it back in the company, to, oh, no, that money can go out and just boost our stock price. And then you get a whole system of what are called results in predatory value extraction, which have to do with corporate raiders, institutional shareholders, pension funds. Everybody's trying to get their yields out of companies and basically support this. And this is, for the economy as a whole, this means a huge increase in income inequality, driven by the stock market, making money in the stock market, and then looking for other ways to make that money through private equity, etc.

41:13One figure, the top one-tenth of one percent of households in terms of net worth in the United States, about 15 percent of their assets were in the stock market in 1990. now it's about 45 % of their assets. So their wealth is very much tied up with the stock market. The stock market is very hard to crash now because people are making so much money out of money that they have to put it somewhere. And actually, the number of listed stock companies are shrinking. And through buybacks, the shares out there are shrinking. At some point, this has to fall apart, though, because surely if everything is based on the value of the stock, every single large company is effectively at the will of the stock market, which will mean that the companies will eventually stop making things with the purpose of doing anything other than raising shareholder value.

42:02Does this not lead to the death of innovation? Yeah, okay. Yes, it does. But it doesn't happen overnight. We're watching it happen now. And so you start seeing China has a different model. They start out competing in the United States and you try to block China. Right. This is a big problem for the United States because tech companies are so... You just can't help their monopolies. They're so integrally related with trade with China and manufacturing and importing from China. This is a total disaster. But basically what has happened is companies, and I can name a whole bunch of them, have fallen behind global competitors in the U.S.

42:41because they stuck with this shareholder value model. So the U.S. is falling behind in a whole range of critical technologies. The reason is there's no major EV battery produced in the United States. The problem of FABs, which I already mentioned. The problem, well, Boeing, they did$43 billion in buybacks from 2013 to the week before the second crack. Jack Welch poisoning. Yeah, and Boeing's stock price was at a record level in March 1, 2019, 10 days before the second crash. And there was no doubt, I wrote an article on this in May of 2019, that the Boeing crashes were the result of top management ignoring issues of safety because it would hurt the stock price.

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44:28Listen to Health Discovered on America's number one podcast network, iHeart. Open your free iHeart app, search Health Discovered, and start listening. Wells Fargo announced a new$20 million program in 2025, teaming up with nonprofits to support small business owners. That's how Wells Fargo is helping strengthen small businesses and communities. Wells Fargo, the bank of doing. Learn more at wellsfargo.com slash say do. Stop settling for weak sound. It's time to level up your game and bring the boom. Hit the town with the ultra-durable LG XBoom portable speaker and enjoy vibrant sound wherever you go.

45:07Elevate your listening experience to new heights, because let's be real, your music deserves it. The future of sound is now with LG XBoom. And for a limited time, save 25 % at LG.com with code FALL25. Bring the boom! XBoom. There's a lot going on in Hollywood. How are you supposed to stay on top of it all? Variety has the solution. Take 20 minutes out of your day and listen to the new Daily Variety podcast for breaking entertainment news and expert perspectives. Where do you see the business actually heading? Featuring the iconic journalist of Variety and hosted by co-editor-in-chief Cynthia Littleton.

45:48The only constant in Hollywood is change. Open your free iHeartRadio app, search Daily Variety, and listen now. so i have a theory i'd love to run it by you it's called the rock con bubble right now i think the tech industry is reckoning with the fact that there are no big ideas sure the audience will love this i do not think generative ai is the future i think it is a gillied up software product based on desperation but what happens if the tech industry stops coming up with hyper growth markets because they haven't had one for a while what happens Like what happens if these companies stop having new things?

46:26Well, first of all, we're reliant on these things still. Yes. So even though they're not new things, we're still using the whole ecosystem. You know, again, I use Apple products, and so Apple's going to make money off of me because I'm stuck in it. And I buy every iPhone. I'm just saying, what if this is, I have the new iPhone with me because I'm a little pig and I oink for Apple every time. what happens if this is about as good as it gets if each version is more increment is just more and more incremental if it's faster but not that fast because we're hitting a wall on cpus as well more's law is falling apart well we don't really have to i mean it's easy to answer that question we get donald trump i mean basically well we have donald trump what happens after that okay well that we'll find out because you know this you know sorry perhaps let me wheel back are you saying that the death of innovation led to trump no i'm saying the financialization of the economy oh yeah so so oh yeah also corporate authoritarian so even here's the problem even when i put more stress on even when there is innovation the wrong people are going to grab it right okay and and And the economy is going to become more financialized.

47:42Sure. The people who actually should be sharing in the first instance, the employees of those companies, they can be laid off in an incident. Elon Musk, 140 ,000 people at Tesla at the end of last year, just like that, laid off 20 ,000 people. Yeah, he doesn't care. But my point is, what if they have no other vehicles for growth? because you look at Microsoft, for example. They are able to, they've had, I think, year-over-year growth of low 10%. These companies are slowing down. Well, yeah, well, first of all, I don't think that the companies themselves don't need to grow bigger and bigger. They could spin off other companies.

48:22Okay. And I think that's a model that works very well because you create incentives for people in those companies to become their own bosses, to become the head of other companies. What if that's not their culture, though? So the reason I'm pushing on this is I'm thinking Microsoft. I'm thinking Meta especially. I'm thinking, I mean, Cisco as well, and even Oracle. I mean, these companies don't have new innovations. Oracle's doing it right because Microsoft became their largest customer. They make data centers. Fine. But what if they stop being able to grow revenue every year? Like, that is the real question.

48:56What happens? Well, they'll lay off some of their workers. You know, that's the first thing. What if that is not enough? Well, then they might go out of existence. I mean, this has happened to some companies, Sun Microsystems. Right. Yeah. Okay. So there are companies that just don't make it. But once you have made it, it's very hard to disappear in 10 years or 20 years. Of course. Because you have that demand base and you have the capabilities, you have basically the barriers to entry, you have a whole lot of advantages that allow you to dominate. And the question is, you know, and then if you take the global competitors and you try to just shut them out, then you have a problem.

49:55I think my bigger point is that in the last 10 years, the tech industry has categorically failed to find any hyper growth movement that matches smartphones, that matches cloud software. They've not had any of them that create the level of value that those did. And they are squeezing everything. and my concern is what happens if they don't have anything left to squeeze because they're all microsoft meta all these companies they've laid off tens of thousands of people they've tried that and they could lay off more and now they're putting billions into a 200 billion into capex into that to lose money i just feel like we're in a corporate psychosis well see the other another way to answer this question is is to say ultimately what does the economy run for the economy actually this is normative.

50:48In my view, it should be run to provide services to people that are not profitable, like health care, education, caring for old people, whatever. That's what a prosperous economy should do. Now, these goods-producing companies, these innovative companies, have a lot of capability produced through those markets. But that means the government becomes a big source. It's either governments or your well-paid employees become sources of demand for those products. And that's the opportunity that's been missed. Now we have the initial inverse, I know. Yeah, and what you have now is with all this financialization of the whole economy, with all this money being funneled out of these highly successful goods-producing companies, successful in terms of profits.

51:43You have money looking to make more money, and you have the whole, which has been written about a lot recently, private equity, moving into health care, for example, moving into areas which would not be for profit at all, buying up doctor's office, dentist's office, basically nursing labor supply, what have you. A lot of stuff being written about that. Now, a lot of it is kind of under the radar because you don't even know who owns these various companies. The corporate structures are so opaque. But basically, what should have been happening all along was that when you became prosperous, this was really taking some of those profits, not just paying your workers better, creating more stable employment, upward socioeconomic ability.

52:30We have downward socioeconomic ability for a lot of, a big proportion of the population, into more education, into more producing things that people need but aren't necessarily the next big profitable product. Actually, some of those would become profitable products if, in fact, you have enough government demand for them and you are the companies as in the military. So that's what should have been happening. That's what's not been happening. So how do we make it happen? How do we force them? Well, okay, so you have to change the whole way in which companies allocate resources. So how do you do that?

53:08Well, so if you wanted to talk practically, you say, you cannot do buybacks anymore. You're manipulating the market. It should be. This is a phenomenon. Buybacks surpass dividends as a source of distribution of shareholders in 1997. They're much more volatile, but way bigger than dividends. But it's bigger than just buybacks as well. Well, okay, but that's a start. Right. Okay. You stop tying executive pay to the stock market. You tie executive pay to the success of the company in terms of employing people, keeping people employed, innovative products. Yes. You change corporate boards. Okay. You put people on corporate boards who have a real interest in that company's position in the economy.

53:56Right. Okay. You change the tax system. The tax system rewards value extraction rather than value creation. And you basically, and this I think is the most important thing, you figure out how to mobilize all the resources in the economy, the human resources in particular, for what I call collective and cumulative learning. When you get down to it, innovation is about people getting together collectively and learning cumulatively. That is, what you learned yesterday determines what you can learn today. And what happens is when these companies stop retaining and reinvesting, you just have all kinds of people with capabilities who are not living up using those capabilities or in the end never even get those capabilities because money doesn't go back through the education system.

54:55I mean, the U.S. at a point in time in the 1980s when it was necessary to, everybody knew you had to really up the educational system. and the U.S. was absolutely and still is ideally situated for that because of the history of higher education in the United States which goes back to something called the land grant colleges which really came out in the late 19th century and were the bedrock of innovation in the U.S. economy at that point in time the huge investments that should have been made were not made public education was virtually in every state free before then it became expensive Student loans, the interest rates are extortionate in the U.S.

55:42from the government. Basically, it was white people not wanting to fund other people for upward mobility. Thankfully, that's definitely changing. Now, how was that resolved? It was resolved through the fact that Asia, in particular in the tech industry, was educating people. and those people were invited into the United States and I think to the benefit of them and the benefit of the United States. So I'm not saying that Asians in some cases took any jobs away from anybody. But they became an available labor supply through what's called L1 visas, H1B visas, permanent visas, employee preference visas.

56:27I've got all the data on this. This was all encapsulated in the Immigration Act of 1990. And for the tech industry, they were now off the hook in terms of the U.S. economy for saying, oh, we have to ensure that higher education is available for African Americans, available for white families who are coming out of low income. that we have to be sure that this system is available for upward mobility. They took a walk on that. Yeah. And they were able to take a walk on that because they were part of the global system. I mean, it's very ironic now that the United States is in this conflict with...

57:14It kind of feels like we've gone socially regressive. Absolutely, absolutely. And what you see is concentration of income at the top, downward socioeconomic mobility for people particularly who have no more than high school educations. And that's why I say that's why it leads to Trump, basically. It's no big mystery once you understand the concentration of income at the top, the money that will go. And I imagine to some extent, even if you don't understand it, you look at the system, you look at the current political apparatus. why would you trust authority even if trump is a like um he's obviously not going to do a whole bunch of stuff and he's going to do much worse it's almost like you i feel like people need to realize everything you've discussed today is just describing how the system fucks regular people how the system has somehow we were more progressive in america in the 70s corporate why it's just it's very worrying so i'm going to end on a nice note what actually should give people hope where How can people find it right now, in your opinion?

58:19Well, that's hard to say right now. I mean, because, I mean, you know, there was a notion that with all the opposition before the election, before Biden had that disastrous debate, okay, you know, he had tried to push policies in a much more progressive way. And I think it's true. Yeah. They were trying. They couldn't get any of the family stuff passed, but they were trying to do it. They got the infrastructure bills passed, et cetera. The Inflation Reduction Act starting finally to try to negotiate health care prices, basically. They were trying to do some things. That got a resounding no from the electorate.

59:05And in fact, that part of the progressive policy was not part of the campaign. And you certainly, Joe Biden was a big fan of this stuff on mine and buybacks back when he was vice president. I'll tell you a little story about that. We can end on this. Basically, in 2016, when he was still vice president, he wrote an op-ed in the Wall Street Journal about stock buybacks, executive pay, and said we have to rein all this stuff in. this is really screwing up the economy. The future of the economy depends on it. In that article, he named one person that was me. It said, according to economists, William Lozonic, comma, and then he had data from the article I mentioned in 2014.

59:54I looked at it a couple of years ago when a journalist contacted me and I said, oh, Biden, when he was vice president, really thought this was a problem. Now he's not saying anything about it. And I said, look at the article. I looked at the article again. It said, according to economists, blank space, comma. Someone had actually hacked out my name. Well, that's the, it feels like we need a populist movement then, like a straight up pro-Label one. Basically, when the Democrats got into power, and this happened under Obama, it happened under Clinton, they have just cozied up to wall street cozied up to rich people basically they do not have a critique of shareholder value there is nothing coming out of the of from the democrats when they are in power in particular uh and uh that that is that is confronting this and i think it's now basically come full circle in terms of the people being affected by the lack of upward mobility, the lack of job security, people living paycheck to paycheck, while other people are getting richer and richer, finding okay, we'll just take someone who with a hope that they're going to do something different.

1:01:14Of course, they're not. So, yeah, so where's the optimism? Of course, we need a progressive movement. But, yeah. I feel like you can find hope in the fact that these ideas will become more prevalent, because at some point we need to review these systems we need to also realize that worker power will make cooler shit it will make more innovation William, thank you so much for joining me and everyone thank you so much for joining us today for the first live episode of Better Offline from the beautiful country of Portugal web summit, thank you everyone thanks thank you for listening to Better Offline The editor and composer of the Better Offline theme song is Matt Ossowski.

1:02:00You can check out more of his music and audio projects at matosowski.com. M-A-T-T-O-S-O-W-S-K-I.com. You can email me at ez at betteroffline.com or visit betteroffline.com to find more podcast links and, of course, my newsletter. I also really recommend you go to chat.wheresyoured.at to visit the Discord and go to r slash betteroffline to check out our Reddit.

1:02:52Thank you so much for listening.

1:03:21We'll see you next time. strengthen small businesses and communities. Wells Fargo, the bank of doing. Learn more at wellsfargo.com slash say do. Stop settling for weak sound. It's time to level up your game and bring the boom. Hit the town with the ultra durable LG X boom portable speaker and enjoy vibrant sound wherever you go. Elevate your listening experience to new heights because let's be real, your music deserves it. The future of sound is now with LG X boom. And for a limited time, save 25 % at LG.com with code FALL25. Bring the boom! X-Boom. There's a lot going on in Hollywood. How are you supposed to stay on top of it all?

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