# Which Capitalism with Luigi Zingales  | Markus Academy | Ep. 37

https://www.youtube.com/watch?v=9iav1WSWL1g

[00:07] okay.
[00:07] welcome everybody and we're happy to have you all back to our another webinar.
[00:12] this time with luigi zingales from chicago booth.
[00:13] hi luigi.
[00:13] hi how are you.
[00:17] good thanks too.
[00:17] it's great to have you.
[00:20] luigi will talk about which capitalism.
[00:23] quick question mark.
[00:23] and before i go into this question with luigi let me do some housekeeping and jump some advertising.
[00:30] what we did so far.
[00:32] so so far last week esteban rossi hansberg was talking about the economic geography of climate change.
[00:39] and next week sims will talk how to worry about government debt.
[00:43] and then bank thomson will talk about seasonal covet and later in the term esther duflo will come.
[00:50] but luigi today will talk about the witch capitalism and capitalism.
[00:54] you know when we go through a crisis is typically always a hot topic.
[00:58] so what i did here is i just blot that how often google name grams actually people search for the word capitalism or how often it.
[01:07] appears in books.
[01:08] and what you can see here you can see that you know when the 1930s.
[01:12] it wasn't after 29 the stock market actually was cash.
[01:16] was going up a lot and then it came down again.
[01:19] the term capitalism was very very high search intensity.
[01:23] you also see that there's a flat region over there.
[01:26] in the early 2000s so the nasdaq bubble or something did not cause a lot of additional activity and capitalism but then it subsequently it went up significantly.
[01:37] so there's a lot of interest in this topic and we're looking forward what luigi has to tell us today on this topic and of course he is heading the stigler center at chicago booth and he is really dedicating a lot of his research to this question.
[01:52] so before i start i would like to mention two recent books which came out on this topic.
[01:59] one is called the cold heart or the heart of stone.
[02:02] it's a german book and it's based uh it draws on the german fairy tale from william howe from 1827.
[02:10] which the german communists have used a lot to bat mouth capitalism.
[02:14] but when a bloomberg turns it around and says okay.
[02:18] capitalism actually is not so easy to define because it's constant in flux.
[02:22] it's the plasticity of capitalism and the dynamism is very very important to understand.
[02:26] and that's also why it brought billions of of people into a higher wealth and a higher situation they are sitting now.
[02:37] now here i think what's important is that the profit motive is very very important.
[02:44] and then you know your competition the competition itself leads to dynamic competition leads to rnd investment which causes some externalities and follow-up are in the investment.
[02:55] so there's some cycle here but what's important is that most of these r d investments have huge economies of scale.
[03:02] just think of henry ford and others you know it's all about economies of scale.
[03:06] and that led to huge mass production so common capitalism led to a lot of mass production rather.
[03:12] than tailored individual production mass production was the key.
[03:17] and you also see it in the current revolutionary iit revolution.
[03:20] it's all about huge quantities low marginal cost and it only works if you also have mars purchasing power.
[03:27] so you need a consumption by the masses as well and that you can achieve if real wages go up.
[03:33] so you can't have too much income inequality if income inequality goes down.
[03:38] and it helps to have more purchasing power that helps again the profit motive and then leads to more innovation and more investment in r d and so forth.
[03:47] and the purchasing power can come for two reasons.
[03:49] one is real wages are going up.
[03:52] that's one way.
[03:52] another one is you ease access to debt and credit for the general citizens and that's one way to to to see that.
[04:00] so that's one channel but important is this dynamism where constantly generate new investments.
[04:08] the new investments lead to productivity gains and the productivity gains ultimately help the society to live in a more.
[04:15] healthy and a wealthy environment and actually when you read cain's uh 1990 so of peace of war
[04:23] essentially the consequences of peace of war he was actually arguing which is very very interesting
[04:28] that wealth inequalities actually was justifiable before the first world war
[04:34] because it led to a lot of of investments so because
[04:37] if there's a lot of wealth inequality but it leads to a lot of investment which leads to the spillovers in r d and spillovers to others
[04:45] then it's actually justifiable that's one key part that's the argument in this book
[04:50] is one key part why capitalism was so successful uh going forward so that's one book which i just would like to mention
[04:59] and then there's another one which just came out recently by my colleague charles bush
[05:04] who actually is a political scientist and looks much more democratic capitalism and saying what this house capitalism connected to democracy and he goes through
[05:15] three defining stages of capitalism one.
[05:18] is the manchester capitalism.
[05:19] in the 19th century then the early.
[05:22] detroit and reford and and so forth and then the.
[05:25] silicon valley uh now what we are sitting in now.
[05:29] you can you know steve jobs type of uh environment.
[05:31] and he argues you know actually this inequality might be a problem.
[05:33] because you have some more polarization going on skill premium.
[05:39] high quality high very qualified workers is going up.
[05:43] and that might actually hurt this dynamism.
[05:46] we're seeing up there but we will see many more things today.
[05:51] from luigi probably more focused.
[05:55] not about this big capitalism cycle here the dynamism but the question is always.
[06:03] how to limit the power the concentration of power.
[06:06] and for that i think markets are very important and competition is very important.
[06:11] so having competition in a clear mandate that the people can actually exit using.
[06:17] all patients uh terms in the goods market they can go to some competitor in the funding market they can withdraw the funding and go to some other things.
[06:25] so we will talk later about esg investing.
[06:28] what's the role of esg investing that's an important topic too.
[06:31] we would like to cover in some future of webinar as well.
[06:35] and then there's another way to con limited concentration of power is through voice.
[06:39] it's through elections for example you can vote in shareholder votes or you can also vote in in democratic perspective that's coming back to the second book i mentioned before.
[06:52] the main focus for luigi i think is today more on the stakeholder governance or the shareholder governance moving to a stakeholder governance and that's really hotly debated at the moment.
[07:03] i think that's probably one of the hottest issues in the moment besides kovit and other environmental issues and the business roundtable has essentially put forward a corporate purpose which shifts away from shareholder focus.
[07:19] to a more broader stakeholder focus with employees suppliers and demanders customers in the community and so forth.
[07:28] it's also the 50 year anniversary of milton friedman's big article on shareholder governance.
[07:34] and i think luigi will allude to that because his center has actually dedicated a whole sequence on this topic.
[07:43] and of course we have already non-profit organizations which are not profit-driven and they're much more driven by other motives.
[07:50] and then the question is you know what are the problems which comes with that.
[07:53] so if you move away from shareholder focus uh share the wealth maximization towards a more general objective you know then it of course gives power to the ceos and they can push their pet projects and we have to see how this goes but generally going back a little bit uh of course i remember when i lived in uk in london the third way was bigly debated stakeholder society was a big issue at that time in germany.
[08:21] we have in our constitution so the german constitution says that ownership comes with responsibilities that's one of the guiding principles.
[08:30] and you see also many elements in the law where this code determination goes on so whenever there is a board there's you know half of the board the employees have representation on the boards and you have a lot of companies which are owned by foundations and there's now a new initiative going on that even small companies should be have some new legal form where there's more responsible ownership.
[08:55] so overall across the globe not only the u.s through the business roundtable also in europe there's a big debate going on how should we design the stakeholder governance.
[09:04] and we're hoping to learn something more from luigi's thinking and he has written a paper about this recently with oliver hart and the third co-author and he will outline his thoughts uh in a few minutes so we start as always with some poll questions.
[09:24] and thanks for answering them the first question was from a social efficiency perspective.
[09:29] is it optimal that google focuses only on maximizing long-term stock prices.
[09:35] and only 21 percent or something uh 25 percent said yes.
[09:43] but uh 75 said no the second question was.
[09:48] is the firm just a nexus of contracts that's you know if you go to contract theory a theory of the firm that's one of you.
[09:57] and actually 22 only say yes 78 dead no.
[10:00] and should we impose limits on corporate lobbying.
[10:04] and actually there is an overwhelming maturity which that 88 said actually we should limit it in only 12 that we should not limit it.
[10:13] and with that i leave the floor to luigi or the screen.
[10:17] and he will give us his perspective and whether you know our poll questions came out right to his liking or not.
[10:24] and uh how to analyze this and how to put everything in an analytical framework.
[10:29] thanks again luigi the floor is yours.
[10:32] thank you very much marcus for the kind introduction and the interesting paul.
[10:37] um can you all see my screen?
[10:40] yes good okay so i think that uh you know the only problem is that the screen does not let me see okay so um since the beginning of the 20th century most economic activity first in the united states than in the rest of the world started to take place in the corporate forum.
[11:02] so when you think about our standard microeconomic textbook we assume that corporations maximize profit.
[11:09] now as it happens this is not true from a positive point of view and it's not a site too for a normative perspective but that's what where most of our economics at least basic microeconomics has done.
[11:23] now not surprisingly with the diffusion
[11:27] of the importance of the corporate form.
[11:29] uh at least since the 1930s economists,
[11:32] legal scholars,
[11:33] and management groups have been struggling with the question
[11:34] of what corporations should do what they should maximize if they should maximize anything.
[11:41] and what i claim is this answer is really fundamental in shaping uh the society we live in the type of capitalist system we live in and so on so forth now uh.
[11:53] as a historical setting in the first 25 years after world war ii,
[11:59] corporate boards were thought to be guardians of all interest which the corporation affects,
[12:02] and not merely servants of its absentee owners.
[12:06] these are um is a quote from a article of mowing dodd that wrote in uh merrick dot so that wrote in 1932 in the harbor law review.
[12:21] and you can think about this as the standard of.
[12:28] practice when the 1970 article by friedman appeared in the new york times.
[12:35] friedman wrote that the social responsibility of business is to increase its profit.
[12:42] in fact at some point say this only social responsibility of business is to increase its profits and this article has been incredibly influential and being derided has been criticized has been loved.
[12:52] uh some people claim that even the wall street uh movie in the 80s where gordon gekko uh interpreted by a young michael douglas say that greed is good is derived from that piece.
[13:06] uh that piece recently been accused to be the world's dumbest idea.
[13:10] but whether you love it or hate it milton's treatment piece in the new york times has really shaped the conversation.
[13:18] and most important shaped capitalists for the last 50 years.
[13:22] i think this must be one of the most consequential op-eds written in the 20th century maybe ever written.
[13:29] And and the fundamental question that we are asking today 50 years later is to what extent these ideas are valid.
[13:35] To what extent are not and what does it mean for the type of capitalists we live today and the type of capitals we want to live in.
[13:47] To this extent as Marcus mentioned the the pro market uh publication which the publication of the Stiga Center has opened a debate that has seen uh values opinions.
[13:55] And so I will uh draw heavily from this debate in trying to uh see.
[14:02] So the 50 years later what can we say about uh what carpool ball should be and so.
[14:10] One of the contributors to this debater Alex Alex Edmonds said that we can think about Friedman's statement uh as basically a different version of some kind of uh modular animal theory where what matters is not whether the theorem is right or not.
[14:26] Of course given the assumption the theorem is right the question is uh.
[14:31] what are those assumptions and how credible they are
[14:35] how big the violation and so frequent
[14:38] idea is that the only focus of managers is to maximize profits
[14:44] leads to really what i would like to call a separation theorem
[14:47] um we all learn and study what is called the fischer separation theorem
[14:53] that when you have to invest at the corporate level you don't have to care about the preferences of all your shareholders in terms of consuming tomorrow to or or today
[15:01] you just look at the interest rate and that's enough to determine what you do
[15:07] and in this sense the friedman theorem is very similar in the same spirit because you say i don't need to know what each individual shareholder wants
[15:13] what i'm gonna do as a manager i maximize profits and then i distribute the money
[15:22] and the shareholders will decide with that money what to do
[15:26] and i want to stress because not everybody appreciate that how important this principle is also in
[15:32] The world of foundations and asset management.
[15:37] Princeton is one of the richest university in America.
[15:42] They have a huge endowment.
[15:45] They run this environment to maximize financial returns.
[15:46] Now the university might have its goal, for example, education.
[15:51] But they don't let the goal interfere the uh asset the way assets are managed.
[15:57] And this is not unique to Princeton.
[16:00] It's true for Chicago, from Harvard, it's true for foundation.
[16:03] So I can be the Gates Foundation.
[16:05] On the one hand, I distribute money to eradicate poverty in Africa.
[16:10] On the other hand, I invest in companies that basically pillage Africa of all its resources.
[16:16] And I don't care because according to the Friedman principle, I can go and separate the one from the other.
[16:25] So this Freeman separation theorem is very important.
[16:26] And I think is important to spell out.
[16:29] Friedman did it in a very tricky way in
[16:33] the article after all was a popular article but i wanted to try to write down what under what assumption this is true
[16:41] and then uh how realistic those assumptions are
[16:45] so the first one is that and here i think that uh milton friedman is very clear at least on the first point
[16:51] is uh companies should be operating a competitive market and you should read freeman peace together with chapter eight of his capitalists and freedom
[17:00] that was written in 1962 so eight years earlier
[17:04] which is very clear that when you have a monopoly then you should not maximize profit
[17:09] so uh the the the 33 percent of the people who answer yes to the first question they did not even pass friedman 1962 test even friedman would say otherwise
[17:21] and here i added that your company should be not only price tickets but also rule takers and i come back on that
[17:28] the second is that either there are no externalities or that the government is perfectly able
[17:34] to address those externalities
[17:36] and uh i'll come back on on on that too
[17:40] um the third is that agents only care
[17:42] about monetary payoff
[17:45] and the last one is contrast are complete
[17:48] so we can write uh every complicated counter we can think of
[17:52] now if those assumptions are true that maximizing long-term shoulders value lead to a pareto optimal equilibrium
[17:59] so in that sense friedman separation theorem is right
[18:05] to the extent that uh we like to be right in the classroom that under certain assumption the results follow
[18:11] and now you might argue and i'm sure that marcus agrees with that
[18:14] is what is new here because all well-trained economists recognize that i structure it in a way that resemble in fact it is a restatement of the celebrated first welfare theorem of economics
[18:27] and the sort of assumption uh competitive equilibria are pareto optimum
[18:31] and and i i list down the assumption that ensure that that's the case and that's
[18:36] kind of the word.
[18:37] uh freedman was operating.
[18:40] hey now you might say what then what's this new uh.
[18:41] now you have to put your historical hat and realize that uh.
[18:47] the first wealth of theorem at least in the generality that we know as today was only proven 1951.
[18:51] so 29 years before treatment is right in that and only 11 years before he writes capitalism freedom.
[18:55] so was not completely sort of digested in the public uh sphere.
[19:00] so friedman remember was not only a very clever economist was also a great polarizer a great diffuser of information.
[19:07] and so in that sense he's pushing for the idea of economic theory to a large public like the one of the new york times.
[19:12] but also he makes a simpler argument and says you can see in the back of his argument especially in the 1962 book uh that he has a wealth of theorem in mind.
[19:23] but he makes a simpler argument that of course is better than in new york.
[19:37] times that uh.
[19:38] the iowa de brave proof of the general equilibrium and he said basically.
[19:42] in a free economy stakeholders voluntarily get together.
[19:47] so you have uh suppliers you have customers you have workers you have provider of capital.
[19:54] in the form of equity in the form of that and in a free economy.
[19:58] they choose to get together nobody forces them.
[20:01] and in that decision they assign the residual right to shareholders so they decided a group of them.
[20:11] and not every corporation not every institution is like that because you have non-profit institution where this is not the case.
[20:17] uh you have cooperative where this is not the case.
[20:20] but in the more standard form of cooperation uh what is decided is that uh shareholders get what is left after everybody is paid and as a result they have the right also to vote.
[20:33] and so freeman argument that of course resonates tremendously with the american.
[20:38] public
[20:39] and this was one of the brilliant aspect
[20:42] of friedman
[20:42] to make arguments in a way that could
[20:44] raise the name to ordinary people
[20:46] he makes the argument that basically if
[20:49] you impose additional burden
[20:51] to the corporation without letting
[20:54] shareholders vote
[20:55] is a form of taxation without
[20:58] representation and i think that that's i
[21:01] want you to keep in mind this two aspect
[21:04] the welfare theorem but also this
[21:06] taxation with our representation
[21:07] because they both have some validity
[21:10] here and i will come back
[21:12] on on that boat so luigi can you
[21:14] elaborate a little bit why friedman was
[21:16] so influential
[21:17] like could he push this and change the
[21:19] environment
[21:20] he was not a policymaker he was just you
[21:23] know an academic
[21:24] like uh it's true it was an academic but
[21:27] uh
[21:27] two things number one uh was writing
[21:31] extremely well
[21:32] and this is something that we
[21:34] underappreciate as academics
[21:36] the quality of writing and the quality
[21:38] of making the argument he was
[21:40] brilliant both in writing and in
[21:42] debating he was a formula debater
[21:45] uh but two i think he had a unique
[21:48] insight of seeing the weak point
[21:52] this is a kind of a uh tsun tzu
[21:55] uh art of war that you see the weak
[21:59] element of your enemy and you kind of
[22:02] put all their strength
[22:03] in that point and so even in the war
[22:06] situation and any love
[22:07] i should add the third thing he loved to
[22:09] be provocative and
[22:11] challenge even the the the wildest crowd
[22:14] so
[22:15] let me give you an example in the middle
[22:17] of the 60s with the anti-vietnam war etc
[22:20] he goes in front of the universe of
[22:23] chicago students
[22:24] that were in a massive protest okay
[22:28] and you know friedman is not exactly a
[22:31] left-wing guy and so
[22:33] uh facing a massive protester
[22:36] very left-leaning very angry was not an
[22:39] easy thing to do
[22:40] and in the little debate what he pulls
[22:43] out it pulls out that
[22:44] is against the military draft
[22:48] and he says that one of the elements of
[22:50] the freedom is that you
[22:52] choose to go to the army you're not
[22:54] forced to go to the army
[22:55] surprise surprise he won the argument
[22:57] that day because nobody of those kids
[22:59] wanted to go to war so
[23:01] i think he's very very good was very
[23:03] good at doing that
[23:06] so now the question that we need to ask
[23:09] 50 years later
[23:10] is to what extent this assumption are
[23:12] true so i will go one by one
[23:14] a little bit like i used to do when i
[23:16] was teaching the basic corporate finance
[23:17] class of what
[23:18] uh the assumption of the modern yani
[23:20] miller theorem are they true and to what
[23:22] extent
[23:22] should we pay attention so the first one
[23:24] is are contrast complete
[23:26] now as a student and co-author of oliver
[23:29] heart i cannot agree
[23:31] uh i cannot disagree with the fact that
[23:33] counters are incomplete and in fact
[23:34] counters are massively complete
[23:37] and so even if markets are perfectly
[23:41] competitive
[23:42] uh they might not be perfectly
[23:44] competitive
[23:46] uh after people make some specific
[23:49] investments so
[23:50] uh i my uh
[23:53] the best example in my way is with
[23:55] marriage i'm gonna get in trouble with
[23:57] this but
[23:57] in uh when you get uh to find a mate the
[24:00] market is pretty competitive as it goes
[24:02] when you decide to marry and especially
[24:04] to have children you make a very
[24:06] specific investment to your spouse
[24:08] and expose you in a situation of
[24:10] bilateral monopoly
[24:12] not complete you have alternative
[24:13] outside but they are extremely inferior
[24:16] to what is inside because you have uh
[24:19] some made a very very specific
[24:20] investment which is
[24:21] to have children so after the specific
[24:24] investment are made
[24:25] you have a situation of bilateral
[24:28] monopoly
[24:29] and because counters are incomplete and
[24:32] marriage is a fantastic example of this
[24:34] because it's the most incomplete of all
[24:35] the contents you don't write
[24:37] even if you have a prenuptial agreement
[24:38] you don't write who is gonna
[24:40] take out the trash and who you're gonna
[24:42] do this who's gonna do that
[24:43] you leave unspecified and so expos
[24:47] there is a lot of bargaining going on
[24:50] and so
[24:51] shareholders are not the only residual
[24:53] claimants uh
[24:54] think about employees employees uh
[24:57] my be seriously damaged if a company
[25:01] goes bankrupt
[25:02] because they had a lot of career prosper
[25:04] that they lose out
[25:06] by it when the company goes bankrupt we
[25:08] know that when a company goes bankrupt
[25:09] the employees
[25:10] generally lose 30 of their wages in the
[25:12] next job so that's a major loss
[25:15] that so chevrolet shareholders are not
[25:17] the only receiver claimant
[25:18] so it comes naturally to say wait a
[25:20] minute why don't we want to protect also
[25:22] the employees
[25:23] what about the community when uh
[25:26] caterpillar decided to move from
[25:28] springfield illinois to chicago
[25:30] springfield illinois real estate market
[25:32] collapsed because it was the only
[25:34] big company in town so big externality
[25:38] on
[25:38] uh the community and so on so forth so
[25:42] it is natural to say wait a minute
[25:44] companies
[25:45] should uh protect other stakeholders
[25:49] from
[25:50] exposed opportunists and
[25:53] after all god's statement might not be a
[25:56] wrong one
[25:59] now the the major objection to this is
[26:03] wait a minute why stakeholders don't
[26:07] choose different in a sense uh
[26:10] the vast majority of corporations and as
[26:13] michael said at the beginning
[26:14] of course we're not for profit we
[26:16] actually both work for a not-for-profit
[26:17] so we should be
[26:18] very much aware that this is an
[26:20] important sector uh there are
[26:22] different system but the vast
[26:25] vast majority of corporations assign
[26:28] votes only to shareholders and when you
[26:31] see
[26:32] situation in which workers have votes
[26:34] like in germany
[26:35] that's not the choice of the individual
[26:38] three parties
[26:39] has been as markus said mandated by law
[26:43] so if companies choose that
[26:47] they choose that for a reason a in
[26:50] recent
[26:51] core decision in the litigation between
[26:54] ebay
[26:55] and newman newman is actually craig list
[26:57] ebay invested in craigslist
[26:59] and craig or craig list of fame was
[27:02] saying that craig
[27:04] liszt is there to provide an opportunity
[27:06] to everybody
[27:08] an ebay suit saying wait a minute it's
[27:10] not opportunity for everybody is an
[27:11] opportunity to make profit because i
[27:13] invested in that and the court said
[27:16] that having chosen a for-profit
[27:20] corporate for
[27:22] then you should run the corporation
[27:25] for the benefits of your stockholders
[27:28] the code said
[27:29] the inc after the company name after all
[27:32] has to mean at least that so freedom of
[27:36] choice
[27:37] uh seemed to suggest that after all
[27:41] in uh this is the dominant choice
[27:45] and if the dominant choice might be a
[27:46] dominant choice for a reason now
[27:48] i'm old enough to know that not all
[27:50] evolutionary arguments are correct and
[27:52] there are some flaws in that
[27:54] and and let me point out to three
[27:55] potential flaws
[27:57] uh the first one uh which we don't like
[28:00] very much in economics but might be very
[28:01] important
[28:02] is that not everybody has infinite
[28:04] rationality and particularly
[28:06] many of the parties involved might have
[28:07] done the rationality
[28:09] even without going to that we know that
[28:11] there are party with wealth constraints
[28:13] so
[28:14] maybe workers would have bargained for a
[28:16] different situation but they couldn't
[28:18] because of wealth constraint
[28:20] the most sort of uh compelling might be
[28:22] that uh
[28:23] there are limits in the law and it's
[28:26] true that uh
[28:27] before for example the creation of what
[28:29] is now called the benefit corporation
[28:31] there might be some ambiguity and then
[28:33] if you chose the corporate forum
[28:35] you had to basically have a fiduciary
[28:38] duty toward the shareholders
[28:40] and that bounded you to that particular
[28:42] form
[28:43] now in the last 10 years or so most
[28:46] countries including the united states
[28:48] have a benefit corporation in which
[28:51] you're not bound to that fiduciary duty
[28:53] a few companies choose the benefit
[28:55] corporation but
[28:56] the overwhelming majority of companies
[28:59] uh even when they start
[29:01] they choose a traditional car platform
[29:03] so my inclination is
[29:05] if you want to attack friedman this
[29:07] doesn't seem the strongest point of
[29:08] attack
[29:09] i think that uh while it sounds very
[29:11] pleasant to say you should pay attention
[29:14] to all stakeholders
[29:15] it seems that at the very minimum
[29:17] freedom of choice
[29:19] seems to suggest that the first order
[29:21] consideration you have to pay attention
[29:23] to
[29:23] is uh the not overburdening
[29:27] the residual claimant and so in that
[29:30] sense
[29:31] freedom freedman was right on that front
[29:33] so luigi
[29:34] isn't it the case that especially for
[29:36] startups that a lot of the
[29:38] employees are also stock owners they get
[29:40] a lot of stock options and is this a way
[29:42] to get around it they just say oh we
[29:43] have this stock focus but we just give
[29:45] them stock options and then align
[29:47] incentives between employees and
[29:49] shareholders uh it's a very interesting
[29:51] question because
[29:53] this proves that they give to
[29:57] the initial employees
[30:00] some bundle of cash flow rights and
[30:03] voting rights
[30:04] but especially startup there is nothing
[30:07] that prevents
[30:08] them from unbundling this they could
[30:10] have given them
[30:11] simply cash flow rights with no voting
[30:13] rights they could have given me simply
[30:14] voting rights with no cash flow right
[30:16] so you could structure a startup by
[30:18] saying uh
[30:19] we have the workers collectively decide
[30:23] at the majority of the votes
[30:25] nothing prevent people from doing that
[30:27] if this was an efficient
[30:28] form you wonder why nobody has
[30:32] invented it before nobody has pioneered
[30:34] before
[30:36] so let's go to the i go backward to
[30:38] assumption number three
[30:40] individuals care only about monetary
[30:41] returns now this is easy to dismiss it's
[30:44] clearly false
[30:45] uh now i'm giving here a lecture for
[30:48] free
[30:50] marcus is there for free and in
[30:52] particular
[30:53] marcus who is very clever could make
[30:56] much
[30:56] more money by being in wall street than
[30:59] by being
[31:00] in in in princeton so he chooses uh to
[31:03] be
[31:04] in princeton because he cares about
[31:06] things other than money
[31:08] it's not that he doesn't care about
[31:09] money but he cares things about other
[31:10] than money
[31:11] so i think that that's a very simple
[31:13] thing and the fact that people give
[31:14] donation the fact that we have
[31:16] endowments and it says
[31:17] it's hard to say that the bill gates
[31:19] foundation should only care about money
[31:21] because that's not a statement of the
[31:22] brigade foundation so
[31:24] the fact that the individuals care only
[31:25] about money is
[31:27] blatantly false so force that actually
[31:29] freedmen anticipated the objection and
[31:31] say no no
[31:32] don't worry because even if shareholders
[31:35] are
[31:36] really socially minded and they want to
[31:38] donate to their corporate child
[31:41] it is much better to let the companies
[31:44] maximize shareholders
[31:46] value and distribute the profits
[31:49] and then each individual will donate
[31:52] the profit they receive to their
[31:55] preferred cause
[31:57] that separation that i argued before is
[32:00] absolutely true in the example that
[32:04] friedman chooses
[32:05] but if you pay attention freeman chooses
[32:08] a knife edge
[32:09] example an example in which if you keep
[32:12] away taxes
[32:14] there are no efficiency consideration of
[32:17] whether donations should be done
[32:18] at the corporate level or the individual
[32:21] level so
[32:21] is equally efficient to donate at the
[32:24] individual level
[32:25] and it is at the corporate level but is
[32:28] better to donate at the video level
[32:30] because marcus and i might disagree
[32:33] on which is our favorite charity so
[32:35] let's have
[32:36] our common company maximize profits
[32:39] distribute the money and then we choose
[32:41] how to
[32:42] to allocate the money this result
[32:45] is absolutely true in the car as far as
[32:49] corporate donations are concerned
[32:51] is probably not true for most
[32:54] of the other sort of uh
[32:57] carpet uh social activity and this is
[33:00] where my paper with oliver had in 2017
[33:03] comes andy because what we
[33:06] show is that under the reasonable
[33:09] assumption that for example
[33:11] it is cheaper not to pollute than they
[33:14] pollute
[33:14] and clean up then it is more efficient
[33:18] for companies to
[33:19] adopt the shareholder social objective
[33:22] like protecting the environment now i'm
[33:25] not saying that everybody wants to
[33:26] protect the environment
[33:27] uh i don't even know exactly and i'll
[33:29] come to that in a second how to
[33:30] aggregate the social objective
[33:32] but is not a guaranteed conclusion
[33:36] that is optimal for companies
[33:39] to uh maximize profits and then
[33:41] distribute the example i made it before
[33:44] uh the gays foundation i need to double
[33:46] check in which company they invest but
[33:48] imagine they invest in oil companies
[33:50] the gates foundation invests in oil
[33:51] companies that they
[33:53] bribe and pillage in africa in order to
[33:56] get
[33:57] extraction rights then they take the
[33:59] money they give it to the
[34:00] to the gates foundation the gates
[34:01] foundation distribute the money in order
[34:03] to undo the disaster they've done in
[34:05] africa
[34:06] that is not socially optimal by any
[34:09] stretch of the imagination
[34:11] and that's a simple point that oliver
[34:13] and i make in that paper
[34:15] now what does it imply here it implies
[34:18] that cardboard balls should maximize
[34:20] not show the value but show the welfare
[34:22] now
[34:23] what is show the waffle that's a bit of
[34:25] a open debate because
[34:27] of course this brings very complicated
[34:29] social choice issues
[34:31] into uh the corporation and then there
[34:34] are
[34:35] a lot of people starting from gene
[34:36] farmer to end with uh
[34:38] uh john matsusaka who wrote on pro
[34:41] market
[34:41] both of them wrote in pro market on this
[34:43] issue they say that the
[34:45] the benefit is not worth the cost that
[34:47] the car the
[34:48] governance cost of figuring out what
[34:50] shareholders want
[34:52] is larger than the benefit of having
[34:54] companies avoid
[34:56] [Music]
[34:59] bribing in africa i i disagree but
[35:02] that's kind of a subjective thing and
[35:03] cost benefit analysis
[35:05] and it's for another day but you can see
[35:07] here two very legitimate position
[35:09] uh on this front so luigi uh just
[35:12] interject here if there is a contract
[35:15] possibility of say say a pollution right
[35:17] between polluting
[35:19] in this particular village it could be
[35:21] that the shareholder himself he collects
[35:23] the money and then
[35:24] buys a pollution right like a coast
[35:27] geogram approach
[35:28] to get rid of this problem now so it's
[35:31] the incoming contract is
[35:33] so if you grant friedman that he
[35:34] understood the increment contract if you
[35:36] give him income
[35:37] contracts if there were complete context
[35:39] then the problem would not be there is
[35:41] this correct or
[35:43] um i think that uh uh if you take the
[35:46] extreme
[35:48] uh caution view which base by the way
[35:51] one of course did not hold
[35:53] that uh every uh thing could be fixed by
[35:57] having uh well-defined property rights
[36:00] because transaction costs are zero
[36:02] then you're absolutely right now in real
[36:05] life we know transaction costs are not
[36:06] zero
[36:07] and so i think that that's a even
[36:10] trying to be generous with friedman and
[36:12] say that he brought calls into the
[36:14] picture here
[36:15] i don't think that that's a a terrible
[36:17] position
[36:18] at least from a practical point of view
[36:19] you can you can
[36:21] defend yourself in the ivory tower and
[36:23] say we assume
[36:24] your transaction cost but you know you
[36:26] can also see assume the famous team
[36:28] opener
[36:28] and staff in the between um okay
[36:32] so speaking of this is perfect the
[36:33] externality we know that there are large
[36:35] externality now one point that is
[36:38] often forgotten and i think is very
[36:41] important
[36:42] in uh in the 50s and 60s
[36:45] shall does tended to be very locally
[36:48] based
[36:49] so uh most of the shoulder caterpillar
[36:52] were located
[36:53] in southern illinois and that made it
[36:57] extremely easy to internalize these
[37:00] externalities
[37:02] with the diffusion of uh with
[37:05] internationalization but also with a
[37:06] diffusion of portfolio theory
[37:09] and the impact that finance ad on uh
[37:12] portfolio location
[37:13] people start to invest in indices and so
[37:16] that makes it
[37:17] much more difficult to
[37:20] fix this problem and so
[37:24] you need to have legislation trying to
[37:27] make it
[37:27] to fix and now what is interesting
[37:30] is conservatives like steve kaplan who
[37:33] wrote on pro market say
[37:35] you shouldn't care about xm9 as a
[37:37] company why because regulation will take
[37:38] care of it
[37:40] and in a sense he's right
[37:43] if you think that number one
[37:47] regulation is perfect and number two
[37:49] companies play no role in interfering
[37:51] with regulation
[37:52] unfortunately that's not true first of
[37:54] all is funny
[37:56] that these are the very same people that
[37:58] argue against regulation so
[38:00] when it comes to regulation against
[38:02] regulation when it comes to
[38:03] companies being involved they say oh but
[38:05] regulation will fix it
[38:07] but the next day they lobby against
[38:08] regulation so that's a bit of a
[38:10] contradiction but besides that
[38:11] um i think that it would be much easier
[38:14] for governments to regulate
[38:16] if companies did not lobby massively
[38:19] against regulation a point i will return
[38:21] because it
[38:22] is very very important
[38:25] now can this examiner be resolved by the
[38:28] private sector
[38:29] through vote uh
[38:33] michael's mentioned a recent paper uh
[38:35] elena boccado
[38:36] oliver harden i wrote the paper is much
[38:39] broader than that but there is one
[38:41] interesting result that i want to stress
[38:43] because it's very important
[38:45] and he says that if
[38:48] the majority of investors are even
[38:51] slightly altruistic
[38:52] so we're not saying that everybody is
[38:54] altruistic
[38:56] but we say that uh at least a 50 50.
[39:00] of the people uh care a teeny tiny bit
[39:04] about something other than just their
[39:06] own well-being
[39:08] and shareholders are asked to vote
[39:12] on for example pollution decision
[39:17] then uh diversified shareholders
[39:20] will vote as a central planner
[39:23] would so they internalize the
[39:25] externality they do the right thing
[39:28] and the logic of the argument is very
[39:30] very simple
[39:31] is that if you are very well diversified
[39:34] the impact of the direct
[39:38] impact of the cost of this decision
[39:42] on your portfolio is trivia but you have
[39:45] a first order impact
[39:46] on the externality itself so if you care
[39:49] about this
[39:50] you're gonna vote in the right way now
[39:53] before you think that all the problems
[39:55] are resolved unfortunately
[39:57] uh the department on labor today is
[40:00] trying
[40:00] make his best to prevent asset manager
[40:04] to do exactly this there is a new
[40:06] directive
[40:07] uh chosen by eugene scalia
[40:10] uh uh some coincidence of the more
[40:14] famous anthony scalia
[40:15] uh that was uh that suggests suggest
[40:19] mandates
[40:20] asset managers not to consider
[40:23] anything else except financial returns
[40:26] in their decision
[40:27] so if i represent the
[40:30] pensioner in a town and i know
[40:34] that that town will be destroyed by
[40:37] pollution
[40:38] by that firm i should still maximize
[40:41] the financial return of my investors
[40:44] ignoring the fact that the pensioners
[40:46] will die because of pollution
[40:49] so what i see however is the fact that
[40:53] a somebody not so in favor of regulation
[40:56] like
[40:56] president trump or even eugene scalia
[40:59] himself
[41:00] our resort into regulation to prohibit
[41:02] this suggests that this exactly
[41:04] potentially a very effective method and
[41:07] and that's the reason why they need to
[41:08] resort
[41:09] to the power of the government to stop
[41:10] it
[41:12] now let's go to the easy stuff
[41:15] assumption number one
[41:17] one a are companies price takers this is
[41:20] friedman is completely clear is very
[41:22] much agrees that monopoly should not
[41:24] maximize profits
[41:26] now he believed that monopoly did not
[41:29] exist without any government protection
[41:31] but things with google today i would
[41:34] like to imagine that
[41:36] he thinks about google as a monopoly
[41:38] because that's what it
[41:39] is and monopoly by the way
[41:42] achieved through organic growth and
[41:45] superior performance so
[41:46] a monopoly that does not violate the
[41:49] anti-trust rules
[41:50] uh at least in uh when you search engine
[41:53] they might have done other stuff but in
[41:55] the search engine
[41:56] they they achieve this monopoly
[41:58] following the rules
[41:59] uh are we prepared to say that they
[42:02] should not have any social
[42:04] responsibility no
[42:05] my answer is no um now how do you
[42:08] prevent that from happening
[42:10] uh there are three ways two are not very
[42:13] appealing one is nationalization
[42:15] and i don't think we want the google uh
[42:18] google search uh run like the post
[42:20] office
[42:21] uh number two regulation uh
[42:25] by running the stiegel center i fear
[42:27] that
[42:28] a regulatory agency of google might
[42:31] actually represent the interest of
[42:32] google and on the interest of the people
[42:34] then there is a third alternative that i
[42:36] would like to explore later
[42:38] because is useful also in the context of
[42:41] rule takers
[42:42] now what i consider the biggest hole
[42:46] in friedman argument is the fact that
[42:50] he assumes that companies are going to
[42:52] take us in fact
[42:54] in a very 1970 article you say
[42:56] corporation
[42:57] should make as much money as possible
[42:59] while
[43:00] conforming to the basic rule of society
[43:03] both those embodied in law and those
[43:05] embodied in ethical customs
[43:07] and in a separate piece is repeat the
[43:09] first part
[43:10] you should make you maximize profits as
[43:13] long as
[43:15] you play by the rules of the game which
[43:18] is fair competition
[43:19] and blah blah blah so here i seem to
[43:22] suggest that companies should take
[43:24] rules and not make them but uh
[43:28] his colleague at chicago joe stiegler
[43:31] the year after he wrote the 1970 pieces
[43:34] wrote the famous piece about regulatory
[43:37] capture
[43:37] in which he recognized that cooperation
[43:40] actually captured the regulators
[43:42] and shaped regulation and the irony is
[43:45] that the two never met
[43:46] of course they match in the corridor
[43:48] ever every day
[43:50] but they never conflated these two view
[43:53] and
[43:54] uh now if you realize that rules are
[43:57] nothing
[43:58] exogenous they are endogenous uh then
[44:01] are you prepared to say that the social
[44:03] responsibility of ceo is to lobby
[44:05] congress
[44:06] to be free of of any polluting law
[44:09] and and pollute as much as possible are
[44:12] we saying that the ceo
[44:13] should maximize profits at the cost of
[44:16] uh
[44:17] bribing congressmen if bribes are legal
[44:21] uh you know in the old days in germany
[44:23] uh
[44:24] bribing for an official was legal and so
[44:27] was a duty of a ceo to bribe
[44:31] foreign officials to get more business i
[44:34] am not prepared to say that
[44:36] i don't know who will uh and i think
[44:38] that this is where the freeman rules are
[44:40] untenable
[44:41] and uh now uh the bigger question than
[44:44] the one that
[44:45] we have not we're not i don't think we
[44:48] have it fully
[44:49] comprehensive answer is how we are going
[44:51] to buy to constrain companies on this
[44:53] front
[44:56] now let me give you a a glimpse of
[44:59] hope as i told you uh basically we
[45:03] owe most of capital america three
[45:06] uh asset management firms blackrock
[45:09] vanguard and fidelity together
[45:12] on this amount of stock of the more on
[45:15] the largest corporation so
[45:16] pick microsoft roughly 20 is owned by
[45:19] these three guys
[45:20] if these three guys vote collectively
[45:22] they probably have the majority because
[45:25] only a fraction of the other
[45:26] shareholders vote so you can easily run
[45:28] microsoft
[45:29] if you control those three companies
[45:33] now this has potentially very dangerous
[45:36] effect from a
[45:38] competition argument however as a very
[45:41] powerful message that is is these guys
[45:44] vote in the right way
[45:46] we can change the world and the good
[45:48] news is we're pretty close to change the
[45:50] world
[45:51] uh this is from the morningstar proxy
[45:54] voting database
[45:55] and this is the amount of support that
[45:58] on average
[45:59] shall all the proposition forcing
[46:01] companies to disclose their lobbying
[46:04] are receiving a shoulders meeting we are
[46:06] 31
[46:08] 10 years ago we are 14 we are within
[46:12] striking distance
[46:13] of making a difference and i think
[46:16] we can make a difference the problem is
[46:19] that the evil powers are fighting back
[46:22] and they are using the department of
[46:23] labor to protect them
[46:25] now what can we say about
[46:29] from an economic point of view the
[46:30] evaluation of friedman doctrine today
[46:34] uh ask something about is it
[46:37] good that they have such a concentration
[46:39] of power of three players
[46:42] of course is not of course he's not
[46:45] however the redeeming feature
[46:48] an official that i personally would like
[46:50] to exploit is to say
[46:52] we should make those guys accountable
[46:55] so larry think writes a letter to all
[46:58] the ceo of gopro america every year
[47:00] i want to write a letter to let you
[47:02] think and say i want to
[47:04] hold you accountable for how you vote
[47:06] your shares
[47:07] and once i debated life thing at a
[47:09] meeting and he said oh
[47:11] the department of labor is forcing us to
[47:13] do that
[47:14] and i say larry the department of labor
[47:17] is forced you to do
[47:18] nothing because with eight trillion
[47:20] under management
[47:21] if you want a rule of the pattern level
[47:23] be changed you change it
[47:25] yesterday not tomorrow okay so i think
[47:28] that that
[47:28] we need to realize this you we need to
[47:31] make these people accountable
[47:33] and through that accountability change
[47:35] the system
[47:36] in the right direction so
[47:40] i think that maybe this is true for
[47:42] every statement but
[47:43] freedom and doctrine is more valid than
[47:46] it detractors claim
[47:48] but more wrong than supporters will like
[47:51] so i think there is no theoretical
[47:54] reason and i'm bias here but there is
[47:56] not a rather reason to ins
[47:57] to insist on shareholders value
[47:59] maximization rather than show others
[48:01] waffle maximization i think that that in
[48:04] my view is is a no-brainer
[48:06] now uh this change might be enough for
[48:10] externality i think is unlikely to be
[48:13] enough in the presence of monopoly power
[48:15] like google or in the presence of
[48:17] lobbying power
[48:19] now i would like to think to divide the
[48:22] world into two
[48:24] and say if you are a small corporation
[48:26] and when i say small
[48:28] i don't mean uh the uh
[48:31] grocery around the corner my favorite
[48:33] example was chucky cheese
[48:35] and fallen chucky cheese went bankrupt
[48:37] recently so i have to pick a better
[48:38] example but
[48:39] you know a corporation that is listed on
[48:40] the stock market but
[48:42] is not a large in the sense that we
[48:44] intend today
[48:46] chuck e cheese has no market power it's
[48:49] heavily subjected to regulation because
[48:52] uh if i step down from the board of uh
[48:56] the epa
[48:57] or from the board of oshkosh i don't go
[49:00] to the board of chuck e cheese i might
[49:02] go to the board of dupont i might do the
[49:03] go board of
[49:05] merc i don't go to the board of chuck e
[49:07] cheese and
[49:08] uh really they have no love in power and
[49:11] this is uh have you ever heard about
[49:13] a member of parliament represented chuck
[49:14] the churches no so i think that uh
[49:17] friedman principle modulo the variation
[49:21] on oliver i introduced i think
[49:22] infringement principle
[49:23] applies to chuck e cheese
[49:27] very different if you are a very large
[49:28] corporation not only google it is clear
[49:31] monopoly
[49:32] but uh think about dow chemical
[49:37] think about merck think about companies
[49:40] that
[49:41] all for what matters actually blackrock
[49:44] okay these companies are they so large
[49:47] they're number one
[49:48] unlikely to enjoy some market power but
[49:51] even if they don't enjoy market power
[49:53] they are certainly
[49:54] number one too big to fail and number
[49:56] two to big to jail
[49:59] and also they can easily change the
[50:02] rules of the game
[50:03] for these companies the idea of applying
[50:06] the freedmen principle
[50:08] in my view is completely wrong
[50:11] now what is the alternative first of all
[50:13] how do you define large
[50:15] uh you know this is a bit tricky uh
[50:18] however
[50:19] marcus teaches me that the dodd-frank
[50:23] act
[50:24] has been able to create some
[50:26] systemically important financial
[50:27] institutions that are treated
[50:29] differently
[50:29] and in part is based on their size and
[50:32] their systemic importance so
[50:33] i don't think it's out of the question
[50:35] uh but here is where
[50:36] richie can ask you but if you want a a
[50:39] one zero
[50:41] or zero one definition not a continuum
[50:43] so it's either you're small or large
[50:45] there's nothing yeah
[50:46] and i come to that why i wanna a a zero
[50:49] one i think that's an excellent point
[50:50] but so this is a i wanna tell you this
[50:53] is number
[50:54] one tentative is walking progress all
[50:56] over heart and will not work out all the
[50:57] details but
[50:58] i want to give you a bit of a of a gist
[51:01] of
[51:01] where my thinking is going that
[51:03] direction and my thinking is to say
[51:05] uh i think it's reasonable for companies
[51:08] like
[51:09] blackrock for company like google
[51:13] to introduce a fiduciary duty to our
[51:16] society what does it mean if i do show
[51:18] you the society
[51:19] that the board members are personally
[51:21] responsible
[51:22] if the company opportunistically
[51:25] exploits
[51:26] some externality so if i'm on the board
[51:29] of dupont and i use dupont now has been
[51:31] bought by
[51:32] um now chemical and as merged and so
[51:36] forth but i wrote a p an article looking
[51:38] at one particular case of pollution
[51:40] dupont in which
[51:41] i don't know if the ultimate board but
[51:43] somebody inside dupont did a
[51:44] cost-benefit analysis
[51:46] seeing that actually the benefit of
[51:49] polluting the oil river with
[51:51] the pfoas which are this toxic substance
[51:54] was worth it and so for 25 years they
[51:57] dumped
[51:58] the pfoas in their iowa killing uh
[52:01] hundreds of peoples and uh basically pay
[52:04] no cost
[52:06] because the ceo of dupont
[52:09] died and the obitory in the wall street
[52:12] journal
[52:13] was the environmental leader so this guy
[52:16] who chose to dump
[52:18] pfoa in the ohio river is an
[52:20] environmental
[52:21] uh master that is celebrated at his debt
[52:24] so
[52:25] i want to say if you're on the board of
[52:27] that company
[52:28] you should do a cost benefit analysis of
[52:30] what it costs to pollute
[52:32] and i'm not a bleeding heart uh liberal
[52:35] to say that the optimal amount of
[52:37] pollution is zero
[52:38] uh there is a cause at the benefit of
[52:40] pollution and but i want you to
[52:42] at least look at the societal cause of
[52:45] pollution
[52:46] and if the societal cause will exceed
[52:49] the uh the societal benefit even if this
[52:52] is profitable
[52:53] you have a personal responsibility of
[52:55] not doing it
[52:56] okay but the small company will still do
[52:58] it this
[53:00] the small company will do it why because
[53:03] i
[53:03] trust the epa to go after the small
[53:06] companies
[53:07] dupont hire the former uh
[53:10] chairman of the epa on the board they
[53:13] drafted the environmental rule
[53:16] that applied to pfoa
[53:18] [Music]
[53:19] those big companies they have too much
[53:21] power those are the ones who should be
[53:23] penalized
[53:23] in a sense this is nothing else that
[53:26] dogfrank applied to every other company
[53:28] like if you are systemically important
[53:31] you have to be treated differently
[53:33] if you are systemically important from
[53:34] the point of your power
[53:36] you have to be treated differently and
[53:38] that's kind of the message
[53:40] okay now i need to terminate but the
[53:42] political i want a political evaluation
[53:45] of the friedman doctrine
[53:46] freedom and peace as we say came at the
[53:49] right time
[53:50] when competition from europe japan and
[53:52] inflation
[53:53] were forcing companies to change one of
[53:56] the things that is unthinkable today but
[53:59] one other thing in the back of the mind
[54:00] of friedman when he writes
[54:02] is the johnson administration we're
[54:04] calling ceos to keep prices low
[54:06] to keep inflation low and the johnson
[54:09] administration was using social
[54:11] responsibility
[54:12] as a justification for this uh pressure
[54:17] on this aspect friedman brought
[54:20] a very fresh a very novel a very
[54:24] right idea to the table and move
[54:27] companies in the right direction
[54:28] now what i think is we went too far and
[54:32] it is now time to have a new
[54:35] reevaluation of this
[54:36] uh not throwing away everything was done
[54:39] but building on what freeman has done
[54:41] to build a better world uh now
[54:44] particularly i think that uh the problem
[54:47] we're facing today
[54:48] is the u.s capitalist system
[54:52] is not delivering for the majority of
[54:54] americans and this is lead to the desire
[54:56] for change
[54:57] and we are the world of third best so
[55:00] it's very hard to evaluate how to best
[55:02] change uh many requests of change are
[55:06] purely opportunistic
[55:07] other just pretends but i don't want to
[55:10] forget
[55:11] that the need is real and let me end by
[55:15] saying if you want to learn
[55:17] more from me i have a podcast with
[55:19] bethany mclean called capital
[55:21] isn't what is working about capital is
[55:24] today and most importantly
[55:25] what isn't thanks a lot
[55:29] luigi that was fascinating so we got a
[55:32] very fresh perspective
[55:33] to overturn milton friedman for large
[55:35] companies
[55:38] some questions came up and i would like
[55:39] to throw these questions at you
[55:42] in particular what about if
[55:46] a certain company is mostly owned by
[55:48] people who don't care about the
[55:49] environment
[55:51] is it then okay to pollute so let's
[55:54] suppose there's a big company
[55:56] all the shareholders are all you know
[55:57] environmentally ignorant they don't care
[55:59] about
[56:00] it how would you handle that are they
[56:02] still
[56:03] representing the welfare of the
[56:04] shareholders because they don't have the
[56:06] same preference so what generally how to
[56:07] aggregate the preferences across
[56:09] shareholders that's the second question
[56:11] excellent question and thanks for the
[56:13] question because
[56:14] hopefully it gives me an opportunity to
[56:16] clarify my position
[56:17] in no way i'm saying we don't need
[56:19] regulation okay in no way i'm saying
[56:21] that so
[56:22] uh i always thought that maximization
[56:25] showed welfare
[56:27] is useful to complement the failure of
[56:30] regulation i don't believe that
[56:32] regulation is perfect
[56:34] i would like to know the person who does
[56:36] but i think on the margin
[56:38] we can do more and one aspect that i
[56:41] think people don't fully appreciate
[56:44] is that corporations are today now
[56:48] worse than the average of us
[56:52] why because we tied them
[56:55] in a system in which they are all forced
[56:58] to look
[56:58] only one aspect so uh i
[57:01] am the last one to celebrate the the
[57:04] golden age of the past but
[57:06] in the past when you had uh
[57:11] shareholders that were more actively
[57:12] involved
[57:14] they care about more about yesterday
[57:16] than today
[57:17] uh in italy uh small companies
[57:20] are care about the employees more than
[57:24] the large companies why because the
[57:26] owner
[57:27] actually leaves with the employees at
[57:29] least more with employees than with his
[57:31] spouse because they work all the time
[57:33] and so
[57:34] there is a bonding that is an
[57:35] internalization of the benefits
[57:37] that is uh forgotten today so
[57:40] i'm not saying that we should replace
[57:42] regulation with maximization on
[57:44] shareholders welfare
[57:45] i'm saying that we should temper
[57:48] the extreme in which we are aimed today
[57:51] by allowing uh shareholders to
[57:55] pick and choose and uh and of course
[57:57] that would be sorting
[57:58] and of course there will be companies
[58:00] that are only owned by
[58:03] uh the koch brothers and they're gonna
[58:05] pollute
[58:06] uh the hell of it that's the reason why
[58:09] i
[58:09] actually started the research project
[58:11] with illinois and oliver to understand
[58:14] to what extent uh divestment works and
[58:17] and the answer is not very much
[58:19] precisely for that reason because if i
[58:21] simply divest
[58:23] uh and i make it more attractive for the
[58:26] couch buyers to buy the company
[58:28] and so uh is there is no guarantee that
[58:31] the outcome is better
[58:32] it might actually get worse and in the
[58:34] process i enrich the cause rather so i'm
[58:36] going exactly in the opposite direction
[58:38] so i i'm not in any way saying uh that
[58:41] fixes all the problems
[58:42] is a small step in the right direction
[58:45] and the reason why
[58:46] we are elaborating this uh societal
[58:48] fiduciary duty
[58:50] uh is uh is um
[58:53] is exactly to address this and and let
[58:55] me clarify because
[58:57] other people have come in started with
[58:59] elizabeth warren and more recently
[59:01] leo's trying and calling mayor
[59:04] have brought some ideas of creating a
[59:08] corporate purpose or societal purpose to
[59:10] companies
[59:11] i see this as very dangerous when this
[59:14] is applied to everybody
[59:16] and when you have a government decides
[59:18] what is
[59:19] uh a social purpose what is not social
[59:22] purpose
[59:23] uh because uh even marcus and i i think
[59:26] we agree on most things you probably
[59:28] disagree
[59:29] on some things so what is something is
[59:31] is a good purpose not purpose and
[59:33] and we both come from countries that
[59:36] have faced
[59:37] terrible dictatorship and so we we
[59:39] realized that sometimes
[59:40] what is sold as as good for society is
[59:44] actually terrible it says
[59:46] the savings and loans of italy at the
[59:48] time were not for profits
[59:50] were distributing their profits uh to
[59:53] the fastest organization during the
[59:55] fascist period and that was considered
[59:57] a corporate purpose so i i see very
[01:00:00] dangerous
[01:00:01] uh path to have uh the
[01:00:04] state decide what is a legitimate
[01:00:07] purpose
[01:00:08] for a company on the other hand i do
[01:00:10] think that
[01:00:11] when you reach the size of blackrock you
[01:00:14] do have to have
[01:00:16] a responsibility to society
[01:00:19] so how would you implement that in
[01:00:21] particular would there be an incentive
[01:00:23] for firms to de-list
[01:00:25] and in order to control who the
[01:00:26] shareholders are so once you're listed
[01:00:28] you can't really control who your
[01:00:29] average shareholder is
[01:00:31] but if the issue is about uh
[01:00:35] there will be a a tendency to to buy
[01:00:38] out uh and and become private like the
[01:00:41] koch brothers are and run privately
[01:00:43] absolutely that that's the reason why
[01:00:45] the divestiture
[01:00:46] element is not sufficient to fix the
[01:00:49] problem
[01:00:50] uh on on the point of of the societal
[01:00:53] responsibility
[01:00:54] absolutely not in fact you asked earlier
[01:00:56] and i
[01:00:57] forgot to answer on the zero one i do
[01:00:59] want a zero one
[01:01:00] exactly like uh the um
[01:01:05] systemically important financial
[01:01:06] institution the cifi and
[01:01:08] the the reason why is because i give you
[01:01:11] the possibility
[01:01:12] of uh rapture down your size
[01:01:15] and uh get rid of it and it says do you
[01:01:18] really think
[01:01:19] that's a cost if you have facebook span
[01:01:22] off
[01:01:23] whatsapp and instagram tomorrow at three
[01:01:27] independent companies
[01:01:28] and all of a sudden you are free from
[01:01:30] that uh constraint
[01:01:32] so uh i see that as a very handy tool
[01:01:37] to enforce another thing that is dear to
[01:01:40] me
[01:01:40] more fragmentation in the u.s economy
[01:01:45] so you mentioned one big impact in your
[01:01:47] thinking was also the assumption
[01:01:49] or the in reality we have bounded
[01:01:51] rationality
[01:01:53] the beauty of the milton friedman
[01:01:54] argument is it's very clean
[01:01:56] a clean clear mandate while the others
[01:01:59] are
[01:01:59] less clean do you think that so that's a
[01:02:01] problem
[01:02:03] uh do you prefer to be clearly wrong
[01:02:05] than
[01:02:06] vaguely right
[01:02:07] [Laughter]
[01:02:09] i i think that the the
[01:02:13] some people say uh often wrong but never
[01:02:15] in doubt
[01:02:16] no most usually i think that it is a
[01:02:19] beauty
[01:02:20] of the mandate of freeman and that's one
[01:02:22] of the reason
[01:02:23] why has been so successful um
[01:02:27] i think that uh in practice
[01:02:30] there are a lot of institutions that
[01:02:32] have multiple mandates
[01:02:35] we both work in one at one point i serve
[01:02:39] in the search committee for
[01:02:40] dean of my business school and i realize
[01:02:42] how difficult the job
[01:02:44] of a dean is much more difficult the job
[01:02:46] of any ceo because
[01:02:47] you have multiple constituencies uh and
[01:02:50] and you have one particularly vocal
[01:02:52] which is us
[01:02:52] you cannot even fire so imagine how bad
[01:02:55] that is
[01:02:56] uh so you have multiple students now i'm
[01:02:58] not saying that necessary universities
[01:03:00] are run perfectly far from me saying
[01:03:02] that but
[01:03:03] i'm saying it is possible uh and uh
[01:03:06] it's challenging but it's possible and i
[01:03:08] think that that argument has been a bit
[01:03:11] overplayed so we we need to
[01:03:13] be mindful there is a danger of complete
[01:03:16] lack of accountability and and i am the
[01:03:18] first one to
[01:03:20] object to the business roundtable
[01:03:22] decision
[01:03:23] or statement because the business
[01:03:25] roundtable uh this
[01:03:26] statement sounds very much like we do
[01:03:29] whatever we want
[01:03:30] and nobody can ask us to be accountable
[01:03:33] because
[01:03:33] it's so vague and and what i love about
[01:03:36] the piece that uh
[01:03:38] lucien bachchak wrote recently is that
[01:03:40] he went on and look at how they behave
[01:03:43] the companies that sign a business
[01:03:44] roundtable
[01:03:45] they behave in the most selfish way
[01:03:47] possible they are the first one to fire
[01:03:50] people doing carving
[01:03:51] so all that stuff is is complete
[01:03:53] propaganda
[01:03:54] to basically give them the flexibility
[01:03:57] to do whatever they want and not be
[01:03:58] accountable so
[01:03:59] i see that that is a serious danger i
[01:04:01] think we should fight against that
[01:04:03] but uh having the wrong objective just
[01:04:07] for being clear it seems like uh too
[01:04:10] much to take
[01:04:11] so there's there's a another question i
[01:04:13] would like to throw at you from the
[01:04:15] audience
[01:04:16] uh if you look at income and wealth
[01:04:17] inequality should this also be one
[01:04:19] consideration because it's really
[01:04:20] a money issue like what is in friedman
[01:04:24] as well you want to have this social
[01:04:25] inequality
[01:04:26] in terms of wealth or income do you want
[01:04:28] to incorporate this in
[01:04:29] and welfare shareholder or is this
[01:04:32] separate
[01:04:33] that that's a that's a very very good
[01:04:36] question now
[01:04:37] uh i think that when it comes to
[01:04:40] uh the the money administered by
[01:04:44] the corporation uh there is a very easy
[01:04:47] way to fix that uh inequality
[01:04:50] is you donate that money and instance
[01:04:52] bill gates in a sense has has done that
[01:04:54] now he has chosen to make two people in
[01:04:56] africa now to
[01:04:57] the poor in seattle but that's a
[01:04:59] different story but but he clearly
[01:05:01] went went in that direction so i think
[01:05:03] that uh
[01:05:05] i don't see necessarily corporations
[01:05:09] engage into this business of reducing
[01:05:13] inequality however i do
[01:05:17] think that monopoly is the source
[01:05:21] of a lot of inequalities and
[01:05:24] and so fighting monopolies and and some
[01:05:27] of what i say
[01:05:28] go in the direction fighting monopolies
[01:05:30] uh is something that
[01:05:31] has uh very important redistributed
[01:05:35] properties my
[01:05:36] my favorite example is uh
[01:05:39] who used to be the richest man on earth
[01:05:41] uh carlos lim
[01:05:42] went from 60 billion to 30 billion in a
[01:05:45] year
[01:05:47] now is still very rich but you know half
[01:05:50] as rich
[01:05:51] why because you brought competition
[01:05:55] in the uh cell phone market in mexico
[01:05:59] so basically you had a massive
[01:06:01] redistribution because
[01:06:03] the cost of uh making phone calls is
[01:06:05] macro planeted
[01:06:07] so you are really a massive distribution
[01:06:09] to the mexican population
[01:06:11] at the expense of one rich guy so
[01:06:14] inequality mexico
[01:06:16] went down significantly as a result of
[01:06:18] just one form of the regulation
[01:06:20] and i think you can go a long way in
[01:06:22] that direction
[01:06:23] with more competition so your colleague
[01:06:27] gene farmer would like to know you know
[01:06:28] how to get this aggregate a meaningful
[01:06:30] aggregate welfare function
[01:06:32] across the shareholders do you have any
[01:06:35] thoughts how you would
[01:06:36] do it because that's that's a key
[01:06:38] question essentially
[01:06:39] it is a key question i think that
[01:06:44] at the end of the day uh the best is the
[01:06:46] enemy of the good
[01:06:48] uh even if we have the hours and
[01:06:49] possibility theorem and all the stuff
[01:06:52] uh i think that uh getting people say
[01:06:55] what they like
[01:06:55] is not a terrible way to to decide uh
[01:06:59] and especially in in a system where
[01:07:02] you actually pay uh your vote is
[01:07:05] proportional to how much you
[01:07:06] pay the cost because if the vote is by
[01:07:08] shares it's not by
[01:07:10] by people so i think that uh
[01:07:13] if you have some guidelines
[01:07:16] on uh what is the trade-off because
[01:07:19] the thing i cannot stand is most
[01:07:21] corporate managers say
[01:07:23] it's a win-win situation and as
[01:07:25] economists i
[01:07:26] think that i always trade off and i say
[01:07:29] how much are we willing to pay for that
[01:07:31] trade-off so i give you a very concrete
[01:07:33] example where
[01:07:34] this can be voted tomorrow so oil
[01:07:36] companies
[01:07:39] burn a lot of gas through flaring
[01:07:41] flaring
[01:07:42] is emission of metal gas that comes with
[01:07:45] the
[01:07:45] oil extraction and is generally too
[01:07:48] costly to be
[01:07:49] captured so either they release it
[01:07:52] directly which is terrible for global
[01:07:54] warming
[01:07:55] all day burn and it's still bad for
[01:07:57] global warming and produce no good
[01:07:59] okay so it's from a societal point of
[01:08:01] view is a gigantic waste
[01:08:03] and if you think that's small no it's
[01:08:05] roughly three or four percent
[01:08:07] of uh all co2 produced in the united
[01:08:09] states is producing this way
[01:08:11] now why they produce it because the
[01:08:13] alternative is more expensive
[01:08:15] if i want to capture gas i
[01:08:18] will will cost me money so
[01:08:22] should i decide to
[01:08:26] lose some money and capture the gas or
[01:08:27] not and
[01:08:29] uh the question is uh at the end of the
[01:08:32] day a question that
[01:08:33] shallowest who paid the price in this
[01:08:35] military freeman was right they paid the
[01:08:36] price
[01:08:37] they have the right to decide and they
[01:08:38] say i'm willing to get
[01:08:40] uh two cents less on my dividend
[01:08:44] in exchange for a three percent
[01:08:45] reduction on co2
[01:08:47] or i'm not willing to do it i don't know
[01:08:49] why this vote is so difficult to do it
[01:08:52] very concrete and
[01:08:56] let's add it let's try it but there are
[01:08:58] a lot of detailed decisions and the
[01:09:00] shareholder every shelter doesn't have
[01:09:01] the expertise to make judgment on that
[01:09:04] so how would you delegate this decision
[01:09:07] making the voting power to some experts
[01:09:09] or you outsource your votes to somebody
[01:09:11] who is environmentally friendly there's
[01:09:13] some agency who takes over for you or
[01:09:15] audio
[01:09:16] so let me do a little bit of a promotion
[01:09:19] for
[01:09:20] not myself but another great scholar who
[01:09:23] is uh
[01:09:24] john masusaka who just wrote the book
[01:09:26] let people rule
[01:09:27] is a book about referendum and he
[01:09:30] overturns in my view the preconception
[01:09:33] that referenda
[01:09:34] only work in switzerland because in
[01:09:36] switzerland they're different
[01:09:37] okay he uses data about the united
[01:09:40] states data about california showing
[01:09:42] that actually people are pretty smart
[01:09:45] in major decision in referenda okay and
[01:09:49] your argument they don't know enough is
[01:09:52] a very dangerous argument because
[01:09:54] and i'm not saying that you are going to
[01:09:56] but you know go to the direction
[01:09:57] let the uh knowledgeable people rule the
[01:10:01] country you go to a
[01:10:02] technocracy or a pistocracy uh how you
[01:10:05] want to call it
[01:10:06] that is pretty dangerous so i do believe
[01:10:10] and is not just a a religious belief his
[01:10:13] belief based on the facts and and john
[01:10:15] mastersack in the book provides these
[01:10:16] facts
[01:10:17] that shows that actually people do pay
[01:10:20] attention to facts and even if they
[01:10:21] don't
[01:10:22] do all the uh digging uh they
[01:10:26] get some information that is probably
[01:10:28] best and most the information that our
[01:10:30] congressman get you know what
[01:10:32] when uh uh the obama plan was passed
[01:10:36] nancy pelosi said let's vote on it
[01:10:39] so we're gonna figure out what is in it
[01:10:41] because
[01:10:42] nobody in congress voted for knew what
[01:10:45] they were voting on
[01:10:46] okay so the idea that delegation brings
[01:10:49] competence
[01:10:50] is not true what delegation brings very
[01:10:53] effectively
[01:10:54] is compromise is making trade-offs and
[01:10:57] and what uh individual vote voting
[01:11:01] makes it impossible the log rolling that
[01:11:04] you have and
[01:11:05] now you can argue sometimes log rolling
[01:11:07] is useful for democracy
[01:11:08] but that can be too much of a good thing
[01:11:10] so i think a little bit more
[01:11:12] referendum is good for the political
[01:11:14] system a little bit more of
[01:11:16] asking shareholders is good now
[01:11:19] additional advantage with the uh the the
[01:11:22] democracy
[01:11:23] is we have intermediaries financial
[01:11:26] intermediaries
[01:11:27] so um i can start a
[01:11:31] green s p 500 fund okay
[01:11:35] and uh i give the same return as
[01:11:38] vanguard because i invest in the s p
[01:11:41] as well but i only vote in favor xyz
[01:11:45] and so i you marcus you don't need to
[01:11:49] know
[01:11:49] the detail of the proposal on dupont
[01:11:53] you just trust my fund or don't trust my
[01:11:56] fan depending on your preference
[01:11:58] invest in me and i do the due diligence
[01:12:00] i vote
[01:12:01] and i accomplish what you like so i
[01:12:04] don't think is
[01:12:04] that impossible so let's come i have one
[01:12:07] final question about that so you will
[01:12:09] prefer such an arrangement
[01:12:11] over esg funds where you know you you
[01:12:13] don't can't invest in all of the 500
[01:12:15] companies you can only invest in 300
[01:12:17] which are more environmentally clean how
[01:12:18] is the difference to that
[01:12:20] and then i want to throw the last
[01:12:21] question at you relating to milton
[01:12:23] friedman you always said milton friedman
[01:12:25] knew
[01:12:25] which button to press in order to make
[01:12:28] social change
[01:12:29] have you found your button on this
[01:12:31] agenda and what is it
[01:12:35] uh okay those those are all uh very
[01:12:38] tricky questions
[01:12:38] let me start with the easy one first so
[01:12:41] um i don't think esg fans will
[01:12:43] uh do the job uh for two reason one the
[01:12:46] one you already pointed out
[01:12:47] that is very profitable for companies
[01:12:50] to actually choose alternative strategy
[01:12:53] and get funding from
[01:12:54] uh somewhere else yes uh uh
[01:12:58] if esg funds are large enough i think
[01:13:00] they might make a difference
[01:13:02] but uh i'm not so sure uh and two
[01:13:06] uh i am very skeptical about rating
[01:13:09] systems
[01:13:10] uh we know that uh
[01:13:13] uh credit rating did not perform
[01:13:15] particularly well during the crisis
[01:13:17] but they had a hundred years of
[01:13:18] reputation by the way reputation
[01:13:21] uh accumulated in a period where there
[01:13:23] was a subscription-based model
[01:13:25] and not a issue of paid model uh in the
[01:13:28] esg
[01:13:29] world i think that i'm very skeptical of
[01:13:32] the esg firms
[01:13:34] and i've seen firms that i know the fact
[01:13:38] they're not environmental friendly
[01:13:39] getting very high esg ratings and
[01:13:43] the literature shows that the
[01:13:45] correlation between the sg rating is
[01:13:47] close to zero
[01:13:48] so i think that's just marketing by and
[01:13:51] large
[01:13:51] and i don't think that this is going to
[01:13:53] make a big difference
[01:13:55] except uh make rich
[01:13:58] a few good marketing guys
[01:14:02] on my button i think that this is on my
[01:14:06] button change corporate america
[01:14:08] one vote at a time
[01:14:11] thanks a lot luigi fantastic
[01:14:13] presentation
[01:14:14] we stay in touch and thanks again i hope
[01:14:17] to see you soon in the real world
[01:14:18] again my pleasure i look forward to the
[01:14:22] real world
[01:14:23] [Laughter]
[01:14:25] okay bye