Makers & Takers: Why Can’t We Get This Right?

November 6, 2018 ~ Written by: W.B. “Bud” Kirchner

Approx. Read Time: 15 Minutes

“A cynic is a man who knows the price of everything but the value of nothing.” – Oscar Wilde

Makers & Takers: Full Disclosure

Lest there be any doubt about my ‘bias’ on this topic, let me share with you a quote (from a PBS interview) that has received a lot of attention since becoming “Interview of the Year.”

I was described as follows:

“Acting with values contrary to the sophisticated and terrible financial engineering” – Bob Scully (http://www.kirchnerpcg.com/w-b-bud-kirchner-interview/)

Further to the above disclosure, anyone who reads these articles regularly (if there is such a person) has undoubtedly come to realize, I (our group) have put a high priority on values and ethics in business, as witnessed by the following articles I have written:

In the context of the above, I have tried to pay tribute, in particular, to Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar, which I believe is a classic when it comes to describing the dilemma.

Having disclosed all this, my goal is not to bash the “bad (read taker) guy”, but to reinforce the good (read maker) guys. In particular, I encourage readers to think about the situations where takers do so at the expense of the makers.

makers & takers

Context

The stimulus for this current article is a new book – The Value of Everything: Making and Taking in the Global Economy by Mariana Mazzucato. Mazzucato is a Professor of the Economics of Innovation and Public Purpose at University College London. Simply put, her premise is that something has gone wrong with capitalism since extracting value is rewarded more highly than creating value.

My objective here is to focus on the latter part of the title (Making/Taking) in this article. Also, it is my intention to do a sequel to this article wherein I drill down on the related roles of government and private sectors in creating IP, as well as the subsequent commercialization. In other words, how do we establish/assign value? Again, this is an area where Kirchner Group is actively involved.

It is no coincidence that this book and several related articles I refer to herein coincide with the anniversary of the Lehman debacle. First, because it exposed so many of the flaws in the system, but also because many believe it will soon repeat itself.

I plan to look at this in the context of Mazzuacato’s thesis and related perspectives raised by other authors.

I have chosen four of these perspectives:

  • Author insights/arguments
  • A quick look back – how did we get here
  • What has happened since Lehman
  • Looking ahead

As always, this is not intended to be a full course meal but rather some food for thought (I do love metaphors) from a few perspectives.

Author’s Thesis

The real measure of your wealth is how much you’d be worth if you lost all your money.” – Author Unknown

While I don’t intend (typically) to provide a review of the book, but rather repeat a few of the salient points – starting with some historical context:

“Until the mid-19th century,” Mazzucato writes, “almost all economists assumed that in order to understand the prices of goods and services, it was first necessary to have an objective theory of value, a theory tied to the conditions in which those goods and services were produced, including the time needed to produce them and the quality of the labor employed; and the determinants of ‘value’ actually shaped the price of goods and services. Then, this thinking began to go in reverse. Many economists came to believe that the value of things was determined by the ‘market’—or in other words, what the buyer was prepared to pay. All of a sudden, value was in the eye of the beholder. Any goods and services being sold at an agreed market price were by definition value-creating.”

I further quote the book:

  • The belief that price determines value and that markets are best at determining prices has all sorts of nefarious consequences. To sum up, four stand out:
    • First, Price-equals-value thinking encourages companies to put financial markets and shareholders first, and to offer as little as possible to other stakeholders.
  • Second, the conventional discourse devalues and frightens actual and would-be value creators outside the private business sector.
    • So public actors are forced to emulate private ones, with their almost exclusive interest in projects with fast paybacks.
  • Third, this market story confuses policymakers.
  • Fourth, the confusion between profits and rents appear in the ways we measure growth itself: GDP.

By way of counterbalance, a negative (but still seemingly objective) review comes from Philip Collins who has criticized the book thusly “this is a book longer on analysis and diagnosis than on solutions”.

dollar sign

A Look Back

“As recently as the 1970s”, the author maintains, “economists viewed financial institutions as merely transferring existing wealth rather than creating new wealth.”

Steven Pearlstein, a Pulitzer Prize-winning business and economics columnist for the Washington Post has reflected on how we got here:

“Thirty years ago, in the face of a serious economic challenge from Japan and Europe, the United States embraced a form of free-market capitalism that was less regulated, less equal, more prone to booms and busts. Driving that shift was a set of useful myths about motivation, fairness and economic growth that helped restore American competitiveness. Over time, however, the most radical versions of these ideas have polarized our politics, threatened our prosperity and undermined the moral legitimacy of our system.”

 “A recent survey found that only 42 percent of millennials support capitalism.” (my emphasis)

He then goes on to identify the five “myths about capitalism” that got us into this situation:

  • “Greed, a natural human instinct, makes markets work.”
  • “Corporations must be run to maximize value for shareholders.”
  • “Workers’ pay is an objective measure of economic contribution.”
  • “Equality of opportunity is all people need to climb the economic ladder.”
  • “Making the economy fairer will make it smaller and less prosperous.”

Post Lehman

What has happened in the interim? It seems not many lessons have been learned?

I quote Alain Sherter, Managing Editor at CBS News, reflecting on lingering issues:

  • The share of national income captured by the richest 10 percent of Americans rose from 34 percent in 1980 to 47 percent in 2016.
  • Between 1980 and 2016, the share of America’s income going to the top 1 percent nearly doubled, while that going to the bottom 50 percent plunged.
  • After declining following the Depression, the top 1 percent’s share of wealth in the U.S. has shot back up roughly to where it was in the 1930s.
  • Between 1970 and 2016, the gap between the richest and poorest Americans jumped 27 percentage points.
  • As of 2017, by some measures, CEOs at large companies on average earned more than 300 times what the typical worker made, up from 58 times in 1989 and 20 times in 1965.
  • In 2015 the combined wealth of the planet’s sixty-two richest individuals was estimated to be about the same as that of the bottom half of the world’s population – 3.5 billion people.

And a specific (some would say egregious) example from O’Reilly: “Pharma price determines value, it is perfectly legitimate for a drug company to charge whatever the market will bear. After all, proponents argue, the cost of a drug should not be based on what it took to produce it, but on what it is worth to someone suffering from the condition it alleviates.”

Looking Ahead

“They who are of the opinion that Money will do everything, may very well be suspected to do everything for Money”.  – George Savile, Complete Works, 1912

In the absence of some significant changes – the future seems to be more of the same.

From the original source I was struck to learn:

  • “Growing inequality isn’t a uniquely American problem. Research shows that gaps in income and wealth are also widening in China, India and even in Europe, where taxation is generally more progressive.”

And even more flags raised by O’Reilly:

  • “The so-called investors have come in only when government has taken most of the risks.”
  • “Any gains belong to the private sector “value creators” is one of those self-serving stories Plato advised those in power to tell.”
  • “Social Investment Stipend” that pays people to invest time in other people, in their community, and in the environment. To use Mazzucato’s language, this would be to put the caring economy inside the production boundary.”
  • “Government is currently doing a poor job of maintaining a market free of rents, precisely because our current definition of “value” allows rent-seekers free rein.”
  • “We constantly see references to the “size” of companies as their market capitalization, not their revenues, their profits, their number of employees, or other real-world factors.”
  • “Investors and households, for whom financial institutions’ control of the flow of money seems to guarantee the institutions’ own prosperity far more readily than that of their customers.”

It has been speculated by many that since more-unequal economies tend to have over-sized and overcompensated financial sectors they are more prone to booms and busts. In other words, ‘predatory’ capitalism winning over ‘productive’ capitalism.

Conclusion

Perhaps a common-sense solution to this dilemma is to accent our activities or initiatives that contribute to making the world a better place and avoiding the temptation to exploit those that do.

Hopefully the solution is not us vs. them, but rather some form of synergism where value is calculated as a societal contribution and respective contributions are ‘back calculated’.

Bibliography

Relevant Business Brain Model articles:

About the Author: W.B. “Bud” Kirchner is a serial entrepreneur and philanthropist with more than 50 years of business success. He is not a scientist or an academic but he does have a diversified exposure to neuroscience, psychology and related cognitive sciences. Generally speaking, the ideas he expresses here are business-angled expansions of other people’s ideas, so when possible, he will link to the original reference.