good morning good morning and welcome i would like to welcome professor lazonica who is at the trento festival of economics for the first time my name is roberto manier i'm a journalist of the italian daily la republica and i will try and introduce professor lazonik's lecture first of all i would like to recall the past because you see at a certain point the liberalist ideology ground and an alternative thought was missing a different approach and a different perspective and in trying and understanding what was happening an alternative voice was missing it was a sort of deafening silence among intellectuals and that also involved not only intellectuals but also journalists who were too lazy in uh addressing this issue and they only focused on the market and the centrality of the market neglecting what was happening on the other side that is the social disaggregation that was taking place inequalities that were growing the disparities and discrepancies in society and the peripheral areas of the globalized world were changing and people were not realizing that we realized at a certain point that there was a fragmentation and there was a breaking down of social classes and walks of life and i think of the middle classes in europe and also in the united states and the social partners too did not actually act it was laziness really an intellectual laziness that prevailed as if the market could do everything as if money producing money could also have a democratic role in redistributing resources but it was not like that the 2007 8 and 8 recession and the following years compelled that we reviewed our perspective and and we understood that there was another way of looking at things it was not only wall street indexes it was not only benefits and bonuses uh for top executives that mattered and their pays were linked to the trend of the stock market and but that was not the whole picture because that happened to their advantage to part of the executives and the elite but not the broad part of large part of society and communities so we had an extraction of value instead of value creation as professor lazonic says and the word value extraction is at the core of the problem an article was published in 2014 by professor lazanik in harvard business review and it was entitled profit without prosperity as if the role of capitalists had gone lost and had interpreted and performed a different function that is not something for the community whereby businesses and corporations are part of the community and that can create value but rather extract value professor lazernick was one of the critical voices of what was happening and he did so from the very beginning because he understood that along with other intellectuals that capitalism was short-sighted that it was diseased that it was capitalism based on rent without entrepreneurs that it was conditioned by short-term approaches and so he developed his original and very interesting theory of innovative businesses which serves the purpose of putting remedy to the floors of capitalism we had then a metamorphosis of of capitalism and the managers the executives that the elites actually did not perform their role and this paved the way to many problems including populism in the united states and also elsewhere in the world so professor lazanik first of all dismantles the classic theories and shows the contradictions in it and it's a frailty the aspect i would like to focus here is that the theorization of the monopolist business that is the the frail element so this is the intellectual direction uh followed and that is supported by several theories starting from karl marx to innovative businesses which again are part of the community and perform something for the community and these are terms that we had stopped using in the past years an innovative business brings together capital and labor and resources in order to produce innovative services professor lazonica wrote that the encentra of these is cumulative learning it is a an entity of people of individuals um engaging in a virtuous and alternative pathway something that we saw had stopped happening something that was revealed by the crisis so the point has to be to create value and not simply pay top executives i jotted down a number of figures and they are incredible really and i understood that no barrier was raised against this diffusion of the liberalist approach and ideology in the period between 2004 and 2013 454 and snp companies used 3 400 billion dollars in order to repurchase their own stocks and that was a percentage of 51 percent of the their net income while an additional 35 percent was destined to distribute dividends in that in those 10 years approximately 9 000 businesses in the united states altogether used a 6 900 billion dollars for uh buybacks and that was a percentage of 43 percent of their net income while dividends absorbed an additional 47 percent so corporations such as exxon mobile between 2003 and 2012 purchased on a daily basis at least 300 million of their own shares and stocks so it is trillions of dollars that instead of being used to pay for labor for invested capital and for growth of the community actually paid and remunerated the top managers it was a manipulation of the value of stocks at the metamorphosis of the system of allocation of resources this happened in all sectors and here i'm coming closer to the very topic that will be addressed by professor lazeneck this system he also included the big pharma company model between 2003 and 2012 pfizer for instance as also johnson and johnson did use the 71 percent of their profits for two for buybacks and 75 percent uh was used for dividends so they actually used more for buyback operations than what they actually uh gained in the united states the drugs have doubled the price of other countries in the world big pharma companies state that the the the price is due to the fact that they invest in innovation but probably it is not that it is not so this is a central topic because the big pharma companies produce medicines that uh that have to that are aimed at improving the quality of our life and make us live longer improving life expectancy and cure us so that is the theory at least that is on paper and i i think that professor lazonic will address on exactly this point because probably there is something else behind all this you have the floor professor laziness thank you very much and thank you for having me in trento beautiful city i've been in italy many times but never in toronto and thanks to the institute for new economic thinking for both bringing me here and also for funding this research which has been generous okay yes uh the here's a picture of uh the percentage of uh national health expenditures in the united states of those prescription drugs it went down in the 70s into the 80s but then started going up again the bigger picture is that the united states spends about 18 to 19 percent of gdp on health expenditures this is no other country is more than 11 and a lot of this is because people are making money without really delivering health services and pharma is one of them and in the pharmaceutical industry there's a widespread discussion about a productivity crisis a lot of money goes in and we do have miracle drugs every once in a while but given the amount of resources that's devoted to drug development and i'll show you some of the figures for government resources taxpayer money in the united states the productivity is is not all that high there's two parts of the problem and i'm going to mention some different dimensions of this problem but one is that we have the old economy the old pharma companies companies like merck pfizer johnson johnson uh they uh have gotten into a model where they're acquiring other companies that have developed drugs they're under patent protection uh in 1995 uh the patent protection was extended from uh 17 years 20 years and they then just try to get as much money out of those patented drugs as they can and do very little of their own drug development and we've traced their pipelines and we can see that this is the case then you have uh some of the new what we call the new economy companies these really started uh in the late 70s and 80s the biotech revolution and uh many of them are listed on the more speculative stock exchange at least it was in the 80s nasdaq and they uh came up with a number of blockbuster drugs in the 80s that were many people in industry called the low hanging fruit it was there ready to be picked because of government funding of of pharmaceutical drugs and biotech drugs for for many decades but then you had increasingly companies saw that they could make a lot of money even if no drugs produced or if they just got a hold of drugs and and some of the most financialized companies are not the old companies but the new ones and we'll see one which is well known as gilead sciences um and i'm going to explain why this is the case um okay uh there's a different dimensions of this broken business model that you have in the united states this is uh the director of research with doctors out borders some testimony he gave about a year and a half ago and basically talks about this in terms of access to medicines that that the medicines people need are not being produced they could be produced they could be produced profitably the companies don't want to produce them because they want to produce the ones that where they can gouge prices and they can uh not necessarily ones or if they have to sell on mass to uh to low to low income populations the uh uh there's been lots of talk and i know here as well about the opioid epidemic uh and uh the drug companies some of the drug companies are just uh implicated deeply in just creating drugs that are not high quality in the sense that they destroy people's lives they don't they don't save people's lives or ease pain they destroy people's lives here's a very good article by jeffrey sachs who i think you all know of and called gilead's greed that kills about this company gilead sciences which got a hold of a drug for hepatitis c that it did not develop and charged really very high prices for it and in this article he says that it's a company driven by unquenchable greed which i agree with and he says that gilead ceo john c martin took home a reported 19 million dollars last year that was in 2014 in compensation the spoils of untrammel agreed and you can see at the bottom it says that he that's not what he took home he took home 193 million now i'll explain that that's uh part of the complication here people don't really understand how much money some of these people are making out of uh exploiting the the position they have in drugs that control over drugs that people need uh that matter of life and death uh we've had the recent case of a company called valiant uh which is just totally price gouging company gets hold of uh existing drugs tries to get prices it got a lot of publicity it actually has failed uh we don't need to cry too much but the uh the the hedge fund guy who was involved in this uh william ackman said it was that they lost three billion dollars with the with the decline of the stock price this is a a a summary of their business model by a ceo of a company genzyme which was a company that did develop on its own in the early 80s with national institutes of health funding a miracle drug that is only for a really rare disease that's about five or six thousand people in the world use it now to understand this we have to understand what economists can't say about it because economists as was mentioned do not have a theory of innovative enterprise economists in fact have a theory of the uninnovative enterprise the unproductive enterprise and then they call it perfect competition and they can't understand what's going on in any industry really where in fact the purpose is to get a high quality product at a low cost that and that is what raises our standard of living and the low cost does not come at the expense of low wages it actually comes with higher wages because you get productivity and that productivity is generated not just the pharmaceutical industry but virtually every industry within companies is not generated on the labor markets and this is this is the big failing of economics and i'm going to talk a little bit about this because it has to be understood in this context the innovation process has three characteristics uncertain uh collective and cumulative so nobody can say what the outcome is going to be and that is certainly true in when you try to develop a pharmaceutical drug you can spend 10 years billions of dollars and and and have a failure uh it's collective lots of people have to be working together uh in a learning process to generate the new technology to access the markets and that's why we have business organizations that's what they do that's the essence of it that's the essence of the innovation process and it's cumulative it takes time and it's not just the passage of time it's because the learning processes take time so it's a collective and cumulative learning process and that's why we need finance uh with what people often call patient capital we need that money uh controlled by these companies so they can get from the point in which they make the investment to when they finally have a product to sell on the market and can generate some uh financial uh returns from making that investment and again it may never happen it's uncertain so and often companies fail but enough succeed that we have whether it's italy united states france germany uh korea now japan high standards of living because of these innovative enterprises essential to understanding the economy okay now is some characteristics as well go over very quickly of the innovative enterprise that need to be understood because the innovation process is uncertain collective and cumulative and these what i call behavioral conditions and i show them here uh strategic control it matters who really is running companies what their incentives and abilities are and if the people who are running these companies do not have the ability to understand the innovation process they're not going to be able to lead the inter aviation process often even if they do understand it uh we'll see that they don't have the incentive to uh sustain the innovation process they have the incentive to make lots of money from themselves in any case and this has become the part of the broken u.s business model uh you need to integrate people into this learning process that means you have to share the gains with them that the gains do not just come from themselves they come from the very productivity of the people but not just individually collectively in some industries it's more complex some industries is less complex in pharmaceutical it's very complex those learning processes and then you need financial commitment to sustain that process so these are what i call the theory of innovative enterprise this is what i think in every introductory course and everywhere in the world people should be learning about no one learns anything close to this except if they take my courses if you are successful in this you get a high quality low cost product but for any company that is trying to do this there is a problem that the very investment in innovation and not just in the plant and equipment but particularly in the people and keeping the people employed and training them retaining them rewarding those people giving people careers which is not out of charity which is out of the need to develop these high quality low-cost products that's high cost and it might be high quality but it might be very high cost but once you can get a higher quality product than competitors you can start getting a larger extent of the market and you can start spreading out those fixed costs and that's really economies of scale and some companies then get also economies of scope by having different types of products that are using uh these fixed capabilities and it's not just again plant and equipment it's it's labor really as a fixed cost which is fundamental to not only innovation but our higher standards of living because we have careers as a result of that okay and uh this then affects economic performance when you have innovation it is potentially possible for lots of different what we might call stakeholders to gain and you can see them here and we'll go through them all including consumers who get the high quality lower cost products and then when we have this and we add it all up and we have enough companies doing this in the economy we have what i call sustainable prosperity we have at least the foundation for what i call stable and equitable growth why because people are have careers developing these high quality products they get a share of the gains there's a shared prosperities this again does not happen on the labor market it fundamentally happens in these major business organizations and we get economic growth and this is what we want we want stable and equitable economic growth and we need to have innovative enterprises and this goes way beyond farmer and other industries this is generally true now if we look at the u.s economy these are some data on the size of firms we know we have a large firm now in italy we do have the phenomena which i think is a very important one of uh the industrial districts uh some are more fragile than others it's not always small firms it might be collectivity of firms but in the united states and uh in many other countries and even in italy in certain sectors of course uh you have very large companies uh that uh compete on global markets and in the united states basically if you look at just the companies five thousand people are more on here average over twenty thousand employees that's very big companies but they they are uh about a third of the visa uh business uh sector labor force which is about 81 percent of the total in the united states uh 38 percent of payrolls and about 44 of revenue so the vote if you take that cut about 1900 companies what they do uh determines how the rest of the economy operates and performs okay now in the pharmaceutical industry as in almost every and every across the whole us economy we have a disease and it's called maximizing shareholder value it's a disease with which uh i wouldn't necessarily take the people sitting here as as as a sample but i would say that if you did a survey 99 of economists would say yes it's good for companies to maximize shareholder value that leads to efficiency in the economy as a whole that's i'll explain very briefly why that's highly problematic and why it's wrong but when you do that you end up having the phenomena which were mentioned in the introduction people at the top making uh extraordinary or taking i should say really extraordinary remuneration and and a lot of people not not getting very much companies buying back their stock distributing dividends and buying back stock from shareholders and it pervades the us economy but it pervades the u.s pharma with a vengeance because the u.s government gives these companies lots of advantages in generating drugs that they don't have to pay for like government spending high drug prices and they they've used this to enrich rich themselves to ceos and increasingly these hedge fund people although some people like ackman lost some money that's too bad uh okay now the people put this forward are called you know agency theorists and the notion it's rooted in the theory of the market economy neoclassical economics and the notion is we've got a market economy out there everybody gets a guaranteed return for labor whatever the products are producing except the common shareholder they're the only ones who take risk in the economy and therefore if the if the company generates profits they should control what happens those profits and if they take losses they they'll take losses and when there are profits uh they don't necessarily just leave them with those companies they'll go and take them through the financial markets particularly through the stock market and allocate them to their more efficient uses and this is uh the theory of of how you should allocate resourcing economy and the role of shareholders in the economy uh this is uh the guru of maximizing shareholder values a guy named michael jensen who brought this along with chicago school economics to the world in the 70s and 80s and then he was hired at harvard business school in 1985 and i was there starting in 84 and over the time when after he was hired no one was talking about this ideology in 1984 at harvard business school everybody was talking about it after and this was also coincidentally the era of reaganomics the rise of wall street people not going into industry going to wall street and the growth the beginnings of growth of huge income inequality and and this theory if there is a legitimizing theory which there is here it's responsible for it and if you want to put one person who is responsible for it it's this particular guy michael jensen okay now what's the critique fundamental problems with with their assumptions the shareholders are not the only ones that take risk in fact they take very little risk because they just buy and sell shares because the market's liquid and they can sell those shares very quickly if they don't want it's what that's long called the wall street walk in the united states uh who takes a risk i as a taxpayer in the united states uh when i pay my taxes and it goes to fund roads or it goes to fund the national institutes of health which will see some of the numbers i'm taking the risk that the companies will not use this well these resources we give to them and even if you have a given tax rate uh i won't get the return because the economy won't do well okay now if it does and we have a given tax rate we might get a fair return but there's also political that's an economic risk that they won't do others a political risk that they'll start arguing that we need lower taxes in order to do well which is precisely what they do with being legitimized by shareholder value ideology uh and workers face face risk as well it's a different type of risk if i go and work for a company and i'm involved in a collective and cumulative learning process uh i am generating the products of the future the productivity of the future and i would say everybody is involved in this in some way unless you're just the most irr replaceable commodity then i'm going to get the gains not even if i pay today i'm going to expect the gains in the future and i'm going to generate be part of generating those gains in the future someone comes in and says no those that's my money they're they're taking my money that's it's basically what maximizing shareholder value did jensen discourse the cash flow belongs to shareholders it took the workers money uh and sure enough my article process of prosperity would say that you know i tried to explain this in terms of the growing inequality of income distribution united states that everybody knows about the irony of shareholder value ideology is that shareholders take very little risk they just buy and sell shares and they don't actually invest in the productive capabilities of the company i can give you an example outside the pharmaceutical industry but a relative uh new company apple the only time anybody ever apple ever got any money from the public public stock market was in 1980 when it did its initial public offering it got 93 million dollars which is nothing and and even steve jobs had sold all his shares by 1985. so these current shareholders do not have never funded that company they're they're going to the company to get dividends to hopefully a higher higher stock price but they do not fund the company so it's a total misconception foisted on us by the theory of the market economy the stock markets actually fund the economy they don't their way of taking money out of the economy and it's always been that way uh in the united states um the yes okay sorry i was going a little too fast for the interpreters which i promised them i wouldn't do okay so slower and they also told me there's many more words in italian than in english so that okay okay so maximizing shareholder value to call msv is a theory of value extraction not value creation and uh and it's a way of taking money out of the economy rather than a way of putting money in the economy and we can see this in this graph so this is from the federal reserve federal flow of funds data this is net equity issues is stock issued by companies minus stock they take off the market largely through stock buybacks and the red line is non uh financial companies or industrial companies and we can see really around 1984 it starts becoming negative it's it's it's volatile but it becomes very negative after 2003 and it remains highly highly negative uh that spike in the blue line is financial companies they did issue shares to the u.s government when they got bailed out so so they have positive net uh equity issues i converted this into uh uh numbers uh in 2015 dollars just so you could see the growth in the size of this funding of the stock market this distribution and you can see that basically how it grows in that first column to four and a half trillion dollars over the decade 2006 to 2015 and just as a a way of giving it some control over the relative size of the economy i show it in terms of uh the percentage of gdp and it's become bigger and bigger more and more systemic this is a picture not of net equity issues but of uh gross distribution of uh dividends and buybacks by the same companies over a long period of time from 1981 up through 2015 and basically in the beginning of the 80s you did not have buybacks on any uh appreciable scale there were some changes that were made when ronald reagan got elected under deregulation that facilitated or encouraged companies to do these buybacks they haven't done them instead of dividends they've done them on top of dividends and they've grown over time and we can absorb more and more of net income which i show here it's a little complicated but these are some of the numbers which were uh mentioned uh so if you take if the same companies over a decade this case 2006 to 2015 459 companies the s p 500 it was 3.9 trillion in total and buybacks another 2.7 trillion in dividends that's a 91 of of net income and by the way a lot of the the rest of their net income is held abroad where they avoid u.s taxes so there's very little that's uh they're using out of net income to reinvest this is uh shows you some of the uh the top 25 repurchasers over that decade the companies and often uh as was mentioned over 100 percent of their net income is is going to uh distributions to shareholders uh this out of that the top 50 these are companies in healthcare so there's eight of them i believe and uh five of them are pharmaceutical companies pfizer johnson and johnson amgen merck and gilead sciences so these are ranked by the amount of repurchase they did over that decade uh so they're well represented here um now uh mention this article profits without prosperity uh uh i critiqued this uh argument uh and i did it in terms of this change in this graph which is shown back here uh which many people have used i didn't invent this uh this is the change in productivity of labor percentage change cumulatively over time mapped against the cumulative percent change in productivity and up until the 19 mid 1970s rate of change in labor uh wages uh tracked the rate of change in productivity and i argue this is mainly because large corporations which dominated the economy had to retain and reinvest resource allocation regime this is what brought the us to be a world leader not ju in every industry uh that is that it was a world leader uh it kept people gave them a career with one company shared the prosperity with them you had a uh emergence of a middle class by the way was mainly a white middle class so when donald trump says make america great again and if there's some to reality it's make america white again if he if he understood anything about history which is not clear uh this might be what he's referring to or what what but that broke down uh in uh the uh late from the late 70s and increasingly you have this gap between productivity and wages and now even productivity is slowing okay so you you start having a problem and this problem is because i would argue with you know shareholder value ideology just taking money out of company going from what it called retain and reinvest to downsize and distribute i retain people money you invest in the company to downsize in labor force cutting wages and distributing the gains to shareholders obviously there's limits to this but some of the companies that dominate in their industries can do this for a long time with with and still remain alive so there's an integral relation in my view between the incomes of the top one percent and the disappearing middle class these are the uh pickety and says data you can see if you take the components of the top one tenth of one percent of incomes it's increasing that blue portion at the bottom is the uh are the uh what they call salaries because the tax data do not show stock based pay but that's increasingly stock-based pay here's the data on a stock-based pay of the 500 highest-paid u.s executives each year from 2006 to 2015 uh the two bottom parts of the bar the orange and the purple are uh stock base pay and it's about anywhere when the stock market's down 67 percent or something like that of their total pay when it's up 84 percent and you can see that the average let's say for 2015 uh was 32.6 million dollars um this some of the the the this pay actually uh is is small relative to the highest paid people who are running hedge funds uh and we have this data here who have been coming increasingly powerful in taking money out of these companies not the only thing hedge funds do but among these people are people who are getting the money out of the companies okay shareholder value undermines innovation uh it separates the people to talk from the rest of the organization they do well even the rest of the organization doesn't do well it takes away from the career employment the productivity uh development of the through experience of workers sharing and the productivity gains which is essential not only those workers but to the innovation process because that's where the learning occurs and it drains the company of money that it needs to sustain the innovation process now in the drug industry it also takes the form of uh financialization of price gouging of charging higher prices and there's an argument that the industry has made for decades that the reason they charge higher drug prices in the united states is because there's more investment in uh r d and innovation in the united states uh well here's the data on drug prices i just have a number of graphs here they're at least twice what they are everywhere else is the data if you can see it from that the uh uk system uh put out uh these are a number of different drugs that are out there on the market where uh the price the united states compared to other countries okay well that point is clear the for drug prices in the united states are unregulated there's no economic rationale for them being unregulated from any theory because they have a monopoly for 20 20 years uh they're really uh pharmaceutical companies once they have the monopoly are like a utility they should be regulated like a utility like a monopoly and and and be allowed to charge prices that give a a decent yield to shareholders for on their dividends they're not actually getting the money from the stock market they're getting from the bond market the more they keep in the money uh the better rates they can get from you know money in the company the better rate in the bond market they should be regulated from the utility they're not uh and this argument actually goes way back this is a newspaper article from 1985 drug industries accused of gouging public uh waxman attributes price price hikes to greed waxman was a guy named henry waxman who just re retired after uh you know about over 30 years in congress he was the kind of watchdog of of the industry uh and he was constantly saying things like he said back in 1985 they're gouging the american public outrageous price increases greed on a massive scale profits at the expense of the sick the poor and the elderly you know as i said he retired after he didn't run the last election i wonder i don't know i never met him i don't know what he thinks now but now the thing is that uh what they depended on they bought the actually here uh there's another part of that article where he calls into question the industry argument which they made back then that that they need these high drug prices to accelerate innovation in the industry and so he was questioning that but the way they tried to deal with it was by saying okay after 20 years you won't have a patent patented drug anymore and there'll be generics and it turns out that some of the generics still can gouge prices because they have to be safe some of the generic companies buy other other companies keep the monopoly etc so it remains a problem even without uh without patents the uh this is funded by the government there would not be a pharmaceutical industry probably not just in in the united states but around the world without u.s government funding of this because in fact european and japanese companies are very good at making use of the us environment uh and and actually if we've been studying some european companies if if they're non-financialized they go into the us they get access to uh the knowledge that's being produced through national institutes of health funding and they get the high drug prices and they actually do put it into innovation they can become leaders and in some companies in in in in europe like roach and novartis are doing better than american companies because of this in drug development these are numbers going back to 1938 on the national institutes of health this is in 2016 their total funding uh it just is about a trillion dollars in total going back to them and the it is double what it was in real terms in the 1990s now uh it actually hasn't increased innovation it increases a lot of startups who get listed on the stock market without a product and people make money even if no products produce we call them product lists ipos or plippos and you do not actually get in many cases drugs develop but you get people making lots and lots of money through speculation on the market about these companies they're also supported by something which europe adopted in 2001 called the orphan drug act to support uh rare and genetic diseases we did looked at all the blockbuster drugs drugs that in any one year had a billion dollars or more in sale and really the modern industry the industry as we know it now was based on orphan drugs so this these are the orphan drugs uh from 1991 on when a lot of these drugs started coming onto the market and uh these are the ones the non-orphan drugs uh that were blockbusters and some of them actually are derivative of orphan drugs so that was another part of the support the government has given to the industry here's a report in 1984 when francois mitterrand was in silicon valley and was being told by a particularly greedy uh venture capitalist named tom perkins who's still around that they had created everything in that industry and it was from kleiner and perkins was a venture capital company was first backed genentech a biotech company uh and a a scientist who had won a nobel prize spoke up and said where were you guys when all the government was doing all the funding and he goes on to say i cannot imagine that had not been an nih funding research there would have been biotechnology industry this is the scientist paul berg as a footnote to this paul berg uh later was a uh for many years a on the advisory council of this greedy company gilead sciences and we added up that he made about 23 million dollars uh uh uh being on the advisory council for that company so everybody gets their take sooner or later okay you don't end up with a lot of innovation now i uh have some numbers here uh just we what we did is out of the s p 500 we pulled out uh the pharmaceutical companies there were 18 companies and basically we see that they are basically more financialized than industry in general they they are highly financialized so it's not simply that they are doing this they are doing it with a vengeance as i said earlier companies like pfizer and merck among the largest they've been doing it for decades they've just been there to create shareholder value that is to boost stock prices we had one article that was actually done at the request of inet we wrote an article about pfizer's when pfizer was trying to go to ireland to get out of u.s taxes and the ceo said in an interview that they couldn't compete because of u.s taxes and then we at the bottom there we looked at what they had spent on buybacks and dividends five times what they had paid in u.s taxes so he said and he said that that u.s companies were competing with one hand tied behind their back so i then kind of photoshopped him uh with some golden handcuffs and if you know that's why they can't compete because he wants to have his high executive pay uh pfizer is among the worst it is probably is the worst of the old economy companies just gouging prices and uh there are here are some more data on now uh the explosion of executive pay some of these companies that started in the late uh 80s early 90s gilead science is one of them they were really started just to make money out of the drug industry they saw that the business model was there and they were going to exploit it and they've exploited it very well uh this is uh we took for every year from 2006 to 2015 a little small to see but the top six uh uh executives by what they're paid in the industry and the percent from stock-based pay uh gilead science's uh ceo john c martin who i mentioned before is in every one of those years he starts at number six and ends up at number one the they are doing again this they're doing this to a more extreme than than the rest of the industry there's another problem here which i'll just touch on briefly again research we did for inet that everybody's measuring executive pay wrong uh because they're using why they well basically why they're using it right or wrong because of crappy economics they're using black shoals merton option pricing models which assumes they're not much volatility in the stock market when in fact that's what it's all about that's how you get high executive pay so we've gone through this i won't go into any details of this but if you actually measure it correctly and this is what i mentioned about this guy martin making 193 million in uh 2014 when his it was reported that he made 19 million that's a phony estimated uh number that comes out of bad economics and what we know what he actually made and they have the same number for 2015 which is his last year of ceo uh 19 million which was prospectively what he might get from the the uh stock options that he had in fact what he took home was 234 million so it was about 400 million in two years nobody knows how much uh exactly gilead expended developing the drug which really created a bonanza for them uh two drugs sovaldi and uh harvoni uh but nobody thinks it's more than 200 million because they bought the company for about 11 billion of course buying for 11 billion they knew that they could in the united states just jacked up the price as high as they wanted uh but he if if that's true who's 200 million he himself uh had nothing to do with developing this drug other than and he's really not a drug developer he's a he's a financial engineer he got 400 million out of just for those two years uh there's another company that's been in the news was in the news uh this is a innovation that happened in 1977 gouging the price of uh uh heavy pens which are injections that you get if you have allergies and kids use them in schools uh and they report the wrong numbers on on that ceo okay so there's a lot of problems here and i'm coming just toward the end of this and i'll wrap up with what should be done about it uh i recently have something on the inet website about the problem of uh not just people who have blue collar jobs lost work or you know a lot of the focus on now now that they're the base of this terrible person who's running the u.s government uh but uh uh it's it's happening to phds it happening to all kinds of people they're not getting the careers that they need the scientific community is not really aware of what's going on so this is a report called restoring the foundation and it's about the need to have more investment in r d and they said there's not enough r d and here where i kind of bolded this this sentence in there which is in their executive summary uh they said you need to have these breakthrough discoveries it says yet companies finding the increasingly difficult to justify such long-term investments in a market environment focus on short-term results have made it clear that the federal government must continue to be the primary funder of basic research now i could say something really crude here to these people but why would you accept that market environment as a given okay and that is not the problem they're getting plenty of government funding now overall government funding is down relative to what it used to be again some research we did for inet but r d is actually not down and in this industry government funding is way up so straighten up the act and and get these companies to be using the money that they're getting to invest in drug development okay how do you do this uh you get rid of buybacks they're just gouging the market be easy actually to get rid of them because they've never even gone through congress as something that uh is said that companies can do uh you regulate executive pay you tie executive pay to how everybody does uh in the company to how the customers do uh not to the stock market which is often driven much more by speculation manipulation and by innovation uh you put representatives of taxpayers and workers on corporate boards we have much more interest in what's happening these companies than the shareholders certainly these activist shareholders have nothing to do with it and so you have to completely change the ideology of companies and who runs companies and who they're run for and i implicate here not just these these greedy people out there but the whole economic profession which has really just dropped the ball in this because they do not understand how a business corporation operates and include among them some of the most liberal progressive members of the economics profession who i will not name okay you fix the tax system you don't give out tax breaks to people who are just going to use it to enrich themselves this happens all over the place and you launch lots and lots of government programs to ensure not just the pharmaceuticals but across the boards that people have careers that keep them productive over 40 years of their lives and that's what you need for a prosperous economy now as far as the drug industry in particular uh you have to recognize that the purpose of the corporation is not to produce profits it's to produce high quality low-cost drugs and profits are just an outcome of this process if they do this successfully gouging the public producing drugs that are just the same with drugs that are already on the market or actually hurt people is not the purpose of the corporation you have to retain and reinvest your money it's not going to happen if you have those numbers that i showed you and the incentives for top executives to do these distributions to shareholders that that exist um you have to recognize that broad pharmaceutical drugs are necessities so there is a need to have regulation of uh of of of drug prices and dividends should just be something that you pay when everybody else has been satisfied uh which is what dividends are supposed to be and if there is a role for business enterprise in drug development and delivery well it's only if it's an innovative enterprise and i would say that in many cases ways you could argue that this should not even be business enterprise this could all be done by government in government labs strategically deciding which medicines the society needs most having maybe competing labs trying to produce the drugs and we'd have a much better system thank you very much refers in the first part of your presentation is factories themselves listed on the stock exchange can rely on a much much more abundant financial resources and then i would like to know whether there are other questions so you can perhaps start answering this question slowly please okay yes so uh when we look at industries uh we look at different characteristics of industries by the technology the markets and the competition uh some industries have huge economies of scale there's no way of having small firms um some industries there are and if it's uh design is very important uh if uh uh the uh uh plant and equipment is not too large that you need to set up as a small firm you can have small firms what the italian duster district shows is that you need to have a collective resources to make that work in terms of marketing research finance so many of the functions have to be done collectively either through trade associations or by the local uh so uh if you and i i wrote an article uh quite a long time ago on uh called uh the managerial revolution the developmental state the case of u.s agriculture so if you take the history of u.s agriculture where you had millions of family farms and it's recognized in the late 19th century that these farms their productivity was very important to uh exports to the standard of living in the united states uh the government became heavily involved in providing the research in uh finance uh ultimately within when the new deal came along uh to allow those farms to be productive now it did create a problem however uh and that is uh once they became productive uh in areas where you had uh you know mass distribution of of of food and packaging and all kinds of things like that you end up getting some of those family farms gobbled up by big actors so there's one company a guy who's a billionaire in idaho produces all the the potatoes for mcdonald's and that's that's kind of so you have a problem because of the characteristics then of the market and uh so sometimes if you want to have that competition you have to to maintain the competition uh uh it may be if you have to use really really expensive equipment uh and uh that that you can't do it on a small scale now once you the final thing is once you get into the knowledge economy if you look at silicon valley where people think of small firms well they start off as small firms but they become cisco google you know oracle all these companies are outside of silicon valley microsoft inside silicon valley intel they become firms that employ tens of thousands of people so uh yeah new firm development where you have opportunities uh in new new technologies might be very important but often those firms become very large as they and you know if you want to be as produce semiconductors and manufacture them there's only a few companies the world can do this now the taiwanese are mainly doing it so you have to look at various industries and there's different stages at which sometimes you can have small scale but uh it changes and uh it's sometimes it may be just because some people are trying to monopolize the industry i'd argue more it's because of the dynamics of investment the kinds of organizations that are needed so we can't uh stay away from large businesses we have to govern them thank you um because such inequalities are such a discrepancies are well known to the uh the u.s public but then of course as we all know hillary clinton was not immediately elected and mr trump was elected instead to what extent is the american public aware of these issues and why they said the um american stock supervisory body allow this black box to be listed on the stock exchange and we know that they do not generate any wealth so is there only one question so we let the professor answer okay well uh the uh first of all the the new york side the the stock changed the united states uh the nasdaq stock exchange which was created in 1971 it was really the first big example of internetworking using computers to create a price quote from a lot of different buyers and sellers the national association of security dealers automated quotation system nasdaq it was for a long time called the over-the-counter markets because before then you had a lot of local dealers security dealers getting on the telephone calling people do you want to buy this stock or that stock and now they could do it over uh electronic system and generate a highly liquid market national market even that people internationally people can invest in that actually came from uh the uh the us government security exchange commission the regulator of the stock markets seeing uh that there was a lot of spin-offs in the late uh 50s and 60s in electronics which they call glamour stocks and they said we've got to get these companies on the stock market and the idea was that they were going to raise money that way but in fact it it wasn't the way they raised money it was the way people took money out of the companies it and and it made the stock market much more speculative compared to that the new york stock exchange although has changed since then in competition you had to have much more of a profitability record much more market capitalization so people when they uh put their money into the new york stock exchange uh it it wasn't going to be a speculative in fact you and it would take maybe 15 years before you could do initial public offering on average rather than three or four years now uh uh nevertheless the stock market has always been a gambling casino even for the best companies and if you may know uh the best companies in the united states i don't know if they use this term here are called blue chip stocks they started using this term a lot in the late 1920s in the boom of the 1920s and these are the best companies on the new york stock exchange the blue chip is the most valuable chip in the gambling casino that's so it was recognized that nobody knows where the stock price is going to go and of course if you put your money into the stock market in 1929 you might have thought that you were safe with these companies but you were not and you know it's only gotten worse uh okay so that's that's just a problem of the stock market and it and it's it's it doesn't it reflects as much speculation and now manipulation things like buybacks as it does innovation and when it's innovation it's after the fact people then see oh that's you know cisco was a fast-growing company and they recognized this after it's happened and then everybody piles in and speculates and then it goes up and then it comes down so the general public actually does not get the benefit of the that innovation now if you really uh if you know if in 19 2001 you bought apple stock at 10 and you held it to september of 2012 it was worth seven hundred dollars and uh if you had the faith in that company and and that's where you wanted to put your money you would have made a lot of money because they actually came up with innovative products but but that's not the way most people are are investing now as far as hillary clinton is concerned it was another part of the question was on the the drug in uh prices it happened that there uh during the campaign uh there were some really extreme price gouging uh one was by a young venture a young hedge fund guy who got control of the company and jacked up the price 750 percent of a drug that had been around for 60 years and this caught people's attention uh i don't know that hillary clinton would have done anything if she had been elected uh about drug prices uh uh i'm not sure the democrats would have done anything about drug prices uh because uh they haven't done anything despite as i say you know people like members of you know uh kind of a odd doc like uh henry waxman saying there's agreed etc they've just let these com these companies do what they want and you know tom ferguson can probably tell you why uh you know they uh you know they get a lot of money from these these companies you know no matter what political party they they're in and uh and so they go they go with the the flow on this grazie there is one thing i did and this is done within the framework of regulation that takes place at a national level but if that happens within only one state and one regulatory system then we achieve nothing because these huge multinationals will find a way to gain their money elsewhere don't you think so okay uh well let me speak to the question of buybacks so this is this is much more uniquely an american phenomenon it does exist in europe but we've collected data for the uh s p 350 europe and we find that there are they are spending all their money or more on distribution shareholders but it's more in dividends than buybacks and there's a difference dividends give shareholders who are holding shares uh a stream of income and so dividends are good as a form of a pay and let's say for retirees or an income for retirees but too much if you're holding the stock too much dividends even forget about buybacks can mean that the company is not generating the products of the future not remaining competitive and then your stock may be worth very little if you try to sell it so that can create a problem at some point the dividends will dry up uh so i think if if first of all from a regulatory point of view if you think of it as the stock market is a way as one place where the savers of a nation can put their money then we want to regulate these companies so they can if they have extra money that they can pay a dividend after everything else is done they can pay out some dividends but they are reinvesting and sustaining not only the company but the employees and the incomes and often the incomes of the people are going to be or paying into pensions now the multinationals uh are what they do is they try to take what they're doing in the united states and extend that around the world in this case u.s multinationals so they try to do that with executive pay they're not as successful as they might want to be because there are sets of social norms and rule rules and in europe they vary from company to country to country and so executive pay is not nearly when you measure it properly which we've done is is not nearly as high as it is in the united states um but it probably is is getting too high because the united states is way out of control the united states if you the the actual c by our data ceo to the worker ratio for the 500 s p 500 companies is about uh 750 800 to 1. okay it should be 20 to 1 maybe okay 20 to 1 be fine average pay uh 50 000 euros top executive a million euros uh in fact uh that's probably even too much uh people who rise to the top of a company uh they're running a company uh if they're getting paid anything more than half a million euros they're doing incredibly well and why do they need more uh and i i think when we look comparatively we can say that in fact uh companies and countries where people are paid top executives are paid less and they're more integrated with the organization those organizations do better companies that are less financialized do better globally and i could talk about i mentioned pharmaceuticals i think some of the european countries are companies are less financial uh so you have to suppress the the uh the financial the na the financialized character of these companies stock buybacks is one thing it used to be illegal in most uh european countries until the late 1990s and then because of it was mainly because american companies were using their stock at that time to acquire other companies many companies in europe started pushing uh to allow them to jack up their stock prices to give them an advantage in acquiring companies the executives also saw the this the gold the golden lining here of also getting their pay up but they couldn't never have been able to do it in in europe the extent except to some extent in in britain but even there nothing like the united states because the social norms still uh constrained executive pay and and and and some laws that that surround that uh the united states everything has has been just you know thrown out to say whatever you can do to get up your pay your you can do and uh and often uh the people who have the most power say yeah let's pay even more to to run down the company there's an example of uh uh in the newspapers recently of yahoo which uh uh basically they hired a woman from google to just get the stock price up so they could sell the company at the highest price and not really based on yahoo but based on their chinese investments in any case you have all kinds of problems with this but it's it's it's something that if you could solve it in the united states you'd be doing the rest of the world a great favor thank you thank you professor william laziness thank you you