Capitalisn’t: Should Companies Have a Social Responsibility to Be ‘Great Businesses’?

John Kay: The language that we’ve used for 200 years to talk about capital and capitalism doesn’t have much to do with the reality of modern business.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Bethany: When I started working at Fortune magazine all the way back in 1995, Fortune thought of itself as a management bible. It was what executives needed to read in order to understand how to run a business.

This was my first encounter with management theory, the first time I realized that telling people how to run a business was itself a business—one that, of course, encompasses schools and books and consultants and theory and practice and on and on and on.

I did a quick search of some of the titles today: The Five Dysfunctions of a Team, The New One-Minute Manager, What Got You Here Won’t Get You There, The First 90 Days: Critical Success for All Leaders, and so on and so on. I’m not making fun of all these books, but man, are there a lot of them.

Luigi, how does management theory intersect with economics? How do the two disciplines think about each other?

Luigi: I think that, traditionally, there was a clear distinction between management theory and economics. Management theory focused mostly on internal operations and organizations, where economics studied market behavior, supply and demand, and general economic allocation.

Methodologically, I think management theory incorporated, traditionally, more insight from psychology, sociology, and other social sciences, and economics was more a discipline on its own, where you assume that individuals maximize utility.

Now, of course, over the last 40 years, everything has been mushed together a bit. Economics started to incorporate, certainly, some elements of psychology. Think about the entire field of behavioral economics. But also, there is an entire branch of economics called theory of the firm that tries to deal with organizations, what the firm is, and so on and so forth. And so, that is really in the intersection.

Bethany: Where does today’s podcast with John Kay, sit? He’s an economist, but he’s an economist who has branched more and more in his writing into this area of management theory. Is that fair?

Luigi: I think it’s fair. I think that if you asked him, he would say that he labels himself an economist. However, in terms of his practice and his writing, et cetera, I think he’s much more eclectic than the typical economist.

Bethany: For those who don’t know who John Kay is, he’s a British economist and a writer who’s had a long career that spans everything from academic work to serving as a corporate director. Among many other things, he has been a fellow of St John’s College at Oxford since 1970. He was the first dean of Oxford’s Saïd Business School, and he’s held chairs at the London Business School, the University of Oxford, and the London School of Economics. His writing has won many, many awards, and he was knighted in 2021.

When we heard that he had a new book out arguing that we’re getting it all wrong, we were, of course, all ears. The title of his book is The Corporation in the 21st Century: Why (Almost) Everything We’re Told About Business Is Wrong.

He says that his book was written “in the hope that a better account of how business and its stakeholders flourish will point the way not just to a better understanding of business, but to the better conduct of business itself.”

Obviously, this is a critical topic for our times. Without further ado, we welcome John Kay.

Let’s start with a big, basic, broad question, which is the subtitle of your book: Why (Almost) Everything We’re Told About Business Is Wrong. What’s wrong with what we’re told?

John Kay: Most of the criteria which were put forward were put forward 100 to 120 to 200 years ago, when, typically, business consisted of people building large plants, steelworks, textile mills, and so on, and recruiting relatively unskilled workers to man these plants. The plants’ work, of necessity, was built by rich individuals or people who had access to substantial amounts of capital.

We’ve been talking about 100 years ago. We’d have been celebrating Henry Ford and Ford Motor, and Ford had this obsession with controlling everything that went into the car. There’s even an area of Brazil called Fordlândia, because he wanted to grow the rubber for the tires that would go on Ford cars.

You can see now how different production and products are. The archetype of the modern product is really the iPhone, and the iPhone is remarkable for all the things it combines.

Luigi: Let me push back a little bit, because it’s true that in the United States, Apple is mostly a design company. But we have Foxconn, which actually produces the iPhone in China, that looks very much like an old Fordist plant.

John Kay: Well, you’re right to draw attention to Foxconn and the way in which most manufactured goods that you see are now made not in America or Western Europe, but in Southeast Asia. Most Apple products are assembled in China. The largest supplier of parts is actually Samsung, Apple’s principal rival in selling smartphones.

This is the modern corporation, which is, essentially, a hollow corporation. It’s characterized by all the things it brings together rather than, as Ford’s motor company was, by the integration of a whole variety of things, and that’s the nature of modern business. The modern business is a collection of capabilities, and that’s what Apple is, and that’s, actually, what Tesla is.

Bethany: Why does it matter if we describe business in the right way? Take it for granted for now that what you say is right. Why does the language in our conception of business matter? Why can’t business just operate as business does? If we’re describing it incorrectly, why does it matter?

John Kay: It matters because what has happened is that this has greatly overestimated the role of capital and finance in describing business. Over the last 50 years, we’ve had this enormous expansion of the financial sector, an expansion which is mainly about trading in existing assets rather than, as it was in Ford’s day, building new ones, and that sucks quite a lot out of the corporate sector.

Apple is an example we’ve just been describing. Most of the capital that’s used is actually being provided by other people elsewhere. Amazon is, in some ways, an even more extreme example of that. You see Amazon vans and pass Amazon warehouses or fulfillment centers, as they prefer to call them.

Most people don’t realize that Amazon doesn’t own these things. In fact, the goods that are in the fulfillment centers, Amazon hasn’t paid for them before you bought them. There is nothing in Amazon except the collection of capabilities. So, the language that we’ve used for 200 years to talk about capital and capitalism doesn’t have much to do with the reality of modern business.

Bethany: Why have those two things happened concurrently? If there’s such a disconnect between the growth of finance and the requirements or the capabilities of modern business, why has finance continued to grow and become more central, even, as you describe, the role of capital has become less important?

John Kay: It’s an interesting story. It’s the idea that management became a kind of professional business, and management was about making money, and it’s done a great deal of harm. A good example is one that is really in all our minds and in all our papers at the moment, which is the story of Boeing. That was one of the great companies of the second half of the 20th century.

Bill Allen, who was CEO of Boeing, famously said he wanted to eat, sleep, and breathe the world of aeronautics. They built all the great achievements, really: the 737 and the 747, which became the dominant planes worldwide, and which brought low-cost aviation to a mass market.

At the turn of the century was this merger of Boeing and McDonnell Douglas. Culturally, it was actually a takeover, in large part, by McDonnell Douglas, and the McDonnell Douglas executives were shareholder oriented.

Harry Stonecipher, who was a McDonnell Douglas executive, who became CEO of Boeing, famously said: “People say this is a great engineering company. It is a great engineering company, but people invest in a company because they want to make money.” That was the Boeing that was created and the Boeing that built the 737 MAX.

In 2019, a Boeing MAX fell out of the sky, and so did the Boeing share price.

Luigi: I’m very sympathetic to your notion of a firm as a collection of capabilities. In fact, 25 years ago, I defined the firm in an article as a nexus of specific investments.

However, there is a question about what the role of the formal organization is, the hierarchy, the ownership in the firm. What is the difference, in your view, between being inside the firm and outside the firm? You’ve been a director in many companies. What do directors do? Where does their power come from?

John Kay: Well, their power comes from their role as directors of the business.

Luigi: What is the business? If it’s not defined by the ownership of the asset, what defines it? If it’s defined by people, they don’t own the people.

John Kay: No. The business is defined as a collection of capabilities, and nobody owns it. I’ve written at some length about this discussion in the book about what lawyers mean by ownership, and the best description I can find is that there’s a list of criteria of ownership.

Outside Facebook, there isn’t a sharp distinction between a friend and a not-friend. If you looked at Apple, you would conclude that in terms of the badges of ownership, the shareholders own very few of them. If you are an Apple shareholder and you go to Apple headquarters, you will be turned away. If you incur debts, Apple assets aren’t available to settle your debts, and so on and so on.

Thinking about ownership in relation to a corporation just isn’t helpful. I teach at Oxford University. Nobody owns Oxford University, and it’s not useful to think about ownership in talking about the institution.

Luigi: It’s true that ownership has many characteristics, but it’s also true that if I were to post a sign of Oxford University, Oxford University would sue me. At the very minimum, Oxford University owns that sign, and I cannot create another university next to it called Oxford. There is a sense in which there are some assets, whether tangible or intangible, that are controlled.

If I am a director of Oxford University, at the very minimum, I can decide how the buildings are used, but also how the name Oxford is used. So, I think ownership does play a role. I agree that it’s not necessarily . . . Certainly, in the university, it’s not in the hands of the faculty, or there are no shareholders. But even in the firm, they’re not in the hands, necessarily, of the shareholders, but they are controlled by management. So, ownership does play a role.

John Kay: Management control is important, but that’s different from ownership. Tim Cook is CEO of Apple. That doesn’t mean he owns it. Apple is defined, as Oxford University is defined, by its collection of capabilities. You can point to the buildings of Oxford University, my college, for example. When we borrowed some money, we had, for various reasons, to give security against the borrowing. So, we gave security of some of the buildings.

I have no idea what, if we defaulted on the loan—which we won’t—the bank would do with the buildings. It certainly wouldn’t get the university by having control of some of the buildings where the teaching takes place.

Oxford University is defined by its capabilities, the reputation of the university, by the abilities of the people who teach there, by the students who value the networking opportunities, as well as the education it gives them. And to ask who owns it is just not an interesting question, and the same is actually true of Apple.

Bethany: If a firm is a collection of capabilities, what role do the employees of that firm play? Are they part of the capabilities? And if they’re part of the capabilities, are they part of it in the specifics of those employees as people? I guess what I’m getting at is, do people matter in this equation, or are the employees, as one of the capabilities, replaceable with other employees?

John Kay: Most of them are not replaceable, whereas the businesses of 100 or 200 years ago had relatively unskilled workers who were recruited from agriculture to man the textile mills and the steel plants. Now, the workers are the capabilities, and the business is a collection of teams of people.

Bethany: So, if nobody owns them, and the purpose of a company isn’t to produce profits for its owners, what is the purpose of a company? What should the purpose of a company be?

John Kay: The purpose of a company is to be a great business, and to do the kind of things that Boeing did and Apple does. In the course of doing that, you need to assemble a variety of capabilities—the people who invented the software and the ideas and design that went into the iPhone. That’s the nature of modern business.

Bethany: Why would you argue that this is important? Why does it matter that people think about business correctly?

John Kay: Well, I think we’ve had a very good illustration just in the last month. We had this extraordinary phenomenon of the CEO of UnitedHealthcare being murdered in the streets by someone who was . . . He wasn’t murdering Brian Thompson. He was murdering the CEO of UnitedHealthcare.

Worse than that, surveys show that a high proportion of Americans, actually, were at least somewhat approving of that kind of action. We desperately need to make business a legitimate, admired activity, and the murder of Thompson is an illustration of the opposite of that.

There’s an equally forceful illustration with which I begin the book, which is the discussion of Goldman Sachs, which was sued by some of their investors, who claimed they had relied on the Goldman Sachs ethics statement, which says, “Our clients always come first.”

The Goldman Sachs defense, as I point out, is not that the statement is true. It is, rather, that the statement is obviously not true, that no one could reasonably invest on the basis that it is true. We need to rescue business from that kind of nonsense.

Luigi: You mention the stakeholders very often. Can you define the stakeholders for our listeners?

John Kay: I’m not particularly keen to define. I write that quite a lot of what’s going on here is that we want precise definitions of things like ownership, that actually define ownership, the definition in that sense.

Who is a stakeholder? Everyone who’s involved in the business in some way: employees, investors, managers, customers, and so on.

Luigi: I’m sorry, maybe I’m too much of an academic, but I think definitions are very helpful to understand, also practically, what you want to do. In your definition of stakeholders, you have not included . . . I’m not questioning that; I just want to question the consequences. You have not included the community and the environment in general. Now, you are, and you have been, a director of many companies. Can you tell us whether, in your choices, you have ever sacrificed profits for the environment?

John Kay: It doesn’t come up in that straightforward way. I can’t think of an occasion on which we in the company were asked to do it and declined to do it or chose to do it. Being a great business involves creating a great environment, and that means you won’t pollute if you can help it. You’ll spend money to avoid polluting. You won’t spend unlimited money to avoid polluting. You have multiple objectives.

I believe in, essentially, virtue ethics as a system rather than a utilitarian one. Virtue ethics mean a good company is defined by a whole variety of criteria: happy customers, satisfied employees, satisfied investors, and so on, and that’s what one means by a good company.

For the first 20 years of my career, I thought people went around maximizing some things. They optimize their utility. They maximize their utility. Business maximizes their profits, and so on.

Then I got involved with people in real businesses, and I realized they weren’t really maximizing everything. They weren’t maximizing profits. So, I started asking, “What are they maximizing if they’re not maximizing profits?”

I came to realize that people who run real businesses typically aren’t maximizing anything. They’re trying to cope with a complex and constantly changing environment. To do that, they have to satisfy all the stakeholders that we’ve been talking about: the employees, the investors, the lenders, and the community in which they operate.

Bethany: It seems to me that we have a whole system built around a concept of ownership and profit maximization. It’s not just within companies and how executives are rewarded, but we have cultures—not just in the United States, but around the world—where the stock market is central to the way people think about wealth and retirement and savings.

If your conception of business as something that nobody owns, where profit maximization isn’t the goal, is right, how does that flow through the entire system? How do all of us on the other end of it, who are putting our retirement savings in the stock market, then think about it?

John Kay: Well, we’re not putting our retirement savings in the stock market. We’re placing them with various intermediaries who will, in turn, invest them in the stock market. We talked about Amazon’s warehouses. The largest owner of Amazon warehouses is actually Prologis, a real-estate investment trust financed partly by bank finance. The largest shareholder is, of course, BlackRock, which is the largest shareholder in a whole variety of things. That’s the complex structure of capital in the modern world.

Now, you talked about different countries, and it’s quite important to notice that different countries differ quite a lot in these respects. In Germany, the stock market isn’t remotely as important as it is in the United States or Britain. There are corporate legal structures that differ across different countries.

In Germany, it’s fairly clear, and it’s also true in Britain, that it’s not the obligation of directors to maximize profits. In Britain, the law says that the duty of the director is to promote the success of the company, and it goes on to say, for the benefit of the members. The members will benefit from the success of the company, but that’s the way around it is. It’s not a matter of maximizing profits.

Luigi: I’m sympathetic that people don’t necessarily maximize, but as an economist, you understand there are trade-offs. Maybe I misunderstand your view, but my impression of your view is that if you build a great company, there are basically no trade-offs, because everything falls in line.

Let me give you one trade-off. The one company in your book that has been successful throughout the entire period is Exxon. Exxon has been very successful, for example, in creating fake science about climate change, basically manipulating the political system in order to make it difficult to introduce carbon taxes. There is a big trade-off there. How do you resolve that?

John Kay: You are right that what has happened over the last 50 years, basically since 1980, we have had this vision that what companies exist to do is to make profits. In addition to that, we’ve incentivized managers or senior executives of these companies to maximize profits. Part of the change we’re talking about has been a change that has enabled managers, senior managers, to take a much larger share of the value which is added in their businesses.

Now, part of the thesis of my book is that all this is deplorable, and we would do much better if we recognized that businesses are collections of capabilities, and we would do much better if we understood that the job of managers is not to maximize profits, but to build great, good businesses which add value to the resources that are used in these businesses. In adding value in that way, they will make returns for investors. But that isn’t all it’s about, and it isn’t primarily what it’s about.

Bethany: If you were putting in place, in the United States at least . . . I’m not sure about around the world, but in the United States at least, executives are still primarily paid on financial performance. Other measures may be incorporated, but they’re weighted much less heavily than financial metrics are, and the hallmark of a well-designed pay package is so-called pay for performance.

If you were instead to design your ideal pay package, what would it be? How would you define performance? How would you incentivize managers if it’s not financial metrics?

John Kay: I would recruit managers who want to do a great job, and that’s what I mean when I say I want to make management a profession, which, indeed, is how most of the best managers really think of it. When Elon Musk set out to build Tesla, Spacelink, he wasn’t saying, “I’m trying to become the richest man in the world.” What he was trying to do was build extraordinary businesses, and that’s true again and again when I identify or see the people we regard as successful entrepreneurs.

Luigi: But again, you have served, and you’re still serving, on a lot of companies’ boards. When you are there designing their pay package, what do you do differently?

John Kay: What I do differently is quite difficult. As you say, incentive-based pay is now pretty general, and also, rather generous pay is rather general. If we need to pay several million pounds a year to get someone to do this job, then I’m not sure we’re recruiting the right person to the job, and I think that’s one of the things that has gone wrong with business in the last 20, 30, 40 years. If we recruit people whose motivation is primarily financial, then we’re recruiting the wrong people to big jobs.

That was most true in the financial sector. The truth is that the companies that went bust or that brought about the collapse in 2008, they were being run by people who were there to make money for themselves. In the end, they destroyed—or nearly destroyed, because the governments, in most cases, bailed them out—the businesses that they’d created.

Bethany: Who do you blame most for what has gone wrong? Is it the fault of the managerial class? Is it the fault of business schools, who are teaching that the wrong things matter? Is it the fault of shareholders and their demands, or activist investors, or all of the above? Is there a place where the daisy chain begins?

John Kay: It’s all of the above, and yet none, exclusively, of the above. There’s a climate that has evolved over 20, 30, 40 years and needs to be changed back, to say, “What is the origin of this kind of change in our thinking?” The Powell Memorandum, at the beginning of the ’70s, essentially said that what business has to do is create an academic community that is much more business-friendly than the one we have in the 1960s, and I can see why it made sense to do that.

But the result of that was a shareholder-value movement and a particular nexus-of-contracts view of the nature of corporations, the incentives which were given to senior managers and the like. All of that was put together, really, as a result of these kind of reactions against the social upheaval of the 1960s and ’70s.

Luigi: You seem to be trapped into this celebration of the past of business. But if we look at the past, it was even more brutal. John Rockefeller was brutal. If you read the accounts of Ida Tarbell, he basically supported the Ludlow Massacre of striking workers in Colorado, just to mention one, not to mention all the tricks he did against his competitors and buying politicians. All the robber barons were one worse than the other. That’s the reason why they’re called robber barons.

So, who are the leaders? Can you point out a great leader of the past that you unconditionally support as an example of the good capitalist you’re describing?

John Kay: Well, let’s take the people who, in the first half of the 20th century, tried to create a profession of management. Alfred Sloan would be the archetype of that, or he and his colleagues. That’s an important qualification. He and his colleagues built a great company, and they pretty sensibly, I think, thought they wanted to create a manual of what it is they had done that would be useful for people in other businesses. That’s my example.

But also, I talked earlier about Bill Allen and Boeing, and The Boeing Company, as it was, in the later part of the 20th century. It was people who wanted to build great planes, who wanted to create a great business, and they did create a great business.

Bethany: We’ve talked about how leaders should think about business differently. What about how employees should think? I think it’s a human desire to be loyal to something. Should you be loyal to your capability, or should you be loyal to your company? In other words, if a company is just a collection of capabilities, is there something there for an employee to be loyal to?

John Kay: I think you should be loyal to your capabilities, but if the company is using your capabilities well, there isn’t a contradiction between being loyal to your capabilities and loyal to your company. But, of course, the capabilities that go into making a particular company successful will probably change over time.

Bethany: I think that’s a perfect note to end on, and we are out of time. Thank you so much for your time, John. It was really interesting, and I hope that you are feeling better.

Luigi: Yeah. Thank you very much, John.

John Kay: Good. Pleasure to talk to you.

Bethany: Luigi, one of the things I thought was really interesting, which I had actually never thought about and didn’t realize was a whole study, or almost a whole field in and of itself, that you and Oliver Hart have focused on is this concept of ownership. Did anything he say change your mind about ownership or make you think differently about it?

Luigi: No. I am sympathetic to his view that physical assets are not that important anymore. They are important but not that important. Where I think it was coming close to something that I studied many years ago is the idea that the business firm does not necessarily coincide with the legal firm.

When you think about Apple, for example, the supplier Foxconn, is very strongly dependent on Apple and vice versa. Legally, they are not part of the same firm. But if you think about the ecosystem that creates value, I think that Foxconn and Apple belong to the same ecosystem.

They are not under the same legal umbrella. I don’t know why, but he was refusing the fact that the legal umbrella carries some role, which I think it does, because when I am on the board of Oxford University, the fact that I can claim to use the title Oxford and the name Oxford is very valuable. That is, to me, what gives the board of directors of Oxford some power, honestly.

Now, that’s not the only source of power. This is where the stuff that I developed with Raghu Rajan differs from the stuff that Oliver Hart has produced, because he very much emphasized the pure ownership of assets, which is an important element, and assets should be interpreted broadly, even nonphysical assets, like the name Oxford.

But I think there is also some power that comes from being, for example, the only buyer of a particular product. If Apple says something to the CEO of Foxconn, probably the CEO of Foxconn will obey without much dispute, because, yes, they could try to supply other people, but their survival in business depends so much on selling to Apple that Apple has a lot of influence.

I think that this distinction between legal organization and business organization is very important. But in spite of my pushing, it never flew, and I think it never flew because people are afraid of opening up the boundaries from an antitrust point of view.

If, all of a sudden, I say that I have power over my suppliers, then I might have some kind of market power that might get in the way of antitrust. I think that the economics profession is very resistant to going in that direction. I still, of course, think that it’s a great idea, but don’t ask the host if the wine is good.

Bethany: What did you think about Kay’s overall idea that a business is a collection of capabilities? Did that seem to you like a relevant or interesting or expansive way of thinking about a business, or did it feel like the same old thing said in a different way?

Luigi: The question is, what is inside and outside a firm? If you don’t have a clear notion of boundaries, then you don’t have a clear notion of firms. It seems that John Kay refuses to have clear definitions. He likes ambiguity, and he has written a lot of books about ambiguity.

But I think, from a research point of view, you need to have clear boundaries in order to understand what is in or out and see whether that concept is useful or not. If the concept is vague, it’s about everything and nothing. And so, it’s not particularly useful.

To his credit, maybe because it’s similar to what I said many years ago, the notion seems to me useful to try to understand . . . because it is true that one of the important things is to maintain these capabilities and make sure that these capabilities are not appropriated by somebody else.

We have plenty of examples of capabilities that were appropriated by other firms that developed on their own. You know that Intel was founded by some employees of Fairchild Semiconductor, who basically understood the capability of the silicon wafer, and walked away and started a different firm.

Actually, I should have asked John Kay, was Fairchild Semiconductor a great company? If you think about it from a societal point of view, they created a lot of spin-offs that created a lot of technology, including Intel. So, it’s a great company. Too bad that the investors lost everything, because they were unable to appropriate the return on that investment.

His notion that “if you do the right thing, everything will work out” is very beautiful, but I’m not sure it is right. And I didn’t find in the book any compelling evidence, except a few anecdotes, that this is true.

Bethany: Continuing on the Intel theme, if you think about Intel’s outsourcing of all of its manufacturing to TSMC, for a time, it appeared that maybe that was a capability that didn’t have to be a firsthand capability. It could be a secondhand capability. But as more and more innovation has come in the manufacturing, maybe the manufacturing is a firsthand capability.

And so, I wanted him to be a little more specific, also, about what needs to be core to a firm, how you should think about what capabilities need to be held close, and what need to actually be part of the firm, and what capabilities need to be outside the firm. But if you’re not willing to be specific about what a company even is or who owns it, then it’s very difficult to be that specific about it.

And as much as I love the beautiful idea of a corporation being about running a business well, we’ve had a long history of grandiose ideas of running businesses well and running them for other stakeholders, and those companies also haven’t survived. Of course, we have a long history of companies that have been run for the bottom line, and those companies haven’t survived, either. So, I’m not really sure that anybody has it figured out.

Luigi: I think that you’re right that he doesn’t have a theory of what is a core capability, what is not. Part of management theory is trying to explain exactly what is a core capability and what is not. That is in the spirit . . . And people make mistakes. I don’t think that we can blame his theory if Intel management made a mistake, because these things are not written in stone, and people do make mistakes.

I’m actually more puzzled by this view that if you run a great business . . . I would like to paraphrase his line that the only social responsibility of business is to run a great business. If you think about it from a societal point of view, that’s not necessarily true. He has this great view of Alfred Sloan as the greatest guy on the face of the earth, but let’s face it. Alfred Sloan was the one who invented planned obsolescence that, from an environmental point of view, is a disaster. He was constantly spying on the workers trying to get them not to unionize.

And this happened shortly after he left, but it was his GM that created the famous Corvair that our friend Ralph Nader criticized in Unsafe at Any Speed. So, was GM a great business at the time or not? Maybe it was a great business from the insiders’ point of view, but not from the customers’ or society’s at large.

Bethany: That actually is interesting, because I tried to pin him down and didn’t have much luck, either, on this idea of how executive compensation should work, then, if it’s not going to be profits first. But maybe there is an argument that you could look at every single stakeholder and measure a CEO. Give them a sliding scale on each stakeholder: stockholders, environment, our children’s children, and employees. On each one, they could have a different weighting, and maybe the bottom line shouldn’t be first and foremost.

In other words, what I’m trying to say is that maybe his argument isn’t so much that the bottom line doesn’t matter. It’s that it’s order of operations, and the bottom line should be the result of all these other things.

But if the bottom line should be the result of all these other things, then all these other things need to be measurable and need to have a scorecard affixed to them. If the bottom line stays the scorecard, then in the order of operations, that’s going to come first.

Luigi: I think you’re absolutely right, but this is where ownership matters. Suppose I run the firm like you described. What guarantees me from the possibility that a raider will take over the firm or an activist will buy enough stock and decide: “Screw the workers. Screw the environment. Maximize profits”? The raider will make a lot of money.

As a manager, I have only two choices. Either I do that myself or I get fired, and I let the raider do that on his own, precisely because ownership matters. If ownership didn’t matter, there would be no raider, no takeover. Right? But the moment ownership matters, this is a possibility. And so, short of adding some restrictions to takeovers—I don’t think it’s going in that direction—this is a possibility. And with this possibility, it’s very difficult to deviate.

Bethany: I think we come back to the idea that things need to be defined in order to know what we’re actually talking about.

It’s a bit of a side note, but I did find what he said really interesting about the role of finance. Maybe I didn’t ask my question clearly, but I didn’t think he answered it clearly. He’s getting at something really important. If capital is more and more of a service and less and less a critical ingredient in a business, why has the role of finance in our society become bigger and bigger instead of smaller and smaller?

I think either he’s wrong, or the invisible hand isn’t working very well, because if capital is becoming not the critical element, if we’re no longer in a Marxist world, then those who arrange the capital shouldn’t be the best-paid people in our society, and finance shouldn’t be becoming a bigger and bigger portion of our GDP, or am I missing something?

Luigi: There is no doubt that today, it’s much easier to manage big amounts of physical capital. Think about a plane. A plane costs a fortune. But if I start an airline, I can start an airline without owning any planes. I can lease them.

Think about computing power. In the old days, if I wanted to start a bank, one of the biggest obstacles is that I had to buy one of those IBM machines that costs an arm and a leg. Without that, I couldn’t function. It was a huge barrier to entry.

Today, you can rent on Amazon a bank-as-a-service, and you can scale it up. You can buy, at the beginning, very few units, and then you double the amount of clients. You double the amount of AWS space, and it’s very easy. Some aspects have become much, much easier to handle.

However, there is the critical component of the business risk of starting a firm that cannot be easily leased or bought as a service. Precisely because the rest has become so commoditized, all the value is concentrated in that. Think about venture capitalists. A venture capitalist is the one who takes the risk of putting this stuff together. While the amount of money might be less than the amount of money you put on a plane, the amount of money you put on a plane is fairly secure. These days, you’re not going to lose much, and the only possibility is that the plane blows up, but you are insured. So, you’re not going to lose much.

On the other hand, if you start an airline company, you can lose 100 percent of it. Allocating that risk capital properly is really, really important, and this is where the venture capitalists and your friends, the private-equity guys, are so important.

Bethany: That’s a really interesting idea. We think about it in financial terms as capital having different pricing, whether it’s at risk or not. But when you think about it in the larger ecosystem of the corporate landscape, at-risk capital versus not-at-risk capital, or capital where you’re going to get some back regardless of what goes wrong, and capital where you’re going to lose everything . . .

I mean, obviously, that’s reflected in the rates people pay for the capital, unless we’re in a complete bubble frenzy, as we’ve been in for a while in venture-capital land. But it’s kind of an interesting . . . I don’t know. Maybe current capital models already take that into account, but I was thinking as we were talking that maybe that’s the shift in our economy, more toward the importance of the at-risk capital versus the way . . .

Luigi: Yeah. That’s the reason why I am intrigued by his book, because I think it touches on some important elements, but it touches on them at a very high level without going into detail on any of them. That’s kind of the tension. It’s very good in terms of breadth, not very deep in terms of depth.

Bethany: I’m definitely more intrigued by it after talking to him and talking to you. You had mentioned before when we were talking about this that he comes at these things in an oblique fashion, and maybe that’s the best way to describe it, that it is actually very thought-provoking, but not in a direct way. He makes you sort of reach to pull together the tangents.

Luigi: Yeah. He has a previous book called Oblique where he makes this general point that sometimes it’s better to not aim at the target to reach the target. The most interesting application I know of that is precisely with the firm, where he says that the best way to make profits is not to target profits, but to target a great business, and the profits will follow, which is a very reassuring theory.

I don’t know to what extent he is correct, and I don’t know to what extent he is actually deceiving, because if, really, you are targeting profits and you claim you’re not targeting profits in order to target profits, are you simply playing a deception game?

But if I want to, again, be on the positive side, in his book, he quotes Michael Sandel for an important point, which is saying that instrumentality breaks a lot of social interactions.

If we are friends just because we have a business interest in being friends, ours is not a friendship. It’s a business relationship. And so, he claims that the more economists bring instrumentality into business, the more they destroy the social nature of business. One of the claims he makes in the book, which I find intriguing, is that business is a social institution that relies on a social structure that can be undermined by excessive instrumentality.

Bethany: That would explain why he’s reluctant to affix very specific definitions to things, because then they become modes of instrumentality, whereas if you leave them vague, you force a social interpretation of them. If I take what you’re saying and apply it to his way of writing and thinking, then there is actually an analytical framework behind it, even if it’s not one that entirely resonates with my brain.

Luigi: That’s a very clever interpretation. I didn’t think about it, but that’s a very clever interpretation of his writing.

Bethany: Oh, good. I like the idea of being clever.