Terminal Value

The Future of Capitalism with Mike Munger

Doug Utberg

Business Growth Authority | Technology Strategy & Resourcing | Cost Optimization Expert | Business Process Architect | Financial Strategist | Founder - Terminal Value Podcast

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I have Michael Munger on the line here. This is actually a little bit of a moment for me. Because I have actually been a long time listener to the econ talk podcast. Where Mike has been a regular and recurring guest and one of my favorite guest of course. I think one of the first episodes I listened to was with Milton Friedman and well you know it’s hard to compete with Milton Friedman. But Mike here is a world-class okie dokie guy and he has written actually a number of books. But the one that I wanted to talk about today just as a part of the conversation is his book is capitalism sustainable. Because I’d like to talk about really what the future of capitalism looks like. And Mike I’d love to get your thoughts or just kind of tee up the conversation. But just what I’m seeing is that you know I think what people call capitalism really isn’t capitalism. People think of capitalism as what we have in America and that is not the furthest thing from capitalism because you know, for a work trip recently, I went to China and Shanghai. Let me tell you that is very far from what we have in America. But still it’s what we have now is very not a free market. There are any number of things that are very tightly controlled and not allowed to freely float, largely just because of people’s political fears. And so what I would love to get your input on is how does this project forward into the future? And is there a way that we can get to that vision of greater prosperity and opportunity for everybody. That capitalism pretends but has a very hard time delivering on due to the externalities and inevitable inequalities. So I’ve talked enough, please share your thoughts.

We make a distinction to begin with between markets and capitalism. So markets is a system of allocation and production that uses prices as signals about the relative value of resources. And one of the things that’s complicated about large societies is that they have to have institutions to reconcile all of the conflicting plans and purposes of individuals. So I think I want to open a restaurant, you think you want to open a factory. We both want the same piece of land to do it, who should get it now? We could have a political process and vote on it, we could have some bureaucratic process. But in a market system then whoever will pay the most for it, must be about to create the largest value for society. So if I can use it for a restaurant and I expect the profits to come to that restaurant. Allow me to pay more for the property. Then you are going to make a cement factory and it’s not really going to produce that much profit. So profit is a price, it is a signal about the relative value of the activity to society. Because it says something about the consumer surplus that’s being created. Which is the value to the people that buy it. I think something

we often miss is that entrepreneurs actually capture only a small amount of the value that they create.

I get profits but everybody who buys this product and all of my suppliers all of these contracts are voluntary. So I go and I buy labor. I go and I buy steel. I buy electricity, buy plastic and each person I contract with is made better off. And then I sell it in a competitive market to consumers and they’re better off. So I’m creating value all over the map and then profit is the signal that there’s actually even some revenue left over after I do. That it’s amazing! It is an amazing decentralized system that old people used to call cybernetics. Because you’re creating wisdom out of no one knows whether this is a good product or not. Nobody knows if this is a good. So the system is wiser than any individual element.

The magical part about markets is that we’re creating value, we’re creating the highest value for all of the resources all down the line.

That’s great! Now you started to say something I interrupted I’m sorry oh.

I was just going to say the I think the and I’m of course very sympathetic to that point of view. Because I think that you know involuntary transactions nobody should ever enter into any transactions unless it’s mutually beneficial. However, in the current environment that happens all the time. So the question is going to be A.) Why and then. B.) How do you get back to a mutually beneficial exchange type of idea? Because the other thing I’d just like to bump what you were saying a little bit, is that because the thing that the profit motive actually does really well that a lot of people don’t appreciate is that it provides signals about what types of businesses are good and bad for people to be in. And they don’t have to know a lot about the internals of their business, they just know if they’re losing money they need to do things either do things differently or get out of that business. And if you’re making money that says you must be at least be doing something right because you’re generating a profit after paying all the costs. But anyway enough for me talking.

Well without you, you have emphasized some important aspects. So that’s a market system and you could argue that in the United states we don’t even really have a market system because a market system requires that prices be unfettered and unregulated in order to give the accurate signals about the relative values of resources. So If we have things like rent controls, then what that is saying is that in a large city, we don’t value new housing very much. And so it’s no surprise at all to learn that New York and San Francisco, the two American cities who have the most rent control are those where the shortage of affordable housing is the greatest. Because they’re not allowing markets to signal to entrepreneurs, you know we really need more housing and the only way that you can get more housing is if people will build it. But, we have these rent controls and we have a bunch of restrictions on building new houses. So it is true that markets are also restricted. Okay, full stop that’s what markets are. China is a market system. It’s really interesting that China is largely a market system. They have some regulation of price. What China is not is the other thing, which is a capitalist system. Capitalism is something that can only exist in a market system but it’s something else. Capitalism is a system of distribution based on returns to property of a particular sort called equity or stock, that is the joint ownership of large amounts of value that we call corporations or companies.

A way to raise capital is to sell things that are literally called shares. Their stock that allow me to have a stake in the future profitability of this company and we can only raise enough capital to be able to invest enough.

If we can find private investors who say you know I’m going to risk my money on this. Now, you can have markets without capitalism and china is a good example of that. And in fact if you look at Deng Xiaoping in 1973 said “you know we’re losing of the international arms race, we’re becoming weaker, we’re going to have to institute markets.” It wasn’t because he was a free market guy far from it but he recognized the essential feature of increasing the productivity. And the amount of value that goes to citizens that comes from using the price signaling mechanism, particularly in such a large society as China. So being able to give accurate decentralized signals that coordinate all of these conflicting plans and purposes it’s a genius move. And so China and India they’re moving right along together. Xiaoping says in 1973 let’s have markets and China has been a remarkable success story ever since. The amount of poverty in china has fallen from 80 percent to below 10 percent. If you use constant international standards, China is one of the great market success stories in the history of the world. Now capitalism is a hard thing to sustain because we have a lot of questions about capitalism as a system of distribution. So here’s the fly in the ointment for the story that I told before. So I have an entrepreneur and they’ve sold stock in their company. Now they have a lot of stockholders and those stockholders are interested in profits and as far as the stockholders are concerned their definition of profits is not the one that I gave before. The signal that the activity is socially valuable, what they’re interested in is increasing the amount of revenues that are left over after costs are paid. Now one way I can do that is to make cheaper and better products and hire engineers, hire sales people and provide better service. But there’s another way that I can do that particularly in democratic society, I can hire lobbyists and lawyers and I can pay US senators to say “You know it seems like you’re really having a difficult time why don’t we give you money or you’re having a difficult time why don’t you protect why don’t we protect you from those rotten awful competitors because it’ll be possible for you to make a lot more profits now.” So the question is at some point mature businesses almost always come to the point where it is more profitable. And I’m making air quotes which I realize is great podcast. But I’m making air quotes when I say.

We’re going to video stream this one too, so the people who are watching on YouTube will get to see the air quotes.

In that case I’m making profits in the sense that I’m getting to keep a lot more of the excessive revenues that I’m earning, as a result of government protection. But then the whole story Doug that I told is gone. None of the social value is being created. What I’m doing is selling stuff to the state and I’m paying bribes. Those bribes could be legal in the form that their campaign contribution they could be I invest in your district, I put a plant there’s no economic reason for me to have a manufacturing plant in your district except that you’re the chair of a key committee and you’re going to ensure that I get protection from competitors and subsidies. If I make a loss you will make it up. So the result is that there is a really bad tendency in capitalism towards a perverse form of capitalism called cronyism. So here’s the thing that about five years ago I realized so for example I have always been a critic of socialism and I teach at Duke University. So I know a lot of people who are not critics of socialism, they are worshipers.

Yeah. I live in Oregon and I and I went to undergrad of Portland State. I am very familiar with the idea of socialism.

Well fair enough and socialism is a really good way because it means that the government cares about the people. I don’t see any evidence of that but that’s what people say. So I say look at Venezuela, Venezuela that’s socialism and they say oh no that’s not real socialism that’s that something went wrong there real socialism that works really well. Well I’m doing the same thing when I look at the U.S system where we’ve got things like Solyndra, we’ve got companies that are investing in state protection I say oh that’s not capitalism that’s cronyism. But Doug what if capitalism becomes cronyism in a democracy if it inevitably becomes cronyism in a democracy because it is more profitable to get state protection than it is to produce better cheaper products then my claims about capitalism are not sustainable and that means that many of the criticisms of the left are perfectly valid. Now I think for the wrong reasons they imagine socialism be better. It’s not clear that’s true, but it is actually true and this is disturbing capitalism has an inherent tendency towards cronyism and let me give two quick quick reasons why because;

That is extremely valid.

Well but and it’s within the context of capitalism too. So suppose that I’m the CEO of a large corporation and I have been trained in economics and I know that engaging in what economists call rent seeking is legal but morally wrong. So it is wrong for me to invest in state protection because that’s not creating value and so I say I’m not going to do it and my stockholders say well uh actually we think you will. And there’s a competitive market for managers and if you do not start a big lobbying operation to increase our returns you’re going to be on the street and we’re going to hire another manager who will. So the competitive market for managers means that they can find somebody else. Now, that’s not outside of capitalism the competitive market for managers is an internal competitive process that will replace people who say it is immoral. I understand it’s legal but it’s immoral you’re going to get CEO’s all of whom are going to engage in that kind of rent seat but suppose we can go one step further and say that stockholders say “you know, he’s right. This is wrong.” Well I’m a corporate raider and I look at your company and I see that your stock price is probably 10 to 12 percent undervalued compared to what it could be if we would engage in lobbying. And so I go to a bank and I say look there’s this company that’s 12 percent undervalued. I can show you why if you loan me 20 million dollars I can pay you back tomorrow. So we issue a 10:10 10-year offer. We buy up the stock, we fire the management and the stockholders are happy to sell I mean they have may have this moral view but you give me a 12 premium. I’ll sell the stock, I fire the managers and now the stock price rises because we are behaving rationally. We’re behaving badly in the sense that we’re harming the society we live in but we are exploiting the fact that lobbying is legal but immoral. So competitive market for managers and the market for mergers and acquisitions are inherent in capitalism there’s nothing outside there’s nothing perverse there’s nothing about the state that says that has to happen. So Karl Marx would say “It’s an inherent contradiction of capitalism.” And I actually think he has a point. Marx was wrong about the way a socialist society would work. But Marx makes a pretty good point about the way a capitalist society works to the extent that it can find government to be helpful. Many regulations benefit the regulated industry more than it benefits consumers.

Pretty much all regulations benefit the regulated industry more than they benefit consumers.

My final point on this is suppose you think that’s not true. Suppose you think that regulation starts out benefiting consumers. Before long the government realizes that there’s a lot more money in corporations than there are in taxpayers. So what we can do is basically have a protection record. So I have a friend John Allison, who was the head of BB&T bank. A large regional bank in North Carolina. And in about 2006 they had realized that mortgage-backed securities were a bad bet. And so they had completely unwound their position. They had divested themselves of all the mortgage-backed securities. So 2008, 2009 come around and his bank BB&T they’re doing fine they don’t need a bailout. So they get a visit from the securities and exchange commission in the treasury department because this is 2009 and their story was you know this wasn’t really the bank’s fault this was a pathology of capitalism we’re going to use the toxic asset relief program and take money from taxpayers and give it to large corporations that made stupid risky investments. It’s pretty hard to explain if it was just stupid risky investment but if it’s a pathology of capitalism okay we understand it. And John said look we didn’t have any toxic assets so we don’t need a relief program. Take your tarp and go and they came back with a more senior official who looked around and said “you know it would be really a shame if something was to happen here you know like a fire maybe an audit who knows how these things get started.”

Just for the sake of the younger listeners. Mike was just doing an impression of Marlon Brando and the godfather..

I’m trying to do a..

Proverbial offering interviews.

It’s a protection racket. So they show up and say either you take toxic asset relief program funds, or we are going to audit you and we’re going to ruin your company and so he ended up saying “okay I’m fine. Give me money. I don’t need it but, okay.”

Go find it you can pay a hundred cents on the dollar for my garbage go ahead.

The state wants companies to be cronies. And if they try to refuse the state has guns, the state has auditors, the state can force you to be cronies. So the steps are maybe you don’t want to but there’s a competitive market for managers. Maybe you don’t want to but there’s mergers and acquisitions even if you don’t want to even then the state wants you to be cronies. So capitalism in a democracy has an inherent tendency towards cronyism.

Well and I’ll even take this down to a little more of a grassroots level you know. You know right now the SBA’s is pitching out PPP loans to pretty much anybody who can fog a mirror. There’s pretty much no qualification required. You can get a disturbing amount of money for you know basically just based on your word. Well okay so the question is let’s say that you’re a startup entrepreneur. You might say “well I think it’s immoral to accept money that I don’t really need.” On the other hand it’s being offered and I’m trying to start a business does that make me stupid if I don’t take out a PPP loan.

The answer is yes.

Yes! Exactly, precisely.

It is not rational. So if economists and public choice people want to argue that people behave rationally. Rationality would dictate cronyism.


That wait a minute the system has a problem because the usual story is well markets rely on self-interest but it produces a good outcome. What if self-interest produces a bad outcome because of the state.

Well and that’s I think that that’s just exactly it. Is that you know that you have to expect people to behave rationally based on their own self-interest. But if that rational behavior involves you know, involves taking advantage of programs or policies that are offered by the public that are actually detrimental to the to the public at large. You can’t expect people to not participate in those just because that would you know that will by definition make them uncompetitive whether they’re a small bit enterprise or a large one and eventually they’ll either go out of business or they won’t grow as much as they otherwise would. So you know I think we’ve done an excellent job of making everybody depressed. So if anybody is has taken a shot go ahead and take another one. And now I’d like to talk about how we think we can maybe turn the ship around.

There’s at least two ways; One is that the United States is blessed with having a dynamic enough economy that we’re often getting new firms or even new industries. And one of the things about new industries I mean, you may remember Microsoft for a long time didn’t have any lobbyists. Now they basically have an entire building on K street but some of the reason for that is that there were anti-trust suits and they became part of kind of the Washington establishment. But twitter and uber are both pretty antagonistic towards government government regulations. So new industries if the system remains dynamic enough that we’re getting new companies and new industries then for a very long time it is more profitable to play it straight and make good products and to sell things that consumers actually want as long as you can keep doing that the system works pretty well. But you need enough new companies and that means that we have to not have too many regulations that prevent dynamic new industry. So we need something called permission less innovation. If I have to get the permission of the state in order to sound like a move well. Permission less innovation means that the presumption is that everything that is not prohibited is permitted. Not I have to get a license to start a new build business. It’s I can start anything that I want and if I violate a law then the state comes after me. So permission less innovation and dynamic new industries is one answer. The other thing is we need better voters so we’ve seen a couple of times. I think there were problems with both the Reagan Administration and Margaret Thatcher’s administration but there was widespread deregulation during both and to be fair in the united states the big deregulation push was under Jimmy Carter. So if you recognize that voters can be persuaded that we can make things better by reducing government involvement and making it less possible for the state to distort market processes then having better voters also gives us a chance now we also need an articulate champion of this point of view. But I think there’s politicians.

We haven’t gone across any of those for a while.

Okay, but that I’m old. In the 1970s in the mid 1970s we thought the United States was gone. Soviet Union was soon going to rule the world market systems were no good, so Jimmy Carter comes in and deregulates a bunch of stuff and suddenly we start to get a little bit of growth. And then Ronald Reagan comes in and yes there’s a recession but by 83 84 the economy had really taken off.


So it had been 30 years of decline. So that we’re basically at that point again and yes I don’t see one either. I’ve run for office myself a couple times and it turns out I am not that but this may surprise you Doug. I’m not the one but.

And to clarify I’m assuming you didn’t win.

That’s a horrible thing to say. I did not win. I didn’t even come in second. But it is possible there are two reasons to hope one is the sort of grassroots dynamic industry and the second is that I think there is considerable hope along the lines of having voters say you know this is terrible let’s try something else.

And wait I’m going to exercise my powers of clairvoyance. I am going to guess that you ran under the libertarian party.

I ran carrying the flag of the libertarian party.

Yes. A libertarian I once knew told me because and this is of course an organ where I think the last Republican Governor that Oregon elected was I think sometime in the early 1980s. But he said that libertarians can lose elections for less than a tenth the cost of republicans.

My dollar per vote spending was enormous. Forgive me tiny. My vote per dollar was actually.

Yeah you were by far the most efficient candidate.

I was, I was extremely efficient. So I got four percent which is kind of the Mendoza line for libertarian candidates.

That’s actually not bad for libertarian.

Yeah. That’s the Mendoza line. If you get which is the baseball term but.

Yeah, I was gonna say and yes for those who are not for those listeners who are not baseball fans. It’s based on a player for the Montreal expo is called Mario Mendoza who is an excellent catcher but a horrendously bad hitter. He had a crew batting average of about a 196 197. So basically about a 200 batting average is the lowest batting average where you can have a starting spot in major league baseball. If you’re exceptionally good at defense otherwise you need to be able to hit.

And four percent, if you get four percent as a third-party candidate you can at least say I was a candidate less than that, you’re saying.

Got you but yeah the I was just kind of just kind of thinking about what you were saying especially with the you know with the deregulation with the and especially with the soviet union and how everybody thought that you that the United States was just just utterly and completely going to crumble. The boy I’d sure hope that there is somebody who can pick up that mantle because yeah I think it you know it can it kind of feels like you know it kind of feels similar to you know similar to that. But like one of the things that what you were just saying kind of a thought that sparked in my head is that a lot of people will say the United States is a superpower because of its military. And I think that’s actually not the case. The United States is a superpower because its economy is so strong that we can pay a ridiculous amount of money to keep an enormous military without bankrupting the economy because that’s what that’s what eventually folded up the Soviet Union was their military was so expensive that their economy couldn’t float it. Now I think the thing that has kept the us in quote “superpower steps” I’m air quoting now too has been that its economy is so effective and efficient. Now I think we are getting to the end of that train that trains hit coming to the end of the line so the whole question is going to be what does America 2.0 look like? And I don’t necessarily know the answer. I dearly hope I’m very optimistic about the permission less innovation. I am less optimistic about the higher quality voter. I would absolutely love to know any suggestions or innovations you have in that ideas you have in that regard.

You should have a podcast. You should reach out and all of us should do the little part reach the few ears that we can and the aggregate consequence of that can be surprising because there are instances where all was lost. A voice was raised saying wait there’s another way and people said let’s try it. So it has happened a number of times in the past and interestingly I think it is more likely to happen at those times when there is an existential threat. So paradoxically the worse things are the more likely and Milton Friedman thought this what we need to have is solutions that are on the shelf that are ready for a time of crisis and this is a time for crisis. So we should be optimistic. This is the perfect time precisely because things suck so hard.

Okay, well and that I think that right there is a beautiful thought to end this show on. So everybody, do your part to I think you know both to help with the innovation cycle. So you know if you have an idea go out and implement it and talk with somebody about you know about the virtues of you know about the virtues of commerce and about mutually beneficial transactions. And when that time comes we will hopefully be ready to again turn the ship around and spark another 20 to 30 years of growth. Alright, thank you very much Mike.

It has been a pleasure.


So following up on that conversation with Mike. I think that

the future of capitalism is really going to depend on people getting their own voices out. And you and also you know on people making you just the decisions to go out and do things that are independently valuable.

You know I think that’s well that frankly that’s actually one of the things that my business is built around and one of the things that I of course personally believe in it’s why I started this podcast. But it’s also kind of the core of my business right my business is an expense reduction consulting and what I do is I help businesses and nonprofits to reduce their overhead costs but without driving headcount reductions, without driving layoffs and the way that I do that is with a zero risk model where I don’t get paid anything until after savings have already been achieved. So what I do is I leverage my network of experts to come in and negotiate on their behalf. And to use industry best practices to bring in best-in-class benchmarking so that they can get the best deal possible I would love to talk with you either about your company or a non-profit or company that you know to help see if we can drive value. Please connect with me at www.meetdoug.biz that’s m-e-e-t d-o-u-g dot b-i-z. I’m looking forward to meeting.

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