In Defense of Big Business (with Tyler Cowen)

Welcome to Free Thoughts. I'm Trevor Burrus.

And I'm Aaron Powell.

Joining us today is Tyler Cowen, the Holbart L. Harris Chair of Economics at George Mason University. He's the author of numerous books including The Complacent Class, the topic of a previous Free Thoughts episode. His latest is Big Business: A Love Letter to an American Antihero. Welcome back to Free Thoughts, Tyler.

Tyler Cowen. Nice to be here. Thank you.

So why did you feel that big business needed a, quote, love letter?

I see both on the right wing and the left wing much, much more anti-business sentiment than even 5 years ago. So there's plenty of talk about how monopolistic big companies are, how much they cheat, that they're to blame for every problem in American society, whether it's income inequality or the decaying of the social fabric. And I intend this as a contrarian book that ought not to be contrarian. To me, it's mainly common sense I'm arguing. Business is pretty good.

Is it just big business though? That's an interesting— 'cause it is about big business. And there does seem, as you point out with polling, people have a different perception of big business and small business.

I thought it was necessary to focus. I'm a big fan of small business too, but big business is coming under heavier fire. So there's nothing in my book, say, to defend the little kid with the lemonade stand. But when you look at, say, what Bernie Sanders or Elizabeth Warren are attacking, mostly it is big business. It's the companies and brands we've all heard of.

How big is big business? Just as far as definitionally, what are we talking about? What's the cutoff?

Oh, I think it's an arbitrary limit. But there, you know, take the S&P 500 if you want to. Companies that people have heard of, I would say, is a pretty good definition.

One of the things you point out in the book is that there are— and you do a very good job of saying this is not an institution that is free from any sin or harm, but the question of whether or not it's more or less fraudulent than other human endeavors such as government or communities or things like this. Is there any reason to believe that big business is more fraudulent or that, as a lot of people believe,— it has an incentive to be more fraudulent due to the profit motive?

Well, obviously it depends on context, but as I point out in the book, if you go to Match.com and you look at the website, well, how much is the company lying to you? And then you compare that, well, how much are the individuals lying on their online profiles? Clearly the individuals are lying much more. If you apply for a job, what's more likely to be falsified? You know, the resumes— or the promises made by the employer? Well, again, it depends, but on average, probably the resumes are less reliable. I think there are some contexts where business is worse. For-profit education would be an example. Maybe some parts of our healthcare system, uh, you know, the herbal supplements market. But overall, richer, more capitalistic societies have higher levels of trust. And due to the internet, it's easier to catch dishonest businesses more than ever before.

Those examples that you just gave of the difference in kind of levels of honesty, it seems like one of the things though is the Match.com's website is this like public-facing with kind of verifiable sorts of facts. Like we would— if Match.com was lying about their prices, that would get figured out pretty quickly, whereas you can lie about your height by a little bit on your dating profile and kind of keep it to yourself or it's not that big of a deal. Or again, if I apply for a job and it says the salary is X, X and when I get the job, they pay me substantially less than X. That's kind of immediately verifiable, but isn't it— I mean, that's kind of different from a lot of the dishonesty a lot of people think about when they think about big business, which is the stuff that we don't know about, the under-the-table dealings or the minor exploitations that aren't that kind of the stuff you might read about in Consumer Reports.

Tyler Cowen: Well, there is plenty of that, but I went through and looked at every possible metric I could find. Including, you know, in experimental games and laboratories, do CEOs cheat more or less? It turned out they cheat less. It's always hard to compare hidden variables, but the overwhelming preponderance of evidence we have suggests that corporations are at least as honest as individuals, and in some cases seem to be quite a bit more honest. So that's what I thought the evidence showed, including on taxes, many other areas.

Now I think a lot of people like business as we've kind of mentioned before and even if you have some very left-wing people in Williamsburg, they might run an artisanal cheese shop and they like their business. They like small business and they like the things that business provides them but they think that this could just be provided with small businesses. We could have cell phone service and internet searches with more small localized businesses. So they don't want to give up the stuff, they just want to give up the sort of huge controlling companies that have more power than they should have is not necessary to bring in that stuff. What would you say to that argument?

Well, for most of these sectors, there are smaller businesses that supply comparable services. You can go to the small cheese shop. You don't have to use Google or Bing for that matter to do web searches. You can use DuckDuckGo, which is a much smaller business. There are all kinds of many ways to do social networking. So you have a choice under the current system. Most people do prefer to use Google. It is somewhat better, but I think it's the experimentation, the competition, and the choice that's important, not a once and for all judgment. Well, is big or small better here?

You mentioned at the outset that even, we used to think Republicans were good on business, or they're generally very pro-big business, but maybe Trump revealed some inherent or previous biases they had before, or maybe Trump created them, but even Trump seems to have a strained relationship with big business. Big business and the way he thinks about it and his role with it in the country?

Sure, it seems he's jealous and envious, you know, of Jeff Bezos. He tweets against CEOs. He's very volatile and unpredictable. That's not something business typically likes in a president. His stances on immigration and trade are not really what most big businesses wanted. So he's not just enacting the will of big business. He's his own thing. Much of what he does is voter-driven or media-driven. Republicans for a long time have pushed crony capitalism and they talk a much better game than what you get when they're actually in office.

Talk a bit about some of the canonical criticisms of big business and one that I think plays a role in a lot of people's negative attitudes is short-term versus long-term thinking, that big business is out to— they're out to turn a quick buck. They'll do whatever it takes to turn a quick buck and so they'll— this plays out in like we need regulations to protect consumer safety because if business could make a bunch of money by killing half their customers right now, they would do it. It plays out in we want to have government more involved in providing certain services because like say healthcare, the government can have like longer-term goals in mind of like long-term health whereas business, if it runs it, will just want to know, like, you know, how can I make a profit off of you right now, whether the product is effective in the long term or not. So how, how do we address that particular concern? Is there anything to that particular concern?

Well, there is. There's plenty of fraud from business. I think we need strong laws and regulations preventing it and punishing it. I'm worried that our government today does too many things that what it's supposed to do it doesn't get right. But I don't think it's true that markets look mainly to the short term. There are so many companies that for years have not had positive earnings and the share prices have been very high or even stratospheric. To this day, Tesla is an example. People are looking to some longer term. It could turn out they're wrong, of course. Amazon for a long time did not generate positive accounting profits, but the market knew they were investing for the longer term. Markets understand this pretty well.

Now, one of the quotes you bring up, I like the paragraph where you raise a famous quote by Milton Friedman that the social responsibility of business is to increase profits. I think you say that you used to pretty much agree with that, but you've kind of rolled that back a little bit.

That's right. I was influenced by John Mackey and his work on conscious capitalism, the notion that a business mission can be broader than just profits. Again, I'm not saying every business should be that way, but you want a system with competition and experimentation. And if part of that competition is like broad versus narrow understandings of a business mission, I think that's great. And Whole Foods has done a lot of good, as have many other businesses that have something socially conscious to their mission. It may help them attract talent, motivate people, maintain internal coherence, build a corporate culture. Now, if you're just selling, you know, toothpicks through the local Walmart, maybe all your business can and should do is maximize profit. But as a general rule, I think we need to go broader.

Now, it also seems that those kind of businesses like Whole Foods and even on maybe the other side, such as Hobby Lobby and Chick-fil-A, where you have these businesses that seem to have extra profit or nonprofit concerns that, that are known by people in society, we seem to— there seem to be more of those now than there were maybe in 1955. I don't know what— of any business at that time who talked about environmentalism, which would have been a little bit strange, but other cultural concerns. Do you think that's a product of kind of the diversification of capitalism? There seems to be more of those conscious of some sort businesses.

It's a product of how much wealth we have. It's a luxury we can afford to some extent, but also in a world of social media, it will be discussed more. So there's a public relations reason to do it. And I would stress, a lot of business talk about broader mission, it can be a kind of hypocrisy or even a lie just done for cynical public relations or related reasons. So I don't think we should endorse all of it by any means.

Now you tackle CEO pay, which is very— I think especially since 2008 has been brought up a lot. And you have a lot of interesting stats on this. And of course, this is very much tied up with, with the top 1%, the peakity kind discussions post-Occupy Wall Street that these CEOs are, are making whatever multiple past their lowest-level worker. What seems to be the reality of CEO pay?

Actually, CEO pay has gone up quite regularly in line with the stock market, which is what you would expect if CEOs are paid with equity and options. So to the extent companies create value, CEOs are paid more. The stock market has done pretty well— overall a good thing. CEOs are paid more. It's mostly supply and demand. Much more is required of a CEO today than, say, 40 years ago. You have to deal with business more. You need to know global markets. You have to do much more in public relations, maybe social media. It's a very difficult, demanding job, and the people who are good at it are in fact underpaid.

But we, we frequently hear stories about these CEOs who drive their business into the ground or wildly ineffective, and while doing this, make a ton of money or get these phenomenally huge golden parachutes as they're booted out. Is there a strong correlation between kind of the level of compensation a CEO gets and how successful they are? Does their kind of past lack of success, like they got the golden parachute, tend to impact how they do in the future? I mean, because broadly it just feels like people— people's sense is that these— yes, there's, there's a lot of pay that these CEOs are getting, and yes, there's, you know, there's a market, like it's a supply and demand thing, but also that maybe the market is just like not behaving terribly rationally.

Well, I think it's important to step back and look at how value is created. So throughout the 20th century up till today, in the S&P 500, it's about 4% of the companies who account for all of the value creation. So there's like a relatively—

4%?

Yeah, small number of winners. And a lot of companies, like, they might do okay, produce useful things, but they're not accounting for equity gains. So it's a little like sports teams. You know, there are only so many championship winners. So along the way, companies are bidding very hard to find those superstar CEOs, like the next Bill Gates or Steve Jobs. So just like with bidding for star athletes, Of course, a lot of people end up being overpaid because only one team wins the championship in that particular year. But CEOs as a whole on average in the numbers seem to be somewhat underpaid. The good ones are grossly overpaid. You know, no one likes it when you have a so-so CEO who takes home a huge paycheck, but that's part of this bidding war to get the very best ones. And that bidding war actually allocates the better CEOs to the more important companies.

Yeah, your analogy to Carmelo Anthony versus LeBron James is— it was an interesting one that people thought that Carmelo Anthony could be the guy who brings home a championship and they gave him a bunch of money and he wasn't. But LeBron James or Stephen Curry or people, they are, but you don't know that beforehand.

That's right. And same with many other professions. Many people end up overpaid. You invest, say, in a professor thinking there's some chance the professor will become very famous. Most do not.— a lot, you know, look "overpaid," but that's how the competitive bidding process works.

Now, how does CEO pay factor into the much-ballyhooed inequality debate? For example, the top 1%.

Well, what's really striking in companies, if you take away the top 2 or 3 people, the income gap between the top executives and the ordinary workers has not over time grown. Income inequality, for the most part, comes from having more superstar companies. You know, say Facebook would be an example, uh, where everyone is paid more. So I think the answer, so to speak, to the extent there is one, is to work to have more superstar companies. It's the difference between pay in the superstar companies and the mediocre companies, that gap widening, that's what's driving income inequality.

Going back, the, the sports analogy raises a kind of interesting question about the way that people think about people getting paid a ton of money. That when we hear that a CEO makes an extraordinary amount of money, makes tens of millions or more a year, people get upset about that. But when we hear that— who is it? Russell Wilson just signed a contract for $35 million a year, which is much, much more than even the other highly paid people on his team are making. We don't tend to get bothered by that. Is there, do you have kind of any ideas about what's going on there? Why only kind of in these one sorts of sectors, people, we seem to get upset about it, but we aren't bothered when it's athletes or say actors getting paid a ton of money.

Or Taylor Swift. It seems when it's an actual human, people relate to that person as a human. There's something impersonal about corporations that our minds are not very good at processing. Uh, and I think that gets to why big business is in some regards not as popular as it should be.

Does that mean then that it would be good for big businesses to kind of humanize their CEOs? I'm thinking of like the, who's the CEO of, is it T-Mobile? Kind of puts himself front and center and puts his personality on display.

Richard Branson.

Or Richard Branson. Would that be, or Steve Jobs did it too. Like, would that then maybe help?

A lot of businesses work very hard to do this. It's a possible strategy. In many cases it helps. But it also can backfire. So Elon Musk is out there on Twitter. He said a number of things that have even gotten him into legal trouble, but also public relations trouble. So whether or not your CEO can pull that off successfully, especially when there's not always someone who can tell the person when they ought to stop, it's a risky strategy. But there's a reason why companies are trying it more, and I think it's exactly what you're suggesting.

I think it's interesting too, because that adds to the skill set, as you, as you pointed out earlier, the skill set of a modern CEO is pretty diverse and unique. And if now you need excellent personality and PR relations, well, that could just raise the pay even more.

That's correct.

Now, you also bring up a chat about work, and this is another one. I mean, I like— one thing I like about your book is, is you— I don't know if I could have, you know, if I would have brought it down to Occupy Wall Street if it existed 10 years ago, you know, how many people would have been amenable to reading it. But it does deal with all their complaints. And another one is that work sucks, or like maybe a more classic one is being a slave to the man, and that would be some sort of corporate corporate drone and that kind of attitude that working for a corporation is somehow worse, a big business, working for mom and pop might be better, but maybe just work in general is something we don't really want to do. You cite Elizabeth Anderson, who's been on Free Thoughts, and her work on that.

Tyler Cowen: Well, there's plenty of evidence that people are happier when they have jobs. Their health is better. Their suicide rates are much lower. So work is not always the most fun thing you can do. But for the most part, it's a blessing. It gives us validation, social networks. If we have trouble at home, we're sort of diversified in having the work sphere. So I'm a big fan of work. Most Americans, in fact, like their jobs, and the alternative is much worse. And I don't just mean not having the income. I mean not having a job.

Shouldn't we be caring about the— the other thing that we get from sort of multinational corporations such as sweatshops and working conditions in other countries sort of put there by American businesses, that there's a difference between what a job someone can get here is versus the kind of oppressive jobs that are in many overseas countries?

I don't cover that very much in the book. It's a somewhat separate set of questions, but I think there's a lot of evidence that, you know, multinationals investing in foreign countries bid up their wages, boost living standards. It's how Singapore moved from being a very poor country to now being richer than the United States in per capita terms. So I'm a fan of foreign direct investment. I think there's a substantial academic literature, not mainly done by libertarians I should add, which very much supports these points.

Regarding work though, I mean, we— so yes, we should be concerned about work versus not work, that people who are working seem to be happier, healthier, all these other benefits that you mentioned versus people who are not working, but that's not necessarily— that's not the whole of the story. There's also kind of the quality of work that you're in and we tend to think of the work of like the person who's at the artisanal cheese shop where they're kind of— it's hands-on and it's a small team and everyone kind of knows each other and you're producing something directly and interfacing with your customers, that that's like more fulfilling maybe than the work of a mid-level manager at a multinational corporation who may not know at all how anything that he or she does fits into the broader picture of what the company is doing. So should we be concerned like maybe saying, well, these big companies are producing— yes, they're giving people jobs, but they're producing jobs that aren't as good, as fulfilling as they could be. Alternatively, like that they're also maybe things like— so Silicon Valley, the kind of cult of workaholism of just like the ultra-long hours and crunch time. That sort of stuff where you're encouraged in these big companies, you're kind of encouraged to just like make work everything you do, whereas maybe in smaller businesses and whatnot, it just becomes part of like a more holistic, fuller life.

Well, people are free to take those jobs at the cheese shops and some people do. But I think for the most part, there's actually more freedom and more companionship in large corporations. Where you can seek out different kinds of friends and allies. In terms of the quality of jobs, keep in mind, we live in a country where really many workers, especially at, you know, mid to higher income levels, they face marginal tax rates that might be 40% or higher, in some cases up to 60% if you live in New York or California. And that means that in the work relationship, your employer will pay you too much with untaxed non-pecuniary benefits and not enough with cash. So my worry is exactly the opposite. Jobs in some ways should be a little tougher but pay more, but because of the tax system, we're not able to give people what they actually want.

To go back to what I mentioned about Elizabeth Anderson, this idea that is I think very widely held that the employers hold a ton of power over their employees via this sort of economic market power, which of course, this goes back to discussions of unionization for 100 years, and that they're somehow beholden to this employer with their debt and with all these other things. Is that— monopsony is the word that you bring up— is that a valid criticism? Especially as these companies get bigger, it seems like do we lose options and then we have more power over us?

Well, there are fewer company towns than ever before. A smaller percentage of people live in rural areas. The best cure for monopsony is to move to a city or well-populated suburb. And that's exactly the main trend in American population movements now for a long, long time. So I wouldn't say there's zero monopsony, but it's been consistently falling. And I find it odd that people are now focused on this again. I think it's part of a kind of emotional bias against big business, sometimes even amongst researchers.

A lot of the criticism we've been talking about so far have been kind of of the left sorts of criticisms. But I mean, we— like libertarians sometimes object to the way that big businesses operate from the perspective of how they interface with government. That as you become a very large corporation with a lot of power, you can start to get government to give you goodies or do things for you that will harm your competitors. Or pass regulations that because you're large, you can afford the compliance costs of, whereas other companies maybe can't. How much of a concern is that and is that the sort of thing that maybe counsels us against maybe just unreflectively embracing bigness?

Well, I'm opposed to crony capitalism and all of the subsidies and tariffs and the like, but I think often libertarians overestimate how much of it there is. Uh, they want to, in a sense, sound more balanced. So if you take the subsidies to Amazon from Virginia, the offers from New York City and state, uh, again, my view, it's all a bad idea, but they're actually quite small relative to the value Amazon would have created. And I don't think they're the major issues of our time. So I'm somewhat different than how a lot of libertarians talk about this issue.

What is the best way of measuring for— this is a sort of basic economics question, but I think a lot of people who don't understand basic economics could stand to hear it. What is the best way of measuring the value that a given corporation created or just let's say Steve Jobs compared to how much he was compensated?

Well, there are studies like what is the consumer surplus from iPhones. I've never read like on iPad, Apple Watch. Maybe that hasn't been done yet. But you can look at how much of them people buy, how much they're willing to pay. And if it's worth, say, $4,000 to you and you got it for $700, your consumer surplus would be the difference between those two numbers. Uh, and those studies have been done. I don't know the numbers off the top of my head, but they're quite phenomenal. There was one study, I think from December, it showed the people they polled, uh, the average value of Facebook or median value rather, —was about $1,000 a year in consumer surplus.

I think it was the Nordhaus study. I think they— he estimated that the people like Steve Jobs capture 2.2% of the social value created by such people, which is an astounding difference. Right. And that—

I mean, and we can measure the consumer surplus, but that also leaves out the job creation and not just job creation in terms of like— I mean, a big business hires— employs a lot of people, but there's— there's extended effects from that, that they can create new markets that employ people who aren't directly involved with the company. They can create whole new sectors of the economy, which probably, I would imagine, get even harder to measure.

Uh, that's correct, but we know in general for big business in this country, the benefits to consumers and workers are really quite substantial, and that does not get enough publicity.

One of the parts I'm really glad you put in the book— going a little back to the workplace is you do talk about sexual harassment. So we've seen of course the MeToo movement and a big awareness with positive awareness of sexual harassment and a lot of this occurred in big business going back a little bit to the power dynamic question. But I like how you point out it and you do throughout the book that it's worthwhile to compare big business to other endeavors such as governments dealing with sexual harassment. Uh, that's right.

You know, I think it's an awful tragedy how slow American business has been to react to this. And there's been such a long history of harassment and abuse of women, and sometimes men, in, in corporations. Uh, but it's much easier to get somewhere with your complaints typically in business than, say, with respect to Congress, where the procedures are very cumbersome. There's a lot of layers of protection. But I would very much admit and indeed stress, this has been an area where big business has kind of failed us.

Now, moving on to the big question of monopolies, this is something that I think I get asked all the time by students if you're promoting business. I think the perception is that monopolies have increased. It seems like at least maybe in some areas, Disney seems to own a lot of the world and the mergers come up. All the time where different mergers are happening. So how does the state of quote-unquote monopolies look now, especially for entertainment, tech firms, as compared to say 40, 50 years ago?

Well, entertainment has never been more competitive. There's the internet. There's YouTube. There's Netflix. There's all the places you can get to out in the real world using the internet. That's just phenomenally more competitive. If you look at like the things you buy as a normal person, In virtually all areas, you have much more choice, choice of product, choice of supplier than 20 years ago. Social networking. If you don't like Facebook, well, there's Snap, there's Fortnite, there's your cell phone, there's email. There's just knocking on your neighbor's door. Even that is not nearly as monopolized as say Elizabeth Warren likes to suggest. I think the one critical area where market power has gone up is a lot of healthcare in the hospital market. That to me is a big problem. It's a complex issue how to best address it. The K-12 education system is like government monopoly, which most critics of monopoly don't seem to mind, but most of the private sector, when you actually dig into the numbers, it's more competitive today than it used to be.

But what about— I mean, we see one of the biggest— the business models in Silicon Valley is you start a company. You get a ton of users, you have no pathway to profitability, you raise a bunch of VC dollars in order to buy a whole bunch of new users, and then your business model is to sell to— it used to be Yahoo that bought everybody— but is to, you know, then flip your company. And so is that— is there accuracy to that picture? Because that would seem to lead to concentrations, at least within the tech community.

Well, I'm not sure what exactly the problem is. First, a lot of these companies do become profitable. Uber might be valued at $90 billion, right? That may be this week. Uh, it is true that, say, Google and Amazon buy up a lot of startups, but Google/Alphabet has turned its acquisitions into many excellent products. YouTube is one of them. They've been a pioneer in driverless cars. Gmail is free and pretty amazing. Google Glass didn't work out, but something like it I think eventually will work, and you will Credit Google for some of that. Amazon, a leader in cloud computing logistics, phenomenally innovative company. So when those resources are bought up, they're being put to very good use.

Doesn't it seem like that Google's position in terms of running the internet search to a large extent and controlling so much of the information is almost unassailable at this point? I know we've talked about this before with say MySpace. Challenging Google here and its power to even control the information by which you could challenge Google. It seems like kind of a bridge too far and maybe we should do something about that.

Well, I don't know. Uh, as the internet changes, what Google is good at will be less important and other companies are likely to displace it. I don't know when that will happen, but if you just look at the core features of the market, like, is output being restricted? No. Is Google actually the best product out there? Yes. Is Google charging people too much? No. In the online advertising market, has Google made ads cheaper and more targeted? Yes. Has Google enabled— Google and Facebook enabled a lot of smaller businesses and other sectors to get their start? Absolutely. Google and Facebook are huge anti-monopoly engines by making targeted advertising possible, easier, cheaper. So I'm not saying they'll be superior forever, but I don't think you should just assume they have a lock on that for the next 50 years. They don't. Especially Facebook.

Should we be worried though about it from another direction, which is not that competitors can't come in, but kind of the vast unelected power that some of these companies have? So the way that Facebook, Yes, a competitor to Facebook could pop up, but as of right now, Facebook is where an extraordinary amount of conversations of kind of our communal social lives take place and Facebook can, through things that we as American citizens, as voters, don't have control over or don't even know about, can kind of color those conversations, shift them, promote certain viewpoints or hide others, and that's all being done by Mark Zuckerberg, who seems like a smart guy, but, you know, I didn't vote him into office. Is, is that something that we should be worried about, even if we can say like, well, maybe 10 years from now someone will take Facebook down, but that's, that's 10 years in which Mark Zuckerberg kind of controls the national conversation?

Well, I would say users have most of the control over Facebook, or for that matter, Google. If you ask the question, like take any point of view you can think of, even some quite repugnant ones, and ask, like, do they have better access to the public eye and ear compared to 10 years ago? And the answer is absolutely yes. So do libertarians have more of a chance, say, to make their case to people because of the internet, Google, Facebook? Of course they do. So Mark Zuckerberg is not somehow throttling that. He's not on the verge of throttling that. There is a perfectly legitimate set of questions. Should we allow truly repugnant material on these platforms? I don't think I have all the answers there. But even those points of view now, they're getting far more leverage. So, you know, my worry is not shutting down debate, but just we're seeing a bit what people really believe, and sometimes that's pretty awful, and that does concern me. But I don't mainly blame the companies for that.

It's kind of interesting that we seem to hold Mark Zuckerberg and Facebook to a higher standard than we used to hold, say, the executive, the CEOs of the 3 networks in, say, 1970, ABC, CBS, and NBC, who had an unbelievable amount of power to shape public opinion and we didn't really complain about it and it also blocked people out of the marketplace of ideas for a very long period of time.

Sure. And no one gets very upset that, say, paper manufacturers allow their product to be printed to form the pages of Mein Kampf, which is about the worst book you could possibly imagine. So it's very selective, these outrages. Some of it is social media driven. Some of it is politically driven. You'll have like an Elizabeth Warren deliberately try to gear up some kind of particular anti-corporate hostility. Uh, I think a lot of it is not entirely sincere. Some of it is that the media hates Facebook and Google because they've been outcompeted.

I'm very glad you have a chapter on Wall Street because I feel like there's a lot of things people use as synonyms. Big business, corporations, Citizens United, which stands in for a bunch of these ideas, and Wall Street and finance, which is maybe the most inscrutable and seemingly powerful part of the "big business world." And of course there— well, I think in popular perception there are no ma and pa finance hedge funds, I think that's the popular perception. So in the finance world, and obviously since 2008, we had these too big to fail issues. How big is the finance world? Is it too big?

Well, there are plenty of small competitors in the finance world like credit unions or boutique shops or family investing firms. But if you look at the total financial sector as a fraction of American wealth, it has held pretty steady at about 2%. So people look at it as a share of income, but finance is managing your wealth. And the more years you have peace, like the ratio of your wealth to income rises, you're not destroying things, you're building more things. So the financial sector does grow relative to GDP in times of peace, but it's not really growing as a percentage of wealth. And I think that puts it in a saner perspective. I do think there are genuine problems in our financial sector, obviously in 2008, but still some today. But I just think some balance needed to be brought back to that discussion. But I'm not trying to say everything is well with finance. It's not the case.

But on a broader level, people, I think, popular don't even understand— so maybe we should even take a step back— why a healthy financial sector is important and why America's venture capital is so successful. I mean, the one stat in your book that really blew my mind was companies that have been backed by venture capital account for 21% of the US GDP and 11% of private sector jobs. So why is the finance sector important for that kind of investment and innovation?

Well, finance is what in your economy allocates more capital to growing and important endeavors and takes capital away from endeavors which have no future. I think it's reasonably clear the American financial system is still in that regard the best in the world.— and we are the most innovative economy in the world. We're not nearly innovative enough, as I've argued elsewhere. Venture capital has been an especially potent form of American finance, but venture capital is not separate from the rest of the banking system. It requires IPOs and letters of credit and many other parts of American finance that help feed into all those innovations.

Now, you also talk about the tax haven aspect of America, which struck me as interesting. Also leads to some sort of almost international relations as it concerns the financial sector, that there are a lot of countries that invest and put their money in America.

That's correct. At the state level, it can be relatively easy to hold money in this country anonymously and perhaps to evade your tax obligations overseas. I have strongly mixed feelings about that. There's a lot of cases where you want to help people escape from tyrannical governments, or maybe their wealth has already been taxed and they just want to put it somewhere where it won't be molested or oppressed. But there are also cases where people use the US system for non-legitimate tax evasion. Uh, that's a mixed bag, but I would just say, uh, that part of the US financial system, it's very good for this country. It encourages more people to invest their money here. So it's another way in which US finance has done more for the nation than is commonly realized.

Is there— to go back to the short and long-termism issue though, is there a problem with venture capital in that it kind of— it sometimes pushes companies to do things that maybe aren't in their own long-term interest or encourages— does it encourage that consolidation that we talked about before that a venture capitalist, you know, you can— you can invest $100 million in a company and then hope to gain from it slowly as the company becomes profitable and maybe IPOs at some point in the future, or you can make a ton of money if they just goose their numbers up really high and then flip the company to Google or Apple. So yes, VC can be bringing money in and supporting these companies, but can it be also creating incentives that are maybe not leading to kind of the long-term innovation or big solutions that we might want?

Well, I've talked to more and more entrepreneurs who are deciding, well, at this point venture capital is not for me. It puts too many growth demands on my business. I want to do things more slowly. So again, that's very much a choice you have. There are plenty of other ways of raising money. Venture capital is itself more diverse, more aware that this is a problem. So I think kind of the menu of financing options keeps on getting richer and more competitive in a good way. So I wouldn't say I'm very worried about that.

So I want to ask you about a thing that you actually do not discuss in the book, but I think you have some opinions on it. I think it's one criticism of big business and maybe just a general criticism of capitalism, but environmentalism. The idea that big business and corporations are sort of rapaciously taking from the earth and destroying the earth and that's something that has to be stopped. Due to the sort of incoming environmental apocalypse. Is it correct to believe that big business has at least some motivation to not really care about the environment and we should be concerned about that?

There's a great deal piled into that. I think a lot of environmental problems are very real. We need to do much more to combat them, especially on the side of carbon emissions. I don't villainize big business in that process. Consumers are as much to blame and big business will need to be part of the solution through innovation. Most parts of our environment have gotten better with capitalism and economic growth. Carbon emissions is a big area which has not. I do think our government needs to step up and do more.

So it sounds that everything is not hunky-dory. I mean, you point out big business has problems, but in many kind of sci-fi dystopias, we We have this idea that the future will be business controlling government and business will kind of control everything and every merger will go together. What's the name of the company in Aliens, Aaron?

Weyland-Yutani.

Yeah, Weyland-Yutani, like the company. Is this something that should concern us? Should we be on the guard at least by watching that big businesses don't get too big and don't have too much control and are properly controlled by government but maybe not be too worried at the same time?

Well, I think there's a lot of words in that question which beg the question, like, should we be worried that things become bad and not good? It's hard to answer no to that, but I would just say, you know, let's focus on the data. And the data are showing there are some problem areas for monopoly, mostly healthcare in my view, and K-12 education. I think we need to address those. And of course, we should watch the other areas. But I think the public perception of how much actual market power there is is just way, way higher than the truth. In my book, I'm trying to redress that balance. I'm not trying to say we should never be vigilant or stop looking at the data.

I would like to ask you the last question is the question that is the last chapter of your book. If big business is good, then why is it so disliked? I imagine that a lot of people who who are on the other side of this conversation, if they listen to this podcast, will not be convinced. They should definitely go read Tyler's book. But what is the sort of psychological element? You've mentioned a couple of times different kind of biases against different formations, but why is big business so disliked? I think it's a very complex answer.

Partly psychologically, we're not well geared as humans to understand the benefits of an impersonal economic order, but I think the main The other point I would stress is ordinary Americans for the most part do not hate big business or big tech. It's largely our intellectual class and segments of our media and some of our politicians. And that's what I'm arguing against. But you look at, you know, people using iPhones or Google or purchasing the products of big companies or taking rides with Uber. I mean, for the most part, they love it. So we're in this paradoxical situation. Americans don't, as a whole, hate big business, but our intellectual classes, as Schumpeter had predicted, are turning on it once again, and I'm hoping to provide the counterweight.

Thanks for listening. Free Thoughts is produced by Tess Terrible. If you enjoy Free Thoughts, please subscribe to us on iTunes or wherever you get your podcasts. If you'd like to learn more about libertarianism, find us on the web at www.libertarianism.org.