WEBVTT - 'Crisis Point': How Complication Killed The Megacorp. 0:00:03.160 --> 0:00:09.320 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:10.440 --> 0:00:12.680 Welcome to Maren Talks Money, the podcast in which people 0:00:12.680 --> 0:00:15.520 who know the markets explain the markets. I'm Meren thumset 0:00:15.560 --> 0:00:18.960 web with me for this week's interview. Unusually, but happily 0:00:19.079 --> 0:00:21.920 is John Steppek, senior reporter and author of the Money 0:00:21.920 --> 0:00:22.880 Distilled newsletter. 0:00:22.880 --> 0:00:23.079 Hello. 0:00:23.160 --> 0:00:25.800 John, hi'ml You know where you're. 0:00:25.680 --> 0:00:28.400 Here, right, Yes, I've actually read the book. 0:00:28.800 --> 0:00:33.360 That's right. We are talking today about the unaccountability machine, 0:00:33.360 --> 0:00:35.840 why big systems make terrible decisions, on how the world 0:00:35.960 --> 0:00:38.320 lost its mind, something I think we can all agree with. 0:00:38.640 --> 0:00:41.480 This is written by our guest Dan Davies, and John 0:00:41.520 --> 0:00:44.120 has read the entire thing. I've only read little bits 0:00:44.120 --> 0:00:46.199 of it, which doesn't mean I don't have opinions, but 0:00:46.280 --> 0:00:48.200 does mean that I'm going to defer to John quite 0:00:48.200 --> 0:00:51.040 a lot during this interview. Davi's worked as an economist 0:00:51.080 --> 0:00:53.000 at the Bank of England and a bank analyst before 0:00:53.040 --> 0:00:55.280 moving to consulting and writing. He's also the author of 0:00:55.360 --> 0:00:58.560 Lying for Money, which is obviously about financial fraud. In 0:00:58.600 --> 0:01:01.640 this conversation with Dan, we fogus on the unaccountability machine 0:01:01.880 --> 0:01:04.520 and it's look at why so many of the world's 0:01:04.560 --> 0:01:07.520 systems are failing now. The other reason I wanted to 0:01:07.520 --> 0:01:09.200 get John on this podcast, apart from the fact that 0:01:09.200 --> 0:01:11.240 he's actually been good enough to read the book, is 0:01:11.280 --> 0:01:14.960 because lack of accountability drives him crazy, and we've talked 0:01:14.959 --> 0:01:17.520 about it on and off on this podcast over the years. 0:01:17.560 --> 0:01:20.160 So it drives us mad that the NHS doesn't work, 0:01:20.200 --> 0:01:22.600 and nobody knows why. It drives us mad. We can't 0:01:22.600 --> 0:01:26.240 build anything in the UK, That infrastructure simply doesn't appear, 0:01:26.280 --> 0:01:29.840 despite the fact that everybody agrees that it should be. 0:01:30.120 --> 0:01:33.880 That's mad, that our transport network doesn't work, that productivity 0:01:33.920 --> 0:01:37.480 doesn't go up. All these things that we all know 0:01:37.680 --> 0:01:41.280 aren't working, that we all want to fix, every politician agrees, 0:01:41.440 --> 0:01:44.640 yet nothing ever happens in the NHS. Is the classic 0:01:44.680 --> 0:01:46.280 of this. John and I think we've talked a lot, 0:01:46.319 --> 0:01:49.160 haven't we, Johne, about why is it that we never 0:01:49.280 --> 0:01:52.360 see Amanda Pritchard on the Telly or listen to her 0:01:52.440 --> 0:01:54.120 on the radio. In fact, does anyone know who Amanda 0:01:54.160 --> 0:01:56.760 Pritchard is. She's the CEO of the NHS. She's the 0:01:56.760 --> 0:01:59.400 person that should be up there, I feel should be 0:01:59.440 --> 0:02:01.120 up there on the race on the Telly every day 0:02:01.120 --> 0:02:04.680 explaining to us why it's so absolutely appallingly useless. But 0:02:04.800 --> 0:02:11.360 she's not their accountability deficit. Dan, Welcome to Maren Talks Money. 0:02:11.360 --> 0:02:13.440 I'm so glad you're here because you're going to explain 0:02:13.880 --> 0:02:15.639 all this to us, right. 0:02:16.200 --> 0:02:18.840 Thanks, thanks very much, Thanks very much for inviting me, 0:02:19.040 --> 0:02:22.440 and you know I will have a go brilliant. 0:02:22.600 --> 0:02:24.440 Well, I tell you what, why don't we start bre 0:02:24.480 --> 0:02:27.480 you just giving us a big overview of what the 0:02:27.520 --> 0:02:30.040 book's really about. I may have jumped your gun slightly 0:02:30.080 --> 0:02:32.600 with my introduction, but what is it actually about? What 0:02:32.720 --> 0:02:33.639 the main message here? 0:02:33.960 --> 0:02:36.000 The main message is exactly the kind of thing that 0:02:36.040 --> 0:02:40.600 you were talking about, Maren, which is that personal accountability 0:02:41.000 --> 0:02:45.640 for decisions is just in many ways a thing of 0:02:45.680 --> 0:02:49.640 the past for lots of the kind of systems and 0:02:49.680 --> 0:02:54.640 institutions that we interact with. There is just no individual 0:02:54.720 --> 0:03:00.240 person who feels like they're accountable for these decisions. But yeap, 0:03:00.320 --> 0:03:04.480 the strange thing is that I started out wanting to 0:03:04.480 --> 0:03:06.399 write a very different book from the one that ended 0:03:06.440 --> 0:03:10.200 up published, and the book was actually pretty much delayed 0:03:10.240 --> 0:03:14.839 by a year in being delivered because I'd begun by 0:03:14.880 --> 0:03:21.440 thinking that this was a straightforward issue of weasily responsibility. 0:03:21.560 --> 0:03:26.600 Ducking managers just trying to create systems so that they 0:03:26.840 --> 0:03:29.920 could avoid having to take any kind of accountability for 0:03:29.960 --> 0:03:33.440 their decisions. And by the time I was halfway through it, 0:03:33.800 --> 0:03:37.520 I started thinking, maybe that's not entirely fair, and that 0:03:37.680 --> 0:03:41.320 maybe the reason that these people don't take accountability for 0:03:41.360 --> 0:03:44.920 the decisions is that they don't feel like they made 0:03:45.240 --> 0:03:50.880 the decisions. So Amanda Pritchard as chief Executive of the NHS, 0:03:51.440 --> 0:03:54.640 she's got that title, she's in a role where you 0:03:54.680 --> 0:03:59.520 would expect to see someone controlling the system, but actually 0:04:00.120 --> 0:04:04.440 she's just kind of the operator of a huge, great 0:04:04.760 --> 0:04:10.280 industrialized decision making machine. Most of the important decisions that 0:04:10.400 --> 0:04:16.560 cause the NHS to dysfunction just arise out of a system, 0:04:16.960 --> 0:04:20.240 and they don't have any individual human being owning them. 0:04:20.680 --> 0:04:24.400 And this is a very weird, kind of new way 0:04:24.480 --> 0:04:27.680 to live our life in the industrialized world. It's not 0:04:27.960 --> 0:04:30.760 like the good old days of the nineteen twenties when 0:04:30.839 --> 0:04:32.960 John Paul Getti could get a report from all of 0:04:33.000 --> 0:04:36.560 his rigs every single morning and make decisions about all 0:04:36.600 --> 0:04:39.600 of his rigs in the afternoon. Everything these days is 0:04:39.720 --> 0:04:44.640 just so complicated that there's no one human being that 0:04:44.720 --> 0:04:47.640 can hold the whole system in their head and make 0:04:47.680 --> 0:04:48.640 decisions about us. 0:04:49.080 --> 0:04:53.480 So it's a function of complication, and the complication driven 0:04:53.600 --> 0:04:59.880 presumably by both size and also by interaction between say 0:04:59.880 --> 0:05:05.000 that corporation in the state and regulation and accounting rules 0:05:05.040 --> 0:05:06.880 and all these kinds of things. So you no longer 0:05:06.880 --> 0:05:10.200 have a system where say the ceover company has a 0:05:10.240 --> 0:05:14.200 direct line of power across the company, because they have 0:05:14.240 --> 0:05:17.799 to interact along the way with endless levels of regulation 0:05:18.240 --> 0:05:18.839 for example. 0:05:19.760 --> 0:05:23.640 Yeah. Absolutely. When I was an analyst, Fred Goodwin, or 0:05:23.680 --> 0:05:27.040 as he was then called, Serf Fred Goodwin once said to. 0:05:27.000 --> 0:05:30.840 Me, you know, some things are big because they're complicated, 0:05:31.520 --> 0:05:35.679 and some things are complicated because they're big. And Royal 0:05:35.680 --> 0:05:39.839 Bank of Scotland is books. It's just as things grow, 0:05:40.320 --> 0:05:42.560 they have to deal with more things. But the killer 0:05:42.600 --> 0:05:45.440 thing is that they have to deal with more combinations 0:05:45.520 --> 0:05:49.520 of things. So you get in this horrible kind of 0:05:49.680 --> 0:05:55.320 arms race, because as something grows, the complexity grows exponentially, 0:05:55.920 --> 0:05:59.800 because roughly it grows as the square of the object. 0:06:00.080 --> 0:06:05.120 The network and the capability to manage that complexity only 0:06:05.160 --> 0:06:09.880 grows linearly, and you know, exponential versus linear is a 0:06:09.960 --> 0:06:12.960 race that they ever has one winner, and so after 0:06:13.040 --> 0:06:18.840 a time the system gets completely unmanageable in the literal 0:06:18.880 --> 0:06:21.480 sense that it cannot be managed, it cannot be regulated, 0:06:22.040 --> 0:06:25.599 and then something has to happen. And what I argue 0:06:25.600 --> 0:06:28.240 in the book is that over a lot of the 0:06:28.279 --> 0:06:32.000 industrialized world, a lot of our most important systems are 0:06:32.080 --> 0:06:36.960 reaching that something has to happen stage where some kind 0:06:37.000 --> 0:06:42.159 of reorganization is just absolutely necessary, because the complexity is 0:06:42.240 --> 0:06:49.160 now completely beyond the ability of anyone to make remotely 0:06:49.240 --> 0:06:51.680 sensible decisions that have any connection with the world of 0:06:51.720 --> 0:06:52.840 their consequences. 0:06:53.320 --> 0:06:56.719 Yeah, but interestingly, on the way to this point, it's 0:06:56.760 --> 0:06:58.880 been rather brilliant, right, And the state says, right, back 0:06:58.880 --> 0:07:02.720 to Adam Smith andvization and everyone doing different things, back 0:07:02.760 --> 0:07:05.960 to the making of pins, isn't it and Adam Smith originally, 0:07:06.120 --> 0:07:08.080 and all these other things where no one knows how 0:07:08.080 --> 0:07:10.880 to make the entire thing. Everyone knows a tiny bit 0:07:10.920 --> 0:07:13.240 of it. And that's been phenomenal for us. And I 0:07:13.280 --> 0:07:15.080 spent a lot of time earlier this year reading books 0:07:15.080 --> 0:07:19.920 by Joseph Heinrich, which was all about how this hive 0:07:20.080 --> 0:07:22.680 brain effectively creates things that would be impossible for us 0:07:22.720 --> 0:07:28.160 to create alone, for example. So until relatively recently, this 0:07:28.320 --> 0:07:32.160 complication that meant that everybody specializes in together we can 0:07:32.200 --> 0:07:35.240 create significantly more than anyone could ever create alone, has 0:07:35.280 --> 0:07:38.360 been rather brilliant. So your suggestion that we've now reached 0:07:38.360 --> 0:07:41.400 a tipping point of a level of complication where it 0:07:41.440 --> 0:07:43.120 no longer works anymore. 0:07:42.760 --> 0:07:46.200 Well, we've reached a crisis point, which is not necessarily 0:07:46.240 --> 0:07:48.240 the same as the end of the road, because one 0:07:48.240 --> 0:07:50.880 of the really fantastic things about the market economy and 0:07:50.920 --> 0:07:53.600 about the way that human beings work together is that 0:07:53.640 --> 0:07:57.680 we're capable of reorganizing ourselves in these kinds of things. 0:07:57.920 --> 0:08:01.280 You know, it's the mark of a viable system that 0:08:01.400 --> 0:08:05.920 they can reorganize to meet challenges that weren't anticipated when 0:08:05.920 --> 0:08:10.120 it was designed. There's really fast, fascinating book, one of 0:08:10.200 --> 0:08:14.880 the only management science books that economists have any respectful, 0:08:15.400 --> 0:08:21.320 called Strategy and Structure by Alfred Chandler from the nineteen 0:08:21.840 --> 0:08:27.040 forties fifties, when he's looking at the history of DuPont's, 0:08:27.320 --> 0:08:32.080 General Electric, General Motors, or the big US corporations, and 0:08:32.160 --> 0:08:35.800 what he discovered is that this phenomenon repeats itself over 0:08:35.880 --> 0:08:38.640 and over Again, the reason he called the book Strategy 0:08:38.640 --> 0:08:42.280 and Structure is that the structure of those companies kept 0:08:42.320 --> 0:08:47.240 on changing because they would grow, they would get more complicated, 0:08:47.640 --> 0:08:51.480 they would become unmanageable based on the reporting lines and 0:08:51.520 --> 0:08:54.840 the reporting systems that they had. Then they would either 0:08:55.400 --> 0:09:00.920 invent new technology to improve the communication and improve them capacity. 0:09:01.360 --> 0:09:05.480 And so obviously you know you have telegrams, but also 0:09:06.480 --> 0:09:10.400 you know accounting systems, cost accounting, even the humble filing 0:09:10.440 --> 0:09:13.720 cabinet was a huge piece of information technology in its day. 0:09:14.440 --> 0:09:17.680 And then when that didn't work, they would reorganize, they 0:09:17.720 --> 0:09:21.959 would restructure, they would develop the multidivisional company model, they 0:09:21.960 --> 0:09:25.200 would deconglomerate. So what you end up doing, and what 0:09:25.280 --> 0:09:27.920 I think we are going to end up as a 0:09:27.920 --> 0:09:32.800 society doing, after we have tried all of the other possibilities, 0:09:33.520 --> 0:09:39.240 is reorganizing, devolving, restructuring our institutions so that we're not 0:09:40.000 --> 0:09:44.600 trying to manage so many things from a big central 0:09:44.640 --> 0:09:49.199 command center with one person having the title of chief 0:09:49.200 --> 0:09:52.880 executive of the NHS or whatever, because that's just not 0:09:53.520 --> 0:09:55.800 a viable way to go on managing these things. It 0:09:55.840 --> 0:09:58.760 means it has to be reorganized, not necessarily that it's 0:09:58.800 --> 0:09:59.200 the end. 0:09:59.080 --> 0:09:59.520 Of the road. 0:10:00.400 --> 0:10:03.760 So no more centralized services, no more giant companies. 0:10:04.280 --> 0:10:08.520 There's always a cycle of conglomeration and deconglomeration, there's all. 0:10:09.000 --> 0:10:09.200 You know. 0:10:09.400 --> 0:10:12.400 The kind of the history of quoted companies has always 0:10:12.480 --> 0:10:18.320 been that they're either in acquisition and consolidation mode or 0:10:18.360 --> 0:10:22.480 they're in spin off and deconglomeration mode. You know. That's 0:10:22.480 --> 0:10:25.679 why investment banking is such a profitable industry. Companies are 0:10:25.720 --> 0:10:28.520 always trying to do one of those two things. And 0:10:28.600 --> 0:10:33.040 so I just think we must be moving into a 0:10:33.040 --> 0:10:39.120 cycle of spin offs and breakups and companies deciding to. 0:10:39.000 --> 0:10:40.199 Do less but do it better. 0:10:40.520 --> 0:10:43.800 Huh. That could be incredibly lucrative for investors. Lots of 0:10:44.120 --> 0:10:46.880 small spin off companies that then as a whole perform 0:10:46.960 --> 0:10:50.080 better than the original conglomerate. So we'll keep an eye 0:10:50.080 --> 0:10:52.480 on that. John, you've read the book over to you. 0:10:53.240 --> 0:10:56.160 I thought what was really interesting, Diana, is you can 0:10:56.240 --> 0:11:02.079 lousy very it can intriging ideas like the accountability sink 0:11:02.960 --> 0:11:06.959 and this idea of looking at systems in particular as 0:11:07.040 --> 0:11:12.120 being you look at that outcomes rather than their intentions 0:11:12.160 --> 0:11:14.800 to see what's going on in the poissy where the 0:11:14.800 --> 0:11:17.160 products of the system is what it does rather than 0:11:17.160 --> 0:11:19.840 what it's kind of meant to do. When you say 0:11:19.880 --> 0:11:22.960 we're reaching a tipping point, where do you think that 0:11:22.960 --> 0:11:26.160 that sense comes from? What is it about the present 0:11:26.240 --> 0:11:28.560 day that makes this a particularly chaotic moment? 0:11:29.040 --> 0:11:34.360 I think that it's a growing gap between the stated 0:11:34.480 --> 0:11:38.600 purpose of systems and their actual purpose. So you mentioned 0:11:38.600 --> 0:11:40.840 that one of the things I discussed in the book 0:11:41.160 --> 0:11:45.600 is a great old kind of scientist from the nineteen seventies, 0:11:45.679 --> 0:11:49.200 a hippie management consultants There really were such things in 0:11:49.240 --> 0:11:53.520 the seventies called Stafford Beer, who coined this fantastic phrase, 0:11:54.240 --> 0:11:57.360 the purpose of a system is what it does, which 0:11:57.400 --> 0:12:00.280 is kind of known by the acronym positive wood in 0:12:00.320 --> 0:12:05.120 the kind of in the jargon. And what he means 0:12:05.160 --> 0:12:08.320 by that is that to understand a system, you have 0:12:08.400 --> 0:12:11.600 to respect the fact that the behavior of that system 0:12:12.160 --> 0:12:15.720 is going to be defined by the way it's set up, 0:12:16.200 --> 0:12:19.600 by the information that it pays attention to, and by 0:12:19.640 --> 0:12:23.040 the way that it converts that information into decisions, not 0:12:23.280 --> 0:12:30.000 necessarily by the actual kind of goals and aids of 0:12:30.200 --> 0:12:33.320 any of the people involved in it, even the ones 0:12:33.440 --> 0:12:37.600 who've got titles like chief executive officer. I'll give you 0:12:37.720 --> 0:12:40.240 a more concrete example of this, I think, because that's 0:12:40.320 --> 0:12:44.520 kind of a bit abstract. A system, dear to all 0:12:44.559 --> 0:12:48.520 of our hearts is the British railway network. Now, the 0:12:48.520 --> 0:12:53.120 British railway network might say that as its purpose is 0:12:53.160 --> 0:12:58.840 to provide comfortable and convenient travel for everyone as a 0:12:58.880 --> 0:13:03.520 reasonable price, and Stafford Beer would argue, you cannot say 0:13:03.520 --> 0:13:06.840 that is the purpose of that system, because you cannot 0:13:06.960 --> 0:13:12.760 say that a system has a purpose when it's structurally 0:13:12.840 --> 0:13:19.440 and systematically provides a different result. And so you think, well, 0:13:19.559 --> 0:13:22.760 let's look at how the purpose of the British railway 0:13:22.760 --> 0:13:27.920 system evolves. And individual people in the system might have 0:13:28.400 --> 0:13:32.760 kind of purposes like drive this train from London to Edinburgh, 0:13:33.040 --> 0:13:36.040 or they might have purposes like cel tickets at a station, 0:13:37.080 --> 0:13:40.080 but they're embedded in a wider system that has to 0:13:40.160 --> 0:13:45.080 run an overall timetable. That timetable is embedded in a 0:13:45.120 --> 0:13:49.040 system that has to make best use of the trains 0:13:49.200 --> 0:13:53.880 and rails kind of provided, which in turn is embedded 0:13:53.920 --> 0:13:56.719 in the overall system of governments, which has to make 0:13:56.760 --> 0:14:01.280 decisions about how much it's going to subsidize a rail network, 0:14:01.679 --> 0:14:05.880 and how much it's going to spend of taxpayer's money 0:14:06.240 --> 0:14:09.920 on investing in capital as sets for the railway network. 0:14:10.440 --> 0:14:14.280 So you end up thinking, well, this system is a 0:14:14.360 --> 0:14:18.920 compromise between all these different levels. What's its actual behavior. 0:14:19.560 --> 0:14:23.640 Its actual behavior is that this is not a railway 0:14:23.720 --> 0:14:28.240 transport providing system. It's a rationing system. So if you've 0:14:28.360 --> 0:14:32.440 kind of sitting on one of those trains from Euston 0:14:32.520 --> 0:14:36.880 to Glasgow or from King's Cross to Edinburgh and everything's 0:14:36.920 --> 0:14:41.640 broken down, everyone's sitting in the gaps between the carriages, 0:14:42.160 --> 0:14:45.360 the train's delayed, and you start thinking, is the purpose 0:14:45.400 --> 0:14:49.400 of this system literally to make this experience as unpleasant 0:14:49.440 --> 0:14:53.120 and demoralizing for me as possible. Then, to a certain extent, 0:14:53.200 --> 0:14:55.760 the answer to that question is yes, because this is 0:14:55.800 --> 0:14:58.440 a rail rationing system and one of the ways that 0:14:58.520 --> 0:15:04.080 it rations these journeys is by making the experience less 0:15:04.560 --> 0:15:08.960 pleasant compared to driving or flying, so that the number 0:15:09.000 --> 0:15:11.320 of people trying to get on the trains can be 0:15:11.400 --> 0:15:16.680 reconciled with all those other priorities about long term investments, 0:15:16.800 --> 0:15:20.240 running a safe time table with the rolling stock provided. 0:15:20.840 --> 0:15:23.280 And so what I'm arguing in the book is that 0:15:24.160 --> 0:15:29.160 all across so many of our systems. This gap between 0:15:29.800 --> 0:15:33.240 what people want the system to do and the emergent 0:15:33.280 --> 0:15:37.120 behavior of the system is getting bigger and bigger. And 0:15:37.440 --> 0:15:39.680 you know, getting back to the title of the book, 0:15:39.720 --> 0:15:45.800 the Unaccountability Machine, there's no real feedback mechanism from the 0:15:45.840 --> 0:15:49.280 people at the bottom of the tree, for the people 0:15:49.320 --> 0:15:53.040 who are actually kind of affected by the consequences of 0:15:53.080 --> 0:15:56.680 all these decisions, to get their voice heard and to 0:15:56.800 --> 0:15:59.120 feed back into the system that it's got to change. 0:16:00.120 --> 0:16:03.280 That's a really interesting point, and that's really perceptive looking 0:16:03.320 --> 0:16:05.880 at the system and saying that's a rationing system. But 0:16:05.920 --> 0:16:08.280 one of the things I found interesting was that when 0:16:08.320 --> 0:16:10.080 I've read reviews of your book or even some of 0:16:10.080 --> 0:16:12.680 the interviews, one of the frustrations people often bring up 0:16:12.800 --> 0:16:16.720 is the scenario where you're at an airline boarding desk 0:16:17.920 --> 0:16:19.880 and you get there a wee bit late and the 0:16:19.920 --> 0:16:21.680 person that there says, well, I'm afraid you're going to 0:16:21.720 --> 0:16:24.320 have to go away, and I can't say or ask 0:16:24.360 --> 0:16:27.960 anyone anything, and if you go in, basically the computer 0:16:28.080 --> 0:16:31.840 says no sort of scenario. But what occurred to me, though, 0:16:31.920 --> 0:16:34.360 is that if you look at airlines as a whole 0:16:34.800 --> 0:16:39.360 then on almost any metric that's actually important, they've vastly 0:16:39.400 --> 0:16:44.920 improved over recent decades in terms of, you know, safety, 0:16:45.800 --> 0:16:48.960 level of pollution per plane, costs, the number of flights 0:16:49.000 --> 0:16:51.440 being done. So I think it's interesting that you take 0:16:51.480 --> 0:16:53.440 this sort of the rail as a contrast to that 0:16:53.480 --> 0:16:56.160 where the rail is actually rationing system, whereas were the 0:16:56.200 --> 0:17:00.920 frustrations of the airlines are relatively petty. Accountability thinks relative 0:17:01.000 --> 0:17:04.399 to the connect in the you know, the advances that 0:17:04.400 --> 0:17:07.320 that partailer industry has made. So I suppose I'm just 0:17:07.359 --> 0:17:11.840 point on other I guess because accountability sinks are there 0:17:11.880 --> 0:17:14.359 to manage the chiost partly on they it's about it's 0:17:14.400 --> 0:17:18.359 about getting read of things that you don't have the 0:17:18.440 --> 0:17:21.720 ability to attend to or pay. It's kind of like 0:17:21.760 --> 0:17:24.600 taken excess information. Now the system is that? Is that right? 0:17:25.160 --> 0:17:29.480 Yeah? I mean basically, an accountability sink is my word 0:17:29.640 --> 0:17:34.879 for the kind of system that managements create as almost 0:17:34.920 --> 0:17:39.560 a survival mechanism. And they have all of this information 0:17:39.920 --> 0:17:44.000 coming into them, lots of it quite hostile information, and 0:17:45.040 --> 0:17:48.520 they've got more of it than they can handle. So 0:17:48.840 --> 0:17:52.000 what you do in that situation is you have to 0:17:52.040 --> 0:17:55.359 cut off some of it. You have to kind of 0:17:57.160 --> 0:18:00.959 reorganize your inputs so that you can handle them with 0:18:01.040 --> 0:18:06.000 the management ability that's available to you. And the easiest 0:18:06.080 --> 0:18:10.480 link to cut off is always the link to the customers, 0:18:10.840 --> 0:18:14.960 because the customers are the ones causing the problems. The 0:18:15.000 --> 0:18:18.960 customers are complaining to you, And if you cut off 0:18:18.960 --> 0:18:22.399 that feedback link, you can then start to manage all 0:18:22.520 --> 0:18:26.199 of the rest of the system. And you know, you 0:18:26.240 --> 0:18:29.159 can deliver a product. The customers might like it or 0:18:29.200 --> 0:18:32.600 they might not. They but as long as they their 0:18:32.720 --> 0:18:35.200 kind of displeasure with it doesn't reach a threshold where 0:18:35.200 --> 0:18:39.280 they stop actually buying it, you've made your business manageable again. 0:18:39.960 --> 0:18:43.880 And I think that's kind of almost the difference between 0:18:44.560 --> 0:18:49.040 the airlines and the railways. You know, the airlines will 0:18:49.119 --> 0:18:53.199 cut off some kinds of customer feedback, but they have 0:18:53.320 --> 0:18:57.639 to pay attention to the kind of signal of people 0:18:57.840 --> 0:19:00.399 either buying the flights or not at the price that 0:19:00.400 --> 0:19:04.399 they're willing to set. And they've got enough freedom and 0:19:04.520 --> 0:19:08.320 capacity to manage their airline to keep on delivering that 0:19:08.480 --> 0:19:11.119 service and to keep on meeting, as you say, all 0:19:11.160 --> 0:19:14.560 of their other constraints. The railway network has somehow got 0:19:14.640 --> 0:19:20.160 itself into a situation where it's not got the capacity 0:19:20.440 --> 0:19:23.840 to manage all of the complexity that it's embedded in, 0:19:24.440 --> 0:19:29.000 and as a result, it just seems to have become unregulated. 0:19:29.240 --> 0:19:33.040 It's not really kind of managing itself towards a goal. 0:19:33.480 --> 0:19:38.119 It's just responding to immediate stimuli, you know, like you know, 0:19:38.920 --> 0:19:43.600 like some creature in some horrible experiments. It's not able 0:19:43.640 --> 0:19:46.840 to make coherent plans and carry them out with. 0:19:46.880 --> 0:19:50.119 It going to be overly ideological about it, but the 0:19:50.240 --> 0:19:52.640 airlines are basically kind of I mean about with free 0:19:52.680 --> 0:19:55.840 market competition at the end of the day and consumer choice, 0:19:56.200 --> 0:19:58.760 which as yeah, I mean I only had a choice 0:19:58.760 --> 0:20:02.359 of one train to get this morning, and you know, 0:20:02.440 --> 0:20:06.320 I can't think of, you know, an easy way to 0:20:06.320 --> 0:20:08.680 be able to get a different kind of train. I 0:20:08.720 --> 0:20:10.320 suppose what I means, how much of this is down 0:20:10.400 --> 0:20:15.200 to any specific form of because for example, you told 0:20:15.240 --> 0:20:19.480 about kind of Milton Friedman as an element of where 0:20:19.600 --> 0:20:23.640 things went wrong. But I suppose I don't quite see 0:20:23.640 --> 0:20:27.240 the connection between Freedman and a rationing system, is what 0:20:27.359 --> 0:20:28.159 I'm getting. 0:20:28.160 --> 0:20:32.280 That is this about shareholder value? Yeah, and about the 0:20:32.760 --> 0:20:35.680 idea that it is this shift to shareholder value as 0:20:35.680 --> 0:20:37.639 opposed to what we now call stakeholder value. That is 0:20:37.680 --> 0:20:38.400 part of the problem. 0:20:39.680 --> 0:20:41.720 Yeah, I mean, I talk about Milton Friedman or what 0:20:41.840 --> 0:20:44.320 in the book, and I even kind of ended up 0:20:44.320 --> 0:20:45.960 writing so much about him. I had to put an 0:20:46.000 --> 0:20:48.919 author's note at the start saying I realized I was 0:20:48.960 --> 0:20:51.639 being unfair in some places and that wasn't really all 0:20:51.680 --> 0:20:55.520 about him. But on that point, I think it's not 0:20:55.680 --> 0:20:59.280 really ideological, and it's one of Friedman's other insights that 0:20:59.400 --> 0:21:02.520 isn't much to do with shareholder value, which is that 0:21:03.440 --> 0:21:07.959 airlines go a bust. Airlines are exposed to the market, 0:21:08.000 --> 0:21:10.119 and they're exposed to the free market in such a 0:21:10.160 --> 0:21:14.840 way that there's a way for a failing aircraft airline 0:21:14.880 --> 0:21:19.480 company that can't manage its complexity to get out of 0:21:19.520 --> 0:21:23.320 the game, have its physical and some of its intangible 0:21:23.320 --> 0:21:26.359 assets taken over by someone else, and then for the 0:21:26.400 --> 0:21:30.680 overall system to reorganize itself. The entire problem in the 0:21:30.760 --> 0:21:33.879 railway system, to my mind, is that it's not got 0:21:34.080 --> 0:21:38.800 any mechanism of reorganizing itself, and because of that, it's 0:21:38.960 --> 0:21:44.160 going to always end up dealing with a changing situation 0:21:44.480 --> 0:21:48.760 being unable to reorganize itself quickly enough and consequently becoming 0:21:48.800 --> 0:21:52.919 unregulated in that way. And where I think that ties 0:21:53.040 --> 0:21:58.600 up with Milton Friedman in shareholder value is that, unfortunately, 0:21:59.280 --> 0:22:04.679 when you get a company that is overly concerned with 0:22:05.080 --> 0:22:10.320 accounting metrics, then it starts losing that connection to the 0:22:10.320 --> 0:22:14.560 real world and losing that ability to reorganize itself because 0:22:15.200 --> 0:22:17.160 you know kind of share hold the value is great. 0:22:17.240 --> 0:22:21.280 You know, who doesn't like shareholder value. But unfortunately, when 0:22:21.520 --> 0:22:26.400 managers start talking about shareholder value, firstly, they start paying 0:22:26.480 --> 0:22:32.160 attention to short term quarterly earnings and accounting metrics, which 0:22:32.200 --> 0:22:35.639 is immediately, you know, it's just immediately giving yourself a 0:22:35.720 --> 0:22:40.240 cognitive impairment. It's just immediately putting a huge information reducing 0:22:40.720 --> 0:22:46.920 filter on your environment. And secondly, when people start moving 0:22:46.960 --> 0:22:51.600 in that direction, they start thinking too much about leverage buyouts, 0:22:51.920 --> 0:22:54.920 and they start thinking too much about taking on debts, 0:22:55.560 --> 0:22:58.520 and I think, you know, we should probably talk about 0:22:58.560 --> 0:23:00.000 that in some more detail. 0:23:00.359 --> 0:23:02.840 I don't think I'm going to slightly interrupt, because that's 0:23:03.400 --> 0:23:05.199 I think that I know you said yourself that you 0:23:05.200 --> 0:23:07.080 were a bit on fair to Milton Friedman occasionally, but 0:23:07.119 --> 0:23:12.480 I do think that's a fairly, fairly extreme interpretation of 0:23:12.520 --> 0:23:15.159 what people mean by shareholder value. And this is the 0:23:15.200 --> 0:23:17.360 idea that if you if you think about profits, you're 0:23:17.359 --> 0:23:20.040 immediately thinking short term. And that's simply not true because 0:23:20.080 --> 0:23:22.480 the you know, the best companies in the world, the 0:23:22.480 --> 0:23:24.640 ones that have lasted the longest and done the best, 0:23:25.000 --> 0:23:28.919 definitely think intently about shareholder value, but they think about 0:23:28.960 --> 0:23:32.480 that over the longer term. And you provide excellent shareholder 0:23:32.560 --> 0:23:35.480 value if you provide stakeholder value at the same time, 0:23:35.560 --> 0:23:37.840 you know, we know that. So you can't really separate 0:23:38.119 --> 0:23:41.320 these things, I think in that in that rather dramatic way. 0:23:42.520 --> 0:23:48.240 Phill, yes and no, because the in principle you're right, 0:23:48.880 --> 0:23:54.680 but in practicable way that the shareholder value movement started 0:23:54.720 --> 0:23:59.439 to as it were enforced discipline on corporate managements was 0:23:59.480 --> 0:24:04.080 through left ridge bias. So the trouble is that if 0:24:04.119 --> 0:24:10.239 you have a company which is kind of planning in 0:24:10.280 --> 0:24:16.920 the long term and not kind of delivering short term 0:24:17.000 --> 0:24:20.040 returns to shareholders or not delivering short term cash flow, 0:24:20.880 --> 0:24:24.400 then it tends to get taken over, and it specifically 0:24:24.480 --> 0:24:26.920 tends to get taken over and loaded up with debt. 0:24:27.600 --> 0:24:32.480 So really, with respect to Muslim Freedman's shareholder value. The 0:24:32.520 --> 0:24:35.119 problem is not so much that as the fact that 0:24:35.160 --> 0:24:38.919 it was the ideological justification for the LBO boom, and 0:24:39.000 --> 0:24:44.440 the LBO boom, I would argue, has been incredibly destructive. 0:24:44.119 --> 0:24:45.040 That I will give you. 0:24:45.520 --> 0:24:47.960 I'll give you that, you know, And I think it's 0:24:48.080 --> 0:24:50.159 it's kind of a way you can talk about it 0:24:50.160 --> 0:24:54.080