
How Superstar Companies Like Apple Are Killing America’s High-Tech Future - tomaskazemekas
http://ineteconomics.org/institute-blog/william-lazonick-how-superstar-companies-apple-are-killing-america-s-high-tech-future
======
Sven7
When I look at the likes of Rockefeller, Ford or Edison and compare them with
today's success stories at Apple, Facebook or Wall Street, the difference I
see, lies in whose weakness they exploit to reach the top.

Today's __success stories __are all about exploiting every possible customer
weakness, while in the good old days it was about exploiting competitor
weakness.

Whether its exploiting people's weaknesses to get them to mindlessly consume
content to sell ads, or cleverly misguiding them about mortgages and student
loans, or tying social standing and aspiration(in the developing world) to the
latest trinket in a phone...it makes me conclude that the best way to build
the next superstar company, is to find a human weakness as yet unexploited in
the ever growing bountiful list that cognitive and behavioral psychology are
just beginning to provide and go to town.

~~~
Zigurd
You are romanticizing the past. Take a look at the ads in LIFE magazines from
the first half of the 20th c. There's consumer exploitation going on that
would make Zynga blush.

~~~
freshhawk
Yeah, blush in embarrassment at how blatant, transparent and ineffective it
was. It was very unsubtle - and shocking to us now because of that.

But they still thought that things were best sold by convincing people that
their product was the best. And many though that actually being the best was a
cost efficient way to convince people of that.

Pretty childish by todays standards.

------
leepowers
Another article from the author helped clarify the points being made in the
original article:

[https://hbr.org/2014/09/profits-without-
prosperity](https://hbr.org/2014/09/profits-without-prosperity)

A gist of the argument:

1\. Companies with large profits are spending an enormous amount of money on
open market stock buy backs.

2\. Buy backs are almost exclusively done for stock manipulation reasons: to
stabilize or increase the value of a stock.

3\. Most executive compensation is in the form of stock. So the incentive of
management is to maximize stock value.

4\. Instead, management should be incentivized to engage in activities that
increase reinvestment, research, and development. Of which longer-term, more
stable employment is one positive effect; increasing U.S. innovation and
inventions is another.

My own amateur take on #2 is that it's popular because it's a non-risky,
conservative action that management can take. If Company X has a billion
dollar profit, spending that on open market buy backs of company stock
effectively keeps the the profits within the company, without incurring a tax
penalty. Combined with the stabilizing effect on stock prices makes it a no-
brainer for many.

Also, having a profit doesn't justify increasing R&D spending, or
automatically expanding into new markets. It's only wise to risk an expansion
if you have confidence it will generate a return. The author conflates
government spending (which is unbound by risk) with private spending (which
necessarily must be bound by risk). A billion dollar publicly funded research
project that results in no measurable return for society will not bankrupt the
government. A risky, unwise, billion dollar private investment that does not
generate a return can destroy a company.

------
saosebastiao
I see this delusion pop up all over and I can't help but just shake my head.
Trying to tax a corporation is like trying to trap an octopus in a fishing
net. They will always find a way to slide out.

You have the perfect collusion of incentives:

1) Pooled self interest in the form of shareholders owning value. When a
corporation spends money on the shareholder's behalf on lobbying or fancy tax
law specialists, in benefits every single shareholder, because stock returns
are apportioned. With the personal income tax, it is not in the immediate self
interest for someone in the lowest tax bracket to help lobby for lower taxes
on the highest bracket. Pooled self interest makes for higher lobbying power.

2) The corporate tax is not a revenue tax (as is the personal income tax), but
rather a revenue-minus-costs tax. And businesses are diverse enough in their
business models that you couldn't feasibly enact a revenue tax without
unfairly penalizing low margin industries like grocery stores or temp
agencies. What this means is that anything that the corporation deems to be a
cost is automatically tax deductible. This leads to ridiculous shenanigans
like using corporate jets to drop off documents that happen to need to be
delivered to the same city as the CEO's daughter's university campus. If you
want to enforce rules on corporate taxation, you are going to have to
scrutinize every single cost they have on their books. Is it any surprise that
the corporate tax has the highest compliance and enforcement costs, and lowest
effective-to-nominal ratios of any tax form in the US?

If you want corporations to pay their fair share of taxes, you have to have
them distribute the money to their shareholders and then place the burden of
taxation on them. Eliminate the corporate tax altogether, and tax capital
gains and dividends as personal income.

~~~
gamblor956
Very little of what you said was true.

1) A corporation spends money on tax specialists to benefit itself. Any
benefit to the shareholders is usually incidental, and the corporation would
eliminate these benefits if it increased the benefit to the corporation.

2) Corporate income taxes are profit taxes. The type of shenanigans you have
suggested as a means of increasing expenses are what tax practitioners call
"tax evasion schemes" that (a) would not work and (b) would result in heft
fines and/or prison sentences for the executives, board members, and
accountants involved. The US corporate tax code has the highest compliance
costs because it has the most deductions and credits of any code in the world,
but every dollar spent on compliance usually results in multiple dollars saved
with respect to tax liabilities.

If you want corporations to pay their fair share of taxes, you tax them on
their profits. If the tax is levied only on distributions to shareholders,
that will simply move the compliance games to the shareholder level. And this
plays into enforcement as well--there are thousands of companies, but there
are _millions_ of shareholders, and it is magnitudes easier to enforce tax at
the corporate level than the shareholder level.

~~~
grey-area
_The type of shenanigans you have suggested as a means of increasing expenses
are what tax practitioners call "tax evasion schemes"_

There's a distinction between tax avoidance and tax evasion, and most of what
companies do to (very successfully) avoid paying tax is tax avoidance (i.e.
perfectly legal).

~~~
toddmorey
Perfectly legal and perhaps a fiduciary responsibility to their shareholders
in some respect.

------
Htsthbjig
If you don't want "stock buybacks", do not print money.

The Federal Reserve prints money(Qualitative Easings) for big companies and
Governments, and of course companies buy their own stock with their cheap
money. Government buy back their own bonds.

Basically they are taking wealth from little savers and giving it to big
Government and big companies, in one of the biggest transfer of wealth ever,
making the people at the top 1% have a bigger and bigger share of the wealth.

It is not a problem of big companies,but a problem of the Government
distortion of the financial world for their benefit(because they are basically
broke).

The "lending of last resort" has become the first and normal way of financing
for them.

Of course, there are always people that believe, like this man, that the
solution is always Central Planning, more Government and more taxes.

~~~
hnnewguy
QE isn't "money printing for big companies and Governments" and stock buybacks
are just another way to return capital to shareholders.

How is it that so many articles devolve into the criticism of banks? Why do
people bother commenting on subjects they know little about (and in this case
are only tangentially related to the article)?

------
rifung
I agree with this in the sense that I wish companies would stop focusing on
short term profits. It'd also be nice if companies would invest in their
employees, although there I have an obvious bias.

Still, is it really fair to say that companies should pay less dividends? And
while I understand shareholders don't really contribute directly to the
success of the company, if nobody paid dividends then what incentive is there
for anyone to own shares? I get that the stock price may increase, but if
stocks don't provide dividends do they have any inherent value at all?

~~~
sremani
The bigger point is re-investment in to the scientific infrastructure - in
spite of its inefficiencies feds seem to be doing an OK job but are cash
constrained. On the other hand big profitable tech companies in spite of lots
of cash are still playing the game of paying less for taxes and other
financial engineering tricks and are doing basic minimum (which they are
entitled to). One may say, its not their job, which is absolutely true. But
the outcome here we want is, better investments into the scientific
infrastructure so the US remains the dominant player for foreseeable future
and that would not be possible with a massive companies sitting on tons of
cash and who are unwilling to make investments in to the future because of the
perceived "volatility".

~~~
wutbrodo
We shouldn't be trying to shoehorn entities into jobs that their incentives
don't best align with. If the premise is that we want to allocate more capital
into scientific infra but the Gov't doesn't have that funding, the solution is
to give government the funding, not to somehow get companies to spend their
cash the way we want it. Where would this extra money come from? Again, under
the premise that we want to re-allocate money towards scientific spending, it
would come from higher taxes.

Fundamentally the issue you're describing is "gov't can't perform one of its
competencies (scientific investment) well enough due to cash constraints". The
cash constraint is a fundamentally political problem, and companies' decision-
making vis-a-vis scientific investment is just a red herring.

------
dark12222000
So, the article is suggesting that everyone who uses GPS technology should be
paying a fee.. to the government? Isn't that what we already call 'taxes'?

~~~
wutbrodo
Well, in the US even those who don't use GPS technology are subject to taxes.
There's a pretty huge difference (in incentives, in outcome, in tax/subsidy
burden) between paying for something if you use it and paying for something
regardless.

In the case of the technologies mentioned, government made the explicit choice
to publicly fund those things through taxes, with the assumption that the
value to the economy from unfettered usage would be higher than the cost. That
doesn't mean that taxes are equivalent to pay-per-use though.

~~~
olefoo
> in the US even those who don't use GPS technology are subject to taxes

There is no way you don't benefit from the GPS system if you are a US Citizen.
It's an infrastructure technology that means your roads are safer, your
package delivery cheaper, your maps more accurate, your emergency services
more effective; and a million other subtle benefits that you would have
difficulty quantifying.

As such it makes sense to fund it from general treasury; and to charge taxes
on everyone in proportion to the benefit they get from society ( represented
as income, including capital gains ). Since public infrastructure benefits the
whole of society.

That's the nature of public infrastructure. And the decadent libertarian
fantasy that someone should be able to opt out of taxes because of their
rugged individualism is just that; a fantasy. There is no such thing as
individual success in an advanced technological society and anyone who tells
you there is is a parasite on that society.

~~~
wutbrodo
> There is no way you don't benefit from the GPS system if you are a US
> Citizen.It's an infrastructure technology that means your roads are safer,
> your package delivery cheaper, your maps more accurate, your emergency
> services more effective; and a million other subtle benefits that you would
> have difficulty quantifying.

> As such it makes sense to fund it from general treasury; and to charge taxes
> on everyone in proportion to the benefit they get from society ( represented
> as income, including capital gains ). Since public infrastructure benefits
> the whole of society.

Yea, duh. If you actually read my comment, there's no disagreement with this:
in fact I tend to be more inclined to public funding of things like GPS and
transit than most people (whether on HN or in the population at large). I was
disagreeing with the contention that paying for something by taxes is the same
as charging for it. The way the incentives and the burden falls is NOT the
same for those two approaches. You're talking about whether or not this SHOULD
be done: an entirely different discussion from the one being had on this
subthread.

------
zwieback
Some good observations but I'm not convinced that the focus on shareholder
value is to blame otherwise we'd see non-public companies systematically
outperform public ones over the medium and long term.

Also, there isn't much evidence that companies with a focus on short term
financial results don't engage in long-term strategic planning. The two
basically exist side-by-side.

------
krick
Oh, please… No, not that what he says is entirely incorrect, but with
reasoning like that we could go basically anywhere. Aplle, Google, my grandma
— they all benefit from an accumulation of knowledge created by Euclid and
Pythagoras, so why we all don't pay taxes to Greece? Seems unfair.

------
sogen
google kills the next google simply: buy startup, shut it down. Repeat

------
bond007rr
He lost me at "America’s is falling behind other countries when it comes to
innovation and technology". What are you talking about? Cheers from Silicon
Valley :)

~~~
normloman
Where we have the most advanced ways to hook up with strangers, order dry
cleaning, post anonymous secrets, and hail a non-regulated taxi cab.

And don't forget about our innovative ways of collecting user data for
advertisers!

We're number 1! U-S-A, U-S-A

~~~
wutbrodo
Oh please, pick up a newspaper sometimes instead of getting all your news from
TechCrunch. If you honestly think that the extent of cutting-edge work going
on in SV is social apps, that's just because you spend your time reading about
venture funding rounds instead of the actual interesting R&D going on.

~~~
mattgreenrocks
What sorts of interesting R&D is going on?

I keep my ears to the ground for this sort of thing, but I don't hear much
about it.

~~~
wutbrodo
> I keep my ears to the ground for this sort of thing, but I don't hear much
> about it.

I'm actually kind of shocked to hear this question. The person I was
responding to originally is probably just going for the childishly rebellious
"I'm gonna say something contrarian to seem like a deep thinker!!!!", but you
don't seem to be saying anything of the sort.

I would be extremely surprised if you hadn't heard of any of this stuff; I
think the problem is rather that your definition of what innovation is may be
arbitrarily and inappropriately defined with respect to the topic of
conversation.

This has been a good few years for AI and there have been some impressive
advances recently in voice recognition, computer vision, language
understanding, core machine learning research, etc. The AI labs at Google and
Facebook alone are an important part of this ecosystem. Silicon Valley has
also been producing advancements in diagnostic nanotechnology, space
exploration and travel, feasible and long-range electric cars, self-driving
cars, power generation and distribution systems, manufacturing efficiency,
etc. There's a thriving biotechnology startup scene. Then you get down to less
"sexy" (but still very important) innovation in things like datacenter design,
distributed systems, software-defined networking, network protocols (like
SPDY), etc. Even softer stuff like the work being done on the economics of
distribution, or the efficient delivery of compute cycles is seeing a lot of
advancement in the last several years, and a lot of it is centered around
here.

I fully expect a response from some commenter who hasn't been able to grasp
what this conversation is about to claim that a lot of that isn't "true"
innovation at the kind of low level one finds in academia, but that's missing
the point. It begs the question of whether companies in SV are innovative by
defining innovation in for-profit companies as more or less impossible (which
is, of course, nonsense). Government-funded academia is an excellent vehicle
for fundamental research, just as corporations are good vehicles for the next
step in the chain (and occasionally fundamental research). The funny thing is
that even if you move the goalposts by restricting yourself to academic
advancements, both Stanford and Berkeley are world-class research universities
and parts of the SV ecosystem.

