Tag Archive: economic

We’ll be Run by Morons Pretty Soon!

“You look at the active value of the companies that you buy the stocks in. And it becomes a little more complex, but basically you look for a company that is cheap and the reason that they’re really cheap. And the major reason is often and usually very poor management.”

“So in a sense, it’s like an arbitrage. You go in, you buy a lot of stock in the company, and you then try to make changes at the company. […] We’re trying to get them to change the structure of the company. We think the board is very poor, and we’re trying to change what happens. The thing about corporate America is that most people in America don’t realize how poorly most of our companies are run in this country. With many exceptions. And when you get inside the companies, you realize it. The real reason is, there’s no accountability, there’s no corporate democracy. And I’ve been saying that, proselytizing it, writing about it. And the reason that we can make so much money when we go into one of these companies is – I’m not even a manager. I never took a course in management and I wouldn’t profess to really know much – but I don’t micromanage. I put in a very good manager. They cut the heck out of cost, but they changed the structure of the companies. And this is the problem in America today, in my opinion:
That we are basically under-managed. We can’t compete, because the best and the brightest don’t get to be at the top of the corporate ladder. And I, I have a sort of a metaphor that’s a little facetious, but not completely: I call it anti-Darwinian. And that means a guy goes to college and he’s the guy who gets to be the CEO. And he’s the kind of guy that was the president of the fraternity. Now all these presidents of fraternities aren’t bad guys, but basically, the normal guy that I remembered at college was always there at the fraternity of the eating club. And he’s always there to be there, if you have a bad day, you walk over to the club. And you’re feeling bad, your girlfriend left you, you did bad on a test score, or whatever. And you go over there, he’s always there. He buys you a drink, and you sit around with him. He commiserates with you. You play a little pool, or whatever. And he tells you whatever it is, yeah, my girl left me, yeah well, they’re all no good, usual conversation back and forth. And what would happen would be you liked the guy, you can’t help but like him. You used to wonder a little bit, when the hell did he ever do any work? But you know, he was always there for you. And he never made many waves. He would never said anything too obtrusive or he never showed too much intelligence. But he was a good guy. He goes, that same guy, out into corporate America. And he’s politically, he’s astute. He knows how to get along with people. And it’s he never really rocks the boat. He never comes up with any great ideas. He’s not a threat to his superior. And as a result, he moves up the ladder because in corporate America, there’s really very little accountability. So he moves up that ladder.”

“There’s a good show “How to Succeed in Business” that was out many years ago – that sort of sums it up. If a genius has an idea in corporate America, they give him an idea to resign.”

“And so the guy moves along the ladder, and he gets up slowly to the top. And he has three attributes: He’s likable, he’s politically astute, and he’s a survivor. And he knows when he’s threatened. These are the attributes of today’s CEOs for the most part, with exceptions. You know, he doesn’t ruffle feathers, he doesn’t get the board upset. And as he moves up the ladder, he finally gets to be number two to the CEO. Now the CEO has the same same attributes where he doesn’t want to be threatened and is a survivor. So the CEO will never let anybody be number two who’s smarter than he is. By definition, the assistant of the CEO is a little dumber than the CEO. Now this guy now is the assistant, and the board likes him. The CEO eventually retires and they make this guy the new CEO. The fraternity president we’re talking. Now he’s the head guy. And he’ll bring in a number two guy that’s a little dumber than he is, because he doesn’t want to be threatened. So by definition, we’ll be run by morons pretty soon. And we’re not too far from that point right now in our economic history.”

[Carl Icahn, 2011]

A Production Possibilities Frontier

The engine of economic progress must ride on the same four wheels (supply side factors), no matter how rich or poor the country:

  • Human resources (including labor supply, education, discipline and motivation)

Labor inputs include, of course the quantity of workers. However, many economists believe that the quality of labor inputs, the skills, knowledge, and discipline of the labor force, is the single most important element in economic growth. capital goods can be effectively used and maintained only by skilled and trained workers.

Improvements in literacy, health, and discipline, and most recently, the ability to use computers, add greatly to the productivity of labor.

  • Natural resources (including land, minerals, fuels and environmental quality)

The important resources here are, arable land, oil and gas, forests, water, and mineral resources.
But the possession of natural resources is hardly necessary for economic success in the modern world. New York City prospers primarily on its high density service industries. While many countries that have virtually no natural resources, such as Japan, have thrived by concentrating on sectors that depend more on labor and capital than on indigenous resources.

  • Capital formation (including machines, factories and roads)

Tangible capital includes structures like roads, and power plants, and equipment, like trucks and computers. In this regard, some of the most dramatic stories in economic history, often involve the rapid accumulation of capital.
Accumulating capital requires a sacrifice of current consumption over many years. Countries that grow rapidly tend to invest heavily in new capital goods. In the most rapidly growing countries, 10 to 20% of output may go into capital formation. In this regard when we think of capital we must not concentrate only on private sector investment. In fact, many investments are undertaken only be governments, and provide the necessary social overhead capital and infrastructure for businesses to prosper. Roads, irrigation and water projects, and public health measures are important.

Government projects involve external benefits that private firms cannot capture so government is necessary to provide them.

  • Technology (from science and engineering to management and entrepreneurship)

Historically, growth has definitely not been a process of simple replication, adding rows of steel mills, or power plants next to each other. Rather, a never-ending stream of inventions and technological advances led to a vast improvement in the production possibilities of Europe, North America, and Japan. Technological change denotes changes in production processes or the introduction of new products or services.

Technological change is a continuous process of small and large improvements.

While the four supply factors of growth relate to the physical ability of the economy to expand, there are two other factors that are equally important:

  • First, there is the demand factor

To realize its growing production potential, a nation must fully employ its expanding supply of resources. This requires a growing level of aggregate demand.

  • Second, there is the efficiency factor

To reach its production potential, a nation must not only achieve full employment, but also two kinds of economic efficiency. Specifically, a country must achieve productive efficiency. That is, it must use its existing and new resources in the least costly way to produce what it does. And it must also achieve allocative efficiency, meaning that the specific mix of goods and services it produces must maximize society’s well-being.