Valuetainment - Episode 349： The Missing Link To Modern Day Capitalism

00:00:00.000 30 seconds. One time for the underdog. Ignition sequence start.

00:00:06.980 Let me see you put them up. Reach the sky, touch the stars up above.

00:00:11.100 Cause it's one time for the underdog. One time for the underdog.

00:00:17.220 I'm Patrick Bedevi, host of ITIM, and today I have an author, Jonathan Tapper,

00:00:21.180 who wrote a book called The Missing Link to Modern Day Capitalism, and he got pretty deep.

00:00:25.620 He talked about how Warren Buffett only invests in monopolies,

00:00:29.640 and he explained it in a way that you probably never heard before.

00:00:32.900 Enjoy this interview with Jonathan Tapper.

00:00:34.900 Jonathan, I appreciate you making the time to come down here and be with us.

00:00:37.560 Well, thank you so much for having me on. It's a pleasure and an honor.

00:00:40.280 Yeah, so the question I have is, you know, a lot of people wake up in the morning and they say,

00:00:44.440 you know, I'd like to go have a nice cup of coffee. I'd like to have a good breakfast this morning,

00:00:48.160 maybe some bacon and, you know, eggs over medium.

00:00:51.180 I don't know how many people wake up in the morning saying,

00:00:53.100 let me write a book about the myth of capitalism, monopolies, and death of competition.

00:00:56.780 So what inspired you to want to write this book?

00:00:58.680 So there were two real reasons for writing the book.

00:01:02.280 The first one was a professional reason.

00:01:05.120 My day job essentially has been I started a investment research company, investment strategy,

00:01:10.300 and we look at economic questions, you know, is the U.S. going to have a recession or not?

00:01:14.580 Is inflation going to go up or not?

00:01:16.840 And one of the indicators that we had was a leading indicator for wages.

00:01:20.300 So it tells you, like, are wages going to go up or not over the next year?

00:01:23.300 And our indicator was turning up very strongly, saying that wages were going to go up,

00:01:27.780 but wages, you know, have been fairly stagnant and weren't turning up.

00:01:30.420 And at the same time, corporate profit margins were at all-time highs,

00:01:33.800 and our indicators were saying that corporate profit margins were going to be falling,

00:01:36.980 and they weren't.

00:01:37.960 And it really annoys me when one of our tools doesn't work.

00:01:41.020 Not necessarily because it doesn't work, but rather if I don't understand why or something's changed,

00:01:46.280 you know, it really gets to me.

00:01:48.080 So I started doing a lot of research there.

00:01:50.100 And at the same time as that was happening, I would go, you know, I live in London,

00:01:53.840 so I'd go to the pub with my friends.

00:01:55.400 And, you know, my friends are all fairly sort of intellectual and love to read books.

00:01:59.160 And they were saying, like, oh, have you read Piketty's book?

00:02:00.960 And I thought, well, I haven't read it.

00:02:02.320 And I then got a copy, and we were discussing it.

00:02:05.560 Piketty is a French economist who's basically, like, you know,

00:02:08.620 the closest thing to a rock star in economics.

00:02:10.840 He sold a million and a half books, which for economics is just crazy.

00:02:14.160 That's sort of like Harry Potter levels.

00:02:16.460 And basically his argument is that capitalism itself has a fundamental flaw

00:02:21.600 and that over time more returns go to capital, so like to shareholders,

00:02:27.460 rather than to laborers or the workers,

00:02:29.600 and that this is just a fundamental law in capitalism.

00:02:32.700 To me, this made no sense at all because if you have a very profitable business

00:02:38.040 and I see that you're making a lot of money,

00:02:40.000 I would want to come in and compete with you and get some of that profit.

00:02:43.140 And that's really the way capitalism actually works.

00:02:46.260 So I thought competition would bring down the returns to capital

00:02:49.080 and increase the returns to labor over time.

00:02:51.460 So as I was looking into this question of why, you know,

00:02:54.400 wages weren't going up with our leading indicator,

00:02:57.020 why wages are relatively low, you know,

00:02:59.720 and Piketty shows that the sort of top 1%, top 10% is doing very well.

00:03:04.780 I thought these two questions are related,

00:03:06.580 and if I can get to the bottom of it, it will be very interesting.

00:03:09.020 So if I can, so what did he say is his alternative?

00:03:12.400 If he's saying that, that it's not working and it's all about the shareholders,

00:03:15.640 what's he suggesting?

00:03:16.440 So he suggests extremely high tax rates to essentially take money from the holders of capital,

00:03:22.720 I know generally obviously the people who hold capital are the very wealthy,

00:03:26.420 and then redistribute it, right?

00:03:27.860 So it's a high tax, high redistribution regime.

00:03:31.640 In my view, that's essentially treating the symptoms rather than the cause.

00:03:35.980 And the cause of the problem through the research that I did for the book

00:03:40.100 is that there actually is very little competition.

00:03:42.440 So competition should be eroding the returns to capital,

00:03:44.520 and it's not doing that.

00:03:46.000 And so if you look particularly at the United States,

00:03:48.000 which is one of the most advanced in this trend,

00:03:50.000 of what economists call industrial concentration,

00:03:52.200 and the average person calls monopolies,

00:03:54.300 when you have a monopoly or a duopoly or even an oligopoly,

00:03:57.920 you have very few players, very little competition,

00:04:00.380 and that gives them significant power.

00:04:02.340 It gives them power over their workers, so not to give them a pay raise.

00:04:07.060 It gives them power over their suppliers.

00:04:09.440 So if you're selling widgets to a big company

00:04:12.900 and they're the only ones that are going to buy your supply,

00:04:15.360 then they have a lot of power in terms of how much are they going to pay you, right?

00:04:18.640 It also gives them tremendous amounts of capital and financing.

00:04:22.220 So you find that some of these very biggest companies,

00:04:24.240 they pay their suppliers very, very late,

00:04:26.800 but they get paid immediately by customers, right?

00:04:28.600 So the working capital, or what investors call a float, works in their favor.

00:04:32.600 And so there's tremendous power that comes from being the monopolist or oligopolist.

00:04:37.000 At the same time, having that power means that it also corrupts the political process,

00:04:40.620 because they, of course, don't want competition.

00:04:43.120 And so while some industries are what you could call natural monopolies,

00:04:46.940 so if you think of, for example, Visa, right,

00:04:49.320 you want to make sure that the buyers and sellers are on the same platform to get paid,

00:04:53.560 and rather than have like 50 payment networks, you know,

00:04:56.060 show up at a store and not know whether you can actually use your card or, you know, phone.

00:05:01.260 And so that's like a natural monopoly with very strong network effects.

00:05:04.380 Loads of the industries in the U.S. that are what I call unnatural monopolies,

00:05:07.620 monopolies are monopolies that come from regulation, from cronyism, and from lobbying.

00:05:12.440 So, you know, you're involved in the insurance industry.

00:05:15.680 If you look at the U.S. healthcare industry on the insurance side,

00:05:20.520 almost all the states are essentially dominated by two to three insurance companies.

00:05:24.840 Some, like Hawaii and Alabama, are dominated by one insurance company.

00:05:27.840 You are not going to get a good deal or lower pricing on insurance when you have no choice.

00:05:32.540 And Obamacare, in many ways, made that worse.

00:05:35.340 Essentially, it forced everyone to buy insurance, but from, and basically you had further consolidation on the insurance side.

00:05:42.680 So people have been forced to buy into monopolies and oligopolies for their healthcare insurance.

00:05:46.920 And you find this in many other industries.

00:05:48.580 And those I would call unnatural, meaning if the laws didn't exist, you know,

00:05:52.660 you can sell Coke across state lines, but you can't sell insurance across state lines.

00:05:56.320 And so that's what drives up pricing, market power.

00:06:00.740 And what did you say about Obamacare, percentage-wise of GDP that is used in America versus in Europe?

00:06:05.620 What was the number you said?

00:06:06.540 So the U.S. is truly the global outlier when it comes to healthcare.

00:06:10.860 And this predates Obamacare, but it's certainly not got any better and slightly worse afterwards.

00:06:15.680 The average OECD country, and the OECD is essentially the developed wealthy nation,

00:06:20.820 so mainly Western Europe, and the U.S., they spend, on average, about 11% of GDP, 10% to 11% of GDP on healthcare.

00:06:29.660 On healthcare?

00:06:29.900 Yeah.

00:06:30.600 And it's a mix.

00:06:31.500 So you have the U.K. and Spain.

00:06:33.680 The government basically taxes people and then provides, essentially, the hospitals.

00:06:38.540 And essentially, the taxation is the form of insurance payment.

00:06:41.900 You then have, like, the full other extreme, which is essentially like Belgium and Switzerland,

00:06:45.500 where the government makes sure that everyone's subsidized and 100% coverage,

00:06:49.720 but the private sector provides the insurance and the medical care.

00:06:53.380 And then you have a mixed model like France, right?

00:06:55.160 So they're from that continuum of sort of pure government to pure markets,

00:06:59.560 but they all achieve 100% coverage, and they all do that spending 70% less.

00:07:04.120 The U.S. spends 17.5% of GDP on healthcare, which is crazy.

00:07:09.160 How long have we been at that number, though?

00:07:11.080 So it has been rising, and it's risen, essentially, over the last two and a half, three decades.

00:07:15.620 So it was much lower before that.

00:07:17.660 But basically what you have is—

00:07:19.320 17.5% versus 10%, 11% in OECD.

00:07:25.260 Yeah.

00:07:25.600 So if you look at the U.S. insurance and healthcare market,

00:07:28.820 it's basically—it couldn't be worse if you try to design a sort of badly designed system.

00:07:34.520 You have concentration monopolies and oligopolies at every level.

00:07:37.560 So 90% of urban hospital markets are highly concentrated.

00:07:41.880 And economists have a way of looking at that.

00:07:44.620 They call it the HHI, which is the Hirschman-Herfendahl Index.

00:07:48.080 And basically what it does is it looks at if you had 100 companies competing,

00:07:52.640 each one with 1% market share, and you squared all those numbers,

00:07:55.800 you'd end up with, you know, 100, right?

00:07:57.620 So one times one times—some of them.

00:08:00.220 Yeah.

00:08:00.400 If you have one company that has 100% market share and square that, you get 10,000.

00:08:04.020 And so then you can just quickly start looking at that number.

00:08:06.440 Almost all the hospital numbers—basically when you get to like four players with 25% market share,

00:08:10.420 that's like a highly concentrated—so 90% of the U.S. hospital markets essentially is above that $2,500,

00:08:15.580 that highly concentrated market.

00:08:17.780 So if you have pain in your chest right now and go to a hospital,

00:08:22.160 you're not going to sit and start haggling about what you're going to pay, right?

00:08:25.980 And so what happens is hospitals have, you know, a tremendous power over the purchaser.

00:08:32.840 They're generally exempt from fair pricing laws.

00:08:35.140 They're generally exempt from antitrust under the McCarran-Ferguson Act.

00:08:38.660 They're supervised by the state level.

00:08:40.420 So you have like concentration at the hospital level.

00:08:42.680 You have all sorts of horrible things going on in terms of FDA and drug approval.

00:08:47.720 So there have been some cases of merger to monopoly where basically you had two companies

00:08:51.200 that could provide a medicine where one buys the other.

00:08:53.600 And now, of course, you again have a monopoly and patents are effectively a legal monopoly

00:08:56.940 that has a finite period of time.

00:08:58.840 You have cases where companies have bought out their generic competitors

00:09:02.000 or even paid them exclusionary payments.

00:09:04.820 And so that's why drug prices cost so much more in the U.S. than they do in the rest of the world.

00:09:10.120 And it's not just like a few bad actors in the drug space.

00:09:14.240 And then you have middlemen in the U.S. system.

00:09:17.880 So in theory, these middlemen were created a long time ago

00:09:20.300 to provide some bargaining power to hospitals, right?

00:09:24.200 So if I had a hospital and you had a hospital,

00:09:26.540 we want to make sure that we're essentially not overpaying for goods,

00:09:31.400 they created group purchasing organizations.

00:09:33.660 But over time, these GPOs essentially got exempted from anti-kickback provisions.

00:09:39.840 And they then have no reason to sort of look after the hospitals

00:09:44.880 who they were meant to initially look after to get better deals for.

00:09:47.640 And now they just want to drive as wide a wedge as possible

00:09:49.960 between the person selling the goods and the hospitals.

00:09:52.060 Sure, of course.

00:09:52.640 You have the same thing with pharma benefit managers, drug wholesalers.

00:09:55.540 So you have like this Byzantine sort of layer cake of organizations in the U.S. health care system.

00:10:01.360 So let me ask you this.

00:10:02.680 Why are we paying 7.5% more?

00:10:05.820 What is it?

00:10:06.620 Is it we're getting incredible service?

00:10:08.540 Like in the waiting room area, someone's massaging your feet,

00:10:11.420 telling you how amazing you are,

00:10:12.720 and you're having a glass of wine before you see the doctor.

00:10:15.280 Why are we paying 75% more?

00:10:16.960 No, so this is truly shocking.

00:10:19.440 The U.S. has actually seen a deterioration over the last three years in lifespan in the U.S., right?

00:10:25.260 Some of this comes from opioids.

00:10:26.900 Did you say lifespan has deteriorated in the last three years?

00:10:29.300 Yeah, mortality rates.

00:10:30.500 So some of this is due to opioids.

00:10:33.000 More Americans are dying earlier and younger.

00:10:35.440 Again, a lot of companies are making money off of this.

00:10:38.580 More people have died from opioids than died in the AIDS epidemic in the U.S.

00:10:42.200 to great profit by some companies.

00:10:44.900 And at the same time, you know, you have obviously worse lifestyle in terms of living and eating.

00:10:50.960 But at the same time, it's not like there's better service.

00:10:53.500 The U.S. has slightly better care in some specific areas.

00:10:57.700 Obviously, we're in Texas right now, and you have the MD Anderson Clinic, which is pretty good for cancers.

00:11:01.640 But in general, Americans have worse outcomes, longer waiting than other countries that in theory are more sort of socialist or socialized medicine.

00:11:11.180 And so Americans spend more and get less for it and don't achieve universal coverage, whereas these other countries do achieve 100 percent coverage of the population.

00:11:21.440 Well, it's a priority, right?

00:11:22.500 And the problem here is that even Obamacare, by the way, left 26 million Americans uncovered, right?

00:11:28.300 So it didn't provide universal care.

00:11:31.240 There is a very strong lobby.

00:11:33.320 So that's 17.5 percent to you and me is a cost.

00:11:36.720 But there's someone actually getting paid that, right?

00:11:38.640 And so you have the insurance sector, hospitals, hospital administrators, drug companies, pharma benefit managers.

00:11:45.240 They benefit from that.

00:11:46.520 And obviously, they have an interest in making sure that you don't end up with genuine reform.

00:11:50.280 So why don't we go back and just think the audience today is a sixth grader, okay?

00:11:56.200 What is a monopoly?

00:11:57.340 What is a duopoly?

00:11:58.440 What is an oligopoly?

00:11:59.840 Certainly.

00:12:00.420 So a monopoly is where you have one seller of goods.

00:12:04.900 So, for example, in the old days, at the peak, Standard Oil was the one company that sold oil and gasoline in the United States.

00:12:13.260 It didn't last very long, and it got broken up in 1911.

00:12:16.180 A duopoly is a case where you have two companies essentially controlling the market.

00:12:20.960 So, for example, an industry that, say, duopoly would be Airbus and Boeing.

00:12:25.160 They make the very, very big jets, right?

00:12:27.080 There's only two companies that really do that.

00:12:29.180 There's quite a lot more competition among these sort of smaller body jets, but it just costs a lot to build a massive, massive factory and do years and years of R&D and testing and so on.

00:12:38.040 You also have a duopoly when it comes to credit rating agencies.

00:12:40.840 That is an unnatural monopoly where you have Moody's and S&P, by law, are the only companies essentially that have these certain designations in our SROs.

00:12:50.620 Oligopoly is where you have essentially generally three or more, and it's generally perceived to be less than six.

00:12:56.060 So you have like three, four, five players dominating the market.

00:12:59.880 Four is the technical level generally actually on the HHI.

00:13:03.640 But basically, for example, oligopolies, there are quite a lot of those in many, many different industries in the United States.

00:13:12.000 And unfortunately, because we've had merger wave after merger wave, many oligopolies turn into duopoly.

00:13:17.800 So the beer industry used to have four or five major players, and now it's down to two effectively when you look at AB InBev and Molson Coors.

00:13:27.140 But like making beer has not really changed over the last couple thousand years, you know, and we're still the sort of modern beer essentially comes from northern Europe and Belgium, and that's not really changed very much.

00:13:36.100 And so you've had this explosion of craft brewers at the same time as the entire sort of distribution is really controlled by the top two companies.

00:13:42.500 What is oligopoly?

00:13:43.280 How many companies makes it oligopoly?

00:13:45.720 So generally it's about four.

00:13:47.500 But there's a lot of research, and I point this out in the book, that shows that when you get below six players in an industry, you get price increases.

00:13:54.640 So, for example, the airline industry in the U.S. has four major airlines, right?

00:14:00.900 And that merger wave happened under Obama, and they were approved.

00:14:07.260 And what happened immediately was airfares started going up, and you started then getting hit with all the additional charges for bags and for everything else.

00:14:16.300 And so when you get below six players, you end up with price increases, and that's what you see getting down to sort of four and three.

00:14:23.380 And the other big problem is that once you end up in the oligopoly situation, it's very easy for firms to collude on price.

00:14:32.240 So, for example, if you and I were running two companies and wanted to screw the consumer, you and I could go meet in a bar and a smoke-filled room in the old days is what they called it,

00:14:43.100 and we would just agree that we're going to charge customers more and not really compete with each other, right?

00:14:46.720 Like, we're happy with your market share, and I'm happy with my market share, and let's just not – competition is bad for us.

00:14:52.020 Do you think that still happens today?

00:14:53.840 Massively.

00:14:54.260 So I go through dozens and dozens of examples in the book.

00:14:56.040 So you think Pepsi and Coke have that?

00:14:57.920 Yes.

00:14:58.460 But this is what's fascinating.

00:14:59.240 It would be a duopoly, right?

00:15:00.300 Yeah, yeah.

00:15:00.480 Pepsi and Coke would be a duopoly.

00:15:01.500 So, yeah, if you look at the soft drink market in the U.S., it's effectively a duopoly.

00:15:05.820 You essentially have a duopoly in the chocolate market between Mars and Hershey, so there are quite a lot.

00:15:10.400 Some of these, I think, are not bad in the sense that, for example, there's no government mandating that people need to go buy Hershey or Mars, right?

00:15:17.580 They just basically have pretty good distribution, and people are pretty conservative in terms of what kind of chocolates they take.

00:15:22.300 People generally are not very adventurous in terms of buying new brands.

00:15:25.120 But where I find it horrible is, like, on the insurance side, that is due to regulation.

00:15:30.140 Rating agencies, you know, which gave us all the subprime bonds that they rated as being AAA, that's due to regulation.

00:15:36.880 But basically, some of these companies don't even need to speak to each other to collude on prices.

00:15:42.900 And so they're –

00:15:44.720 What do you mean by that?

00:15:45.700 So, for example, if I just observe what you're doing, right, and this is game theory.

00:15:49.900 So there's a chapter in the book where it points out that the longer – the more you interact with someone else – and there's a classic prisoner's dilemma in game theory, right?

00:16:00.280 So let's say that you and I are both robbing a bank.

00:16:02.400 Okay.

00:16:03.020 And then the police come and arrest us.

00:16:04.600 They put you in one cell, and they put me in another cell.

00:16:06.760 And then they ask us, like, so, you know, did you do that with him?

00:16:09.740 Now, we both have a very strong incentive to reach a deal with the police.

00:16:12.960 Well, we have an incentive to not rat on each other, right?

00:16:15.280 But then I don't know whether you're going to rat on me, and you don't know whether I'm going to rat on you, right?

00:16:17.980 So I have an incentive to rat on you, cooperate with the police, get a better deal for myself, you know, and you're really not my problem.

00:16:24.600 You have the same incentive.

00:16:25.580 So the question is, of course, like, are we going to rat on each other or not?

00:16:28.700 And that's prisoner's dilemma in economics.

00:16:30.540 And there are many, many problems in life that you can look at through that lens, right?

00:16:33.780 Like, do you cooperate, i.e. we don't rat on each other, or do you defect and do that?

00:16:38.240 And so what they found is that the fewer players you have in the industry, the easier it is to reach some sort of understanding.

00:16:44.900 And then if you can play that game again and again, where I get to see, are you raising your prices or not?

00:16:49.820 Are you increasing your capacity or not?

00:16:51.500 And I can see what your pricing today is, right?

00:16:53.700 Then it leads people to change prices.

00:16:56.460 So Americans spend vastly more for insulin than any other country in the world, right, on a per-patient basis.

00:17:03.600 There are basically two companies that make insulin.

00:17:05.700 And they all raise their prices in lockstep, as if, like, they called each other on the day and raised insulin prices, right?

00:17:12.860 Now, you'd think that would be illegal, right?

00:17:14.400 Because price-fixing is, per se, illegal.

00:17:16.980 But they're just – it's just, you know, parallel pricing.

00:17:19.880 They're just watching what the other one's doing.

00:17:21.320 There's nothing illegal about that.

00:17:22.560 And that's the way it is in most industries.

00:17:24.420 And so that's one of the big problems with having so little competition.

00:17:27.720 So to you, you know, you hear a lot of different definitions of liberal means something else in America than it does in Europe, like you and I were talking about earlier, right?

00:17:35.480 What does capitalism mean to you?

00:17:37.620 Just the word capitalism.

00:17:39.060 Certainly.

00:17:39.580 So the liberal one is a fascinating one.

00:17:42.380 I won't answer the capitalism one.

00:17:43.660 Like, Americans use the term liberal to mean, like, someone who's left-leaning, right?

00:17:47.560 Someone who, you know, particularly when it comes to social policy.

00:17:50.820 To Europeans, the word liberal essentially is like a classical liberal, meaning in the sense of wanting freedom.

00:17:56.400 So up until the early 20th century, Americans thought of someone who was liberal as someone who's, like, freedom-loving.

00:18:02.100 But with capitalism, I think, it means different things to different people.

00:18:05.620 But in general, if you look at almost all the different dictionaries and economic dictionaries, it has a couple central elements.

00:18:11.720 The first one is private property, right?

00:18:14.420 So communism defines itself in opposition to private property, where the state controls the property.

00:18:19.620 And anything that the state doesn't want to control might be your private property if the state allows you to have that, right?

00:18:23.960 You know, things that you have in your house.

00:18:25.240 Because after 1989, with the fall of the Berlin Wall, basically the battle for private property was won, right?

00:18:31.580 So now pretty much universally besides North Korea, it's accepted that private property is the way forward.

00:18:37.580 The other elements of capitalism involve essentially competition and freedom of exchange, right?

00:18:42.400 And so what we're seeing in more and more is that there's less competition in many industries.

00:18:48.560 And as I mentioned, much of this is unnatural, meaning there are very strong regulatory barriers to entry, excessive regulation, which keeps out startups.

00:18:57.240 So the competition element is dying in many areas where, you know, believe it or not, there are only two companies that make IV drug solution in the U.S., right?

00:19:07.740 And they both had their manufacturing facilities in Puerto Rico.

00:19:11.700 And so when Hurricane Maria hit, there were shortages of IV drug solution in the U.S., which is just salt and water, right?

00:19:16.740 But that's because it's very, very hard to go through the entire FDA approval process.

00:19:20.940 Same thing for drugs.

00:19:21.760 So the competition element of capitalism is missing in many different areas of the economy.

00:19:28.240 So I'm listening to you and trying to see how your brain is wired going through all this stuff.

00:19:33.160 And I think about your upbringing and what you were raised.

00:19:35.860 Your family had a company that I think was called Betel or something.

00:19:39.080 Yeah, it's a charity, working with heroin addicts.

00:19:41.560 Heroin addicts.

00:19:42.080 So you grew up, your friends were heroin addicts, HIV positive, folks that didn't have a long time to live.

00:19:48.340 How was that for you?

00:19:49.480 And how did that impact your way of thinking today?

00:19:52.240 So my family story is fairly odd in some ways.

00:19:55.440 My parents were Christian missionaries or Presbyterians.

00:19:57.700 My father, before he became a missionary, studied economics at Cambridge.

00:20:02.320 It was back in the 60s when Cain's and his, well, not Cain's, but rather his disciples were still teaching there.

00:20:09.820 And so that was a great place to study economics.

00:20:12.480 Afterwards, he went to Harvard Business School, got his MBA.

00:20:15.500 So I remember my early lessons in economics were going to McDonald's in 1986 with him.

00:20:20.740 I was 10 years old.

00:20:22.020 And my grandparents would send me like a $20 check every year as a gift.

00:20:27.720 And at the time, the dollar was swinging around in value quite a lot.

00:20:31.160 And I remember like my check was worth about half as much as it was two years earlier.

00:20:36.700 And so my father was explaining exchange rates to me, and he was explaining purchasing power parity and how, you know,

00:20:43.600 and The Economist that year came out with the Big Mac Index.

00:20:46.340 86. How old were you at 86?

00:20:47.640 At 10.

00:20:48.380 Your dad's talking about you, this kind of stuff, at 10 years old.

00:20:50.220 Yeah, and he would draw diagrams on napkins.

00:20:52.140 Wow.

00:20:52.980 And so I then became very, very fascinated with economics.

00:20:55.820 But my parents ran the Drug Rehab Center, and the Drug Rehab Center itself is almost entirely free.

00:21:02.080 I'm sorry, it is entirely free, but it generates almost all of the revenue to run through businesses.

00:21:07.500 So the addicts themselves run secondhand furniture stores, secondhand clothing stores.

00:21:13.200 I used to work in my summer times in high school with the painting team.

00:21:17.080 So we'd go around Madrid painting apartments.

00:21:19.180 And so all of this was essentially a business that was done to deliver a good, essentially a charitable service to people.

00:21:26.960 And so it's a Christian Drug Center, which obviously is motivated by the ideals of, you know, the Sermon on the Mount.

00:21:32.020 And my parents didn't view and don't view any incompatibility between, essentially, markets, i.e., running businesses, and doing good with that money.

00:21:42.060 But how was it for you as a kid being around it?

00:21:44.080 Like, just as somebody sees somebody who says, he's HIV positive, maybe they have a certain way of looking at him afterwards, right?

00:21:49.800 Oh, you know, this person's an heroin addict.

00:21:51.500 How do you look at somebody like that being around them for so many years?

00:21:53.740 So I think that people's childhoods only appear odd or different, I think, like, in retrospect, when you start meeting other people who don't have a childhood like yours, right?

00:22:03.540 And so when I was very young, I was like, you know, I thought that, like, my childhood is normal.

00:22:07.200 And it was only, like, later in high school, and particularly college, where I realized that most people didn't grow up in a drug rehab center.

00:22:12.300 So my parents worked with heroin addicts, and Spain had the biggest drug problem in Europe when it came to heroin, but it also had the biggest HIV problem.

00:22:20.620 So most of the people were sharing needles, particularly in jail, where you might have one needle to be shared with 200 men.

00:22:26.340 And so that's how AIDS spread very quickly.

00:22:29.100 And almost all of the early addicts in the program died of AIDS, and they were essentially, like, older brothers and older sisters to me and my brothers.

00:22:37.680 And so my brothers and I spent, like, the evenings going to Ramon y Cajal Hospital, which was the biggest hospital in Madrid, to the infectious diseases ward up on the eighth floor.

00:22:47.080 And, you know, it really did, I think, from a young age, make me think a lot more about life and death.

00:22:54.600 And my own brother died when I was 15.

00:22:57.240 So I think it really focuses the mind and makes you realize that, you know, life itself is very precious.

00:23:03.120 And, you know, yeah, it sort of makes you grow up, I think, a lot faster.

00:23:08.320 Your brother died at 15?

00:23:10.100 Yes, it was a car accident.

00:23:11.720 How old were you?

00:23:12.860 Sorry, he was 10, I was 15.

00:23:14.140 How was that, going through it as a 10-year-old?

00:23:17.740 So I think that losing someone is obviously always very painful, but I think it's particularly more so when these are, like, the formative years of your life where you're still sort of figuring out who you are as a person and your personality being formed.

00:23:30.080 And so, you know, it made me a lot more pensive and thoughtful and probably just sort of focus on my studies.

00:23:39.540 And my parents, you know, would read to us from, like, you know, as early as I can remember at the dinner table.

00:23:46.160 So the kinds of books that my parents read to us were C.S. Lewis's A Grief Observed.

00:23:50.940 And I think that what you find, what I find often is speaking to people is that people don't necessarily always talk very much about grief or bereavement.

00:23:57.440 And, you know, many people have lost other people.

00:23:59.900 I'm not the only person who's lost a loved one.

00:24:02.160 But often it's obviously so painful that people don't tend to talk about it very much.

00:24:06.180 And, you know, it certainly marks you as a person.

00:24:10.400 Did that bring the family closer?

00:24:12.500 I mean, it sounds like your family is a very close type of family, lots of values and principles that was built on.

00:24:18.380 So I think that, yes, over time it did.

00:24:21.620 In the very short run, you know, everyone responds to trauma and grief differently.

00:24:26.560 And there's a very good organization in the United States called Compassionate Friends where they put people in touch with each other who have lost loved ones.

00:24:34.540 So my mother was talking to other mothers in the U.S. who, you know, corresponding with them.

00:24:39.600 And, you know, it does create quite a lot of tension and stress in the family, you know, when you lose a loved one because everyone just reacts slightly differently.

00:24:48.380 And also, you know, you don't necessarily talk very much.

00:24:51.420 But, you know, we're very, very close as a family.

00:24:53.820 My older brother David, my younger brother Peter, is still in very, very close touch with.

00:24:59.180 My mother died a couple years ago, but my father still runs the Drug Rehab Center.

00:25:02.580 You know, that started in 85.

00:25:04.940 We arrived in 83 in Spain.

00:25:06.140 And the Drug Center headquarters is still in Madrid.

00:25:08.640 My father still runs it.

00:25:09.560 And I think he said that he wants to die working.

00:25:12.620 And I hope he does, you know, meaning, like, he can keep on working until the very end.

00:25:16.520 I think that would be like, you know, I hope I can keep on working, you know, doing what I enjoy.

00:25:20.600 But he's certainly doing quite a lot of good.

00:25:22.760 So 85 years old, he started it.

00:25:24.680 You were nine.

00:25:25.640 86, he's talking to you about economics.

00:25:27.800 Yeah.

00:25:28.220 And telling you what's taking place with the $20 really being only worth $10 while you're going to McDonald's.

00:25:32.820 So were you raised, was your relationship in a way where you guys had deep conversations at a young, it was like, you know, you read stories about Charlie Munger, right?

00:25:41.620 And they interviewed the kids.

00:25:43.500 And they said every night dad would tell us stories about somebody who made a very big mistake that cost them everything, right?

00:25:48.420 What was that, you know, dinner table like with the family?

00:25:51.220 Yes, I think.

00:25:52.740 Because if I found that mistake, both Peter and David, all of you guys went to Oxford, right?

00:25:55.700 Yes.

00:25:55.920 I mean, all of you graduated from Oxford.

00:25:58.220 I mean, that's like not, you know, hey, you know, I've got three kids.

00:26:01.860 I went to Oxford University.

00:26:03.300 Somebody did something right raising the kids.

00:26:06.320 Yes.

00:26:06.820 Well, I think my parents did an extraordinary job.

00:26:09.500 The funny thing is I didn't necessarily like it all very much when I was a kid.

00:26:13.740 So, you know, we had our…

00:26:14.580 Because of discipline or because, like, the structure?

00:26:16.280 Well, there was quite a lot of discipline.

00:26:17.160 But also it was more that, you know, like when you're sort of six or seven years old and your father's reading St. Augustine's The City of God to you at the dinner table, right?

00:26:25.400 Like, it appears pretty tedious and boring, right?

00:26:28.880 And it's only, like, years and years later that you come back and think, like, oh, okay, you know, I've been exposed to all these great books and ideas.

00:26:36.140 I remember, like, you know, some of my early childhood memories are my parents would read not only at the dinner table.

00:26:41.720 We would then go back to go to sleep.

00:26:43.280 And my father would read Robinson Crusoe or the Song of Roland to us.

00:26:47.200 And so we were really getting all these great works of literature.

00:26:49.220 And then my father read loads and loads of theology and philosophy.

00:26:53.040 My mother…

00:26:53.700 From all walks, like all over?

00:26:55.740 Yeah.

00:26:56.020 So, like, both of my brothers ended up studying theology at Oxford, right?

00:26:58.680 And so, you know, I was very heavily exposed to that.

00:27:02.060 Was it majorly inspired by C.S. Lewis?

00:27:03.900 Was it like…

00:27:04.660 Oh, so they read everything of C.S. Lewis to us.

00:27:07.700 They're basically…

00:27:09.120 Yeah.

00:27:09.400 My parents, like, I mean, if you think of, like, every night of your life that you could have something read to you, like, it covered an enormous amount.

00:27:16.520 And so I think that, you know, and my father was telling me about his childhood.

00:27:20.700 He was remembering his father, who I sadly didn't get to know very well because I grew up abroad, so I didn't see him.

00:27:25.900 He lived in Los Angeles and New York.

00:27:28.580 But, like, you know, he was a genius.

00:27:30.120 During World War II, they were giving IQ tests to people.

00:27:32.740 He had 152 IQ.

00:27:33.960 So he was teaching, like, mathematics to the artillery people.

00:27:38.280 But, you know, he…

00:27:39.080 And then he went into the transistor business after the war, you know, when essentially they invented the transistor at Bell Labs.

00:27:45.260 But he remembers his father reading Bull Finch's mythology to him when he was a little kid and U.S. history books.

00:27:51.140 So, you know, I think, like, anyone who watches this program, you know, I would say, like, you probably underestimate the ability to…

00:27:59.860 You have to influence your own children in terms of, you know, how you want them to be and how you want to shape their mind.

00:28:05.300 And, you know, while they might complain a little, as I did, certainly, my brothers and I would complain after dinner.

00:28:10.140 But, like, you know, these are the kinds of things that you just don't forget.

00:28:13.020 Unbelievable.

00:28:13.540 Reading.

00:28:13.780 Reading.

00:28:14.140 We had an incident this past week about that at our house.

00:28:17.900 And I told my nanny, I said, no more TV.

00:28:20.180 I'm taking the remote control away.

00:28:21.440 We're reading.

00:28:21.940 These kids have to read more.

00:28:23.020 And so it was a big…

00:28:24.880 She's like, what do you want me to do?

00:28:26.460 You mean to tell me we can't have the remote to watch Netflix?

00:28:28.940 Nope.

00:28:29.520 Give me the remote.

00:28:30.480 No more Netflix.

00:28:31.360 We didn't have a TV until 1984.

00:28:34.080 I was eight years old.

00:28:34.980 And the only reason we got it was because my parents wanted to watch the 1984 Los Angeles Olympics.

00:28:39.860 And then after that, we could only watch, like, a movie on a Saturday.

00:28:42.800 Get out of here.

00:28:43.660 For years.

00:28:44.360 Yeah.

00:28:45.420 So who were you in high school, by the way?

00:28:46.820 If I was in high school with you, who were you?

00:28:48.760 So I was very, very nerdy and slightly proud of it.

00:28:54.240 I had a couple of friends who were also very nerdy.

00:28:56.440 And we were just, like, read.

00:28:56.800 I would have never guessed it.

00:28:57.740 I thought you were, like, the, you know, lady killer.

00:28:59.800 You were the athlete.

00:29:00.700 You were…

00:29:01.160 No.

00:29:01.500 Like, I've always been in pretty good shape.

00:29:03.380 My father was a New York State wrestling champion.

00:29:05.020 And so my father would get us to do pull-ups and push-ups and things.

00:29:09.160 But, like, we just read nonstop.

00:29:12.480 And in high school, it was pretty…

00:29:13.040 I'm giving you a hard time, by the way.

00:29:14.020 I hope you realize this.

00:29:14.860 Because, I mean, if I'm raised in a family and I'm reading Crusoe and C.S. Lewis every night,

00:29:19.860 my brain goes, another father's throwing a football or throwing a baseball or you're

00:29:23.140 playing hockey outside.

00:29:24.460 It's a different environment.

00:29:25.480 Different muscles being built.

00:29:26.900 Yeah.

00:29:27.300 So, like, my older brother, David, taught himself calculus and trigonometry in high school.

00:29:31.480 Taught himself.

00:29:32.440 Yeah.

00:29:32.760 So my grandfather would send books.

00:29:34.020 Pretty normal.

00:29:34.620 You know, just teach yourself calculus.

00:29:36.820 Well, that was the good thing.

00:29:38.100 So at the time, one of the formative episodes of my life was my parents were missionaries.

00:29:44.140 And because of that, the churches from the U.S. would send money.

00:29:47.600 And not every year were they getting the same amount of money, particularly with exchange

00:29:50.380 rates.

00:29:50.860 They weren't always getting the same amount and translated into pesetas.

00:29:54.360 But my parents didn't have enough to send us to school for two years.

00:29:58.040 So my mother taught us at home.

00:29:59.440 And I was obviously very embarrassed not to be able to go to school with my friends.

00:30:03.060 But I learned that I could teach myself anything if I had the books.

00:30:07.900 And then, like, once you figure that out in life, it's extraordinarily liberating.

00:30:12.300 Powerful.

00:30:12.840 Yeah.

00:30:13.260 And so I got my brother, when he went to college, to send me his college textbooks.

00:30:17.460 And so then I was able to skip about two years of college in terms of the advanced placement

00:30:21.460 tests and the various tests.

00:30:23.680 Because, like, he was sending me his college chemistry textbooks.

00:30:25.960 He was sending me his college economics textbooks.

00:30:27.660 You know, and so, and I think that's the most powerful thing, you know, particularly for

00:30:33.540 younger people.

00:30:34.560 Like, you can teach yourself anything if you set your mind to it.

00:30:36.720 So are you married or single?

00:30:37.820 Single.

00:30:38.320 So what do you look for?

00:30:40.260 Like, you go on dates.

00:30:41.180 You got a girlfriend.

00:30:42.020 You got...

00:30:42.260 I do, indeed.

00:30:42.900 Okay.

00:30:43.240 So say you're in high school.

00:30:44.920 Like, say you're in college.

00:30:46.040 Like, what did you...

00:30:47.440 Did a girl you date have to also be brilliant like you?

00:30:50.420 Because what's the conversation going to be?

00:30:51.900 What do you want to do?

00:30:52.420 I want to go have a couple of cups.

00:30:53.400 Like, was it like you have to go deep conversation?

00:30:55.300 Oh, no.

00:30:55.620 I was, like, pretty bad in general at talking to...

00:30:58.640 Well, talking to anyone.

00:30:59.580 But, you know, it certainly doesn't make it easier when you're talking to women, you know,

00:31:02.140 who you're nervous around.

00:31:04.000 Like, what entertains your thought?

00:31:05.780 Like, I mean, I bet you got to talk to somebody that's also entertained at your level of thinking.

00:31:10.020 Well, I think...

00:31:11.000 Well, I mean, it's not like I'm that sort of interesting or brilliant relative to the average

00:31:16.060 person.

00:31:16.340 I think everyone has things that make them interesting and fascinating.

00:31:18.640 I think that the first time I really felt so that I connected was when I was at Oxford.

00:31:26.140 And that was meeting very, very interesting people.

00:31:28.020 And I thought, in undergrad and then in high school, I'd always want to, like, stay at home

00:31:32.540 and read.

00:31:33.200 And there I thought, actually, I want to go out.

00:31:34.660 You know, I want to go out to dinner with them, you know, have a glass of wine, chat all

00:31:37.840 evening, and I'm going to learn something.

00:31:39.000 And so some of my friends there, you know, thank God I'm still in touch with and have wonderful

00:31:44.140 friendships, but, like, they read different things than I do, and they study in different

00:31:47.680 areas than I do.

00:31:48.700 And so, you know, listening to a friend who's an oncologist or a friend who's a linguist,

00:31:53.360 you know, or whatever that subject is, I always learn an enormous amount from them.

00:31:58.260 And so I try to do less talking and let them do the talking and ask a lot of questions.

00:32:02.700 I don't always succeed, and people have gotten after me.

00:32:05.360 What does your girlfriend do, by the way, for work?

00:32:06.760 I'm just curious.

00:32:07.140 Financial research.

00:32:08.300 Okay, so that makes sense.

00:32:09.540 We bizarrely met through Twitter.

00:32:13.920 That makes, seriously?

00:32:15.280 Yeah.

00:32:15.580 You met through Twitter?

00:32:16.420 Well, I think it's a Twitter, getting back to...

00:32:18.800 Is that why you deleted Facebook and you stayed on Twitter?

00:32:20.140 Because Twitter is more...

00:32:21.820 Yeah, so I think Facebook essentially allows you to connect with existing friends, right?

00:32:25.520 You're not generally making new friends.

00:32:27.940 And, you know, Facebook is good for some people.

00:32:30.660 You know, it allows them to connect with distant relatives or friends.

00:32:34.040 But I found that there are two main drivers of social media presence.

00:32:37.660 One is voyeurism, i.e., what's my friend doing I want to watch.

00:32:41.860 And the other is exhibitionism, which is, look how well I'm doing.

00:32:44.740 And so that really does feed a lot of social media.

00:32:47.240 I think Twitter, in general, is much more about ideas.

00:32:50.260 So you have, like, you know, journalists use it quite a lot, people to follow the news.

00:32:54.120 In finance Twitter, you're discussing stocks or the economy.

00:32:57.440 And so you end up meeting people who you don't know in the real world, but are sharing your similar interests.

00:33:06.260 And so in a way, like with finance, I've ended up connecting with people all over the world.

00:33:10.420 And it's true, blogging as well.

00:33:12.480 But blogging has sort of been dying out and people have moved to Twitter.

00:33:16.320 But I think Twitter is very much interest-based in the way that the Internet essentially itself was made.

00:33:20.340 You know, where you have these message boards and people connected around ideas and topics on message boards.

00:33:23.980 So let's get into you sold your company, DemoTix, to a company owned by Bill Gates.

00:33:34.640 I think it was Microsoft that bought DemoTix, right?

00:33:37.260 No, so Bill Gates owned Corbis.

00:33:39.000 Corbis, yeah, Corbis.

00:33:39.460 Yeah, so you had basically, you had Getty Images and Corbis were essentially a duopoly when it came to the sort of image libraries.

00:33:48.680 And they themselves had bought very big archives and libraries like the Bettman Archive and so on.

00:33:54.900 And at the time, basically, and then on the news side, you had sort of AFP, Reuters, and AP, and doing the news photographs.

00:34:04.420 So being a startup in that industry is very, very difficult to sell your images, particularly when some of the bigger news organizations have essentially an all-you-can-eat photos from the big players.

00:34:16.840 And we were doing news.

00:34:19.200 So, like, it's much easier if you're selling, you know, stock photos because you don't, there's no credibility attached to a photo of a pelican.

00:34:26.420 On the other hand, what we were trying to do was to take user-generated news photographs.

00:34:30.640 So, for example, you know, you're of Iranian background, but our big moment was extraordinary where they had the Iranian election, the sort of Green Revolution.

00:34:38.840 It was 2008, and they had locked up all the Reuters photographers in Iran and all the foreign photographers.

00:34:47.840 The Iranian students were uploading, because we were taking user-generated news photos.

00:34:51.580 So any Iranian with a camera could take a picture and upload it to our website.

00:34:54.320 And so we were getting all the photographs of what was happening in Tehran.

00:34:57.560 How did they find that about you?

00:34:58.820 So we were getting in touch with quite a lot of people.

00:35:01.260 So anyone who's a freelancer, people who...

00:35:03.000 In Iran?

00:35:03.420 Yeah, so, like, the university had loads of student journalists.

00:35:07.480 But how do you find them?

00:35:08.500 How did you contact them?

00:35:09.660 So we had quite a lot of people working with us in London, part-time, some of them full-time.

00:35:14.660 We had one guy.

00:35:16.120 Yeah, so one guy, he wasn't actually Iranian, but he spoke Dari, which, you know, is very similar.

00:35:22.640 But he was in touch with a lot of them, and they were getting the photographs to us.

00:35:26.420 But I realized, like, our business was close to doomed when we were getting the main photos out to, like, the Western press at the time.

00:35:36.080 And then Michael Jackson died two or three days later, and then no one cared.

00:35:39.100 And then it was basically wall-to-wall with Michael Jackson pictures.

00:35:42.080 And it took me back to a conversation that Turi, my dear business partner and friend, we went to Harvard and met Ethan Zuckerman.

00:35:52.500 And at the time, he was very involved in essentially bringing sort of foreign bloggers to sort of highlighting their work.

00:36:01.100 And he said, look, the problem with your business, I'll tell you what it is.

00:36:03.560 He said, you want to bring news about Iran or Uganda or some interesting place around the world to the average American?

00:36:09.980 He goes, well, there are more searches for Britney Spears this year, he said, than there are for Uganda.

00:36:14.160 He goes, no one actually cares.

00:36:16.500 And unfortunately, he was right.

00:36:17.880 So, you know, people prefer to sort of Google and search for Kim Kardashian or, you know, Britney Spears.

00:36:25.300 And I think Turi and I realized that voyeurism and exhibitionism drives it.

00:36:29.900 We probably would have created an Instagram and allowed people to put filters on their photos.

00:36:33.400 Yeah, it would have made you a lot more money, huh?

00:36:35.340 Yeah.

00:36:36.100 But still, what was it like getting a check from Bill Gates?

00:36:38.160 Knowing, hey, you got something on your resume, now you sold the company to Bill Gates.

00:36:42.560 So, we didn't become very wealthy doing it.

00:36:45.560 We basically, you know, returned some cash to investors.

00:36:49.160 The main thing that I felt, and I think Turi probably too, is just a huge sense of relief, you know,

00:36:53.560 which is like you have this idea from nothing, you take it to something, you build it up.

00:36:57.040 And so much interesting.

00:36:57.700 And then you have employees that you have to look after, you have your shareholders you have to look after.

00:37:01.540 And so, like, I think people don't generally appreciate the pressures and stresses that go on entrepreneurs, right?

00:37:07.040 Like, you know, basically, I think doing a startup, it's like getting married in a way.

00:37:12.660 Like, Turi and I spent, you know, more time together than anyone did.

00:37:16.020 Probably, you know, he was married at the time.

00:37:18.600 He saw me more often than he saw his family, you know, his wife and kids.

00:37:22.300 And, you know, you really are pouring your life into it.

00:37:25.040 So, it was a sense of relief to, you know, just be able to know that it was going to be passed on into good hands.

00:37:29.600 So, you say, you know, the whole myth about capitalism, monopolies, and death of competition.

00:37:35.620 You said capitalism without competition is not capitalism, right?

00:37:40.280 And so, I remember being at Harvard OPM program, owner-president management program.

00:37:46.280 And one of the guys from Brazil got up and he said, you know, I'm having a hard time losing market share

00:37:52.920 because there's this new business that keeps coming out in Brazil.

00:37:56.900 And they've taken, you know, it was 2%, now it's 3%, now it's 6%, now it's 8%, now it's 12%.

00:38:01.500 What do I do to prevent this from happening?

00:38:04.220 And it was the funniest thing that somebody from South America in a country that's not very regulated,

00:38:09.960 he says, who do you know that's running for something?

00:38:13.560 And he says, well, I know somebody that's running for something in my country.

00:38:16.800 How close are you to him?

00:38:18.080 What does he need from you?

00:38:19.160 Can you give him some funding?

00:38:20.380 And you have him come out with a new regulation that prevents the newer guys to come up,

00:38:25.660 so the barrier to enter is tougher to compete against you, right?

00:38:29.240 So, are you saying, are you suggesting or thinking that some of this is taking place

00:38:34.960 because the bigger companies are saying, hey, let me go get some lobbyists,

00:38:38.300 let me go get some new regulations, let me go get some guy that needs some money,

00:38:42.000 and hopefully in return he comes out with new laws that hurts everybody else to compete with me,

00:38:45.680 and I still stay strong, and in a way I can have my own monopoly or duopoly.

00:38:49.940 Are you seeing that taking place where competition is going away?

00:38:52.680 Absolutely.

00:38:53.380 So, I think that there's a chapter in the book where we point out that the more regulated a sector is,

00:39:01.300 generally the higher the degree of concentration.

00:39:03.660 And when firms have a lot of power, they can influence laws and make sure that the laws help them and keep people out.

00:39:09.800 And this is what leads to essentially cronyism, where you have a revolving door,

00:39:13.220 where people go from companies to government to the regulator and back,

00:39:16.360 and it leads to making sure that regulations are enacted that protect them.

00:39:20.320 So, if you think of the U.S. banking sector, for years you had the Glass-Steagall Act.

00:39:24.940 That was 35 pages, and there were hundreds of new banks that were started after Glass-Steagall, which was in the 1930s.

00:39:32.220 After the financial crisis, you had the Dodd-Frank Act, and that was 2,200 pages,

00:39:37.040 with thousands of more pages essentially delegated to rule writing committees.

00:39:40.360 And it was nicknamed the Accountant and Lawyer for Employment Act, because almost no one had read it,

00:39:46.040 no one knew how to understand it, and you had to go hire the guys who wrote it to mediate it.

00:39:49.760 And the problem with that is that basically in the last decade, we've had almost no new banks in the U.S.

00:39:53.680 So, you know, what your Brazilian friend is talking about is that extensive regulation keeps businesses and competitors out.

00:39:59.760 And so, I think the issue is not that you want to sort of just purely deregulate.

00:40:05.100 Obviously, none of us want to have, you know, poison or lead in the water.

00:40:07.860 But what we need is sensible regulation, one that is done on the basis of principles.

00:40:11.720 It's very simple, very clear, rather than extensive rule-based regulation, which essentially inhibits startups and competition.

00:40:19.200 And so you find this as well in Europe.

00:40:21.480 The hedge fund industry, for example, and the investment fund industry has gotten much, much more regulated.

00:40:25.960 And it means that the top 100 hedge funds in Europe control about 90% of the assets.

00:40:30.820 So the more regulation you get—

00:40:32.420 Top 100?

00:40:33.200 Yeah.

00:40:33.500 So, for example, in the old days—

00:40:34.540 And you say that's better if it's top 100?

00:40:36.900 No, no, no.

00:40:37.440 Well, I mean, hedge fund is a very fragmented industry.

00:40:40.720 But the problem is, like, Steve Cohen or David Einhorn, all these, like, hedge fund legends from the 90s started out with $6, $10 million.

00:40:47.300 So you can't do that nowadays.

00:40:48.760 You know, it's very, very hard.

00:40:50.540 It's the cost of compliance, the cost of, you know, just complying with all the regulations.

00:40:55.960 That's the right amount of competition, though.

00:40:57.100 How many companies is it good to have good, healthy competition?

00:40:59.720 You're saying four isn't enough.

00:41:02.200 You want it to be—you're saying that it's better to be, what, in the 20s, 30s, 40s, 50s?

00:41:09.080 I don't know.

00:41:09.360 Is there a good number?

00:41:10.680 There's no ideal number.

00:41:12.080 And obviously, the structure of every industry is dictated by the economics of the industry, right?

00:41:16.760 So, for example, in the old days, you had loads and loads of microchip manufacturers.

00:41:22.120 That's—there are fewer nowadays because the complexity is much, much higher and the capital costs of making microchips is much higher.

00:41:29.960 Nowadays, many of the microchip companies are what's known as fabless, meaning that they don't have the factory or the fab.

00:41:34.380 They design them and they hand them over to, for example, TSMC, which is the Taiwan Summit Conductor Manufacturing Corporation.

00:41:41.300 And essentially, they then make them, right?

00:41:42.860 But it's like this—it's so expensive to make a factory that makes the microchips.

00:41:47.360 And the same thing we were talking earlier about sort of the very, very large-bodied jets with Boeing or Airbus.

00:41:52.620 So, those are industries—or Visa, you know, which we have everyone on the same payment system.

00:41:57.240 But there are many other industries that are highly competitive.

00:41:59.400 If you think of, for example, the restaurant industry, right?

00:42:01.640 You could drive out and find hundreds.

00:42:03.320 And so, some industries should have very high degrees of competition.

00:42:07.320 You know, they basically—they're almost no barriers to entry.

00:42:10.540 People have many different tastes and preferences.

00:42:13.000 And it's just a natural part of the economy to see some churn.

00:42:16.300 And so, if you—

00:42:17.360 I mean, I remember being at Harvard and we were at a case study about Coca-Cola and Pepsi.

00:42:22.620 Where to open up one bottling company is $75 million of what you need.

00:42:28.020 And these guys have a ton all over the world.

00:42:31.900 So, somebody that's coming in, you don't even know if I get one bottle.

00:42:34.680 Say, I need 10 of them.

00:42:35.540 That's $750 million to want to compete.

00:42:38.760 So, you know, in some of these industries, you can't really compete for some folks.

00:42:44.500 So, what do you do with it?

00:42:45.400 Are you saying, you know, some companies like the whole idea would want to go original founders of Facebook.

00:42:49.600 And we've got to, you know, break apart.

00:42:52.060 You know, not break apart.

00:42:52.680 What's the word they're using?

00:42:53.740 Yeah, break up Facebook.

00:42:55.780 And Google, do you break up, you know, Coca-Cola and Pepsi and some of these companies as well?

00:43:01.360 So, what's quite interesting is—so, Chris Hughes this week talked about breaking Facebook up.

00:43:05.860 Yeah.

00:43:05.940 And, you know, one thing that we've not really talked about in this program is essentially the history of antitrust in terms of, one, how did we get here?

00:43:13.960 And, you know, breaking companies up is essentially a potential remedy.

00:43:19.140 In the past, mergers were not allowed, right?

00:43:22.040 So, there was a very long period of time where you could not buy your direct competitor.

00:43:25.100 And so, but starting in the early 1980s, the Justice Department under Reagan, Baxter, who was running the antitrust department, basically, the antitrust division essentially within the Justice Department, made the hurdles for buying a competitor much, much lower, right?

00:43:43.640 And so, you could then have much higher concentration ratios to go purchase people.

00:43:47.500 If you think of the World Cup, you know, for sort of foreigners or you think of the Sweet 16 for Americans, you get these brackets where you're 16, 8, and you start going down.

00:43:57.420 And so, if you fast forward almost 40 years to today from the early 80s, what you've had is you've gone sort of, you know, from 16 to 8 to 4, and you're basically getting down to very, very few players.

00:44:08.120 In the past, those mergers would have been blocked.

00:44:10.220 Nowadays, they happen.

00:44:11.180 So, Facebook was allowed to buy a direct competitor in an area that they were already dominating, which was social.

00:44:16.560 Something like WhatsApp or Instagram?

00:44:17.560 Exactly.

00:44:18.200 So, in the past, that kind of acquisition would not have gone through.

00:44:21.080 So, Google, for example.

00:44:22.260 Google, you couldn't have, you shouldn't have allowed them to buy.

00:44:25.020 Right.

00:44:25.420 So, I think it's very simple.

00:44:26.900 If you're in an industry, you know, where you're going to go below six players, you shouldn't be able to do it.

00:44:31.480 You could grow organically.

00:44:32.620 So, let's say you're the most amazing company ever at doing social.

00:44:36.360 Yeah.

00:44:36.740 And you reach 100% market share.

00:44:38.620 Okay, great.

00:44:39.280 But you shouldn't be able to get to 100% by buying your competitors who are going to compete with you.

00:44:43.960 And so, Google, for example, completely dominated search, still does.

00:44:48.260 But they bought DoubleClick, which dominated display advertising, right?

00:44:51.620 And so, we now have a duopoly in online advertising between Facebook and Google.

00:44:56.220 And much of this is due to the acquisitions being allowed.

00:45:00.220 And so, I think, and Senator Warren's talking about this, we're going to see an increased push to break up these companies.

00:45:06.320 So, mergers that should not have happened would be broken up, possibly, in the future.

00:45:11.280 Yeah.

00:45:11.460 I saw you in your book.

00:45:12.440 You talk about Google commands 90% of search market.

00:45:15.920 Okay.

00:45:16.220 Facebook rules 80% of social traffic.

00:45:18.340 Amazon has 75% of book sales and 43% of e-commerce.

00:45:22.900 So, would you categorize those companies as a monopoly?

00:45:28.380 Well, there's no question that there are monopolies.

00:45:29.960 There's no question those three companies are monopolies.

00:45:32.200 Well, on Facebook and Google, definitely.

00:45:34.120 Amazon has what business strategists would refer to as a high relative market share.

00:45:39.180 So, while it's only 43% of e-commerce, the next player is less than a fourth or a fifth of their size, closer to a fifth.

00:45:47.340 So, that's a very high relative market share.

00:45:49.320 The big problem with Amazon is slightly different in the sense that they have AWS, which is wildly profitable.

00:45:55.500 And so, they can then use the profit from AWS to subsidize their sort of last mile delivery on the e-commerce side.

00:46:01.940 But they also are highly conflicted where about half of Amazon's sales come from third-party sellers.

00:46:07.880 So, not Amazon, but rather people are selling their goods on the Amazon platform.

00:46:11.740 They can, of course, discriminate against the sellers in favor of their own goods.

00:46:16.040 They can see what's selling very well and then cut the person out by going straight to the manufacturer.

00:46:21.280 And so, there's all kinds of things that Amazon can do, anti-competitively having that dominant position.

00:46:26.000 What's funny is Peter Thiel said, and I agree with him, that companies that are true monopolist tend to deny it.

00:46:32.820 And companies that don't have much strength tend to sort of boast a bit too much about their dominant position.

00:46:39.780 So, who else would you put in the monopoly category?

00:46:43.000 I mean, there are loads.

00:46:44.680 It's basically one of the ways that you can get a monopoly easily is essentially to control something that doesn't travel well, right?

00:46:52.100 And that has often natural monopoly characteristics, right?

00:46:59.240 So, all your local cable companies in the U.S. are local monopolies, right?

00:47:03.680 There's almost no choice in the U.S.

00:47:05.180 Local monopolies.

00:47:06.080 So, while it appears that there's competition, you have four cable companies, actually, at the local level,

00:47:13.540 if you want to get cable or you want to get high-speed internet, which is delivered via cable, good luck to you, right?

00:47:18.880 Like, there's one company you're going to buy that from, right?

00:47:20.620 They have tremendous pricing power.

00:47:22.100 John Malone, who's one of the greatest investors ever and who's done a lot of cable investing,

00:47:25.980 said that cable essentially is now a monopoly, right?

00:47:27.760 They own the last mile.

00:47:28.960 So, even if you're switching to Netflix, right, and don't want, you know, some of the content that you're going to get on cable,

00:47:34.060 you're still paying sort of, you know, a charter or whoever it might be to deliver that to you.

00:47:39.680 The internet?

00:47:39.920 Yeah, exactly.

00:47:41.400 You often have monopolies when it comes to waste delivery, right?

00:47:45.080 So, for example, or cement and aggregates.

00:47:48.080 Those are also local monopolies that happen.

00:47:50.720 It's just not efficient.

00:47:51.480 How do you address that, though?

00:47:51.880 How do you address that?

00:47:53.060 So, you know, because if you look at the stat about 1970, 60% of Fortune 500 companies from 1970 are no longer around, right?

00:48:04.160 60% of Fortune 500 companies from 1970 are no longer around.

00:48:08.580 And a big part of that is competition.

00:48:10.280 Somebody said, I think I can come out and do it better than them.

00:48:12.420 So, I've got a question for you.

00:48:14.020 Nobody thought for the longest time Sears was going to lose or Kmart was going to lose.

00:48:18.060 When Kmart first got started in 1962, I think was called a super center year.

00:48:24.080 1962 Target got started, Kmart got started, Walmart got started, right?

00:48:27.920 After five years, Kmart has 250 stores because they had more investors.

00:48:32.660 Walmart only has nine stores.

00:48:34.380 That's Kmart versus Walmart, right?

00:48:35.680 Today, Kmart's out of business.

00:48:36.780 Walmart's in business, right?

00:48:37.780 And Walmart employs 2.3 million employees worldwide.

00:48:40.860 They're number one employers worldwide.

00:48:42.060 I think I have 1.6 million in the U.S., 700,000 outside of the U.S.

00:48:45.900 So, do you believe someone is going to come and do better than Facebook or Amazon or Google

00:48:53.080 and take that marketplace from them?

00:48:55.020 Or you're saying there's nobody that can compete with Google, Facebook, or Amazon?

00:48:59.380 So, there's quite a few interesting ideas in what you just said.

00:49:04.500 So, I'll try to talk about them in turn.

00:49:06.100 So, the first one when it comes to technology, but Warren Buffett talks about moats.

00:49:10.420 And essentially, moat is a barrier to entry.

00:49:13.140 And so, there's a venture capitalist in Silicon Valley.

00:49:19.700 It's Benedict Evans.

00:49:22.340 And he said, basically, people don't tend to sort of get over your moat.

00:49:25.580 They just go around it.

00:49:26.520 And so, what often happens to people who lead in technology is not that someone comes and

00:49:31.200 directly attacks the castle or gets over the moat.

00:49:34.220 Rather, it's just that a new technological paradigm emerges and then they're left behind.

00:49:38.360 While that is true in many areas, people forget that Microsoft essentially has dominated desktop

00:49:45.300 since the early 80s, right?

00:49:47.260 So, IBM for decades dominated essentially sort of the larger mainframe computers.

00:49:54.240 So, even though you do end up with different paradigms emerging, these can often last decades.

00:49:59.640 Particularly, we have very strong feedback.

00:50:00.900 Is that a bad thing?

00:50:01.600 I certainly think it is if you think about innovation and, you know, basically, it was

00:50:06.380 only when IBM settled with the government as an antitrust suit that you ended up with

00:50:11.940 software being split from hardware, right?

00:50:13.920 We wouldn't have sort of the modern computer age really in a way if software hadn't been

00:50:18.620 completely divorced from hardware.

00:50:20.520 Also, believe it or not, Google itself would not exist if antitrust hadn't limited Microsoft.

00:50:25.760 Microsoft had tremendous power controlling the desktop.

00:50:27.800 And where do you think Google would be today if Microsoft had used Internet Explorer to default

00:50:34.800 to MSN Search and not allowed people to pick Google versus MSN Search in the top box?

00:50:42.340 So, antitrust in many ways has been very useful essentially for making sure there is a level

00:50:48.140 playing field.

00:50:49.240 How different is antitrust in non-compete?

00:50:51.160 Does it play a similar role except at different levels?

00:50:53.540 So, antitrust broadly is meant to make sure that the very big companies are not behaving

00:50:58.720 in anti-competitive ways, that they're not tying, i.e., for example, because I'm dominant

00:51:02.440 and I want to sell you product A, I'm going to make you buy product B. That's what happens

00:51:07.040 often.

00:51:08.640 Or, for example, that they deny people access to essentially essential services and rather

00:51:13.040 than provide them on a sort of fair, open, non-discriminatory way.

00:51:15.800 That's what a lot of antitrust is about and preventing mergers that are uncompetitive, even

00:51:21.940 though, by the way, the FTC and the DIJ do nothing.

00:51:24.920 I call them aggressive do nothing is their strategy.

00:51:28.560 Non-competes limit competition on the worker side.

00:51:32.020 So, believe it or not, about one-fifth of American workers are covered by non-competes.

00:51:36.420 And interestingly and paradoxically, the non-competes tend to happen in industries that are not

00:51:41.260 highly concentrated.

00:51:41.960 So, in industries that are highly concentrated, there's not much need to use non-competes

00:51:46.780 because they're the only buyer of labor and their competitors often collude with them.

00:51:50.480 So, there have been cases where there was like an industrial parts company where there were

00:51:55.140 two companies that provided the parts and they both just reached an agreement that they weren't

00:51:59.340 going to poach each other's engineers.

00:52:00.740 And so, there are loads of these cases where companies collude.

00:52:03.360 So, they didn't even need to have a non-compete because the two companies were just talking

00:52:05.900 to each other.

00:52:06.200 What happens in the U.S. is that, for example, fast food restaurants are highly competitive.

00:52:12.400 You know, you just drive down the highway and you see sign after sign after sign of fast

00:52:16.360 food restaurants.

00:52:17.080 So, the way that they become essentially less competitive is by forcing their workers to

00:52:21.640 sign non-competes.

00:52:22.760 And so, this is changing now that there is more press and pressure.

00:52:26.800 So, they enforce their workers to sign non-competes at fast food restaurants?

00:52:31.700 Yeah.

00:52:31.880 They tell them like, okay, I won't hire you unless you sign the contract for employment.

00:52:35.380 And part of that contract for employment is one, that you will not go work for a competitor

00:52:40.340 for a certain period of time.

00:52:42.320 Also, they have...

00:52:43.320 Can you name like McDonald's as this?

00:52:45.540 When you say fast food, who...

00:52:47.160 So, for example, ones that have discontinued it.

00:52:49.720 There was like Jack in the Box.

00:52:51.160 There was quite a lot of the Burger King franchise.

00:52:54.820 Basically, almost any of the big ones you can think of.

00:52:56.500 So, if I worked at Burger King, there was a non-competes that I couldn't go work for

00:52:59.380 McDonald's?

00:53:00.540 Many of these have these or they have it within that.

00:53:02.740 So, for example, like you have Burger King, which is the company, and then you have franchisees,

00:53:06.160 right?

00:53:06.240 Yes, I've never heard of this.

00:53:06.660 And I worked at Burger King.

00:53:07.840 That's what I'm asking.

00:53:08.760 No, so, most people, believe it or not, I'm not blaming you for not reading your contract,

00:53:12.180 but most people don't actually read their contracts.

00:53:13.380 No doubt about it.

00:53:14.100 Absolutely.

00:53:14.460 And so, I'm just curious.

00:53:15.620 I was 15 years old, 16 years old.

00:53:17.660 The average person should read their employment contract.

00:53:20.780 They will find, among other things...

00:53:22.160 So, they're putting non-competes on 16-year-olds?

00:53:24.820 So, moving away from Burger King, by the way, I believe they're not doing it right

00:53:27.060 now.

00:53:27.360 But, in general, a lot of the fast food restaurants have had, and many still have, non-competes.

00:53:34.100 And, believe it or not, there was a woman who was a janitor working in a New England building.

00:53:41.040 And the contract for that cleaning of the building went to another company.

00:53:45.520 That company then hired her because she knew the building well, and they wanted to keep

00:53:49.000 her, and she lived locally.

00:53:50.800 So, her employer sued her for non-compete for cleaning a building.

00:53:54.940 So, in general, in law, there was something called the sort of janitor test, where basically

00:54:00.760 a non-compete should only really apply to CEOs, people who are highly skilled and know what

00:54:05.500 they're doing, in terms of like to have technical know-how of the business.

00:54:09.440 And, if a janitor was covered, it was deemed to be too broad.

00:54:13.040 And, the idea that literally a janitor was being covered by a non-compete, you know, under

00:54:16.840 the sort of janitor test, tells you just how crazy the situation has gotten.

00:54:20.180 Once that received public attention, they ended up dropping the suit against the janitor.

00:54:24.560 But, you can see that there's a reason why wages aren't going up when people feel that

00:54:28.800 they're going to be sued by their employer.

00:54:30.300 You think that's what it is?

00:54:31.120 And, by the way, it is true that, in most of the U.S., non-competes are not enforceable.

00:54:35.780 Right?

00:54:36.120 But, the average person does not know that.

00:54:37.840 And, furthermore, the average person doesn't have the wherewithal…

00:54:39.640 In most states, they're not enforceable?

00:54:41.800 Yes.

00:54:42.160 Isn't it a few states, like California, Montana, one of the Dakotas?

00:54:45.480 No.

00:54:46.000 Well, because, in most of them, basically, non-compete has to have three essential elements, which is,

00:54:52.220 one, it has to be like a limited in time.

00:54:54.540 You can't have a five-year non-compete, generally.

00:54:56.900 It has to be limited in scope, i.e., you worked at this restaurant or this company,

00:55:02.560 and in a 10-mile radius or whatever, you can't go work beyond that.

00:55:06.020 Right?

00:55:06.220 And, it has to be reasonable in terms.

00:55:07.580 And, so, most of these don't fit that.

00:55:10.520 Right?

00:55:10.720 They're sort of too long.

00:55:11.940 They're too broad.

00:55:13.100 You know, and they don't cover any specific know-how.

00:55:15.860 So, most of them are not enforceable.

00:55:18.180 The average person doesn't know that.

00:55:19.500 But, the other part of these agreements for employment that's a problem is that most people

00:55:23.940 sign away their statutory rights to join class action lawsuits and subject themselves to mandatory

00:55:29.160 arbitration.

00:55:29.980 And, so, most mandatory arbitration cases are resolved in the company's favor, not in the

00:55:33.780 workers' favor.

00:55:35.100 And, by not signing up to, or being able to sign up to class action suits, it then means

00:55:40.200 that if a company's wronging a thousand people, they can't actually band together.

00:55:43.900 And, so, it makes no sense for any one person to pursue a claim because they just don't have

00:55:47.740 the financial wherewithal.

00:55:48.640 Whereas, if you actually were able to enter a class action lawsuit, you know, you could

00:55:52.580 pool your resources.

00:55:53.640 I mean, I can see how that can affect the small percentage.

00:55:56.880 I don't know if that's the reason why income, median income, median income just hit, what,

00:56:01.900 61,000?

00:56:02.800 They just reported that the number's the highest it's been in a while.

00:56:05.160 So, it's not, it's not the only reason, but put a few things together.

00:56:07.780 One of the reasons.

00:56:07.940 Put a few things together.

00:56:08.780 By the way, I agree with you on the non-compete side.

00:56:10.660 It's so interesting you say this because two days ago, one of the guys, Mario, I'm walking

00:56:15.900 with the guys, the guy that had asked the question where he said, so, Patrick, you left

00:56:20.620 and started your own insurance company, okay?

00:56:23.100 And, you were with another company.

00:56:24.280 I was with Morgan Stanley, then Trans, then I left and I started PHP and I had a massive

00:56:27.380 lawsuit.

00:56:27.960 A $400 billion company sued us.

00:56:29.440 I've been sued one time.

00:56:30.200 That was a time.

00:56:31.180 We settled eight months later, nine months later.

00:56:33.820 He said, what do you do if somebody wants to leave you and be your competitor?

00:56:38.960 How do you handle that?

00:56:40.460 I said, it's very simple.

00:56:41.660 The day I no longer take care of the company and the people in the company, they deserve

00:56:45.460 the right to go out there and compete against me.

00:56:47.060 If we don't, that's how it should be, right?

00:56:49.500 But you're saying non-competes are hurting the marketplace because that's preventing other

00:56:56.040 people to compete with the former company that they were a part of, which makes sense.

00:57:00.860 And, by the way, I also understand protecting the company's privacy and trade secrets and

00:57:06.000 some of those things because that is leaving as well.

00:57:08.180 So, you can't just say, hey, here you go and go do this.

00:57:10.240 Although, Elon Musk recently talked about the fact that he gave the code open source

00:57:15.200 to, you know, Tesla and he doesn't have no problem.

00:57:17.740 Somebody does it better than me.

00:57:18.760 Go out there.

00:57:19.140 And that's pure capitalism based on what you're saying.

00:57:21.900 There's a part in your book where you talk about Buffett.

00:57:23.920 I want to read this where you said, Warren Buffett does not like competition.

00:57:27.860 He believes it limits a company's ability to raise prices.

00:57:31.120 Interesting.

00:57:31.940 He prefers investing in monopolies.

00:57:34.060 But absent a monopoly, Buffett's second best choices are in sectors with a limited amount

00:57:39.960 of competitors.

00:57:41.320 And then you continue to say that Buffett shares this view with the Silicon Valley mogul, Peter

00:57:45.920 Thiel, which you mentioned earlier, Peter Thiel, founder of PayPal, who has invested into

00:57:50.820 the monopoly Facebook and declared capitalism and competition are opposites.

00:57:54.980 Some investment gurus or even economists have gotten on bandwagon and recognized the monopolies

00:57:59.440 as an enlightened form of capitalism.

00:58:02.420 So are you saying Buffett likes investing in monopolies?

00:58:06.360 Well, it's undoubtedly true.

00:58:08.380 If you look at much of his investing recently, it's been in regulated utilities, which are

00:58:13.900 complete monopolies, essentially at the local level for power in the U.S. Midwest.

00:58:19.620 If you look at, he's bought, for example, a company called VeriSign, which is an absurd

00:58:24.900 company, basically the URL for your website or for any website gets assigned, and that's

00:58:32.180 established by ICANN, which is the international sort of body that regulates the giving of

00:58:38.140 addresses.

00:58:38.960 But it's a government-run monopoly.

00:58:40.560 They have 60% operating margins.

00:58:42.420 And VeriSign essentially is a monopoly when it comes to handing out addresses, right?

00:58:46.140 Like there should be a dozen companies doing it, and it should be absurdly cheap to do,

00:58:50.380 right?

00:58:50.580 So they just have tremendous pricing power, getting back to what Buffett does.

00:58:54.760 When you look at Moody's, right, he's owned that for years.

00:58:58.620 Moody's is part of a duopoly, and I could go name company after company after company

00:59:02.360 that Buffett's owned.

00:59:03.740 Many of these, as I mentioned earlier, I think are unnatural monopolies, meaning that they

00:59:07.800 only exist due to legislative acts or regulatory sort of red tape.

00:59:14.220 If you, Peter Thiel is slightly different.

00:59:16.200 So Peter Thiel, in his book, talks about the beauty of monopolies, but it's quite clear

00:59:21.000 that every single example he gives in the book comes from essentially network effects,

00:59:26.120 right, where these are natural monopolies, where, for example, social networks tend to

00:59:31.360 have network effects.

00:59:33.440 Everyone wants to be on the network where their friends are.

00:59:35.380 You don't want to be on 12 different networks.

00:59:37.780 Visa or payment systems he started, PayPal, have network effects.

00:59:41.160 So all of Thiel's examples essentially come from industries that are naturally monopolistic.

00:59:46.660 He does not talk about all the ones, like in the U.S. healthcare system, that are unnatural

00:59:52.460 ones.

00:59:52.880 He doesn't really talk about Moody's or VeriSign.

00:59:55.740 And I would bet money that if you asked him about all the other ones, he would say that

01:00:01.080 you need to essentially deregulate to have competition in sectors, you know, where there

01:00:06.000 shouldn't be a barrier to entry.

01:00:07.060 You know, and he tends to invest in companies that are software as a service, where you end

01:00:12.360 up with a very strong sort of feedback loop, you know, where you essentially, you have,

01:00:16.920 you build a platform and more people can build apps or things on it.

01:00:20.120 He's looking for sort of natural network effects and feedback loops.

01:00:24.200 He's not really, Thiel has done no investing in, for example, like, you know, the U.S.

01:00:29.040 healthcare market or insurance market, which are, I view as unnatural monopolies.

01:00:32.700 Like, you and I could probably set up a better insurance company if we could sell across state

01:00:36.280 lines.

01:00:36.580 And, you know, it's very, very difficult to do that.

01:00:38.580 These are all very, insurance has one of the highest levels of lobbying in the U.S.

01:00:42.700 So would you say Buffett buys companies after they are on track to be in a monopoly or a

01:00:48.480 duopoly?

01:00:49.460 Yeah.

01:00:49.800 So he bought the airlines after.

01:00:51.820 After that happens.

01:00:52.780 So, so interesting.

01:00:55.620 When you look at regulations, one side of the aisle politically over-regulates, the other

01:01:01.600 side of the aisle deregulates, you regulation, deregulation, right?

01:01:06.360 I think that that, it's easy to sort of see it that way.

01:01:10.540 I think that generally there's very little difference when it comes to Republicans and

01:01:14.560 Democrats, when it comes to regulation, or even antitrust.

01:01:18.400 If you look at sort of antitrust under Clinton, George W., Obama, basically there was almost

01:01:25.140 no real change at all from one president to the other.

01:01:28.880 Generally, people look after their corporate donors.

01:01:32.080 So let me ask you.

01:01:33.460 So would a Buffett be for a candidate that is willing to help regulate to, you know, make

01:01:42.760 it more difficult for the barrier to enter?

01:01:44.980 Would he be more for that?

01:01:46.080 So I would bet you money that if a candidate ran on the premise of making it, getting rid

01:01:52.040 of the NRSRO designation, which protects Moody's market share, Buffett would not be

01:01:56.920 thrilled with that and probably wouldn't want to donate.

01:01:59.560 Wouldn't want to donate for that candidate.

01:02:01.300 Yeah.

01:02:01.520 You know, there are plenty of businesses that he owns that would disappear pretty quickly

01:02:05.800 if there was a change in regulation.

01:02:07.780 I mean, think about this.

01:02:09.060 Moody's and S&P have close to 90% share globally.

01:02:11.980 There's like some very small ones in Europe that rate, but there's no reason why, like,

01:02:18.580 you know, particularly nowadays with a lot of bright people, quants and computers, that

01:02:22.840 you couldn't develop better ratings for companies, right?

01:02:25.820 I mean, they've done lots of studies, you know, where looking at CDS spreads and credit

01:02:32.360 spreads essentially do a better job of predicting bankruptcy than Moody's and S&P, right?

01:02:36.600 But they're paid.

01:02:37.460 Every single person who wants to issue a bond has to pay Moody's and S&P.

01:02:39.860 And so how is it that this duopoly persists, right?

01:02:42.740 It's regulation.

01:02:44.320 And Buffett himself in the Financial Crisis Commission, when they went and interviewed him

01:02:48.520 afterwards, so they asked him why he owned Dun & Bradstreet, right?

01:02:53.580 Did you go meet the management?

01:02:54.620 He's like, no, I didn't.

01:02:55.320 He said, I just realized that they essentially had a monopoly, right?

01:02:58.180 If you want to get paid by the government.

01:02:59.920 He said that.

01:03:00.480 Yeah.

01:03:00.800 So David Dyan, who's a very interesting journalist, D-A-Y-E-N, that's where he started writing

01:03:05.540 about Buffett as a monopolist when he read that.

01:03:07.560 And what's fascinating is that Dun & Bradstreet effectively is you couldn't get paid for,

01:03:13.660 and I think you still can't get paid by the U.S. government unless you have a small business

01:03:17.900 number given to you by Dun & Bradstreet, right?

01:03:20.780 So these kinds of regulatory or legislative fiat create that monopoly.

01:03:28.260 So, you know, a lot of the problem that I write about in the book comes from sort of government

01:03:33.200 regulation and laws that essentially protect specific companies.

01:03:37.300 So a monopoly doesn't happen without the help of the government.

01:03:40.760 Is that fair to say?

01:03:41.860 I would say in general, yes, because if there are barriers to, if you eliminate the regulatory

01:03:47.660 barriers to entry, generally people will want to come in and compete.

01:03:51.020 Now, there's some industries, as I mentioned, you know, in the case of Visa or Boeing, that

01:03:55.440 the industry structure itself makes it difficult.

01:03:57.400 But in general, yes, people will come in and compete.

01:04:00.100 So let's just say if I'm a candidate, hypothetically, if I'm a candidate, and if I want Buffett support

01:04:07.120 and endorsement, I'm just throwing a name out there.

01:04:09.640 Let's just say if I want Thiel's support and endorsement, Cuban, give me some of these

01:04:13.480 names that are, you know, name names, Bloomberg, you know, Dalio, whatever these names are,

01:04:18.600 that are billionaires, you know, successful, would I ask them where they have help or figure

01:04:26.340 out where they need help and say, hey, I'll be able to help you out in this area because

01:04:29.780 is there some of that?

01:04:31.220 No, that seems...

01:04:32.120 Are you insinuating that there might be some of that taking place?

01:04:33.820 No, no, I think that...

01:04:34.580 Okay, yeah, because that's what you're saying.

01:04:36.480 Well, no, I think that's fairly crude.

01:04:38.080 I think it's much more subtle than that, right?

01:04:40.160 You know, the U.S. is not Nigeria.

01:04:43.480 You don't end up with, you know, suitcases with cash.

01:04:46.580 No, I'm not saying cash.

01:04:47.420 I'm not saying cash.

01:04:48.120 That's not what I'm talking about.

01:04:48.520 I mean, there's not even like an explicit quid pro quo, right?

01:04:51.260 But like, for example, do you think that you would be, as a candidate, be more likely

01:04:56.340 to do something if you knew that you had to go get money from people, you know, who,

01:05:00.700 like, would you piss off the cable industry?

01:05:02.760 Would you go piss off, you know, Google?

01:05:05.600 And if you look at the revolving door...

01:05:07.320 The guy was a president that pissed off everybody.

01:05:09.040 He pissed off everybody.

01:05:09.940 Okay, so Trump's, this is a very good example.

01:05:12.520 Trump is a fascinating case where he, on the campaign trail, said that he was going to do

01:05:16.100 a lot more to go after monopolies and that there would be fewer mergers approved.

01:05:19.920 And, you know, so everyone thought, okay, well, maybe Trump's going to be different

01:05:22.340 than Clinton and Obama.

01:05:23.380 But what happened, the people that he appointed, essentially, and the people running his transition

01:05:27.620 team were people who had gone through the revolving door working for, as a lawyer

01:05:32.240 for Google at the FTC, and basically nothing changed, right?

01:05:36.320 So Trump talks a good game.

01:05:37.640 He's going to be different than Obama.

01:05:38.480 But actually, when you look at it, the revolving door is pretty strong, and there's no change.

01:05:42.260 The guy running the FTC right now seems like a good guy.

01:05:45.020 He's not a bad guy.

01:05:46.200 But ultimately, he's gone through the revolving door multiple times, representing corporate

01:05:50.020 clients that want to merge, right?

01:05:51.460 So there's not much of a change.

01:05:53.200 And I think that it's Nassim Taleb, the writer who wrote, you know, Black Swan, he refers

01:05:59.240 to it as the retrospective bribe, meaning that you're not going to do anything overtly to

01:06:04.240 piss off people that might one day hire you.

01:06:06.620 And I think campaigns work the same way, right?

01:06:09.540 Where you're just, you naturally don't do things that might upset people who are going

01:06:14.400 to write you checks.

01:06:15.560 You don't upset, but I'm saying, do you help and support the need of a regulation that

01:06:22.240 they need?

01:06:23.500 That's what I'm saying.

01:06:24.360 Because you know how a lot of times, like, well, we should minimize taxes.

01:06:28.620 Okay.

01:06:28.900 So someone's like, I'd like to see, raise taxes.

01:06:31.960 I don't think I'm paying enough taxes.

01:06:33.480 You know how Buffett says, I don't think I'm paying enough taxes.

01:06:35.780 I think I should be paying more tax.

01:06:36.880 I don't know if you heard him say that.

01:06:37.840 Yeah.

01:06:37.980 He says that over and over and over again.

01:06:39.080 Okay.

01:06:39.760 So let's just say you raise my taxes.

01:06:41.880 Fine.

01:06:43.000 What is more valuable to me?

01:06:44.900 A regulation that eliminates a competitor or you're raising 5% on taxes for me?

01:06:50.480 I'd much rather take a, you know what I'm saying?

01:06:52.660 A regulation that eliminates a competitor that gives me 12% market share of this guy that

01:06:58.740 now cannot compete against me versus 5% raising taxes.

01:07:02.220 You give me the regulation any day that we go over the tax.

01:07:04.760 Do you think those conversations happen or no?

01:07:06.900 Well, if you, I mean, I have the quotes in the book and then there are many that happened

01:07:11.400 after the book that I wish I could have included.

01:07:13.160 But for example, a lot of the bank CEOs are thrilled by Dodd-Frank, right?

01:07:17.760 It was Jamie Dimon and the former CEO of Goldman Sachs said that it's like the golden age of banking

01:07:23.120 with Dodd-Frank, right?

01:07:24.440 So quite a lot of them do like the regulation that's happened and view it as being, as protecting

01:07:29.000 their industry.

01:07:29.700 So I certainly think there's a very strong element of that where people recognize that laws can

01:07:33.360 keep out competitors.

01:07:34.520 Yeah, I don't know if you saw the, I think it was Yahoo Finance came out yesterday saying

01:07:43.080 70% of economists say that Trump is getting reelected with what is taking place right now.

01:07:49.060 It's going to be interesting because, you know, how that's going to affect, how, because, you

01:07:54.080 know, he's going after Bezos a little bit.

01:07:55.580 You're seeing what he's doing with Facebook and the conversations he's having with some

01:07:58.640 of the guys being kicked off of Facebook and Twitter, he's having conversations with Dorsey.

01:08:03.160 How do you foresee that taking out, taking place?

01:08:05.820 The economy and being reelected or the tech regulation?

01:08:09.320 Yeah, both of them.

01:08:10.120 You know, how, how those go hand in hand?

01:08:11.900 Because a part of him, he did say he's going to go after Bezos and he's trying to give him

01:08:15.660 a hard time, but nothing's really happened.

01:08:17.680 I, well, I mean, I, I hate to talk about politics.

01:08:20.020 It's not really something I have too much interest in.

01:08:22.460 It's more distaste.

01:08:23.340 But I think Trump has the attention span of a mosquito.

01:08:26.560 And so I genuinely think like, you know, if he has a coffee in the morning, he'll probably

01:08:30.960 do 20 tweets.

01:08:32.020 I have no idea what he's going to be thinking the day after tomorrow.

01:08:34.560 He's by far the most entertaining president of all time, though, I got to tell you.

01:08:36.780 If entertainment is what we pick presidents for, then that might be a good thing.

01:08:40.100 I'm not really sure that's true.

01:08:41.720 But in terms of, I don't think.

01:08:43.600 We picked entertainers as presidents before, though, you know.

01:08:45.040 Well, unlike Trump, Reagan had actually run California relatively well and, you know,

01:08:51.820 been the head of the Screen Actors Guild and, you know, had at a minimum been competent without

01:08:57.120 multi-billion dollar bankruptcies.

01:08:59.160 But on the regulating the Internet, I'm not certain that Trump's going to actually do anything

01:09:03.520 about that.

01:09:04.040 I think the much bigger danger to, or not danger, but the much bigger changes that are going

01:09:09.300 to happen to the Silicon Valley giants is going to come from essentially the, you know,

01:09:15.040 candidates like Senator Warren, or you have the Antitrust Committee in the House of Representatives.

01:09:22.760 You have David Cicilline and others, you know, who are looking into the tech giants.

01:09:26.820 And so I think that's probably where you're going to see some changes.

01:09:29.060 I don't know why I visualize you having a beautiful, massive painting of Trump in your

01:09:33.800 bedroom.

01:09:34.360 It just, I kind of felt the love you have for the guy.

01:09:36.460 I just felt it.

01:09:38.120 It was a very special moment.

01:09:39.960 Well, I think independent of whatever someone thinks politically, whether you're left or right,

01:09:44.140 I think the thing that I find troubling about Trump is that in the past, people look to

01:09:49.400 leaders to be sort of men and women of good character, you know, people who you would want

01:09:54.740 to emulate.

01:09:55.540 And unfortunately, you know, particularly given sort of the household I grew up in, you know,

01:10:00.540 Trump is essentially the antithesis of the qualities and virtues of the Sermon on the

01:10:04.740 Mount.

01:10:04.860 And, you know, all the sort of good qualities that you would want for your children are qualities

01:10:11.580 that are completely absent in Trump, you know, whether it's sort of patience, kindness,

01:10:16.320 lovingness, all these kinds of things.

01:10:17.540 And the idea that sort of nastiness should be elevated, you know, and be a quality that

01:10:22.660 people aspire to, that they get off watching him fire people is something that I just truly

01:10:26.740 don't understand.

01:10:28.080 Yeah.

01:10:28.580 So, so there's a part of that, that I agree with you.

01:10:30.860 The other part of it for me is also at night when I pray with my kids and I talk to my kids

01:10:35.260 about life, we talk about four things, lead, respect, improve, love is four things we do

01:10:38.980 as a family.

01:10:40.280 And four things, if you're going to pray to God, courage, wisdom, tolerance, understanding,

01:10:44.120 ask for those four things.

01:10:45.020 And I explain each one of them.

01:10:46.580 But one of the things I talk about is we don't bully people and we don't get bullied.

01:10:51.360 And a part of what I like that he's doing is he's bullying the bully, which no one's

01:10:56.800 been a bigger bully than these politicians that have been on for 20, 30, 40 years.

01:10:59.680 And a lot of people play their game and he's just not playing their game and he's bullying

01:11:02.960 that.

01:11:03.720 And I don't think they're used to that because they're typically used to bullying you and

01:11:07.520 I.

01:11:07.740 And we're kind of like, oh my gosh, don't piss off the government because they may do an

01:11:10.020 audit on me.

01:11:10.540 They may do this.

01:11:11.160 So we're kind of like, just say nice stuff.

01:11:12.800 Don't say anything bad.

01:11:13.620 Don't say what you believe politically.

01:11:15.460 And he's kind of given backbone a little bit to people that have been quiet for a long

01:11:19.480 time, fearing everyone in the government.

01:11:21.720 I think an element of that is not bad because it goes back to freedom of speech, not freedom

01:11:26.320 of press and what they're saying, freedom of speech or what you and I think about it.

01:11:30.200 Having been a guy that was raised in Iran like they did in 10 years and we were told

01:11:35.720 as kids growing up, don't talk about your religion.

01:11:38.040 My mom and dad, they're Christians.

01:11:39.280 Even though my mom was a communist, my dad was an imperialist, we were Christian.

01:11:41.700 You can't tell your religion in school, all this other stuff.

01:11:43.540 So, you know, from that perspective to go into Germany, you're still afraid because

01:11:47.560 you're like, I don't even know if it's real.

01:11:49.040 Are we still free?

01:11:49.760 Then you come to US.

01:11:50.480 You can tell me what you're talking about.

01:11:52.420 And in America, it's a business to make fun of the president, whether it's Obama, you

01:11:55.400 know, Will Ferrell doing Bush.

01:11:56.540 It doesn't matter what it is.

01:11:57.420 It's entertainment for it.

01:11:58.740 But it's interesting perspective coming from you.

01:12:01.000 I'm a fan of some of Milton Friedman's concepts.

01:12:04.300 Are you a believer of some of his philosophies?

01:12:06.580 Because you mentioned him as well on what he said in 1960, Milton Friedman took up the

01:12:12.520 banner of free markets, deeming government interference in commerce to be more damaging

01:12:16.060 than helpful.

01:12:16.560 What do you think about some of his philosophies?

01:12:18.000 So, I like a lot of what Milton Friedman's written.

01:12:20.380 I, you know, I do believe that free markets are far better than communism.

01:12:24.400 You know, I think that he is a sort of towering intellectual figure.

01:12:28.420 Some people have written that I don't like him.

01:12:30.660 The area where I disagree with him significantly is on antitrust.

01:12:34.820 And, you know, early Friedman was in favor of antitrust, if you read his writing carefully.

01:12:39.720 Late Friedman wasn't.

01:12:41.400 And the problem that I have with essentially assuming that you're going to get new entrants

01:12:46.820 competing, you know, which he thought private markets will take care of themselves, so you

01:12:50.600 don't want the government getting involved.

01:12:52.320 The problem is when you have very high barriers to entry or high regulation, when you allow mergers

01:12:56.720 with high barriers to entry, you're not going to get more competition.

01:12:59.420 And so, in a world where there's, where ease of entry is, you know, you find that in every

01:13:06.560 industry and there are no barriers, I'd be fine letting mergers.

01:13:09.380 He was for that, though.

01:13:10.060 Yeah, I would be fine allowing almost any mergers if there were very few barriers to

01:13:14.620 entry and you didn't have massive regulation.

01:13:16.820 You're saying he wasn't for having a few barriers of entries?

01:13:20.360 No, what I'm saying is he didn't like over-regulation either, right?

01:13:23.300 No, he's not over-regulation.

01:13:24.620 But the problem is, if you're in favor of mergers, right, which he was towards the end of

01:13:28.840 his life, right, thinking that free markets didn't take care of it.

01:13:31.580 At the same time, he didn't seem to acknowledge the fact that regulation itself was a very

01:13:35.160 high barrier to entry and there were other barriers to entry that basically meant that

01:13:38.480 you often wouldn't get competition.

01:13:40.000 You wouldn't get new companies entering and competing with these old established companies.

01:13:43.760 And so, simply allowing firms to merge when you can't get a lot of competition is highly

01:13:50.000 problematic.

01:13:51.260 If we had lower barriers to entry in many industries, I'd say, fine, you two merge, you know, get very

01:13:56.520 big.

01:13:56.800 Like, someone's going to come in and eat your lunch tomorrow.

01:13:58.560 But that just really doesn't happen.

01:14:00.340 Are you saying merge or acquisition or it's the same thing to you?

01:14:03.540 Oh, yeah.

01:14:04.760 It's always like M&A.

01:14:06.100 They're the same thing.

01:14:06.880 I mean, it's how you structure it, whether one's company buying another, whether the merging

01:14:09.860 is equals.

01:14:10.920 Yeah.

01:14:11.300 I'm asking that question because you talk about the fact that Google, Facebook, Amazon,

01:14:14.700 Microsoft, they bought 436 companies for $31.6 billion.

01:14:18.900 And, you know, they're just buying, buying, buying, buying more companies, right?

01:14:22.860 But isn't like, think about yourself.

01:14:25.320 You want to become an entrepreneur.

01:14:26.620 You're a new partner.

01:14:27.460 You realize how difficult it is.

01:14:28.620 It's hell.

01:14:29.540 You're trying to keep your commitments.

01:14:30.640 You're trying to get the money back to the investors.

01:14:32.220 You're trying to pay your employees.

01:14:33.640 You're trying to have a life.

01:14:34.780 You're trying to get some rest, save your sanity, be able to have some fun, be able

01:14:38.000 to have personal life.

01:14:39.000 And you realize this thing about running a business is not as easy as I thought it was

01:14:41.660 going to be.

01:14:41.880 It's hell, right?

01:14:43.120 And eventually you sell DemoTix to, is it Corbis or Corbis?

01:14:47.960 And then they eventually send it to, is it CVG, SVG?

01:14:50.580 Yeah.

01:14:50.820 Something like the Chinese company.

01:14:52.160 Yeah, VCG.

01:14:52.900 VCG.

01:14:53.500 I confused that.

01:14:54.540 Yeah.

01:14:54.560 I stopped following them after we sold them.

01:14:56.460 But I mean, some of my friends still work there.

01:14:57.720 They sold them to Demo a year later after.

01:14:59.000 I think like 2011 was you.

01:15:00.560 It was a couple years later.

01:15:01.420 A couple years later, yeah.

01:15:02.640 So isn't, if that's what you are not for mergers and acquisitions, you essentially allowed

01:15:07.680 Microsoft to acquire your company, right?

01:15:09.400 So, well, yeah, so if you think about this from the entrepreneur standpoint, and in the

01:15:14.920 case of the photo business, it's slightly different, but in the tech business, you really

01:15:18.780 do depend on these platforms, right?

01:15:20.740 So you really cannot exist without using the services of the companies that are competing

01:15:27.520 with you and basically decide whether you get to access your own audience, right?

01:15:32.260 So, you know, you're in the fortunate position where, you know, you get lots of views through

01:15:36.220 YouTube.

01:15:36.660 But just imagine if you were competing with Google, right?

01:15:38.580 They can demote you or downgrade you.

01:15:41.040 There's all sorts of stuff Google can do to its competitors.

01:15:44.360 And, you know, they do, in fact, do that.

01:15:47.040 And I write about that in the book.

01:15:49.060 Facebook, for example, decided that Vine was competitive.

01:15:51.400 There are like loads of emails from Facebook, by the way, that are now in the public domain

01:15:54.460 because the British Parliament has released them.

01:15:57.200 They're part of a lawsuit.

01:15:58.620 But basically, Facebook was very, very calculating about who got access to what data on its platform

01:16:03.260 and which ones they just shut out.

01:16:05.580 And so because these companies are dominant platforms, they basically can discriminate to

01:16:12.380 developers and to potential eventual competitors.

01:16:16.000 And so I think that if we care about innovation and we care about competition, then it is a

01:16:19.760 problem that these companies can do that.

01:16:21.580 And yes, but you had the benefit of being able to have somebody acquire you.

01:16:26.580 What's wrong with that happening to an entrepreneur?

01:16:28.860 Oh, no.

01:16:29.120 I have no problem with people getting some cash.

01:16:31.620 I don't think it's a great system where the only way you're getting out is by selling

01:16:36.360 to the competitor rather than to the dominant company rather than competing.

01:16:40.440 I mean, there's no dominant company bigger than Microsoft.

01:16:42.840 And, you know, you got four trillion dollar company.

01:16:44.520 The point I'm trying to make, I'm trying to think from the perspective of the entrepreneur,

01:16:47.880 right?

01:16:48.220 Because the entrepreneur is thinking this.

01:16:49.500 Here's what the entrepreneur is thinking about.

01:16:50.840 I think I can do it better.

01:16:52.360 Okay, great.

01:16:52.940 Go do it.

01:16:53.840 All right.

01:16:54.100 So you go and you compete.

01:16:55.820 You realize very quickly, you can compete, right?

01:16:58.520 For instance, I want to be Mr. Olympia.

01:17:00.440 My dream was I want to go be Mr. Olympia.

01:17:02.160 I was a bodybuilder in the army.

01:17:04.080 I'm 6'5", okay?

01:17:06.380 My calves are like a toothpick.

01:17:08.860 And no matter how much calf raises I did, donkey raises I did, my calves are my calves.

01:17:14.280 And I looked at these guys in Mr. Olympia that were winning, 5'8", 5'9", 5'10".

01:17:18.380 That's the body.

01:17:19.020 I'm talking to a good friend of mine.

01:17:20.080 Phil Heath was a seven-time Mr. Olympia.

01:17:21.480 He was 5'8", 5'9".

01:17:23.140 And he wanted to go into the NBA.

01:17:24.380 He was a great basketball player.

01:17:25.460 But he realized to get in the league, you got to be about 6'1", 6'2".

01:17:28.460 So he won Mr. Olympia.

01:17:29.920 He won seven times.

01:17:30.660 I said, I don't think Mr. Olympia is for me.

01:17:32.560 I'm just not going to do bodybuilder because the chance of me winning as a 6'4", 6'5 guy is slim, right?

01:17:37.060 So I leave.

01:17:37.560 I'd have to be off-season, 400 pounds.

01:17:39.500 It was more of a logical decision that was made.

01:17:41.360 Okay.

01:17:42.100 No problem.

01:17:43.380 You go into the business world.

01:17:44.480 You say, man, I don't think I can make this.

01:17:46.320 You fail.

01:17:47.080 You lose your savings.

01:17:47.980 You 401k, the house you finance.

01:17:49.640 All that money is gone.

01:17:50.500 You go back to getting a job.

01:17:51.420 And you have to take 2, 3, 4, 5 years to clean house and come back to where you were at before.

01:17:56.340 Or you go and you compete.

01:17:57.580 You're like, I've got a pretty good business.

01:17:58.700 I'm going to make this a legacy business.

01:17:59.980 I'll pass this down to my kids.

01:18:01.460 I want my sons to work with me.

01:18:03.160 I want them to do what I do.

01:18:04.300 This will be awesome.

01:18:04.900 We'll work together generation to generation to generation.

01:18:08.460 Or you build a business and say, somebody wants to cut a check to me.

01:18:10.720 I like it.

01:18:12.000 Microsoft's cutting a check.

01:18:12.840 This person's cutting a check.

01:18:14.200 So I can't sell to this guy now.

01:18:16.400 Well, now I only have one buyer because the other buyer I could have some competition of

01:18:19.760 buyers.

01:18:20.100 Now I can't do it because of merger and acquisition.

01:18:21.860 So I can see what Milton Friedman is thinking about.

01:18:25.820 But the other part for me that I agree with what you're saying is the barrier to enter

01:18:30.520 is when you make that extremely difficult to go in and compete, I mean, that's an additional

01:18:38.160 edge of competitors having that.

01:18:40.000 How are you?

01:18:40.420 How is somebody?

01:18:40.940 So going back to the question I asked you earlier, I didn't hear the answer to the question

01:18:44.060 I asked you earlier.

01:18:44.620 I was actually really curious on what you were going to say.

01:18:46.740 Do you actually think someone can eventually beat a Facebook, a Google, an Amazon?

01:18:53.360 Can someone go compete with those guys and beat them?

01:18:55.620 Do you think eventually someone's going to take over who they are today?

01:18:58.880 So I think that there are certain things that could happen that it would be possible to

01:19:03.460 beat them.

01:19:03.880 So for example, voice is the next big technology, right?

01:19:07.580 I think they completely dominate today's technology, and I think it's unlikely that

01:19:11.580 they're going to be beaten on, whether it's social networks, whether it's search through

01:19:15.020 mobile or the desktop.

01:19:17.460 But there could be something new, meaning, for example, voice could be the thing, right?

01:19:21.780 And Amazon is now doing this with Alexa, or you could end up with virtual reality could

01:19:26.500 be a big thing, right?

01:19:27.540 Now they're all pursuing things in that area, right?

01:19:30.140 But that might be like an ex-field of computing.

01:19:32.120 It's going to be something that we're not thinking about and something that is not really

01:19:35.460 the way that we are today.

01:19:36.320 I mean, if you think of within our own lifetimes, you know, I have like my mobile phone in my

01:19:39.200 pocket, but, you know, you basically have these sort of massive transitions where you

01:19:42.360 had essentially the mainframes in the 1970s, then you go to the PC, and then you go to

01:19:46.180 the mobile, dumb mobile, you know, and then you go to the smartphone.

01:19:49.740 So you have these sort of technological leaps that change markets, and different companies

01:19:55.540 emerge with these new technologies, right?

01:19:57.800 Where Microsoft emerged with the PC.

01:19:59.600 The question is, what are these new technologies, and who's going to dominate those?

01:20:03.220 So I think it's not, it's what Benedict Evans talked about, which is going around the moat,

01:20:07.880 around the castle, rather than even attacking it.

01:20:09.900 I think it is possible that they might not be on the next big thing.

01:20:13.180 So, you know, a threat to Google is obviously that if people really, if you get paid, Google

01:20:18.880 gets paid for searches, generally product searches.

01:20:21.420 If all product searches happen on Amazon, Amazon's arguably a much bigger threat than people

01:20:25.900 realize to Google.

01:20:26.840 But those are the kinds of things that threaten them.

01:20:29.740 Amazon's a much bigger threat to Google than people think it is.

01:20:31.900 Yeah.

01:20:32.080 So 90% of the searches on Google essentially are not profitable, right?

01:20:35.120 Now, they are profitable, of course, because, like, if you're searching for Dallas weather,

01:20:40.220 you know, you then think of, okay, Google gives me all my answers.

01:20:43.320 I want to buy some sneakers.

01:20:44.400 I'm going to go to Google and search for sneakers, right?

01:20:45.840 Sure.

01:20:46.740 So, but you wouldn't go there if they didn't also provide you universal answers, right?

01:20:50.960 So you don't, you can't just split up useful from non-useful searches, right?

01:20:55.820 But I think, though, that the big problem, of course, is that by having these platforms,

01:21:00.020 you can essentially dictate the terms.

01:21:01.260 So, you know, anyone who's old enough probably remembers, like, Lotus Notes in the 1980s,

01:21:05.920 and you had competitors to things that were Microsoft Office.

01:21:08.840 But Microsoft had the benefit of itself controlling the platform, controlling the API calls.

01:21:14.440 And so you can essentially make sure that the industry looks the way you want.

01:21:19.100 But the fact that Google had such a high market share in search meant that it was able to then introduce Chrome

01:21:23.720 and it could make sure that its own websites didn't support other browsers, right?

01:21:28.580 You know, so you can help shape the playing field to make sure that it favors you when you are a dominant company.

01:21:35.360 Is that one of the reasons why you say, you know, your concerns are the existing laws were not written at a time

01:21:42.880 where digital platforms were there, where, you know, we have to have different kind of laws

01:21:46.520 that have to take in consideration into what we're dealing with digitally?

01:21:49.620 Well, I think that if you look at the pace of change, certainly the laws that govern the Internet go back to 1998.

01:21:57.840 And, you know, that 20 years is a very, very long time when it comes to technology.

01:22:03.160 And it would be crazy not to update them.

01:22:05.940 I mean, the companies basically are not treated as media companies.

01:22:10.180 They basically have no responsibility for what goes on on their sites,

01:22:13.760 even though they do act like media companies and they curate content and effectively edit it.

01:22:19.280 So, you know, these companies basically have great power.

01:22:23.080 And with great power comes no responsibility.

01:22:25.660 With great power comes...

01:22:26.940 No response for them under the current system.

01:22:29.140 Wow.

01:22:31.940 What a thing to say.

01:22:33.320 You typically hear with great power comes, you know, a lot of responsibility.

01:22:37.820 You're saying no responsibility.

01:22:39.180 Pretty much, yeah.

01:22:40.000 I mean, they're not responsible for anything that appears on their platform,

01:22:42.560 even though, you know, they do sort of pay for content,

01:22:47.120 even though they have algorithms that function as editors, right?

01:22:51.280 And so they are effectively functioning like media organizations in many ways.

01:22:55.960 But they, of course, don't want to be regulated as such.

01:22:57.740 So therefore, they would deny that they're media organizations.

01:22:59.980 Last question here.

01:23:01.280 You know, this whole word of socialism is being thrown out everywhere.

01:23:04.420 You're hearing it everywhere.

01:23:05.600 AOC, Bernie Sanders.

01:23:07.520 Bernie's running right now on a, you know, socialism, democratic socialist is what he calls himself.

01:23:13.060 And AOC says, no, I'm just a socialist.

01:23:14.840 He's just pretty open about it.

01:23:16.900 And then, you know, you have Pelosi says that system's never going to work here.

01:23:21.520 You know, Trump says what he says about socialism.

01:23:24.100 What do you think about socialism?

01:23:25.620 Somebody that's into economy.

01:23:26.740 So socialism, properly understood, effectively goes back towards Marxism, essentially.

01:23:35.340 And if you look at it around the world, there are very, very few places that are properly socialist, right?

01:23:40.220 When American politicians talk about socialism, what they're really talking about in general is social democracy,

01:23:47.260 which essentially is a lot of European left-leaning parties are social democrats.

01:23:51.860 And so that social comes from that.

01:23:54.980 And European social democrats are not at all communist.

01:23:58.640 They're basically, they like capitalism but want to tame it and sort of, you know, get rid of some of the things that they perceive to be bad.

01:24:06.220 So I think that if you're looking at the kinds of things that Sanders and others are promoting are essentially sort of left-leaning European platforms.

01:24:14.660 They are not sort of North Korea, Venezuela, or even sort of, you know, pre-'89 communist countries.

01:24:21.180 And I think, again, sort of the term is being abused.

01:24:25.680 It would be much more helpful if they said that they were social democrats to, you know, essentially say they're Europeans.

01:24:31.800 But, you know, socialism itself is a failure, broadly, wherever it's been implemented.

01:24:37.060 Whereas social democracy, which essentially is a Western European sort of left-leaning, you know, government sort of stepping into free markets.

01:24:45.320 You know, you have some successful countries in Western Europe and some slightly less so.

01:24:50.580 But, you know, broadly European social democrats are just left-leaning, you know, slightly more state involvement than Americans might have.

01:24:58.380 But, again, like the word liberal means different things in Europe than it does in the U.S.

01:25:03.240 So who do you think got it right?

01:25:04.840 Who do you think got it right as a president?

01:25:06.200 Who was economically, who understood capitalism the best in the history of America?

01:25:12.160 I think the post-war settlement, essentially, if you look at, like, Eisenhower, Truman,

01:25:19.340 I think these were periods of time where they were very definitely sort of very strongly pro-capitalist.

01:25:26.560 Antitrust was enforced.

01:25:28.380 And I think that there was a view that the government itself was meant to look after the poor and needy and to make sure that markets functioned properly.

01:25:37.960 I think the problem right now is that there's essentially a left and right, often there's sort of a very binary approach,

01:25:44.520 which is either government can do no wrong or any government involvement's wrong.

01:25:48.440 And I think that the answer is obviously somewhere in between.

01:25:51.860 And the question is trying to manage that intelligently and effectively.

01:25:55.060 And I think that if particularly on the Republican and conservative side, historically the Republicans and conservatives were a party of antitrust,

01:26:01.560 were a party that wanted to make sure that competition flourished.

01:26:04.220 And it really was only essentially in the 1980s that that started changing.

01:26:08.420 But I think, you know, Eisenhower, I go back to probably Eisenhower in terms of one of the people, I think, who, you know, found that balance relatively well.

01:26:21.000 Well, not just him, but I mean, there were obviously Democratic presidents in the post-war period, which were pretty good too, right?

01:26:24.840 You know, Reagan, I think, was a very useful counter to some of the problems in the 1970s, right?

01:26:32.140 And, yeah, well, the funny thing about Carter, Carter gets a very, very bad rap.

01:26:37.640 If you look at a lot of the deregulation that's credited to Reagan, a lot of that started under Carter, right?

01:26:43.380 So in terms of, you know, there was very, very extensive regulation of railroads, of airlines,

01:26:50.920 in ways that made these have higher prices, be less competitive.

01:26:54.640 A lot of these were essentially introduced under Carter.

01:27:00.020 Very cool.

01:27:00.960 I can talk to you about this concept of capitalism for a long time.

01:27:04.020 You know, economy interests me a lot, especially since I haven't seen a lot of different things.

01:27:08.920 Where can people find you?

01:27:10.400 I know you're not on Facebook.

01:27:11.440 If they go on Facebook looking for you, they're not going to find you.

01:27:13.440 If it's a Jonathan Tepper, it's a different Jonathan Tepper, but you're on Twitter.

01:27:16.880 Yes.

01:27:17.300 So JTepper2 on Twitter is where I am, so number two, JTepper2.

01:27:22.640 And then I have a personal website, jonathan-tepper.com.

01:27:26.600 The business that I started, Variant Perception, which does economic research, variantperception.com.

01:27:32.360 So, you know, if you work for a bank or an asset manager or hedge fund, there's a lot of very high-quality research there.

01:27:38.720 And that's sort of where people can find me.

01:27:40.900 And then, of course, the myth of capitalism, the book, love it or hate it, I hope it makes people think.

01:27:45.920 And that is available from any fine bookstore and even Amazon, which is a relative monopolist.

01:27:51.340 I highly, highly recommend you get this book.

01:27:54.420 And the reason for it is because I don't like to read books on capitalism just with people I agree with.

01:28:00.740 I like to read capitalism, topical in capitalism.

01:28:03.980 There was a book called End of Capitalism.

01:28:05.660 I read the book.

01:28:06.140 I'm like, what is this?

01:28:06.840 This was a depressing book when I read it.

01:28:09.100 But I think it's a good book for somebody to read if this topic is intriguing.

01:28:12.240 If you're an entrepreneur, business owner, executive, this is the kind of stuff you've got to know

01:28:15.020 because it allows you to kind of see what's happening out there with a blind spot.

01:28:18.520 So we are going to leave the link to everything he talked about, Varian Perceptions, his website,

01:28:23.640 his Twitter account, and the link to Amazon to go buy his book, The Myth of Capitalism.

01:28:28.180 Jonathan, thank you so much for coming out.

01:28:29.880 I really enjoyed spending time with you.

01:28:31.100 Thank you.

01:28:31.500 Likewise.

01:28:31.720 Thanks, everybody, for listening.

01:28:33.960 And by the way, if you haven't already subscribed to Valuetainment on iTunes, please do so.

01:28:38.520 Give us a five-star.

01:28:39.900 Write a review if you haven't already.

01:28:41.420 And if you have any questions for me that you may have, you can always find me on Snapchat, Instagram, Facebook, or YouTube.

01:28:47.460 Just search my name, Patrick David.

01:28:49.340 And I actually do respond back when you snap me or send me a message on Instagram.

01:28:54.340 With that being said, have a great day today.

01:28:56.080 Take care, everybody.

01:28:56.780 Bye-bye.

01:29:01.720 Bye-bye.

Valuetainment - July 31, 2019

Episode 349： The Missing Link To Modern Day Capitalism

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