George Gilder: Why I Trust Ken Lay
Forbes Magazine
Tuesday December 10, 2:52 pm ET
By George Gilder
Why I trust the most disgraced chief executive more than I do the most reputable public
servant.
Why do I trust Gary Winnick and Jeffrey Skilling -- nefarious former chief executives of
notoriously bankrupt companies -- more than I trust Senator John McCain of vaunted
valor in prison camps or David Broder of Pulitzer fame or Senator Joseph Lieberman of
famously flinty integrity? Why do I trust Kenneth Lay of Enron (Other OTC:ENRNQ.PK -
News) and Bernard Ebbers of WorldCom (Other OTC:WCOEQ.PK - News) more than I
trust Justices William Rehnquist and Antonin Scalia, the stalwart intellectual leaders of a
nominally conservative Supreme Court, or even George W. Bush, that most trusted of
Presidents?
Why do I trust General Electric (NYSE:GE - News) chief emeritus Jack Welch or AT&T
(NYSE:T - News) Chief Michael Armstrong more than I trust the entire scientific and
environmental coverage in the New York Times and all the venerable editors of the
increasingly political Scientific American? Why do I trust Martha Stewart and ImClone
(NasdaqNM:IMCL - News)'s Sam Waksal far more than I trust the crusading journalist
James B. Stewart or New York State Attorney General Eliot Spitzer, trustbuster deluxe,
as they righteously seek to banish moneylenders, marketmakers and conflicts
of interest from the temples of Wall Street?
The reason I trust disgraced executives more than politicians, judges and journalists is
the same reason that I trust physicists more than I trust sociologists. The answer comes
from the eminent philosopher of science Karl Popper: falsifiability. In science,
falsifiability means that a hypothesis is presented with sufficient rigor to be proven
wrong, that is, falsified. It is the condition of trust. By contrast, the sociologist deals in
broad propositions -- such as "ethnic diversity improves educational outcomes" or
"patriarchy causes war" -- that, by sinking into a mush of definitions, defy disproof.
Except when conducting trials of identifiable crimes such as murder or assault, judges
are no more truthful than politicians or journalists. They all adhere to the "ring-true"
standard of sociology rather than the falsifiable standard of physics. Most of the time,
as physicist Wolfgang Pauli put it in another context, they are not even wrong. Their
statements lack the rigor to rate as lies and swim in the ontological soup of the verb "to
be." From such a soup, no enduring truths can evolve.
Like a physical experiment, every entrepreneurial venture embodies and tests a
hypothesis about products or markets. Intel is currently preparing to test the hypothesis
that computer companies will choose a microprocessor that runs at 3 gigahertz, or 3
billion cycles a second, and will buy it in sufficient volumes that Intel can profitably
manufacture it in a plant that costs $2 billion to build and equip. Samsung is testing
whether people will buy a cell phone that takes digital photographs. Ebay
(NasdaqNM:EBAY - News) is testing whether it can move beyond Web auctions of used
wine openers to Web auctions of $20,000 antique cars, and to TV programs. The
presence of such testable hypotheses distinguishes investment from both gambling
and government planning. A true gamble does not test a refutable principle. Therefore
it cannot produce valuable knowledge. Likewise, a nationalized business with
guaranteed markets cannot yield falsifiable information.
Knowledge emerges not from chaos, or fixity, but from conditions of uncertainty. Under
capitalism power flows to precisely the people who are willing to stake their money not
on gambles or sure things but on testable hypotheses, thus generating knowledge and
wealth for society. Entrepreneurs are trustworthy because they accept a moral code of
testability and falsifiability rather than one based on sentiment, sanctimony, good
intentions, good press, good luck, good looks or guarantees.
Bankruptcies play the same role in economic progress that falsifiability plays in the
progress of ideas. Both sciences and businesses advance as much by disproof as by
affirmation. Every capitalist investment has the potential for a dual yield: a financial
profit and an epistemological profit. One without the other is sterile. Economies
progress when the process of investment is informed by the results of previous
investments. What makes the entrepreneur uniquely trustworthy is that he combines in
one person these two yields of enterprise. If his venture succeeds, he also gains the
power -- through profits -- to make further investments, further experiments in light of his
initial venture. If his venture fails, he and other investors who shared his confidence in
the business may well lose wealth, and the project will sooner or later be halted, no
matter how commendable and morally uplifting it is. But even as money is lost,
epistemological profit is gained, distilled through the learning effects of direct
experience.
I trust chief executives because they deal in projects that can go bankrupt. They cannot
repeatedly or consistently lie about their companies because the truth will out in a
relatively short time. Even at Enron, Lay and Skilling could deceive themselves and the
public only for a matter of months. Skilling got skittish--and got out. Lay maintained his
faith through no fewer than 14 margin calls that he had to meet by selling Enron
shares. Both Enron stars learned their lessons (about off-the-books subsidiaries and
financial engineering, for example), and they taught them to the world.
Gary Winnick and his serial executives at Global Crossing (Other OTC:GBLXQ.PK -
News) also submitted to the crucible of experience. Building a unique global network of
optical fiber, they learned the perils of debt in a deflationary market. Selling a quarter of
his shares at a $600 million profit, Winnick also signaled a belief that they were fairly
valued or even overvalued. Many other shareholders did not trust that signal, though
they should have. Now politicians want to banish such information from markets
altogether in the name of making them more transparent and trustworthy. But most
business information is uncertain most of the time. Which means that bans on insider
trading make markets more treacherous, since prices will not move until outcomes are
sufficiently certain to be announced. Insider trading rules make the executive
personally liable for getting things wrong, though much of what any chief executive -- or
any person -- thinks at any particular time is wrong. Thus the law bars all the guesses
and intuitions of people closest to the company from influencing the price of the shares.
While executives can be trusted to face reality and learn from it, even if it means
bankruptcy, no such corrective faced the politicians and judges who allowed the
bankruptcies of some 35 onetime producers of asbestos on account of preposterous
claims of "potential illnesses" from this mostly safe and useful material. No such edifying
gauntlet faced the government officials and politicians who brought down 70 telecom
companies through a series of egregious policy errors of telecom reregulation and
monetary deflation.
Politicians are indignant about bankruptcy. They deem it a crime, rather than a
punishment. But they would never tolerate the equivalent outcome for themselves. To
prevent such a catastrophe, incumbent politicians such as McCain and Lieberman, who
want us to trust them, have been busily enacting campaign-finance rules that bar
anyone without a personal fortune from displacing them. But even the loss of an
election does not require the abnegation faced by a bankrupt entrepreneur, or the
recanting expected of a scientist whose findings have been falsified. Coming from an
entirely different culture, politicians and journalists are baffled by enterprise and
science. But the most crucial reason to distrust nearly everything said by politicians is
their defiance of truth and reality on issues of science.
Example: In one of the most brazen chemophobic claims in the history of science and
government, politicians around the world are now condemning carbon dioxide (the air
that we breathe out and plants imbibe) as a dangerous pollutant. Seeking new controls
on the global economy, Greens urge implementation of the Kyoto Protocol on global
warming, which would cost $500 billion a year to apply, reliably causing a Third World
holocaust of famine and poverty. Citing a nonexistent consensus of scientists, the
political choirs ignore all evidence that temperatures today, though admittedly warming
up from the "little ice age" of the last millennium, are cooler than their average in the
human era. By many paleochemical calculations, corroborated by historical record,
global temperatures were several degrees warmer 1,000 years ago, 3,000 years ago
and 6,000 years ago, long before humans began using fossil fuels. Rushing to justify
new government powers over the global economy, journalists and politicians simply do
not deign to consider the available data on the history of weather.
Politicians get away with denouncing reality and blaming it on executives and other
private-sector powers. But driving most of the misrepresentation in business is the
labyrinth of laws through which the chief executive has to guide his company, following
the advice of lawyers and accountants and sharpie chief financial officers. Since
corporate tax laws and securities regulations make no sense, executives do not bother
to learn the details, leaving interpretation of the cabalistic codes to highly paid experts
with many years of training and specialized degrees. Journalists who would never
dream of filling out their own tax returns deride executives who claim they have no clear
idea of the contents of thousands of pages of mandated forms and accounts that
remain unread by anyone, including the government bodies that mandate them -- until
bankruptcy or recession lends 20-20 postmortem clairvoyance to press, politicians and
prosecutors. Depreciation rules that assign lives of 15 years to telecom switches that
grow obsolete in 15 months make "the capitalization of expenses" a mandatory part of
telecom business. Mandatory, that is, when the government mandates it. Otherwise, as
in the case of WorldCom, it becomes felonious. As the President put it, "Corporate
accounting is not necessarily black and white."
What makes these accounts so critical to politicians are insider trading regulations that
try to create a level playing field for both a taxi driver and Warren Buffett. With all other
information pushed beyond the pale, politicians want to believe that the quarterly
numbers are meaningful and sufficient guides to investment. But without inside
information of material significance, investment loses its falsifiable basis and becomes a
form of gambling. Buffett or the executives of General Electric or the masters of Silicon
Valley's venture capital would never think of staking their funds without inside
knowledge unavailable to hoi polloi. Inside knowledge is perfectly legal for all these
players, who sit on multiple boards, read hundreds of for-their-eyes-only business
plans, and shuffle capital among hundreds of companies under a corporate umbrella or
within a portfolio.
The law denies inside information only to the layman, who is expected to invest on the
basis of technical analysis (the voodooistic interpretation of past trading patterns),
Keynesian economic astrology, quarterly earnings reports known to the world and other
trading trivia. While investigators pore over tomes of paperwork to ferret out the
possibly inside provenance of information about ImClone -- which had already plunged
the stock ten points when Martha finally sold -- the rest of the world is left to contemplate
the baffling challenge of finding any shred of actionable data about a company that
cannot be deemed an inside tip. The idea of a level playing field of information is
ridiculous on its face, since information is defined as a deformation of the level. Outside
analysis is mostly useless to investors -- because it is outside, and thus widely known
and already reflected in the prices of shares.
Chief executives understand that it is impossible to banish insider trading without
crippling the markets themselves. They grasp that conflicts of interest are ubiquitous in
life and that intelligent people take them into consideration when appraising a particular
report, tip, argument or analysis. But politicians rule a realm where rhetoric trumps
reality, where they imagine they can guarantee corporate purity with Chinese walls and
chastity belts among analysts and bankers, forced recusals by "interested parties,"
mandated "independent" board members, executive seals and signatures on all
accounts, back-checks and other fake remedies imported from the world of law and
politics. Amid the fun-house mirrors of insider trading rules, we now live in a world
where the only investors free of suspicion are people who channel their money into
companies they know nothing about. Approved by politicians everywhere, the best
investment by this measure is a state-run lottery or, more significantly, an all-market
index fund from which all useful inside information has been excluded. If people are not
allowed to put their money in companies they understand, capitalism loses its
advantage over socialism, since what makes capitalism succeed is the assignment of
capital to the insiders who earned it -- and thus learned how to invest it profitably.
The insanity of our securities laws, and even our tax laws, is nothing compared with the
sand thrown into capitalism's gears by American antitrust law. Based on the idea of
perfect competition, where the market is omniscient, this code is as unenforceable as
the insider trading rules. Now coming forward with treble-damage antitrust claims are
the likes of class action attorney William Lerach. Under the rules, companies today can
set any price they choose for their output, as long as it is not too high (gouging), too
low (predatory dumping) or just right (collusion). At present Micron Technology
(NYSE:MU - News) and other producers of dynamic random access memory chips for
computers -- one of the most competitive industries on the planet -- are confronted with
charges from the Justice Department that imply all three pricing offenses at once.
No government program has ever gone broke, which is why politicians need never face
the inconvenience of weighing the truth or falsity of their claims while they calibrate
them to the resonant frequencies of their audiences. Republicans were cruelly unfair to
Bill Clinton, whom they assailed as dishonest, when in fact he was fully honest to his
trade as a Democratic politician. Republicans are scarcely better. They adopt a
different idiom, oriented toward people in businesses, churches, constabularies and
intact families, rather than toward single mothers, academics envious of others'
success, union members, government workers, criminals and professional Greens or
grievance groups. But politicians in neither party tell the kinds of truths espoused by
physicists.
When a politician breaks the pattern and speaks the truth -- normally in a crisis too
sudden to permit the conducting of a public opinion poll -- he gains instant beatification,
as Rudy Giuliani and George W. Bush discovered after Sept. 11. The public reels in
amazement and admiration, as if their dog had begun to sing Schubert lieder. After a
time, though, the politician wishes to discover what it was that elicited the public
enthusiasm. He takes a poll.
Chief executives trust the personal opinions of their customers, who voluntarily and
authoritatively choose what to buy with their own money. Politicians collect the money of
others in order to spend it on public purposes sanctioned by figments of aggregate
opinion.
In a profession offering a limited number of powerful slots -- 100 senators, 50 governors,
1 President -- politicians live in a zero-sum world, where the gains of one necessarily
come at the expense of others. In an election, one candidate wins and the other loses.
In a zero-sum world, you may envy or blandish others, but you cannot trust them,
because you can assume they are seeking to aggrandize themselves at your expense.
Thus politicians necessarily distrust one another and the public. It is natural for them to
tax and regulate people coercively.
By contrast, chief executives know that their success is dependent on grasping a reality
that they can never comprehend in its fullness themselves. In order to win they must
trust others and collaborate with them. Their success depends on the successes of
others; their own enrichment relies upon the enrichment of their customers and
collaborators; their own profits stem from the dignity of voluntary personal choices,
rather than coercive appropriations. Their entire enterprise is ultimately founded on
trust. That is ultimately why I trust them. They trust me.
George Gilder writes on the economy and technology and is editor of the Gilder
Technology Report. |
