6. FINANCIALIZATION OF THE REAL ECONOMY
1. https://www.ft.com/content/294ff1f2-0f27-11de-ba10-0000779fd2ac
2. These figures give an approximate idea of the weight of large companies in the economy. On the one hand, some companies do not report their turnover, so total revenues are underestimated. On the other hand, the list includes the biggest banks.
3. G. Mukunda, ‘The price of Wall Street’s power’, Harvard Business Review, June 2014.
4. E. Hadas, ‘Seeing straight: Why buybacks should be banned’, Breakingviews, 14 December 2014: https://www.breakingviews.com/features/why-buybacks-should-be-banned/
5. W. Lazonick, ‘Profits without prosperity’, Harvard Business Review, September 2014.
6. Ibid.
7. http://online.wsj.com/public/resources/documents/blackrockletter.pdf
8. Source: Adapted from Lazonick, ‘Profits without prosperity’.
9. Jensen and Meckling, ‘Theory of the firm’, pp. 305–60.
10. Source: Bain & Co., Global Private Equity Report (2015), fig. 2, p. 43.
11. https://www.blackstone.com/the-firm/asset-management/private-equity
12. D. Burns, L. Cowie, J. Earles, P. Folkman, J. Froud, P. Hyde, S. Johal, I. Rees Jones, A. Killett and K. Williams, Where Does the Money Go? Financialised Chains and the Crisis in Residential Care, CRESC Public Interest Report, March 2015.
13. G. Ruddick, ‘Four Seasons Health Care reports £264m annual loss’, the Guardian, 27 April 2016.
14. K. Bayliss, ‘Case study: The financialisation of water in England and Wales’, FESSUD (Financialisation, Economy, Society and Sustainable Development), Working Paper series no. 52 (2014).
15. W. Lazonick, ‘Innovative enterprise or sweatshop economics? In search of foundations of economic analysis’, ISIGrowth Working Paper no. 17 (2016).
16. P. Aghion, J. Van Reenen and L. Zingales, ‘Innovation and institutional ownership’, American Economic Review, 103(1) (2013), pp. 277–304.
17. Bogle, The Clash of the Cultures.
18. J. M. Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936), p. 154.
19. Ibid., p. 155.
20. S. Patterson, Dark Pools: The Rise of AI Trading Machines and the Looming Threat to Wall Street (New York: Random House, 2012).
21. Amy Or, ‘Average private equity hold times drop to 5.5 years’, Wall Street Journal, 10 June 2015.
22. D. Barton and M. Wiseman, ‘Focusing capital on the long term’, Harvard Business Review, January–February 2014.
23. Ibid.
24. Keynes, General Theory of Employment, pp. 161–2.
25. Return on Invested Capital is a measure of profitability. It is calculated by dividing net (after tax) operating profits by invested capital (less cash and cash equivalents).
26. J. P. Morgan, ‘Bridging the gap between interest rates and investments’, JPM Corporate Finance Advisory, September 2014.
27. K. J. Murphy, ‘Executive compensation: Where we are, and how we got there’, in G. M. Constantinides, M. Harris and R. M. Stulz (eds), Handbook of the Economics of Finance, vol. 2 (Amsterdam: Elsevier, 2013), pp. 211–356.
28. L. Mishel and J. Schieder, CEO Pay Remains High Relative to the Pay of Typical Workers and High-wage Earners (Washington, DC: Economic Policy Institute, 2017).
29. The Conference Board, CEO Succession Practices: 2017 Edition, https://www.conference-board.org/publications/publicationdetail.cfm?publicationid=7537
30. Fig. 26 depicts data retrieved from the Bureau of Economic Analysis website.
31. J. Asker, J. Farre-Mensa and A. Ljungqvist, ‘Comparing the investment behavior of public and private firms’, NBER Working Paper No. 17394 (September 2011).
32. Author’s elaboration of data from the Bureau of Economic Analysis.
33. Author’s elaboration of data from the Bureau of Economic Analysis.
34. Bogle, The Clash of the Cultures, pp. 22–3.
35. M. Friedman, Capitalism and Freedom (Chicago: University Press, 1962), p. 133.
36. R. E. Freeman, J. S. Harrison, A. C. Wicks, B. L. Parmar and S. de Colle, Stakeholder Theory: The State of the Art (Cambridge: University Press, 2010), p. 268.
37. https://www.kfw.de/KfW-Group/About-KfW/Identität/Geschichte-der-KfW/
38. C. Leggett, ‘The Ford Pinto case: The valuation of life as it applies to the negligence-efficiency argument’, Law & Valuation, Spring 1999.
39. C. Perez, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages (Cheltenham: Edward Elgar, 2002).
40. C. Perez, ‘The Double bubble at the turn of the century: Technological roots and structural implications’, Cambridge Journal of Economics 33(4) (2009), p. 801.
7. EXTRACTING VALUE THROUGH THE INNOVATION ECONOMY
1. https://www.netmarketshare.com/search-engine-market-share.aspx?qprid=4&qpcustomd=0
2. R. Solow, ‘Technical change and the aggregate production function’, Review of Economics and Statistics, 39 (3) (1957), pp. 312–20: JSTOR 1926047; R. R. Nelson and S. G. Winter, An Evolutionary Theory of Economic Change (Cambridge, MA: Harvard University Press, 2009).
3. D. J. Teece, ‘Profiting from technological innovation’, Research Policy, 15(6) (1986), pp. 285–305.
4. https://www.theatlantic.com/magazine/archive/2015/11/we-need-an-energy-miracle/407881/
5. https://www.washingtonpost.com/opinions/americas-miracle-machine-is-in-desperate-need-of-well-a-miracle/2017/05/05/daafbe6a-30e7-11e7-9534-00e4656c22aa_story.html?utm_term=.b38348fbc471
6. https://hbr.org/2014/05/why-germany-dominates-the-u-s-in-innovation
7. M. K. Block and F. Keller, ‘Explaining the transformation in the US innovation system: The impact of a small government program’, Socioeconomic Review 11(4) (2013), pp. 629–56: https://doi.org/10.1093/ser/mws021
8. S. W. Leslie, The Cold War and American Science: The Military-Industrial-Academic Complex at MIT and Stanford (New York: Columbia University Press, 1993).
9. See W. Lazonick, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States (Kalamazoo, MI: W. E. Upjohn Institute for Employment Research, 2009), ch. 2: doi: https://doi.org/10.17848/9781441639851
10. Business Week, 1960, cited in H. Lazonick, Sustainable Prosperity in the New Economy? Business Organization and High-tech Employment in the United States (Kalamazoo, MI: Upjohn Press, 2009), p. 79.
11. W. Lazonick and M. Mazzucato, ‘The risk–reward nexus in the innovation–inequality relationship: Who takes the risks? Who gets the rewards?’, Industrial and Corporate Change, 22(4) (2013), pp. 1093–128: https://doi.org/10.17848/9781441639851 The structure of this market is particularly important in understanding where innovation risk truly lies. Liquidity is provided by market makers, who underwrite IPOs and ensure the instant sale and purchase of stock at close to market prices. In this way, investor risk is transferred to market makers. Market makers are backed by investment banks, which – as it turns out – are underwritten by the government (K. Ellis, R. Michaely and M. O’Hara, ‘When the underwriter is the market maker: An examination of trading in the IPO aftermarket’, Journal of Finance, 55(3) (1999), pp. 1039–74.
12. ‘I have worked with investors for 60 years and I have yet to see anyone – not even when capital gains rates were 39.9 per cent in 1976–77 – shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.’, The New York Times, 14 August 2011: http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html?_r=2&hp
13. Lazonick and Mazzucato, ‘The risk–reward nexus in the innovation– inequality relationship’.
14. N. Henderson and M. Schrage,
‘The roots of biotechnology: Government R&D spawns a new industry’, Washington Post, 16 December 1984: https://www.washingtonpost.com/archive/politics/1984/12/16/government-r38/cb580e3d-4ce2-4950-bf12-a717b4d3ca36/?utm_term=.27fd51946872. I am grateful to William Lazonick for pointing me to this article.
15. This section on the role of venture capital and the following section on executive pay draw heavily on Lazonick and Mazzucato, ‘The risk– reward nexus in the innovation–inequality relationship’.
16. Ibid.
17. Ibid.
18. P. A. Gompers and J. Lerner, The Venture Capital Cycle (Cambridge, MA: MIT Press, 2002).
19. See S. Davidoff, ‘Why I.P.O.s get underpriced’, Dealbook, New York Times, 27 May 2011; J. Ritter, IPO data website, 2012: http://bear.warrington.ufl.edu/ritter/ipodata.htm; M. Gimein, E. Dash, L. Munoz and J. Sung, ‘You bought. They SOLD’, Fortune, 146(4) (2002), pp. 64–8, 72, 74.
20. Gary P. Pisano, Science Business: The Promise, the Reality, and the Future of Biotech (Boston, MA: Harvard Business School Press, 2006).
21. W. Lazonick and Ö. Tulum, ‘US biopharmaceutical finance and the sustainability of the US biotech business model’, Research Policy, 40(9) (2011), pp. 1170–87.
22. R. Fontana, A. Nuvolari, H. Shimizu and A. Vezzulli, ‘Reassessing patent propensity: Evidence from a dataset of R&D awards, 1977–2004’, Research Policy 42(10) (2013), pp. 1780–92.
23. More formally, a patent holder is awarded a ‘probabilistic’ right to exclude others from using and commercializing an invention (M. A. Lemley and C. Shapiro, ‘Probabilistic patents’, Journal of Economic Perspectives, 19(2) (2005), pp. 75–98: doi: 10.1257/0895330054048650). The patentee must be willing and able to enforce its rights against infringement of the patent. The patentee can license others to use the invention in exchange for royalties.
24. The intensity of patenting activity and the importance of patents – both in relation to appropriability and disclosure – varies in importance across countries, sectors, technologies, and by firm size. Firms in pharmaceuticals, biotechnology and ICT, for example, tend to patent more than firms in other areas. Patents are the most important appropriability mechanism for pharmaceutical companies, for example, whereas in other sectors firms may rely more on secrecy, lead-times to production, trademarks and additional complementary assets to gain from their inventions. Similarly, patents play a far more important role in the diffusion of information for R&D labs in manufacturing firms in Japan compared with those in the US, where publication and informal information exchange is more important (W. M. Cohen, A. Goto, A. Nagata, R. R. Nelson and J. P. Walsh, ‘R&D spillovers, patents and the incentives to innovate in Japan and the United States’, Research Policy, 1(8–9) (2002), pp. 1349–67: doi: http://doi.org/10.1016/S0048-7333(02)00068-9
25. According to M. A. Lemley, in ‘Software patents and the return of functional claiming’, Wisconsin Law Review, 2013(4), pp. 905–64, the costs of software innovation are lower than innovation in the life sciences. Software is also protected by copyrights, which already provide for effective prevention of copying by others. Network effects may help innovators to capture returns regardless of intellectual property protection (more on this later in this chapter). There is, in addition, the open-source community, which suggests that patents may not be a necessary condition for innovation in the sector. Finally, software patentability varies across regions and countries (for example, it is limited in Europe and India, and broad in the US), which also suggests that patent protection may reflect a policy choice.
26. Baumol, ‘Entrepreneurship: Productive, unproductive, and destructive’.
27. R. Mazzoleni and R. R. Nelson, ‘The benefits and costs of strong patent protection: A contribution to the current debate’, Research Policy, 27(3) (1998), pp. 273–84.
28. M. Kenney and D. Patton, ‘Reconsidering the Bayh–Dole Act and the current university invention ownership model’, Research Policy, 38(9) (2009), pp. 1407–22.
29. http://www.nybooks.com/articles/2004/07/15/the-truth-about-the-drug-companies/
30. L. Burlamaqui and R. Kattel, ‘Development as leapfrogging, not convergence, not catch-up: Towards Schumpeterian theories of finance and development’, Review of political Economy, 28(2) (2016), pp. 270–88.
31. Mazzoleni and Nelson, ‘The benefits and costs of strong patent protection’.
32. S. Haber and S. H. Werfel, ‘Why do inventors sell to patent trolls? Experimental evidence for the asymmetry hypothesis’, Stanford University Working Paper, 27 April 2015.
33. J. Bessen and M. J. Meurer, ‘The Patent Litigation Explosion’, Loyola University Chicago Law Journal, 45(2) (2013), pp. 401–40: http://lawecommons.luc.edu/luclj/vol45/iss2/5
34. J. E. Bessen et al., ‘Trends in private patent costs and rents for publicly-traded United States firms’(March 2015). Boston University School of Law, Public Law Research Paper no. 13–24: SSRN: https://ssrn.com/abstract=2278255 or http://dx.doi.org/10.2139/ssrn.2278255
35. C. V. Chien, ‘Startups and patent trolls’, Stanford Technology Law Review, 17 (2014), pp. 461–506.
36. W. J. Baumol, Entrepreneurship, Management and the Nature of Payoffs (Cambridge, MA: MIT Press, 1993), ch. 2, p. 25; see also ch. 4.
37. Foley, ‘Rethinking financial capitalism and the “information” economy’.
38. The Economist, 8 August 2015: http://www.economist.com/news/leaders/21660522-ideas-fuel-economy-todays-patent-systems-are-rotten-way-rewarding-them-time-fix
39. C. Forero-Pineda, ‘The impact of stronger intellectual property rights on science and technology in developing countries’, Research Policy 35(6) (2006), pp. 808–24.
40. E. M. F. t’Hoen, The Global Politics of Pharmaceutical Monopoly Power: Drug Patents, Access, Innovation and the Application of the WTO Doha Declaration on TRIPS and Public Health (Diemen: AMB, 2009).
41. M. Mazzucato, The Entrepreneurial State: Debunking Private vs. Public Sector Myths (London: Anthem Press, 2013).
42. Source: US Department of Health and Human Services: http://www.hhs.gov/opa/reproductive-health/stis/hepatitis-c and World Health Organization: http://www.euro.who.int/en/health-topics/communicable-diseases/hepatitis/data-and-statistics
43. Sovaldi is, however, more costly than Harvoni overall, because it needs to be taken in combination with other drugs.
44. The letter is available at http://www.finance.senate.gov/imo/media/doc/Wyden-Grassley%20Document%20Request%20to%20Gilead%207-11-141.pdf
45. A. Hill, S. Khoo, J. Fortunak, B. Simmons and N. Ford, ‘Minimum costs for producing hepatitis C direct-acting antivirals for use in large-scale treatment access programs in developing countries’, Clinical Infectious Diseases, 58(7) (2014), pp. 928–36: doi: 10.1093/cid/ciu012
46. M. Mazzucato, ‘High cost of new drugs’, British Medical Journal, 354: i4136 (2016): http://www.bmj.com/cgi/content/full/354/jul2710/i4136
47. D. W. Light and J. R. Lexchin, ‘Pharmaceutical research and development: What do we get for all that money?’, British Medical Journal 345:e4348 (2012): http://dx.doi.org/10.1136/bmj.e4348
48. A. Swanson, ‘Big pharmaceutical companies are spending far more on marketing than research’, Washington Post, 11 February, 2015: http://www.washingtonpost.com/news/wonkblog/wp/2015/02/11/big-pharmaceutical-companies-are-spending-far-more-on-marketing-than-research/
49. Lazonick, ‘Profits without prosperity’.
50. Mazzucato, The Entrepreneurial State.
51. H. Kantarjian and S. V. Rajkumar, ‘Why are cancer drugs so expensive in the United States, and what are the solutions?’, Mayo Clinic Proceedings, April 2015, report that 85 per cent of basic cancer research in the US is funded by the government.
52. J. Sachs, ‘The drug that is bankrupting America’, Huffington Post, 16 February 2015: http://www.huffingtonpost.com/jeffrey-sachs/the-drug-that-is-bankrupt_b_6692340.html
53. V. Roy and L. King, ‘Betting on hepatitis C: How financial speculation in drug development influences access to
medicines’, British Medical Journal, 354:i3718 (2016).
54. P. Barrett and R. Langreth, ‘Pharma execs don’t know why anyone is upset by a $94,500 miracle cure’, Bloomberg Businessweek, 3 June 2015: https://www.bloomberg.com/news/articles/2015-06-03/specialty-drug-costs-gilead-s-hepatitis-c-cures-spur-backlash
55. LaMattina’s article on Forbes is available at: http://www.forbes.com/sites/johnlamattina/2014/08/04/politicians-shouldnt-question-drug-costs-but-rather-their-value-lessons-from-soliris-and-sovaldi/
56. R. Zirkelbach, ‘The five essential truths about prescription drug spending’, March 2015, available on PhRMA website at: http://catalyst.phrma.org/the-five-essential-truths-about-prescription-drug-spending
57. See for example Hilner and Smith, ‘Efficacy does not necessarily translate to cost effectiveness’.
58. Peter Bach’s interactive calculator can be accessed at www.drugabacus.org
59. According to the ranking compiled by Forbes for 2014, on average the ten largest pharmaceutical companies enjoy a 19 per cent net profit rate – the highest of all industries included in Forbes’ worldwide analysis. Pfizer leads the group with a remarkable 41 per cent net profit margin. Only large banks, which are well known to enjoy rents because of their size and political influence, earn a profit rate comparable to that of large pharmaceutical companies, while for example the ten largest automobile companies – also one of the most profitable industries in the world – have on average a 6 per cent net profit rate.
60. P. David, ‘Clio and the Economics of QWERTY’, American Economic Review, 75(2), Papers and Proceedings of the Ninety-Seventh Annual Meeting of the American Economic Association (May 1985), pp. 332–7; G. Dosi, ‘Sources, procedures, and microeconomic effects of innovation’, Journal of Economic Literature, vol. 26 (1988), pp. 1120–71.
61. According to its own mission statement, for example, ‘Facebook’s mission is to give people the power to share and make the world more open and connected’ (investor.fb.com/faq.cfm). Sergey Brin, one of Google’s founders and President of its parent company Alphabet, has often talked about Google as trying to be against evil, and a ‘force for good’. http://www.businessinsider.com.au/best-quotes-google-sergey-brin-2014-7#to-me-this-is-about-preserving-history-and-making-it-available-to-everyone-1
The Value of Everything (UK) Page 36
