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- [00:02]
A
Many of these ways of making money without creating value that we celebrate today in our grandparents or great grandparents time not only would have been seen as morally dubious, they would have been crimes. That pressure to use AI as a cost cutting tool is just immense. That is how it's being sold to the public as a way to cut costs, which I think is a huge mistake. We are building tools where the humans are aligned to the goal of getting humans out of work. You do the right thing and let the chips fall where they may. You don't always know how it's going to work out because if you're always making an ROI calculation, then the instinctively understands that there might be a day where betraying you is high roi.
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B
This is a show about the future of tech and the future of work. I'm Jeff Nielsen and today my guest is Erik Reiss. He's the best selling author of the startup the Lean Startup, a tech entrepreneur and an all round business guru. From advising Anthropic on their governance structure to founding answer AI, Eric continues to be a power powerhouse in all things tech. His recent focus though is on this creeping sense that the business world and maybe capitalism itself is fundamentally broken and we're seeing once great companies completely corrupted by greed. I want to ask him why this is happening, what it means with the rise of AI and what we can do to fix it. Let's find out. Eric, super excited to have you here today. You know, I guess to jump into it, one of the areas that you've been looking at recently is, you know, if I can be blunt about it, why and how good companies go to shit. And this is something that I think intuitively a lot of us, you know, whether we're on the consumer side and we've seen it with companies and products that we love, whether we've seen it firsthand from being leaders or inside companies, and it's happening. And you know, I want to take this conversation toward what's going on with AI companies in the AI space. But before we do that, let's set the table a little bit and you know, can you tell me a little bit about this notion of corporate corruption? You know, what you're seeing happening as a trend and what you see as some of the drivers of it.
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A
Yeah, I feel like we all live this reality every day and we hardly know what to call it. You know, Tory doctor wrote a whole book called Inshidification. So picking up on your profane idea that there's something wrong, which is really about technology, companies, companies, but I feel like, we recognize this all over the economy. Just to start with a funny story, I was out to dinner with a group of friends. We were traveling together and on two different nights, one night we go to a restaurant that a friend recommend. Oh, I love this place. It's really good. Haven't been there in a few years. We sit down, we take one bite of the food, and they're like, hold on one sec. And they're like on their phone, we're like, dude, you're being kind of rude. Just one sec, one sec. Oh yeah, I thought so. This restaurant had been taken over by private equity. I could taste it. And the second night, the same thing happened at a different restaurant. We had to actually look up if it was the same private equity firm. But it wasn't. I was like, how is it that the ownership, the capital structure of the company is edible in the food? Like, this has become so pervasive. I work with so many leaders, board members, CEOs, middle managers. I worked on the factory floor with, you know, factory foreman, everybody, if you ask them, like, what is going on in your company? What is going on in our economy? Are full of these stories. But if you ask them why is it happening? They resort to just those stories. It'll be like, well, greed, you know, or, well, when money gets involved and when things get big, or once a company's a certain age, you know, this is kind of inevitable. But I just don't think that that's true. First of all, I've been around a lot of these companies, so I've watched it happen. And to me it is the result of human choices and structural forces. And this is really backed up by not just the data, but, but also the fact that there are these outlier companies. So for example, I was watching a lecture the other day and the person was saying only family run companies can resist this force. And they were listing off the family run companies that have been able to maintain a multi generational ethos. And they're enumerating them, you know, one after the other after the other. And then they're like, oh, and also Costco, for some reason, Costco's 40 years old and has a $400 billion valuation. And it's not family owned. It's actually had four CEOs in its life anyway. But it also seems to exhibit this. Anyway, moving on. And you're like, excuse me, hold on. And if you ask people, the same people that tell you this force is inevitable, if they can think of any companies that they really trust and they don't feel this way about. They all can name one. They'll be like, oh, well, Patagonia, sure. Or I have a Vanguard mutual fund. I trust them. Or I take a Novo Nordisk medicine. Or, or, or, or there's so many. So how can there be so many exceptions if the rule is inevitable? So that's really what I spent the last couple years trying to figure out, what is causing this corruption and what can we do about it?
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B
So just before we talk about these exceptions to the rule, and I love the choices you picked, and I mean, Costco, I don't mean to give them free advertising, but I just feel like nobody has a negative thing to say about Costco. It's just like such a uniformly beloved company. But you mentioned private equity in your story about restaurants. And private equity and VC are like, they're well known, almost like cartoonish villains at this point. But it feels like there's broader forces and broader villains, if I can call them that, because IPOs, the market as a force, feels like it can erode these companies. And I think for a lot of people, this just becomes a byword for all of capitalism, that capitalism itself is the problem. So, you know, can you tell me a little bit about your reaction to that? Is it capitalism itself? It's the mark. Is it the market? What are these, these triggers and, you know, these forces that you talked about.
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A
Yeah. So let's break it down into, like, that's, that's. There's a lot to that. Capitalism is a big topic, so let's try to get more specific. First of all, I've worked with a lot of big companies over the years. You know, because of Lean Startup, not only have I helped people take companies public, I've helped huge old public companies revitalize themselves. And I've also worked with governments and nonprofits and all kinds of companies. And if you spend time inside those companies and you ask people what's wrong with this company, they will always tell you the same thing. Short sighted, short termism. My managers want us to cancel the good projects, you know, to make the quarter. Like, I come from the innovation space of entrepreneurship, so that's like the number one casualty. I just got a call yesterday from a public company C suite executive who's like, why? We're doing cost cutting because of AI and they want to cut all the innovation projects first. Why isn't that where we're going to get the benefits of? It makes no sense. And I was having to explain, like, yeah, this, this does make no Sense, and yet it happens. So if you talk to their manager, you work your way up the hierarchy, middle manager to senior manager, you say, do you want this to happen, this bad thing? They'll be like, well, I don't want that, but my boss wants that. That's the boss. You want this? Boss, I don't want this. But the CFO wants you talk to the cfo, I don't want this. But the CEO. Talk to the CEO, I don't want this. But the board wants this. You talk to the board, they're like, I don't want this, but investors want this. And you. I've actually spent a lot of time with investors because, you know, I build a stock exchange. So I spent a lot of time with institutional investors. And you ask them, and they're like, we don't want this. What are you talking about? So, like, how can it be that this phenomenon exists if everybody involved will disclaim it? If you look at so now trying to tie it into capitalism, if you study the history of capitalism and you go back to all the people over the years who have attempted to defend the moral logic of capitalism as they dig down through the layers of reasoning, they always hit what I call the moral bedrock. This one argument that's like the foundation of the defense of capitalism, which is as follows. When two people voluntarily transact, meaning you and I exchange something free of any coercion and fully informed, that's always the, that's always the formula they use. From, you know, from Adam Smith to Bastiat to Milton Friedman, everyone always uses the same formulation. Fully informed, voluntary, uncoerced transactions, then both parties after are better off than they were before, even though no material change has happened. So if I trade you a goat for a sheep, no new animals were created. But I'm wealthier and you're wealthier if you sell me an ipod for a hundred dollars. No new ipods were created, only that the materially nothing has changed and yet more wealth is created. This is the magic trick of capitalism, that wealth was not stolen, it was generated. But that logic creates the asterisk that we are having a huge problem with in our society today, which is, what about transactions that are somewhat coerced, that are only partially informed? Do those perform the magic trick? And of course the answer is no, they absolutely do not. And again, this is a really ancient form of wisdom going back to Aristotle and to many religious traditions, that there are better and worse ways to make money. When we create net new value in the world, we capture Some of that for ourselves. We not only make money selfishly, but we leave the world better off than we found it. But there are lots of other ways to make money. And in our economy today, if you look around, you will find many, many, many ways to make money without creating value. And I think this is the root of the problem. When people say they're opposed to capitalism or they, they feel like there's something that's gone wrong in our economy, they're putting their finger, even if they can't name it, on this phenomenon so pervasive that like I said, we don't know what to call it. And when I was trying to think about what to call it, I asked myself, well, what would our grandparents or great grandparents have called it? See, many of these ways of making money without creating value that we celebrate today in our grandparents or great grandparents time not only would have been seen as morally dubious, they would have been crimes like we've actually legalized many ways that of making money that in more ancient times, even in living memory would have been seen as extremely inappropriate. Stock buybacks were illegal until the 1980s. And in the 19th century, if you attempted to take over a corporation and convert it from having a beneficial purpose like constructing a railroad to just enriching its shareholders, that would have been considered a crime and the courts would void your charter. You would get the corporate death penalty. So things have changed actually relatively recently in the grand scheme of things. And I just realized, oh, our grandparents would have called this corruption. This is corrupting the moral logic of, of capitalism. And so I think a lot of the debate we're having now, from AI governance to climate change to inequality, like on so many dimensions. This is the proxy war we're actually fighting about. Who can we hold accountable for these corporate actions and how can we redirect all this corporate energy back into beneficial purposes, purposes that are aligned with human flourishing. It's one of the great tasks of our time.
- [10:46]
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If you work in it, Infotech Research Group is a name you need to know no matter what your needs are. Infotech has you covered. AI strategy, covered. Disaster recovery, covered. Vendor negotiation, covered. Infotech supports you with the best practice, research and a team of analysts standing by ready to help you tackle your toughest challenges. Check it out at the link below and don't forget to like and subscribe. So obviously a lot to unpack there and really, really interesting stuff.
- [11:17]
A
Stuff.
- [11:18]
B
A couple of thoughts come to mind though. One of them, I guess, is the notion that in, in this pursuit of increasing capital, I Guess if you could, if you can call it that, that there's, you know, you said something I love, which is basically that not all forms of, of making money are created equal. Which I think a lot of, you know, self proclaimed capitalists would, would maybe disagree with. But, but I, I really like that statement and I think it's just so, you know, inherently and viscerally true. And there's this distinction between creating something of value and trying to extract value and that it feels like in this most modern form of capitalism, you used the word greed earlier, but there's this kind of extractive force about how do we just, how do we extract as much money or value right now? How do we, you know, I've heard you use a phrase before which is basically surgically deboned companies or surgically debone products, which again is this like, has this very, you know, kind of emotionally resonant feeling of what's going on here. And so to come back to something else, you said there's this sort of diffuse abstraction of accountability here where if you ask any individual player in, in the system, in the machine, they'll say no, well I, I don't want that. And yet all of this is happening with, with sort of alarming regularity. So I mean, what, what do you make of that? How, how is like what is actually going on in these machines? What do we need to know about the way that they function? And I guess like how do you, how do you short circuit that?
- [13:06]
A
Okay, well, okay, I'm going to answer each of those questions, but we got to take them in turn because it's a lot. The first question, like to me the, the, this is a double mystery. The first mystery is why does this happen at all? And the second mystery, if it's inevitable, how come there are exceptions and why is it getting worse? You know, that's really like, that's, people want to know. It's like if it's been going on for 200 years, why is it getting worse? So we can answer both of those questions by looking at what has stayed the same and what has changed over this period of time. We have been making this simple mistake for a long time. You know, very famously. I don't know if you know the story of Robert owen, you know, 19th century capitalist who, who discovered what, what we would now call enlightened capitalism. He was way ahead of his time. He treated his workers well, he paid above market wages, he wouldn't let he oppose child work. He created housing for his employees, healthcare for his employees. This is all way before the rise of the modern welfare state and was almost instantaneously rewarded by taking a mill that was formally bankrupt to tremendous prosperity, a prosperity that lasted for a really long time. But the whole time he was doing this, he thought that because just like us, he thought the market rewards value creation. So when people see these incredible results, they'll see it like a breakthrough technology and it will spread. The market will reward and protect me. And then his. His own investors tried three times to get him out of there so they could return the mill to conventional, less profitable methods. And on third try, they eventually succeeded. These investors were not stupid. One of the investors involved was the great utilitarian philosopher, Jeremy Bentham. So, like, this is not. This is not a stupidity thing. It's a. It's a matter of incentives and forces. So it's been going on a long time, I think, to see it really clearly, like, to see both what is happening in our modern era that has made it so much worse, and to see the solution. Because you mentioned Costco, let me tell you a story of a. Of an entrepreneur named Saul Price. Now, Saul is the absolute uncontested father of modern retail. But I kind of feel like for a lot of younger audiences especially, his name has fallen out of the public lexicon. So not as many people know his story. But to give you a sense of how influential Saul Price was, the reason Walmart is called Walmart is because Sam Walton was paying homage to Saul's company, fedmart. So Saul was a lawyer. And when he, you know, he. He came to entrepreneurship late in life as a lawyer. He had been trained that he had what's called a fiduciary duty to put his client's interest ahead of his own. That's what we all want from our lawyer, right? So when he became a. A retailer, he asked himself this simple question. Who's my client? My client is the customer, and I have a fiduciary duty to the customer. That was his motto. And he had a strict fiduciary hierarchy. He said, customers first, employees second, shareholders last. This is pretty much always the hierarchy you see in truly great companies. The great Peter Drucker did it a little bit differently. He said, employees first, customer second, shareholders last. The Johnson and Johnson famous. Our credo is patients and customers and doctors and nurses first, employees second, communities third, shareholders last. Each of these great thinkers took an approach that's the opposite of what we teach today as our best practice, but to give a sense of how seriously he took this ethos this is in the 1950s, when his competitors would try to drive him out of business by selling products below their cost to drive customers out of Fed Martin to their store. Their theory being they could lose money today, but if they drove Saul out of business, then they could jack up prices later. Common strategy. Saul would post their advertisements inside his own store and put up signs telling his customers, don't buy this product from me. You can get it cheaper down the street. So as a result, his customers trusted him to look after their financial interest. That's what it means to be a fiduciary to the, to the customer. So fedmark grew, was a very successful private company. He took the company public. It was a very successful public company. But just like Robert Owen and just like all the entrepreneurs and managers and board members, it was, he was afflicted by this hidden force. Nobody would ever like, come up to him and say, look, you have to abandon your ethos and raise prices. But that was the constant, relentless pressure on him and his employees. Higher prices, lower wages, not the reverse. Even though he had demonstrated that his approach made the retailer more profitable. To escape all this pressure, Saul figured, okay, the problem is these bad guys. You asked who are the bad guys in this story? Saul was like, oh, the bad guys are these public market investors. I will take the company private. So he arranged for new investors to take the company private. They own 51%. He owned 49. You can probably guess where this is headed. The new board that he established had the same problem, even though they had even more incentive, financially speaking, to be in favor of the company's long term health. But it wasn't enough. No matter how much money he made them, they always wanted more. They wanted faster growth. They wanted conventional best practices. A big part of this is just the allure of these best practices that we have encoded into our financial system. Anyway, the conflict came to a head one day in 1975 after Fedmart. If you saw had been building Fedmart for 20 years at this point. He comes into work one day and the locks on his door have been changed. He doesn't work there anymore. So this is a sad story for anyone who's an entrepreneur listening, you'll be like, oh God, not another one of those stories. Thanks, Eric. What a. What a bummer. But before we get to what happened to Saul, it's important to understand what happened to Fedmar. If you've ever read the parable of the goose that laid the golden egg, you can predict what's about to happen next. The investor got what they wanted. The for profit investors, in order to increase their own profits, got what they wanted. Faster growth, more conventional retail. And within seven years, they had driven fedmart directly into liquidation. They drove it bankrupt through their greed. But Saul Price understood something that they didn't understand. They thought that afterwards that this was just a story about his charismatic leadership and that they had like misjudged that. But no, Saul understood that it had nothing to do with him. Fed Mart had been powered by an engine, a system that generated the most valuable asset and the most underrated asset in all business today, trustworthiness. So Fed Martin had stockpiled trustworthiness and the investors had tried to steal it from him. I think perversely, they understood something that Saul didn't, that precisely because Fed Mart was trusted by its customers, they could get away with more. So that's kind of the problem. We see that I, someone said to me the other day, they were talking about one of their favorite brands, they said, I love this company. I'm really happy for them. I hope they, I hope they're really successful. And they said, well, actually no, I hope they're successful enough to make some money, but not so successful that they'll be taken over by private equity. Like, because the more successful an organization, the more valuable it is as a target. And again, I don't mean to pick on private equity in particular. Saw Price was undone by a whole different set of investors. It doesn't matter. The system has its own logic and the drama are just the play actors who are playing out their parts. So Saul was a classic entrepreneur, though he took two weeks off after having his life's work stolen from him. And after two weeks he was back at work. He, he leased the office upstairs from fedmart HQ and started a new company. That company was called Price Club. Now again, most people have not heard of Price Club, although when I was growing up, it was a local fixture in Southern California. And the reason you haven't heard of Price Club is because it eventually merged with a different company. Because the one of the people who left Fed Mart to go with Saul to Price Club was a guy named Jim Senegal. Jim Senegal had started out his career as a stock boy at fedmart and had worked his way up to executive. He was one of Saul's proteges. And when it was time, he left Price Club to go start his own company. And a few years after that, his company and Price Club merged to form the legal entity that is now called Costco. So coming back to Costco this is the origin story of Costco. Costco today combines the two things we need if we're going to resist this force. The ethos of Saul Price. A mission, a purpose, a sense of duty, and a sense of a framework for making principled decisions that can put others before yourself. So it is truly a service business. Costco maintains those same commitments, including the 14% capped margins that Saul pioneered in the 1950s, are still alive in Costco to this day. But it has something that Fed Mart never had. Jim Senegal was there the day investors betrayed Fedmart. And so when he took Costco public in 1986, he instituted what I call a governance fortress, A series of legal protections that give Costco its structural integrity. So this combination, the ethos and the integrity are the things that make an organization capable of enduring and maintaining its mission over the long term. What's interesting about it, and this goes really to the question of why are we in such a dire state? These practices are considered violations of our finance driven best practices. So much so that Costco is routinely given the lowest possible governance rating score from governance ratings agencies. And in fact, this is not unique to Costco. Since 2008, companies that are rated to have bad governance have outperformed companies that are rated to have good governance. Even though the theory of governance that is being used to make all these determinations about best practices is literally called shareholder primacy, the idea is that all of this is meant to maximize the returns to shareholders. Yet what we see in practice is that these best practices are in fact value destroying. So now you ask the question, why is this happening? Well, over the last 200 years, we have taken what used to be a bug in the system of capitalism and turned it into the most dominant driving idea in the whole thing. We have financialized everything. At the same time, we have adopted practices, governance best practices that are leaving organizations incredibly weak to this force that we are magnifying. And as a result, they are crumbling. We are watching institutions crumble before our very eyes.
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B
Again, a lot to unpack there, Eric. And really, really interesting answer and stories. There's sort of a grand irony here that putting your, like putting your investors first is like a recipe for actually destroying value. That it seems like if you're going to build trust, whether it's employees first, whether it's customers first, investors last, tends to actually produce a much better long term result for investors, which I've seen firsthand in my experience. But I think, you know, many of us have, even if it's counterintuitive, but the point you were just making about companies with the worst governance ratings outperforming those with better governance ratings. One of the big challenges here for business leaders, I'm sure, is that if you want to do this in practice, if you want to implement any of these fortress like practices, the amount of resistance you face is immense. Right from, I have to imagine, from your lawyers, from your investors, from your board, there's gotta be an army of people telling you you can't do this or you're destroying value and just these systemic forces pushing you to do something that is actually going to be an act of self harm as an individual and also to the organization. And so I'll come back and I'll ask this broadly and there's a lot of room to play in here. But if you're a leader who's actually committed to building something good and of lasting value, how do you, you talked about ethos, you talked about the importance of, I guess, more unique governance practices. What are the key things you need to do to, to get really good at this protective layer? And what kind of challenges can you expect?
- [25:17]
A
Yeah, I do, I do try to address all of these obviously in the new book. And the reason I mentioned that is that I, I'll answer your question and I'll give you kind of the overview. But like this is just like if you think about anything you might have learned at business school or you know, any of the most important things you've learned about how to run a business, you didn't learn them from some, some guy on a podcast in 30 minutes, right? Like there's, there's a level of detail to this that's really important. And I see this a lot with, with leaders who admire some great company or some great leader that they look up to. And it's like imagine you went to an Olympic athlete and you said, oh, what's the secret to your success? And they're like, well, before I even got to like training to do the luge or tennis or you know, fencing or whatever, you know, I did first get the foundations in place, I had to eat right, I had to be in the gym all the time and be exercise. And imagine if you heard that and you're like, oh, okay, so after I'm an Olympic athlete, then I need to make sure to go to the gym. They'll be like, no man, I don't think you understand. You're like, oh, okay, got it. If I go to the gym one time, then I'm going to be an Olympic athlete. It's like, no, man, you're really not hearing me. And like, oh, only if I'm an Olympic athlete, then I have to go. It's like, no, this is the foundation of the thing you want to accomplish. I don't think we appreciate like business, the business leaders, we really admire the outlier successes. They're like our Olympic athletes of organizations. And if we want to be like them, we. We have to study what they do to be successful. Not like the daily habits they get up at 6am but these deeper commitments. And we have to put them into practice in advance of becoming, you know, whoever we're going to be. Because this is a foundation, a practice you build on over time. So what can we do? Like, it is true that we're going to have a lot of resistance. And I literally wrote in the book whole sections called, like, how to talk to your investor about this, how to talk to your lawyer about this. Like, I really tried to be extremely practical and specific. And to me, the way I look at it is I call this force that we're up against financial gravity. It's like the equivalent of physical gravity in that it is an unconscious, automatic transmission of values that is a function of size difference. So because our financial system is so huge, its values are being amplified or projected, we all receive this pressure. And just like physical gravity, you can say, well, I don't believe in gravity, but gravity believes in you. As it proves, every time you jump up in the air, you come crashing right down. This resource sensitivity is deeply ingrained in the human psychology. It is a big part of our evolutionary history. And it is a reflex that you cannot turn off any more than you can stop your pupils from dilating in the dark. You can easily prove this to yourself by watching. You ever have a friend who you watch meet a celebrity for the first time or a billionaire for the first time? I'm around a lot of rich people, so I get to see this up close. It's like so gross. People become like instantly obsequious and flustered. Even people who are very strong go to jello in these situations. And it's like, why? What do you, you know, if you ask them afterwards, why did you behave that way? They don't know. It wasn't, it wasn't intentional. So gravity warps our behavior. And you see it in companies. Like, people think about, you can't help it. Your boss asked you to do something, you can't help but think, well, maybe this will help me get promoted, right? Like, I'm pleasing this person is going to be useful to me in the future. It's why so many people like wind up being abused by their company, sometimes even without anybody intending to. Because your boss wasn't saying, you must work this weekend, they just said, hey, do you mind working on this? And we didn't even feel empowered to tell them what the human cost of it would be. We have to comply, we have to do what they want. We see that when companies go public. I asked CEOs who've taken companies public, what's the biggest, number one, biggest change you notice before and after? They always say the same thing. Everyone's looking at the stock ticker all of a sudden. And if you go to meetings in newly public companies, you'll often hear this phrase, well, the market might not like that. It's like there's this ghost in the meeting now called the market. And now keep in mind that the market might not like that is a might statement. That's different from like you've said, I want to have a long term partnership with investors, very healthy. I'm going to go interrogate them to find out what they really want. That would be healthy. That's no problem. But what the market might want is financial gravity talking. And unfortunately, this gravitational pressure locks investors into a prisoner's dilemma. The value that we're currently transmitting is actually not shareholder primacy, but extraction primacy. The financial system rewards those who squeeze value out of existing organizations. And so if every investor thinks every other investor is going to do that, like get in, squeeze out some value and get out, you gotta, you gotta beat them to the punch, otherwise they're gonna steal the value for themselves. It creates this pressure that everybody feels to squeeze, squeeze, squeeze. So just like when a bridge collapses, if I ask you, your engineer, why did that bridge collapse? And you say to me, well, you know, gravity. I'm gonna be like, Jeff, I hear you. I mean, yes, that is technically true. Yes, it is true that the gravity is the last, that is the formal cause of why it fell to the ground. But that's not a very satisfying answer because first of all, why did the bridge collapse today and not yesterday? Why did this bridge collapse and these hundred other bridges didn't collapse? Right. A real engineer and someone who studies structures for a living would analyze, not gravity. They would say, well, let's look at the load, load factor. Let's look at the tension on the, on the machines, on the, on the, on the, on the bars. Let's look at a wind shear. Hey, look at this. All the metal joints seem to be corroded. Oh, I have material fatigue. Oh, that's why it collapsed. And I say, well, I want to build a new bridge. You say, okay, let's build with stainless steel this time so that the corruption doesn't seep into the joints. That is the equivalent of what we're trying to do for organizations. Let's study what are the things that make those joints secure and strong. And broadly speaking, that's why I told you the Fed Martin Costco story, broadly speaking, these, the techniques of this fall into these two, what I call paths, the path of ethos. That's the path of internal alignment. The problem we have in most organizations is the trustworthy action almost always scores as ROI negative because the benefit is intangible, but the costs are tangible. I could tell you hundreds of stories like this. Costco is loaded up with practices that they do that nobody else in the industry does. They pay suppliers faster and more fairly, even when they don't have to. When they raise wages, they, they don't, they don't prolong the wages they give the way the wage increases faster than other people. They pay more than they have to to, for all kinds of stuff. They do more food safety inspections than they have to do. Costco, if, as, as I reported in the book, does something like 40% of all of the food inspection safety inspections in the U.S. they do almost as many as the U.S. federal government because they care about the welfare of not just their own customers, but of all the citizens. Most of us are protected by Costco's food shield because if you want to be a Costco supplier, you're not allowed to cherry pick. They don't inspect only the stuff you send to them. They inspect the whole facility for everything it makes anyway. So you see these, these positive externalities is what economists would call them. They are benefits that accrue to others but don't show up on our balance sheet. Now, in the long run, it's very obvious if you know Costco or any of these really cool companies, that these benefits do eventually come back to you, but not in, not in any kind of time period that you can measure or, or quantify. So what we have to do, if we want to make trustworthiness into an asset that we try to maximize, we have to adopt practices that let us see these intangible benefits and defend these values. Even in this face of the legions of people in the modern economy who are always wielding spreadsheets with their ROI based calculations being like, excuse me, couldn't we, like, make this thing slightly more carcinogenic. Would anyone notice? Roi? That would be really high. And it's like, you know what? No, you're right. At first, nobody will notice. Jim Senegal, founder of Costco, calls it. Literally likened it to taking heroin. He was explaining to somebody that if Costco were to raise prices by 3% across the board, they would literally double their net income and nobody would notice. So he's like, why don't we do that? I think, like, one of the most remarkable things about Costco is just how big it is. If they're a Kirkland private brand, if it was an independent company, it would be bigger than United Airlines, Coca Cola, or Procter and Gamble. It's. It's massively large. So, yeah, tiny increase. No one would ever notice. They sell more hot dogs in the famous. The famous $50 hot dog they sell in their stand outside their store. They sell more hot dogs in a year, 200 million. That's more than every major league baseball park combined. So if the hot dog was $2 and 50 cents, that would be $200 million of free profit straight to the bottom line. But the reason he called it like heroin is the second you do that, you got to do it again and again and again and again because it's just so easy. You don't see the costs until way later. So we have to have an ethos, a system for defending that internally, to really create alignment, to make sure that the company understands, the organization understands at every level that the only way to prosper is by achieving its mission. And making a little extra money by betraying the mission is not profit at all. And then on the path of integrity, that's where we get into the structural integrity things. Things like writing the purpose of the organization into its corporate charter so that, legally speaking, it's allowed to pursue that purpose instead of just maximizing shareholder value. Things like what I call the Director's oath, basically like a Hippocratic oath for boards of directors, I think is really important. And of course, things like voting rights, board rights, the. The relationship between shareholders and the company, what I call mission guardianship. And I'll just float one other idea. There is a corporate structure that is different than what we teach today. As a best practice that is old enough to have been well studied. The German optics company Zeiss, who probably makes your glasses, lenses, and mine. Zeiss has had this structure since 1885. So although to most people it will be new to them, I always tell them, I'd be new to you. But it doesn't mean it's new. And because this structure has been studied, we have a data set of companies that are structured this way. Novo Nordisk is structured this way. Hershey Chocolate is structured this way. IKEA is structured this way. Lots of companies structured this way. And if you compare the companies with this structure to conventional structures, they are six times more likely to live to year 50. We're talking about 10% versus 60% probability. So it's not just better socially or ethically or morally, it's actually better economically, including for shareholders to have this structure. And we can get into the details of how it works. But just to say, like, my main message is for leaders to realize that there's more to the story than what you learned in business school or what you learned in an economics class. There's been a suppression of this really valuable knowledge that is known in kind of academic niches, but not broadly understood in business.
- [36:21]
B
I'm, I'm really, really tempted to delve into a bunch of that, but I'm not. I'm not going to. I'm going to take us down a completely different path, Eric, because I think now, you know, for anybody who's been listening this far, your mind is probably just abuzz with concepts that we've been talking through in this sort of ecosystem.
- [36:40]
A
I hope so.
- [36:40]
B
And I can't imagine any other, you know, any other reaction unless you, you know, weren't listening. But I want to start applying this to what we're seeing in AI right now, the AI space, you know, the AI companies. And, you know, you said something, you know, not in this podcast, but, you know, before that caught my attention, which is that most fears about AI are actually fears about capitalism.
- [37:10]
A
Yeah.
- [37:10]
B
And so, you know, I'm interested in hearing you sort of unpack the state of AI, but both in terms of, I guess, its promise as a technology, but even more so looking at the structure of the handful of men and the handful of organizations that control this technology, and I guess the ecosystem kind of clamoring for it. So I know that's a very broad space to play in, but can you tell me about, from where you're sitting, what does that look like?
- [37:42]
A
Sure, yeah. I'm very deep into this. You know, I. I played a bit part in the, in the str. In the governance structure of Anthropic. So I've been part of that story from the beginning. And I also helped found an AI research lab called Answer AI. So, so this is not idle speculation, but, but a big part of my daily work. So I think corporations are actually the first artificial intelligence that we had that humanity built on this planet. And many of the properties of what people are now calling AI, we see also in organizations, they're both instances of what are called emergent intelligence. And we can talk about that, that if that is of interest. But just to say that one of the biggest unsolved problems in AI is what they call the alignment problem, which is how do we build this technology in such a way that is aligned to human values, which if you believe the fears about existential risk, is actually like a really urgent problem. Problem. We're already starting to see problems. I mean, someone asked me like I was on a panel yesterday where I was asked, you know, when do you think the first like AI driven catastrophe will happen? And I just thought that question was so strange. I was like, we just had AI drop a bomb on a school like a couple months ago. That doesn't count. We're like the, you know, the proverbial lobster in the pot of water, right? Like as the temperature rises, as we see these catastrophes unfold, we just get used to them. We don't, we don't really appreciate how, how far we have come from a situation where we're really in control of what's happening. And I think one of the key questions in alignment is not the technical question of how do you build the software in such a way that it's aligned to some specific value, but who aligns the aligners? These, these organizations, these technologies are being built by for profit companies that are being shaped by this financial gravity that I was talking about before. But I do have a tiny sliver of hope that comes from this. It was a very surreal experience I had last year. I was at the Vatican of all places, and I was at a conference about AI governance that is sponsored by the Vatican. And I happened to be on this panel discussion and on the panel with me were all of the leading AI labs, so representatives from Anthropic, OpenAI, Google, Paler Cohere. Everybody was there. And when I looked down the row of all the people with me, I realized that not a single one of those companies has standard governance. Not, not one. And I was like, oh, that's so interesting. There's something about AI. I think it's instinctive danger level that nobody who's developing, like none of the major researchers who work on this would say that they would feel comfortable with a typical shareholder primacy type company running it. It just seems incredibly dangerous. So although the companies have taken different approaches to what I call mission guardianship. And some of them are better, some are worse, some of them I don't think are very good at all. But anyway, but the point that everyone's trying to find a way is really important because if you know Conway's law in software, this is an old finding going back many years, that the values of the organization that makes a piece of technology will show up in the technical design of that technology itself. Like very famously, Conway showed that the organizational chart of the parent company will show up in the architecture diagram of the technology. And that's actually, we're used to that, an old finding in software. So we don't think about it that often, but it's actually very remarkable. Why should these two things have anything to do with each other? It doesn't actually make technical sense at all. But of course a political scientist or sociologist would say it makes all the sense in the world. What do you expect? If you study power relationships between people, you will understand, but it's important, you have to see how the values of the parent work warp the construction of the thing. So that's what we're seeing in in AI, that the different so called agents are reflective of the values of their parent. And I think to me the danger, the most dangerous sign of, of all. And I, and the British ad man, Rory Sutherland put this really succinctly. He said that we have built an economy where people who cut costs are rewarded without ever being held accountable for the negative consequences, the downstream consequences of those cost cutting. So we see that in, you know, when the brand collapses because costs were cut, the person who did the cutting got promoted and they're already long gone. You see that obviously with hedge funds and private equity, lots of ways to take costs out of a thing and it collapses only later because of that. That pressure to see to, to use AI as a cost cutting tool is just immense. So that is how it's being sold to the public as a way to cut costs, which I think is a huge mistake because fundamentally we are building tools. Now this goes back to the alignment question. We are building tools where the humans are aligned to the goal of getting humans out of work. That is using AI as a replacement for human creativity. I really think that's wrong, like both morally wrong, but I think it's also like a big mistake in terms of how the technology is being sold and also in terms of how effective the technology ultimately will be. To me, the biggest exciting thing about this technology is it can be an amplifier of humanity. Creativity, helping us compensate for the weaknesses that individual humans and groups of humans have. You know, because we, for all our creative skill, we have a lot of, a lot of imperfections like this can be used to help augment. So to me, I'm excited about the technology as a, as a source of, of creativity augmentation, but never as a, as a creativity replacement. And you watch the people who are the heaviest power users of this technology because it's been architected in this way that's really designed to get you, to get humans out of the loop. You're starting. People are trying to develop what they call agent psychosis, or LLM psychosis, where the technology is warping their own sense of what they're capable of. And what's interesting is it's like a Dunning Kruger machine. It's causing people to become more overconfident in their own skills while actually causing those same skills to atrophy. So we're seeing this big divergence in terms of the heaviest users of AI, what they think they've accomplished and what they've actually accomplished. Because we live in the social media era, A lot of those people are embarrassing themselves on, on social media every day, bragging about their, their income. It's like their incredible accomplishments. And then you go and look and you're like, what. What happened to you, man? Like, this is not, this is not a. You're not having a very measured reaction to the thing you've actually produced. So anyway, so I think the most important thing, if I could impart one lesson to people who are grappling with AI. LLMs are incredible teaching machines if you use them properly, differently, because they are trained on all human knowledge. So they're very good at helping you fill in the gaps in your own knowledge. They're very helpful. They're very good for helping you develop skills. So if you use it, if you, if you see AI as a box, a black box that will make an artifact for you. Think about how many people are excited about this. Hey, I can make AI, make me a website. You're in trouble because over time, what you'll notice for the people that are doing this the most, the AI starts to subtly shift their own goals for the project itself. And next thing you know, you're not really in charge of this project anymore. It's become a zombie. Instead, ask the AI to help you learn how to create the artifact and improve your own skill at it. Help it help you go deeper into what you're making, and you'll still get great artifacts that way, but you'll have to kind of go a little bit slower at first, but over time you will find your own capabilities increase and your sense of agency increases. And that's using AI in a way that I think is aligned with, with human flourishing. The way we're teaching people right now, I think is, is very much not
- [45:00]
B
so again, obviously a lot there. And you know, I'm, I'm just still processing it. I, I, I agree with you about the concerns around AI and using it the wrong way and just using it to try and either optimize the hell out of everything, remove people, or, you know, remove creativity entirely. The use case and the argument for using AI to augment, using it to teach, using it to build our own muscles and get better at our craft. To tie this back to an earlier theme, none of that feels like it has its own gravitational pull right now, at least the way I'm seeing it. It feels like it takes, I don't know if it's fair to call it an act of courage, but like a deliberate, you know, a deliberate act on the part of individuals, on the part of, you know, business leaders to say this, this is how we're going to use it and how we're going to get the most return from it. So with that in mind, can you give some examples, I guess, of organizations that are using it really well, you know, how it ties into, I guess, broader cultures, credos, ethos and you know, I guess what some of the, just to take it one level deeper on that, you know, education piece and on that augmentative piece, what are some of the best use cases for really using it to drive your mission forward?
- [46:35]
A
Yeah. Well, I'll give a personal example first to start, because at Answer AI, we, I have the, I have the advantage of having a completely custom AI rig. You know, that is B is what the, the rig that we use for our own research and has improved our own productivity immensely. We take the idea of augmentation so seriously that we, you know, Jeremy Howard, who's the founder of Answer I, he has said that he wants to cap the total number of employees that we'll ever have at 12, forcing us to not to do less, but to be more dramatically more productive with each of those 12 people. And it's been really amazing to watch that happen. When you don't have the release valve of being able to hire more people to handle demand, you have to forces yourself to use this augmentation. So when I was, I was working on the book. I was really worried about AI writing. You know, I was like, I can't. AIs can't write well, I hope everyone knows that. Please don't send me AI written material. You can always tell if it's AI written. It has a certain, certain smell, certain distinctive taste to it. And so I was really worried about that. But I. But I wanted to take advantage of it as a productivity tool. And so I was able to do a lot of stuff that I think just would have been completely impossible in the past, you know, because I. I'm lucky. I benefit. I have editors, I have human researchers. I have, like, a whole team that helps me, you know, on the writing side. So I'm very blessed. But even so, there's just. It was so useful to be able to, while I was writing, to be able to have access, instant access to a huge amount of context and to have a partner who would help me, like, stay on track, you know, the biggest, the hardest part about writing, it's the saddest, loneliest job in the world. You know, it's just you and the blank page, and you have to. You have to grapple with it. And for me, for my brain, just the overwhelm of, like, I have 24 tasks to accomplish today. Which one am I on again? What do I have to do next? Oh, how do I get started? Just have someone there to say, this is. You're on task seven. You know, if I got interrupted, like, if I'm writing on someone interrupts my flow, it's really difficult to get back in the flow. But this was so much easier. So, you know, I have a partner who's like, hey, you were on task number seven. We were halfway done. Let's keep going. Or if I had trouble getting started, hey, why don't you try getting started this way? And I'd be like, that's horrible. Oh, but the human brain, when it sees a horrible thing, it can be like, well, that's no good. Now throw that out. We need to do this other thing. So it was very stimulating to me. I found it very helpful. But another thing, we did an experiment. We did an answer AI. We were doing a course to learn about, about deep learning and LLMs. You can still access it, I think, on our website called Solve It. And we had, you know, a thousand students, and we gave them access to the manuscript of the book when it was still in its draft form. And instead of just saying, we'll read this and see what you think, we taught them how to do. AI Assisted close reading. So close reading is one of the like most ancient academic skills there is. And for people who are really good at it, you know, think about like the PhD level people who teach literature. When they do close reading, they are pulling on a vast context of Western literature and history and everything you would want to know to understand. Like, why did the author make this choice? What, what's it a reference to? What, you know, what's happening, what, what, how Harold Bloom calls the anxiety of influence, right? Like how are they in dialogue and in relation to these other figures in their own life? So most normal people cannot do that. Certainly a thousand software engineers can have struggle with that. But by using the AI as a reading companion, they were able to do that. They were able to go through the book, you know, section by section, and then ask their questions, what does that word mean? Why would he choose that? What's happening? As a matter of craft here. And a bunch of the students shared their dialogues with me so I could actually watch them go through. And I both as an artist myself, seeing other people grapple with the material in this new way was super interesting, so informative, you know, to see what they were learning, what they struggled with, what they understood and what they didn't understand. And a lot of them reported that it was like one of the most satisfying reading experiences they'd ever had. So if you compare that, the level of collaboration that we were having, me and those readers, AI assisted on both ends. Compare that to the way people are using AI for writing today, like I did. I was did a lecture the other day with like a couple hundred people in the room, and I said, everyone, raise your hand if you've ever taken three bullet points and had Claude turn that into a proposal for you that you've emailed to someone. And everyone, every single person raised their hand, everyone's done it. It's just, it's so tempting, right? Like, I need to write 20 page paper, here's the three bullet points, write it for me, it will do it. I said, okay, how many people have received a proposal from someone and ask Claude to summarize it down to three, three bullet points. And everyone raised their hand. I was like, so look at what we're doing. I write three bullet points, I waste millions upon millions of tokens and all that electricity, and I burn out GPUs and I use all this water, I consume all these resources to produce this bullshit report which I send to you, and you burn even more millions of tokens to condense it back down. To the three bullet points. So to me, that is, you know, and of course, people are eager to get the humans out of the loop and just have agents sending bogus proposals to each other with no human oversight at all. To me, that's a really impoverished view of what we be doing when we could be using the technology in this much more rich, augmentative way. So I'm. I'm really excited to be part of that contrarian view, but I. I grant your premise that everybody at work is feeling tremendous pressure, this gravitational pressure to conform to the other view of AI and, you know, I think the. There is power in resisting. So for those who want to be contrarian, you know, I give you. I hereby give you permission to do so.
- [51:45]
B
No, that's great. And it's. It's a really cool use case. And I. I made a mental note that if I ever try to read Ulysses again, I should bring AI along for the ride.
- [51:54]
A
Oh, it would be so much easier. And again, if people. Okay, I'll. I'll tell one more funny story, if you don't mind. All rightista. And think about what exactly I can say and not say about the story. Hold on. Yeah, I think it's okay. This has happened to me twice now. You know, it must be very common. I've been sending out, you know, I. I'm a big believer in feedback. So I had a lot of test readers for the book, as I mentioned. Not just the students, but a lot of people, early reviewers and academics, all kinds of people. I wanted to see how. How different people from different walks of life would respond to the book. As a result, two different people admitted to me that they had accidentally read an AI summary of the book when they intended to read the actual book, which, like, this is unbelievable where we're at now. I had sent them, like, someone. I must have sent them a PDF, and they must have been, like, asking Claude to, like, help me read this PDF, and it somehow, somehow tricked them into thinking the summary was the thing itself. And as they were sending me this kind of embarrassed email, being like, I'm really sorry, I realized, I love this book. It's incredible. But actually, I realized I've only read the summary of it. I can. You know, I was like, it was a weird. It was a really weird email. I was like, why are you even telling me? I think people are, like, really getting into trouble. Another person, they didn't give it the PDF they meant to, but instead, Claude just fully hallucinated a whole book based on nothing but what the title of the book is and what it knew about me from its training data. So here's the book it thought I would have written. And the person was asking me all these follow up questions and I was like, some of these questions make sense, but some of these questions really don't make sense. And I had to be like, I finally was like, listen, sorry, just one sec. Did you, you know, Dopen AI Chatgpt write this summary for you? And he's like, how did you know? It's like, this is not the book, right? So people are losing, like losing their ability to keep track of reality in a way that I think is really, is, is really scary.
- [53:48]
B
It's, it's terrifying. And I, I don't know, like, to me this could be a much longer discussion and it probably doesn't have to be, but it like, as someone who is in the business of content creation, both, you know, podcast, but also written, to me, it really shines a light on quality and I don't know, like, I guess quality and sort of the Zen in the art of motorcycle maintenance, you know, definition of quality. But if something is truly worth consuming and is done with quality quality in mind, like an AI summary is just destroying that, but it forces you. If something is not, then who cares, right? I don't know. To me, to use the point about the three bullet points out to a novel back down to three bullet points, I feel like there's this world of slop out there, whether it's AI generated or whether it's human generated, going back and forth between AI that I don't know is worth distinguishing and to me just makes that ultimately quality content even more of a valuable resource.
- [54:59]
A
I actually think people are sleeping on what's going to happen next. The idea that this is going to put artists and engineers and people out of work, I think is totally backwards. I think it is going to skyrocket. The value of having artisanal skill in these things. First of all, because actual we're going to obviously have to develop standards for labeling things as AI versus human generated. There's a study that was done recently. If you give people writing AI generated writing or human generated writing, on average, they prefer the AI generated writing until you tell them it was AI generated and then they really hate it. So right now we have this like superficial enthusiasm for all these artifacts that like, it will not be long before people just hate, hate, hate, hate getting one of these AI generated artifacts. So a verified human generated product is going to be like a super premium item and, and you know, it's called Jeevan's paradox that the cheaper you make something, the more demand there is for it. So yes, it's possible that the like piece rate of certain kinds of creative work is going to go down, but the demand for software, the demand for writing, the demand for cultural artifacts is just going to absolutely explode because we're going to make the tools of the means of production of accessible to more people. So I'm, I think that's a really genuinely positive outcome. But there's going to be a lot of pain along the way, way before we get from here to there. So I think our responsibility as leaders is to try to mitigate that pain as best we can.
- [56:21]
B
I think that makes sense. And I think you and I probably have a similar view of just kind of the economic impact where in any domain that AI touches the bottom, I don't know, 80 or 90% are going to have to adapt to this world where the cost of this stuff is driven close to zero with this tool. But the top, you know, 1% or 0.1% are going to be if it's artisanal and they're really masters of their craft. You know, we may be in a world where they can charge 10x for what they were doing before because it stands out so dramatically in this new, you know, economic shape, I guess.
- [56:59]
A
Yeah, yeah, we're kind of like, we're really in a worst of both worlds like intermediate moment right now where like, you know, it's almost impossible to get the word out about new work. Like all of our channels of distribution are being completely monopolized by outrage, bait and things that really only reward celebrities. So like I didn't understand in when I was younger why is everyone so desperate to become a celebrity. But now I really understand it. It's like if you, we live in an attention economy and the non celebrities really have a hard time getting recognized for anything. So what a mess. But that will have to get sorted out. I really think that, that we're not, we're not in a stable equilibrium right now. And so you know, you could imagine, you know, when people are, have ready access to high quality agents that hopefully are aligned to their flourishing that we don't, we're not there yet even close. These, these, most of these chatbots are being aligned to their own maximizing engagement like a social media algorithm. So they're illness producing machines. You don't want anything to do with that, but we'll get past that. I think people will demand and, and I think it will start to be seen as like a right that you are able to have access to an agent that is aligned to your actual well being. Then I think we'll be able to do all kinds of new platforms of discovery because then it's like, okay, of all today, if you ask the question of all the people producing content on the planet today, who would be best for me to consume? That's a too difficult problem. There's too much content being produced by too many people. No, no. Even if you're the richest person on earth and you could pay a whole staff of 10 to scour the Internet, it just, it's too much. But you know, synthesizing, summarizing, analyzing this kind of context is some, the technology is really good at. So I think we could imagine a world in which discovery gets a lot easier, where creators are able to connect with their fans more directly and don't need all the social media BS intermediation. So hopefully some people listening are working on that and they'll get in touch. Tell me all about it.
- [58:45]
B
There's an optimistic assumption there that I want to tie back to our earlier discussion, which is that we will get past all this kind of, you know, engagement, you know, engagement prone behavior. And you know, I think about it as that same metaphor of heroin that Costco was talking about. I mean, I'm personally worried by asking that question, will we get past that and do we have, I guess, the structures in place and the ability to defy this financial gravity to do that? Because I mean, it's toxic, right? We've seen it in social media. It feels like we're starting to see it seep into these AI tools. You know, I, I often joke that it feels like it's just a matter of time, but before, you know, you ask Claude or ChatGPT a question and you know, at the end it, you know, recommends an ice cold glass of Coca Cola or something.
- [59:42]
A
Right?
- [59:42]
B
Like, like the fact that ChatGPT is already doing that.
- [59:45]
A
They're experimenting with, that they, they made, I can't remember the revenue numbers recently, recently reported how much money they're making already from that. It's, it's, it's crazy. And listen, the founders and a lot of the early employees of Instagram are employed by these labs. Like they're not being subtle about it. They really want that engagement powerhouse growth, hacking stuff. I, I think it's time for an, what I call an AI Bill of rights. And when I talk about this, people say, oh, you're Advocating for governance, government action or whatever. It's like, hold on, before we even get to like, who should develop the, who should enact the right, first we have to talk about like, what is the affirmative thing that humans should be entitled to have. So for example, there was a judge bade ruling the other day that if you use an AI to give you legal counsel, your chats are not privileged. So if you're in a lawsuit, the government or your opponent can subpoena your chat bot records, no matter how intimate or personal they are, because you don't have what's called, quote, an expectation of privacy. That is news to most people. They assume they do have an expectation of privacy. And that is a really bad situation because now you're saying that this right is not, is only going to be available to those who can afford the artisanal, handcrafted human lawyer and the infinitely accessible and ever tempting robo lawyer that everyone's gonna have access to. You know, now those people have to have their privacy be violated. So obviously we should have a right to privacy in our interactions with these LLMs. Well, what other rights should we have there? I think we should have a right to be free of the kind of algorithmic manipulation we see in social media that is leading to addiction or negative habit formation, depending on your point of view. I think we have certain, a bunch of harms, you know, AI driven discrimination, obviously autonomous weapons. Like there's a lot of things today that are like already illegal that we're struggling with that LLMs are exacerbating, making a lot worse. So I think we could articulate affirmative human rights in each of those domains. And you know, and, and again, before we jump to government regulation as the way to implement that, first we have to agree what should we be trying to accomplish? And then I think a lot of these AI labs are trying to compete to show that they're the more trustworthy steward. So I'm hope, I think in some ways, like they're the ones really who should be embracing these rights to say proactively, here's what we promised to do or not do. And it gets to this deeper question about what does it mean when we say that an organization did the right thing. We are so confused about this. Like we live in this hyperpolarized time when if I say as an author, I run into this problem all the time. If I cite a case study about a company, people come up to me now and say, you're saying that that company is perfect and they're the, they're God's gift to humanity. Well, I know something bad they did, therefore your thesis is wrong. And I'm like, hey man, I just pointed out this one thing. Or if I criticize a company, you're like, you're saying they're the devil, the worst company on the planet. No, I'm just saying they did this specific thing. We, we have to be able to learn from case studies as an illustration of a specific point, not as a moral judgment. So we're hyper judgmental and hyper cynical at the same time, which is a really bad combination. So when you say, for example, you know, an anthropic had that kerfuffle with the Pentagon, you know, did people want to say did they do the right thing or the wrong thing? You know, people like, they jump immediately to this, like moral value judgment. Like, well, who should make such decision? Who's anthropic to say they should get to make this decision? Which is first of all, like government contractors have been saying what their technology can and can't be used for since time immemorial. The idea that that's like some violation of the democratic process is a brand new argument invented just for anthropic. Give me a break. But leaving aside what they should have done, quote unquote, we can still say that they did the right thing in this three with a three part test, I think. First, do they have values that are aligned to human flourishing? Two, are they consistent in those values? And three, are they being strong? Do they have the strength to resist outside pressure to deviate from those values? I know a lot of people, normal people especially, they are capable of trusting or even praising an organization for doing something consistent with the organization's values if they see that it's a point of consistency and if they can understand the linkage to human flourishing. So I know a lot of people who gave anthropic props who don't actually think they did the right thing because like, really they were an impossible situation. It's a, it's a Kobayashi Maru situation. Like there's no, there's no right answer when you're in a David and Goliath fight with the world's largest military, like as a private company, like it's actually very dangerous situation to be in. So one of the things I think we have to look for is who, who is capable of just having any consistent value over time? Who is able to say no to outside pressure? Who was able to say like, we embody some specific set of values going back to costco They've been kind of like a recurring character in our conversation. Last year or the year before, Costco had this big kerfuffle where a bunch of activists were pressuring Costco to abandon their DEI programs. At the moment when DEI went from very popular to very unpopular, Target gleefully did it and Costco refused. And it's really interesting if you look at the stock price or the financial performance of those two companies since that moment, it's like Costco has been rewarded by customers. Target was severely punished. And it's interesting to me, even people who disagree about DEI felt contempt for Target and supported Costco. Costco did a shareholder vote. There's an activist that forced a shareholder vote at CostCo about their DEI program. And something like 98% of people voted in favor of it. Now, keep in mind that Costco has millions upon millions of retail shareholders that live all over the country. Dave, people shop at Costco in every kind of political climate, Market, City vill it is a very popular brand. And you're telling me that 98% of of Costco's customers are woke? No, obviously not. What happened is even people who are not super keen on DEI can respect that. Costco was doing DEI back when it was unpopular. When it became popular, their programs didn't change, and when it became unpopular again, their programs didn't change. The board was very consistent. They said, we do what we think is in our best interests and we don't need your advice. Thanks very much. We do what we do. And so I think that constancy of purpose is extremely important, like an attribute to cultivate, not just for ourselves as leaders in our organization, but when we think about who should we reward as vendors, what product are you going to use after. After Anthropic took that stand, Someone sent me a video that night. I think it was for the next day. Someone had chalked up their sidewalk all around their headquarters in San Francisco thanking them for taking a brave stand. And I was like, wow, when you hear that San Francisco based tech company has had their sidewalk chalked, this is not, believe me, this is not the typical way that people respond. Claude jumped to number one on the App Store like it had. Doing the right thing has these very concrete business benefits. So much so that people sometimes say, well, they were just virtue signaling. They're not really doing the right thing. They just wanted to go to number one on the App Store. And it's like, you're telling me they could have foreseen that outcome? No, of course not. The point of building a trustworthy organization. And the point of rewarding such organizations is that you do the right thing and let the chips fall where they may. You don't always know how it's going to work out, but you do the right thing anyway. That's what customers crave to see. Because if you're always making an ROI calculation the way we teach in our business best practices today, then the customer instinctively understands that there might be a day where betraying you is high roi and they'll do it. But we want to work with companies that will never betray us. That should be our goal.
- [67:14]
B
I've been sort of chuckling throughout that answer because I think the way you framed it up makes it very clear to me that you're even more of an Aristotelian than you let on with a lot of your logic and a lot of your language. And so if we're talking about virtue and how we can behave virtuously and how we can kind of enable human flourishing, you know, to bring it back to the regulation of AI and whether that's with these handful of companies and handful of people that control this technology, whether that's, you know, the market kind of clamoring for a piece of this, whether this is governance regulation, you know, government regulation, what is the right path there? And I, like, I'm asking kind of an intractable question here, but if we acknowledge that we want to make sure that the decisions made are as virtuous as possible, how do we do that? And one of the pieces that's coming to mind, by the way, is one of the analogies I've liked more about AI recently is that people mistake it for a tool, but it's actually a utility and it has more in common with electricity than it does with a hammer or a traditional piece of software. And to me it sort of begs the question that often goes unasked of, well, should it be regulated like a utility if it's going to be a utility? And so I'm curious when you think about this space, like, given the promise of this technology, how do we ensure that it's that its own governance and its own development is as virtuous as possible?
- [68:52]
A
Yeah, this is a deep question. And yes, there is a certain, there's like this, this book and my work recently has a kind of a very old fashioned throwback quality to it. And I tried really hard in writing the book to avoid trendy modern business language consultant driven speak like mission statements and stakeholders and culture even, I was just like, no, we want to really use these old, old fashioned concepts because we have to kind of, we do have to restore a certain idea of virtue ethics into our body politic. Like that's, that's an old project and a little renewal from time to time. It's good. This. I'm gonna, I'm gonna give you a kind of a seeming paradox that to me is the answer to your question. And I grapple with this a lot in the writing of the book because on the one hand, the value, the true strength of a market driven democratic society is that we don't have to have one totalitarian, unified set of values that we all embrace. The very diversity of values is our strength. And that includes in organization. One of the things I hate the most about the era of shareholder primacy is its attempt to enforce a business monoculture with these very rigid best practices, this extractive philosophy and its, its willingness to just destroy anybody who deviates in order to create uniformity of compliance with these gravitational pressures. I think that's actually like a real loss of our human birthright. You know, human beings have been experimenting with their social and political forms for as long as there have been human beings. And I think it's a real shame that we've kind of lost that in our ideas about business. There are so many alternative forms out there that the evidence shows are better than what we're being taught is the only and best way. So I think that's exciting. So anyway, because we have this diversity, I really advocate that every organization should be free to declare. I do think they should have to declare, but I think they should be free to declare what slice of human flourishing they are committed to, to pursue and how their structure allows them to do that with integrity and then let the chips fall where they may reap the competitive consequences of doing that. Some people read that and they feel like it's a. I'm giving my blessing to moral relativism. It's like, well, wait a minute, you're saying that any values are equally good. Anyone can have any values. And of course, no, I don't really believe that. Of course I secretly think there are best set of values. And I try in the book to give the evidence that there are. There is a universal current that runs through us all. A longing for work that we find meaningful, that is of service to humanity and to advancing the flourishing of those we love, right to be of service to others. Like there's, there's actually like a deep human longing there. So part of the reason why, why so many of These outlier companies have this massive advantage is because they're tapping into that universal current. So when I say let the competitive consequences be what they will, I think I know what they will. But unfortunately today we're not playing on a level playing field. So, you know, I even write about this in the book because somebody said this to me. He said, look, if what you were saying was true, if mission driven, purpose driven companies really do outperform, then we would think just by natural selection, by Darwinian natural selection, the economy would be full of those companies and everything else would be driven out of business. And that argument sounds so right, sounds so clinical and true. That's like the, the clean logic of natural selection. But of course it has at its root the fallacy that the market, as currently constructed, rewards value creation. But it doesn't. It just doesn't. And again, I have the, I got all the data to prove it. Now if we were to build a more just economy where the market did reward and these other forms of corruption were minimized or even eliminated, I do think that's what we would see. And the utopia of that future is what I hope for our children and grandchildren and for those that feel that that sounds like an impossible dream, you know, too bold, too big, too much. I hear you, but just think how unrecognizably different our economy is to the economy of our grandparents, parents. So surely it's at least theoretically possible that our grandchildren's economy will be as unrecognizably different as to us. So that's a pretty short time, pretty dramatic change can happen. Many of the best practice we're, best practices we're fighting against are younger than the trees in your local park. So take heart, it's not too late.
- [73:25]
B
It's, it's a really interesting perspective to, to put it, that time horizon on it. And to your point, so much of what you're saying and your sort of gospel is it's resonant with me and I have to imagine it's emotionally resonant on a very human level with a lot of people. But it's still, again, just in relation to this, what we broadly call this kind of capitalist zeitgeist, that it's heretical, right? It's heretical to say that, you know, not all forms of making money are equal or that we should be, you know, building trust or doing things for the long term. And it's very easy for me listening to it and you know, reading your book to have an image of you being kind of like laughed out of boardrooms or dismissed as like this kind of like hippie, dippy kumbaya guy. And you're not, you've been able to really establish yourself for a long time as not just somebody who's optimistic, but who's able to kind of effect change here. And so I guess I'll ask next, how do you do that? How do you fight that current, how do you fight that gravity on a moment to moment basis with business leaders? And what advice would you give business leaders who I guess feel morally that they have an obligation to do that or are being asked to do the wrong thing and they're concerned about not speaking up because of this unspoken pressure?
- [75:05]
A
Yeah, I. Listen, I have been in that situation many, many times and I've been afraid. I mean, I, I've built up, I've spent a whole career building up the credibility to speak on these issues. And so, you know, so when I speak at the boardroom, I don't get laughed out of the room, but I worry about it all the time. And I, when I first started talking about this, I was very worried. What's interesting is, let me give you just a little bit of mini, little mini history lesson and then I will answer your question. The idea of shareholder primacy is a relatively new one. So, so first thing you have to. It's really important for people to understand. For the vast majority of the time there have been joint stock corporations on this planet. It was seen as completely obvious that corporations should be incorporated only to do a specific thing. So the idea that, that corporations are just financial instruments, like that's a very new idea. Our grandparents and great parents are like, what are you talking about? No, they're not. So it's a new idea. The, the more holistic understanding of corporations, the one that is been true for most of the human history that has had them on the planet, is that they should not only be chartered to do a specific thing, but that thing must have a beneficial purpose. This. And so when we, when we fought the battle in the 19th century over what was called general incorporation, the idea that you shouldn't have to go to the state legislature to get special permission to form a company, but anyone should be able to do it, we didn't immediately give up the idea of purposeful incorporation. In fact, if you read the statute, like the Delaware statute from 1899 when Delaware switched to general incorporation, it actually says, you know, you need, here are the requirements to form a company. You need three people. You need a, a director, an office, a Treasurer of this, you know, you got to fill out this form, you got to do this and you have to file with the government, what is the purpose of this company? So they still, they understood that purpose was still paramount. And then over the course of the 20th century, with the rise of financialization, people started to write into the purpose field on the form any lawful act or purpose. And that's like, there was like, let's just, I just want maximum optionality. Oh, very BE or open ended. And then after a while, a cabal of judges, academics, legal experts decided that any lawful act or purpose actually means maximize shareholder primacy. And that didn't really become the law in Delaware until a series of court cases in like 1986. So this is not like ancient wisdom. This is, this is more Depeche Mode than Mozart. Okay, it's very recent. But what's interesting to me is that that act to switch over from purposeful incorporation to shareholder primacy has never been ratified by any popular referendum or legislative action ever. It is an idea that is that rules the world today and has zero democratic legitimacy. So if you read the legal literature on shareholder primacy, you will notice this very funny fact. They have to grapple with why is this the law when it's not really the law and they have all kinds of theories. One of my favorite papers said that. Well, you see, the thing you have to understand is that shareholder primacy is not a legal duty, but it is a legal obligation. Like, oh good, thanks for clearing that up now. Super clear. Like, so, like in the law, they've created these gyrations and contortions. Anyway, if you, if you wait through all this insane writing, you eventually come to like the, the basic conclusion that they've drawn is that after a certain number, amount of time has gone by, whether or not you agree shareholder primacy is what's called a normative consensus. Meaning, not that it is a just a descriptive consensus would be everyone agrees that this is what companies do do. But a normative consensus is the idea that everyone has agreed. We've just all decided that this is what corporations ought to do, this is what they should do. So for example, in that writing they'll say things like, a corporation is only permitted to care about externalities, AKA your health and well being, insofar as it enriches their shareholders to do it. Meaning that under this view they literally, I quote this in the book that literally a corporation should be expected to break the rules if it's profitable to do so. And of course to lobby to have the rules changed if it's profitable to do so. So although today they might feel like keeping you alive is worth it, who knows? Tomorrow they might lobby to have the rules changed so that they can kill you and make money from it. Most people find that quite shocking, and they always assume I'm exaggerating. That's why I have all the quotes and footnotes in the book. I was really careful about that. So what do we do about this normative consensus? The most important question I ask in the book, actually is in a footnote. It's simply, are. Are you the reader? You the listener? You, Jeff? Are you part of this normative consensus? Almost everyone I've asked that question to privately will say, no, I'm not. This seems nuts to me. Am I great? But I say, have you ever actually told anybody that you're not part of this normative consensus? Most people have never said it out loud, like, I'd be afraid to, because everyone else thinks I'm the only one who thinks this way. And Vaclav Havel, you know, wrote the famous essay about living in truth. He called it that when you are in an authoritarian situation, which is really what our financial system is, you. You perform obeisance to the values of the system. That's what gravity really is. In order to protect your interests. It's con. It's convenient that you get rewarded for doing so. If you don't do so, it creates turbulence in your life there. You know, if you ever want to study solidarity, don't study union. Study banks, okay? They understand solidarity. They. They have class, class cohesion. And they can close ranks like nobody, nobody, nobody's business. So what's interesting to me is what Vakav Hubble said, is that when you first start speaking the truth, you don't have to go protest and jump on the table the first day. He gives the example of someone taking the Communist Party's placard down from their store window. Just used to be there. But since they don't really believe, they take it down. And probably nothing happens, but maybe someone walking by notices and says, oh, I'm going to take mine down too. So I've been asking people, when I give talks to the audience, I say, look, just. Can you tell one person tomorrow that you're not part of this normative consensus? Can you just say it out? Just pick a friend, Go to a friend and say, hi, my name's Eric. I'm not part of the normative consensus of shelter, primacy. Your friend might be like, what are you Talking like, huh, what? That's odd. But, like, your friend might be like, oh, yeah, me neither. Oh, isn't that interesting? Now, we both know that we both think this way. Who knows how many people might actually secretly believe this whole regime is insane. And I think this is going to sound so wild, but I actually think the era of shareholder primacy is already over. This is an idea that has caused its own intellectual collapse. And we're kind of like, this is a bit of an emperor has no clothes moment where we all secretly think this and we haven't figured out how to coordinate to say it out loud and to do it. So I'm hoping that as people hear this, especially people who build things for a living, who have that thing I call that builder's intuition, that there are better and worse ways of making money, I hope those people will start to talk to each other and just say, yeah, we don't really want to live under this regime anymore and we can talk about what comes next. But the first step is simply to say, I am not part of the normative consensus. And what's amazing about that, we don't have to change any laws. We just have to break the consensus and then shareholder primacy, poof. Its legitimacy will be erased.
- [82:22]
B
Eric, I love that. I love the positivity of it. I love the sentiment of it. It's again, deeply resonant with me as someone who doesn't find myself in alignment with the normative consensus. And it's inspiring to hear that there's probably more people out there, you know, like me then are openly admitting it and frankly, making me reflect how much of, you know, my non consensus comes out versus is stifled in some way by these kind of, you know, oppressive power structures where you only feel that you can, you know, share so much truth before you're kind of, you know, beaten down. I want to be conscious of your time here. I could very easily spend many more hours talking with you about this stuff. We didn't.
- [83:07]
A
We'll do it again sometime.
- [83:08]
B
This has been fun. Yeah, yeah. You know, I'd love to talk at some point about, you know, AI and its impact on lean startups and all that good stuff. I wanted to say such a big thank you for coming on. This has been so much fun, so interesting and I've really appreciated your insights and your conversation.
- [83:21]
A
Well, thank you for saying so. I really appreciate that.
- [83:24]
B
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