On Fri, 2002-12-06 at 13:05, R. A. Hettinga wrote:
> http://www.forbes.com/forbes/2002/1223/234_print.html
> 
>  Forbes.com
> 
> 
> Forbes 85th Anniversary
> The Confidence Game
> George Gilder, 12.23.02
> 
> Why I trust the most disgraced chief executive more than I do the most
> reputable public servant.
> George Gilder
> Why do I trust Gary Winnick and Jeffrey Skilling--nefarious former chief
> executives of notoriously bankrupt companies--more than I trust Senator
> John McCain of vaunted valor in prison camps or David Broder of Pulitzer
> fame or Senator Joseph Lieberman of famously flinty integrity? Why do I
> trust Kenneth Lay of {Enron (otc: ENRNQ - news - people ) and Bernard
> Ebbers of {WorldCom (otc: WCOEQ - news - people ) more than I trust
> Justices William Rehnquist and Antonin Scalia, the stalwart intellectual
> leaders of a nominally conservative Supreme Court, or even George W. Bush,
> that most trusted of Presidents?
> 
> Why do I trust General Electric (nyse: GE - news - people ) chief emeritus
> Jack Welch or AT&T (nyse: T - news - people ) Chief Michael Armstrong more
> than I trust the entire scientific and environmental coverage in the New
> York Times and all the venerable editors of the increasingly political
> Scientific American? Why do I trust Martha Stewart and ImClone (nasdaq:
> IMCL - news - people )'s Sam Waksal far more than I trust the crusading
> journalist James B. Stewart or New York State Attorney General Eliot
> Spitzer, trustbuster deluxe, as they righteously seek to banish
> moneylenders, marketmakers and conflicts of interest from the temples of
> Wall Street?
> 
> The reason I trust disgraced executives more than politicians, judges and
> journalists is the same reason that I trust physicists more than I trust
> sociologists. The answer comes from the eminent philosopher of science Karl
> Popper: falsifiability. In science, falsifiability means that a hypothesis
> is presented with sufficient rigor to be proven wrong, that is, falsified.
> It is the condition of trust. By contrast, the sociologist deals in broad
> propositions--such as "ethnic diversity improves educational outcomes" or
> "patriarchy causes war"--that, by sinking into a mush of definitions, defy
> disproof.
> 
> Except when conducting trials of identifiable crimes such as murder or
> assault, judges are no more truthful than politicians or journalists. They
> all adhere to the "ring-true" standard of sociology rather than the
> falsifiable standard of physics. Most of the time, as physicist Wolfgang
> Pauli put it in another context, they are not even wrong. Their statements
> lack the rigor to rate as lies and swim in the ontological soup of the verb
> "to be." From such a soup, no enduring truths can evolve.
> 
> Like a physical experiment, every entrepreneurial venture embodies and
> tests a hypothesis about products or markets. Intel is currently preparing
> to test the hypothesis that computer companies will choose a microprocessor
> that runs at 3 gigahertz, or 3 billion cycles a second, and will buy it in
> sufficient volumes that Intel can profitably manufacture it in a plant that
> costs $2 billion to build and equip. Samsung is testing whether people will
> buy a cell phone that takes digital photographs. Ebay (nasdaq: EBAY - news
> - people ) is testing whether it can move beyond Web auctions of used wine
> openers to Web auctions of $20,000 antique cars, and to TV programs. The
> presence of such testable hypotheses distinguishes investment from both
> gambling and government planning. A true gamble does not test a refutable
> principle. Therefore it cannot produce valuable knowledge. Likewise, a
> nationalized business with guaranteed markets cannot yield falsifiable
> information.
> 
> Knowledge emerges not from chaos, or fixity, but from conditions of
> uncertainty. Under capitalism power flows to precisely the people who are
> willing to stake their money not on gambles or sure things but on testable
> hypotheses, thus generating knowledge and wealth for society. Entrepreneurs
> are trustworthy because they accept a moral code of testability and
> falsifiability rather than one based on sentiment, sanctimony, good
> intentions, good press, good luck, good looks or guarantees.
> 
> 
> 
> Bankruptcies play the same role in economic progress that falsifiability
> plays in the progress of ideas. Both sciences and businesses advance as
> much by disproof as by affirmation. Every capitalist investment has the
> potential for a dual yield: a financial profit and an epistemological
> profit. One without the other is sterile. Economies progress when the
> process of investment is informed by the results of previous investments.
> What makes the entrepreneur uniquely trustworthy is that he combines in one
> person these two yields of enterprise. If his venture succeeds, he also
> gains the power--through profits--to make further investments, further
> experiments in light of his initial venture. If his venture fails, he and
> other investors who shared his confidence in the business may well lose
> wealth, and the project will sooner or later be halted, no matter how
> commendable and morally uplifting it is. But even as money is lost,
> epistemological profit is gained, distilled through the learning effects of
> direct experience.
> 
> I trust chief executives because they deal in projects that can go
> bankrupt. They cannot repeatedly or consistently lie about their companies
> because the truth will out in a relatively short time. Even at Enron, Lay
> and Skilling could deceive themselves and the public only for a matter of
> months. Skilling got skittish--and got out. Lay maintained his faith
> through no fewer than 14 margin calls that he had to meet by selling Enron
> shares. Both Enron stars learned their lessons (about off-the-books
> subsidiaries and financial engineering, for example), and they taught them
> to the world.
> 
> Gary Winnick and his serial executives at Global Crossing (otc: GBLXQ -
> news - people ) also submitted to the crucible of experience. Building a
> unique global network of optical fiber, they learned the perils of debt in
> a deflationary market. Selling a quarter of his shares at a $600 million
> profit, Winnick also signaled a belief that they were fairly valued or even
> overvalued. Many other shareholders did not trust that signal, though they
> should have. Now politicians want to banish such information from markets
> altogether in the name of making them more transparent and trustworthy. But
> most business information is uncertain most of the time. Which means that
> bans on insider trading make markets more treacherous, since prices will
> not move until outcomes are sufficiently certain to be announced. Insider
> trading rules make the executive personally liable for getting things
> wrong, though much of what any chief executive--or any person--thinks at
> any particular time is wrong. Thus the law bars all the guesses and
> intuitions of people closest to the company from influencing the price of
> the shares.
> 
> While executives can be trusted to face reality and learn from it, even if
> it means bankruptcy, no such corrective faced the politicians and judges
> who allowed the bankruptcies of some 35 onetime producers of asbestos on
> account of preposterous claims of "potential illnesses" from this mostly
> safe and useful material. No such edifying gauntlet faced the government
> officials and politicians who brought down 70 telecom companies through a
> series of egregious policy errors of telecom reregulation and monetary
> deflation.
> 
> Politicians are indignant about bankruptcy. They deem it a crime, rather
> than a punishment. But they would never tolerate the equivalent outcome for
> themselves. To prevent such a catastrophe, incumbent politicians such as
> McCain and Lieberman, who want us to trust them, have been busily enacting
> campaign-finance rules that bar anyone without a personal fortune from
> displacing them. But even the loss of an election does not require the
> abnegation faced by a bankrupt entrepreneur, or the recanting expected of a
> scientist whose findings have been falsified. Coming from an entirely
> different culture, politicians and journalists are baffled by enterprise
> and science. But the most crucial reason to distrust nearly everything said
> by politicians is their defiance of truth and reality on issues of science.
> 
> 
> 
> Example: In one of the most brazen chemophobic claims in the history of
> science and government, politicians around the world are now condemning
> carbon dioxide (the air that we breathe out and plants imbibe) as a
> dangerous pollutant. Seeking new controls on the global economy, Greens
> urge implementation of the Kyoto Protocol on global warming, which would
> cost $500 billion a year to apply, reliably causing a Third World holocaust
> of famine and poverty. Citing a nonexistent consensus of scientists, the
> political choirs ignore all evidence that temperatures today, though
> admittedly warming up from the "little ice age" of the last millennium, are
> cooler than their average in the human era. By many paleochemical
> calculations, corroborated by historical record, global temperatures were
> several degrees warmer 1,000 years ago, 3,000 years ago and 6,000 years
> ago, long before humans began using fossil fuels. Rushing to justify new
> government powers over the global economy, journalists and politicians
> simply do not deign to consider the available data on the history of
> weather.
> 
> Politicians get away with denouncing reality and blaming it on executives
> and other private-sector powers. But driving most of the misrepresentation
> in business is the labyrinth of laws through which the chief executive has
> to guide his company, following the advice of lawyers and accountants and
> sharpie chief financial officers. Since corporate tax laws and securities
> regulations make no sense, executives do not bother to learn the details,
> leaving interpretation of the cabalistic codes to highly paid experts with
> many years of training and specialized degrees. Journalists who would never
> dream of filling out their own tax returns deride executives who claim they
> have no clear idea of the contents of thousands of pages of mandated forms
> and accounts that remain unread by anyone, including the government bodies
> that mandate them--until bankruptcy or recession lends 20-20 postmortem
> clairvoyance to press, politicians and prosecutors. Depreciation rules that
> assign lives of 15 years to telecom switches that grow obsolete in 15
> months make "the capitalization of expenses" a mandatory part of telecom
> business. Mandatory, that is, when the government mandates it. Otherwise,
> as in the case of WorldCom, it becomes felonious. As the President put it,
> "Corporate accounting is not necessarily black and white."
> 
> What makes these accounts so critical to politicians are insider trading
> regulations that try to create a level playing field for both a taxi driver
> and Warren Buffett. With all other information pushed beyond the pale,
> politicians want to believe that the quarterly numbers are meaningful and
> sufficient guides to investment. But without inside information of material
> significance, investment loses its falsifiable basis and becomes a form of
> gambling. Buffett or the executives of General Electric or the masters of
> Silicon Valley's venture capital would never think of staking their funds
> without inside knowledge unavailable to hoi polloi. Inside knowledge is
> perfectly legal for all these players, who sit on multiple boards, read
> hundreds of for-their-eyes-only business plans, and shuffle capital among
> hundreds of companies under a corporate umbrella or within a portfolio.
> 
> The law denies inside information only to the layman, who is expected to
> invest on the basis of technical analysis (the voodooistic interpretation
> of past trading patterns), Keynesian economic astrology, quarterly earnings
> reports known to the world and other trading trivia. While investigators
> pore over tomes of paperwork to ferret out the possibly inside provenance
> of information about ImClone--which had already plunged the stock ten
> points when Martha finally sold--the rest of the world is left to
> contemplate the baffling challenge of finding any shred of actionable data
> about a company that cannot be deemed an inside tip. The idea of a level
> playing field of information is ridiculous on its face, since information
> is defined as a deformation of the level. Outside analysis is mostly
> useless to investors--because it is outside, and thus widely known and
> already reflected in the prices of shares.
> 
> 
> 
> Chief executives understand that it is impossible to banish insider trading
> without crippling the markets themselves. They grasp that conflicts of
> interest are ubiquitous in life and that intelligent people take them into
> consideration when appraising a particular report, tip, argument or
> analysis. But politicians rule a realm where rhetoric trumps reality, where
> they imagine they can guarantee corporate purity with Chinese walls and
> chastity belts among analysts and bankers, forced recusals by "interested
> parties," mandated "independent" board members, executive seals and
> signatures on all accounts, back-checks and other fake remedies imported
> from the world of law and politics. Amid the fun-house mirrors of insider
> trading rules, we now live in a world where the only investors free of
> suspicion are people who channel their money into companies they know
> nothing about. Approved by politicians everywhere, the best investment by
> this measure is a state-run lottery or, more significantly, an all-market
> index fund from which all useful inside information has been excluded. If
> people are not allowed to put their money in companies they understand,
> capitalism loses its advantage over socialism, since what makes capitalism
> succeed is the assignment of capital to the insiders who earned it--and
> thus learned how to invest it profitably.
> 
> The insanity of our securities laws, and even our tax laws, is nothing
> compared with the sand thrown into capitalism's gears by American antitrust
> law. Based on the idea of perfect competition, where the market is
> omniscient, this code is as unenforceable as the insider trading rules. Now
> coming forward with treble-damage antitrust claims are the likes of class
> action attorney William Lerach. Under the rules, companies today can set
> any price they choose for their output, as long as it is not too high
> (gouging), too low (predatory dumping) or just right (collusion). At
> present Micron Technology (nyse: MU - news - people ) and other producers
> of dynamic random access memory chips for computers--one of the most
> competitive industries on the planet--are confronted with charges from the
> Justice Department that imply all three pricing offenses at once.
> 
> No government program has ever gone broke, which is why politicians need
> never face the inconvenience of weighing the truth or falsity of their
> claims while they calibrate them to the resonant frequencies of their
> audiences. Republicans were cruelly unfair to Bill Clinton, whom they
> assailed as dishonest, when in fact he was fully honest to his trade as a
> Democratic politician. Republicans are scarcely better. They adopt a
> different idiom, oriented toward people in businesses, churches,
> constabularies and intact families, rather than toward single mothers,
> academics envious of others' success, union members, government workers,
> criminals and professional Greens or grievance groups. But politicians in
> neither party tell the kinds of truths espoused by physicists.
> 
> When a politician breaks the pattern and speaks the truth--normally in a
> crisis too sudden to permit the conducting of a public opinion poll--he
> gains instant beatification, as Rudy Giuliani and George W. Bush discovered
> after Sept. 11. The public reels in amazement and admiration, as if their
> dog had begun to sing Schubert lieder. After a time, though, the politician
> wishes to discover what it was that elicited the public enthusiasm. He
> takes a poll.
> 
> Chief executives trust the personal opinions of their customers, who
> voluntarily and authoritatively choose what to buy with their own money.
> Politicians collect the money of others in order to spend it on public
> purposes sanctioned by figments of aggregate opinion.
> 
> In a profession offering a limited number of powerful slots--100 senators,
> 50 governors, 1 President--politicians live in a zero-sum world, where the
> gains of one necessarily come at the expense of others. In an election, one
> candidate wins and the other loses. In a zero-sum world, you may envy or
> blandish others, but you cannot trust them, because you can assume they are
> seeking to aggrandize themselves at your expense. Thus politicians
> necessarily distrust one another and the public. It is natural for them to
> tax and regulate people coercively.
> 
> By contrast, chief executives know that their success is dependent on
> grasping a reality that they can never comprehend in its fullness
> themselves. In order to win they must trust others and collaborate with
> them. Their success depends on the successes of others; their own
> enrichment relies upon the enrichment of their customers and collaborators;
> their own profits stem from the dignity of voluntary personal choices,
> rather than coercive appropriations. Their entire enterprise is ultimately
> founded on trust. That is ultimately why I trust them. They trust me.