The Capitalist's Manifesto according to Michael Milken - Part 1 of 3

The Actual Value of People & Science
 
Michael Milken addressed the assembled CEOs and directors at the Directorship Boardroom Forum on the campus of Pepperdine University’s Graziadio School of Business in Malibu, Calif., in late June. It would be challenging to find another financier who has risen above the “dismal science” to exert such a profound influence on the myriad aspects of business, global affairs, politics, education, and healthcare. Milken will no doubt continue to make business history. His encyclopedic knowledge of finance and global markets, combined with a point of view on the unlimited human capability, makes up what one might call Milken’s Manifesto. His remarks are germane to our readers not only as directors and officers, but as members of the global community.

Here, in his own words, is the story of innovation, America, and the future of our economy as we know it today. (First of a three-part series.)

First, I want talk about what an unusual country the United States of America is. If you look at the statistics, people living in the U.S. give almost twice as much money as a percentage of income than any other country in the world. This giving, this caring, is so different than almost any other country on the planet.

The second thing that is so unique about this country is its willingness to change its face. By the middle of the century, this European-based country will be an African-American, Latin American, and Asian-American country. A peaceful change—with the willingness to hand over the reins and the realization that in states like California, Arizona, and New Mexico the majority of people’s ancestors will have come from Latin America—is one of the things that has kept this country so resilient.

The third thing, that you might not think about as much, is the gene pool. Why is the U.S. different than most other countries? Our ancestors were risk takers. It might have been 10 generations ago. It might have been one. It might have been you. But someone made the decision to leave where they were and come here. So it’s a very unusual country and it’s a very resilient country because of these things.

How Democracy Unlocks Value
Democracy is a dependent variable. It is not an independent variable. If you look at history from an economic standpoint, you find that there is not any great correlation between economic growth and democracy. However, there is a tremendous correlation between sustained economic growth and democracy. And therefore it’s very difficult to impose a democracy on a society that doesn’t first have sustained economic growth. As you look at Japan or Korea or other countries around the world as examples, you will find that where democracy has flourished, you’ve had economic growth for a long period of time, creating middle classes and prosperity.

In this context, I want to look at China. In the U.S. in 1800, 95 to 98 percent of the people were involved with agriculture or lived on farms. A hundred years later, half the people in the U.S. were involved in agriculture, so one person’s output fed two people. Today, a half of one percent of the people in the United States. work in agriculture, and each person feeds 340. So we’ve had a substantial increase in productivity. In China, if you assume at least six or seven hundred million people are involved in agriculture today and they are moving to the cities. But they only can absorb 25 to 30 million people moving a year. Think of all of France moving every two years: everyone has a new school, a new house, a new neighborhood, and you want to try to keep order and assimilate people into the systems. What a challenge it is when you try to move from an agrarian society—whether it’s India or China, or elsewhere—to a non-agrarian society, without having jobs for the people to do.
 

And so, more than a billion people in the next 20 years will leave agriculture, and we’ll have much more efficient production, but we need to find things for them to do to be productive and absorbed into that society.

The Largest Asset Class
What is the world’s largest asset class? In 2006, the Federal Reserve put out the household balance sheet. The largest category was real estate, and except for a very short period in the mid 1960s, and a very short period in the 1990s, real estate has been the major asset class, according to the Federal Reserve and the financial markets. But this information is totally incorrect. The work of Gary Becker, who won a Nobel Prize in 1992, shows that the major asset category is the productivity of individuals. He estimated at the time that productivity was about three-quarters of all assets. There’s recent work that has suggested it’s as much as 90 percent.