TCS Daily

The Innovationist

By Arnold Kling - May 6, 2004 12:00 AM

"Mother Teresa helped many people, but Michael Milken helped more."

-- John Stossel, "In Defense of Greed," Forbes, Feb. 2, 2004 *

On April 26-28, I attended the Milken Institute Global Conference, held in Beverly Hills, California. The conference attracted leaders from business, finance, public policy, and academia to hear about issues related to "prospering in a changing world." Topics included the state of the economy, global investment opportunities, medical research, and education reform.

In my view, going to conferences to sit and listen to speakers is not an effective use of time. My goal in attending was to connect with other people interested in pursuing organizational and technological innovation in schooling. I failed, but the conference was still a worthwhile experience. I got a chance to size up the phenomenon of Michael Milken, former junk-bond king and convict, hero to many, villain to many others.

In the end, what strikes me about Michael Milken is that he is an innovationist, by which I mean that he has a zealous, ideological commitment to innovation. For an innovationist, nothing is worse than complacency or satisfaction with the existing order. He strongly favors upstarts over incumbents. He believes that change is good. Moreover, Milken promotes innovation with enormous intensity and drive.

I first saw Milken in action when he was moderating a session on "accelerating medical solutions," featuring Andrew von Eschenbach, the Director of the National Cancer Institute, and two Nobel Laureates in Medicine: David Baltimore and Lee Hartwell. Milken complained about inertia in the field of medical research, and he badgered Baltimore and Hartwell over ways to speed the process of finding a cure for cancer. His tone was that of a venture capitalist who is frustrated with a startup company that is not meeting its milestones.

Milken was much happier with von Eschenbach, who has stated a goal of eliminating death from cancer by 2015. In the process of waging his own battle with prostate cancer, Milken evidently became von Eschenbach's patron. Milken, who barely survived, created the Prostate Cancer Foundation, which influenced the level of funding and the direction of cancer research. A book put out by the PCF, A Call to Action, reports on page 51, for example, that the Defense Department created a program in prostate cancer research. The manager of that program is quoted as attributing its creation to the work of the PCF and Michael Milken.

Low Geek Profile

I skipped the dinner session on "imagining the future." The topic was the outlook for humans and computers. On this sort of issue, I think that Pop!Tech, which I wrote about in Nonlinear Thinking, was like graduate school for geeks, so I figured I did not need to attend the freshman class at Milken. In fact, the geek profile at Milken was very low. The attendees neither knew how to blog nor how to switch a cell phone to vibrate. Instead of the rudeness of open laptops, there was the rudeness of frequent loud ringing.

The next morning, I attended a session on "The State of Education in America," featuring Lowell Milken, Michael's brother and business partner, and former education secretary William Bennett. The slides that went along with the session (which will be on line eventually at the conference web site -- click on "program"), documented the reasons for concern with our schools. National tests classify students either as "proficient," "basic," or "below basic" in reading or math. My notes (the slides went by quickly) say that the majority of blacks and Hispanics and 25 percent of whites scored "below basic" in reading at the fourth grade level, which Bennett says means that they cannot read at all. Lowell Milken marveled that the parents of students in low-performing schools do not launch an uprising. Again, it is difficult for a Milken to fathom complacency, particularly when there is room for improvement.

Terrorism and the Third Wave

The next session I attended was on America's military readiness for the problem of terrorism. William Perry, Secretary of Defense during the Carter Administration, said that a problem with re-instituting the military draft is that training is critical for the modern military, and it would be unwise to mix in untrained draftees with trained soldiers.

I thought that the most impressive speaker at this session was futurist Alvin Toffler. He talked about the world situation in terms of his Third Wave model. The agricultural age was the first wave, the industrial revolution was the second wave, and the information age is the third wave. The third wave is much less centralized and less dependent on mass markets and mass production than the second wave. This model seems obvious now, but it is quite remarkable that his book was written in 1980, two years before the IBM PC and more than a decade before the popularization of the Internet.

Toffler says that the friction between Europe and the U.S. is due in part to the fact that America is much farther along in the third wave. He sees terrorism as a conflict between first-wave societies and more advanced societies. He says that the transformation from industrial-age warfare (mass armies, mass production of tanks and airplanes) to information-age warfare is complete. The terrorists use "ideologically-propelled weapons," which sounds like the concept of "arsenals of hatred" that I came up with shortly after 9/11.

Toffler argued that the nation-state is a fading, second-wave phenomenon. States are becoming more porous--the 9/11 attack was an infiltration. Also, states are bureaucratic. Ultimately, we cannot defeat terrorism by defeating states -- we must defeat a "deep coalition" of religious and ideological allies. Once again, I heard Milkenian innovationism in Toffler's call for unbureaucratic, network-based approaches to the war on terrorism.

Third World Diet

Of the next sessions, I chose one on nutrition. Milken, the moderator, showed a number of slides documenting the sharp increase in obesity. One slide, which he particularly enjoyed, was a cartoon showing an evolutionary sequence from apes to humans to taller humans to short, fat humans, to pigs. I imagine that Milken sees his own species as using its drive and its knowledge of medicine and nutrition to avoid descending into the pig species, which will be populated by those who are complacent. Another of his slides claimed that 70 percent of health care spending is on lifestyle-related diseases, which Milken probably would regard as the cost of people's resistance to change.

One panelist was Dean Ornish, the coronary specialist who was among the first to emphasize diet and lifestyle factors in heart disease and other illnesses. He said that fear of death is not a motivating factor for people to change lifestyles. Instead, he argued for emphasizing the benefits of feeling better, including maintaining sexual function. He also argued that health insurance companies should offer more incentives for healthier lifestyle changes.

Another panelist, Francine Kaufman of Los Angeles Childrens Hospital, made an emotional statement that poor people cannot afford to substitute fruits and vegetables for junk food. She made it sound as though a good diet is a luxury only the rich can afford. Ornish, however, was having none of it. "What I'm advocating is a third world diet," he retorted. Kaufman had compared the cost of raspberries to the monthly income of single mothers in poverty. Although Ornish admitted that raspberries are expensive, he said that many foods that he recommends cost less than the foods that poor families consume.

The panelists, as well as Milken, took an innovationist stance. The diet and lifestyle changes they advocated receive little emphasis in mainstream medicine. When Milken asked whether change would more likely be driven by ordinary consumers or by doctors, David Heber of the UCLA Center for Human Nutrition said emphatically that the public will move ahead of doctors.

Doctor Howard Dean

Ironically, I heard the doctors' point of view at the next session, which was held at dinner. It was a political shootout, with the right represented by Paul Gigot of the Wall Street Journal and GOP strategist Ralph Reed, and the left represented by former Democratic presidential aspirant Howard Dean and New Mexico Governor Bill Richardson as well as by moderator Bob Schieffer.

At one point, Dr. Dean said, "The market does not work for health care. If I tell you that you need a $40,000 heart bypass operation, then you have to do it. You can't go shop around for something cheaper." Of course, this point of view was the opposite of what I had heard at the previous panel. Both as a doctor and as a politician, Dean comes across as arrogant and authoritarian.

The panel produced no insights, only sound bites and applause lines. The only surprise came when Dean credited George Lakoff in making the case in favor of candidates who fire up the party's base rather than attempt centrist moderation. I thought that Lakoff was relatively unknown.

Education Non-reform

Early next morning, I heard a talk by Lewis Solmon of the Milken Family Foundation on the "No Child Left Behind" act. Solmon defended the act against left-wing critics, in the process solidifying my own opposition. I intend to return to this in a future essay, but suffice to say that no true innovationist should try to defend NCLB.

Next, I skipped a star-studded session that included Steve Forbes and President Bush's chief economic adviser Greg Mankiw in order to stick to my plan of focusing on the education track. I saw a panel discuss "the next wave in technology in education." Several education technology bureaucrats gave uninspired, unconvincing presentations. As any innovationist can tell you, meaningful change will not be driven by incumbents. The revolution will not come from within.

Continuing the education track, I passed up a session on the tech industry featuring several celebrity CEO's (Craig McCaw, AOL's Jonathan Miller) to attend a panel on lifelong learning. Milken, as moderator, again had a powerful briefing book of slides, one of which argued that the value of human capital in the United States is three times the value of all other assets -- stocks, bonds, real estate, etc. Another slide indicated that between 1950 and 2000 the proportion of unskilled jobs in the United States declined from 60 percent to 15 percent.

The thrust of the discussion by Milken and the panelists was that lifelong education is important. Gary Becker, the 75-year-old economics Nobel Laureate, emphasized how much effort he continues to make to keep up with the profession. Andrew Rosenfield, the chairman of Milken-funded UNext, pointed out that 75 percent of students attending college today are over the age of 25.

A Math Lesson for Public Schools

Next, I passed up more celebrity CEO's (Sumner Redstone, Peter Chernin) as well as a competing session of celebrity investment pundits (including Lawrence Kudlow) to attend a panel of superintendents of large public school systems. I was struck by the statement of David W. Gordon, superintendent of the Elk Grove Unified School district, that 87 percent of his budget consisted of personnel costs.

Unlike most sessions, this one had adequate time for questions from the audience. I used the opportunity to offer an entrepreneurial math lesson. I pointed out that if a teacher has 25 students and the total cost per student is $10,000, then the revenue per teacher is $250,000. Also, the panelists had pointed out that teachers are only paid between $25,000 and $60,000. Given Gordon's estimate that 87 percent of costs are personnel costs, I asked how to account for the difference between $250,000 and $60,000.

In response, Gordon sputtered and stammered. "We need people to keep the schools clean. We need janitors. We also need bus drivers. Only five percent of our cost is for administration. We need janitors and bus drivers." He either could not or would not give the real explanation, which is likely that the school system staff is bloated with large numbers of curriculum specialists, program co-ordinators, and other non-teaching bureaucrats.

Becker Dominates

At lunch, Milken moderated a panel of economics Nobel Prize winners, consisting of Becker, Myron Scholes, Michael Spence, and Daniel Kahneman. Within the profession, Becker has by far the highest reputation, and I thought that he dominated the conversation. He seemed to take up 60 percent of the minutes, but I felt that he also offered 90 percent of the insights.

Milken began by asking whether the rise in obesity represents rational or irrational behavior. Kahneman, a psychologist (see my discussion of his Nobel here), said simply that "If you put food in front of people, they will eat." Becker was not satisfied with this answer. He argued that it did not explain why there has been such a sharp rise in obesity since 1980. He speculated on three possible causes. One is that the price of junk food has fallen (at the nutrition session, a slide went by that I believe showed a tenfold reduction in the price of soda in fifty years). A second possibility is reduced physical activity among teenagers, with more time spent with TV and computers. A third possibility is that people have reduced their estimate of the cost of unhealthy lifestyles as they observe progress in medicine. In effect, people may be expecting science to develop a "morning after pill" for over-eating, and "That expectation may not be entirely irrational," Becker observed.

Milken focused much of the discussion on international issues. On Europe, Kahneman took the position that the United States should be open to learning from the Europeans, who he argued may have a higher quality of life. On the other hand, Becker shares the innovationist's contempt for complacency. He recognizes that Europeans are content with low economic growth, but he finds this contentment difficult to accept (I am taking some of Becker's views on Europe from one of the other sessions where he spoke).

Becker drew a sharp contrast between India and Pakistan. He argued that India's pro-market reforms, begun in 1991, have led to strong and steady economic growth. He sees India passing China in five years. In contrast, he views as Pakistan as "perhaps the most dangerous place in the world," an economically backward country, unstable politically, with nuclear weapons.

Becker argued that although economists know that free-market reforms enable economic growth, the Muslim world and Africa are mired in poverty. "It's their fault," he said emphatically, taking the position that pro-market reforms have much more potential to reduce poverty than does international aid. Again, one could hear an innovationist railing against complacency.

Scholes was also bearish on China. He sees it as using capital less and less efficiently, as the banks continue to prop up obsolete enterprises. He sees the former Soviet Republics as having finally shaken off government impediments to growth by reducing taxes. "They're still corrupt, but they have less to be corrupt about," he argued. However, he says that joining the European Union could be the "death knell" for Eastern Europe, because it will mean adopting less market-oriented economic policies.

Just Another Asset Class

Scholes also drew attention to one of Milken's slides giving a formula for economic success as:

financial technology multiplied by (human capital plus social capital plus real assets)

That formula says a lot about the Milken world view. It puts financial wizardry -- Milken's skill set -- on center stage. While the other factors are merely additive, financial technology is a force multiplier, an Archimedian lever, as it were. The power to achieve meaningful things depends on the ability to mobilize financial resources. Putting other people's wealth to work in productive ways is critical. This means that it is important to have access to large investors.

While it places a premium on access to wealth, Milken's formula reduces intellectual and social resources to mere financial investments. The research of Nobel-caliber scientists is just another asset class.

Milken's financial supply chain has allowed him to make large bets on companies that promise innovation in education and health care. Time will how well those bets pay off. As I left the conference, one of the exhibitors, a company funded by Milken in the "nutrition space," offered me a "protein and fiber" bar. Not yet the "morning-after" diet pill, but an attempt to put good dietary properties into a junk-food package. The stuff tasted all right, but it gave me really bad reflux.


In fact, I found a number of aspects of the conference to be paradoxical. Many of the innovationists who spoke passionately about what they are doing to improve the lives of the disadvantaged are people who would not give the time of day to an average human being. They are too busy pursuing contacts with those who are wealthy or who are perceived as providing access to wealth in some way.

Milkenians exhort ordinary people to be less complacent and more pro-active. But if Milken's financial-centric model is correct, then only the wealthy have real influence in the world. What is the point of the average person attempting to accomplish anything if high-leverage investment is all that matters?

My own instinct is that the third wave reduces the importance of large concentrations of investment capital. I like the sorts of innovations that Mike Milken is working to realize, but my hope is that his wealth-centered approach is not necessary for achieving them.

* Author's note: Evidently, Forbes was not the first magazine to draw this comparison. A Business Week article comparing Milken favorably with Mother Theresa is referred to in this critique.


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