Left Outside

What are existing companies for?

Rick‘s post is good, firms really are meant to be run only for shareholders, and this makes Neil Morrison wibble asking business to pull out its finger all the more silly:

We all know the state of the economy. We all know that unemployment is at the highest level for the best part of two decades. We know that youth unemployment is a social tragedy. And we know that the Government is ill-equipped and ill prepared to deal with it.

So who is going to make the difference?

Well the answer is that business is partly responsible for getting us into this mess, and we are the only people who can get us out of it. And we aren’t going to do that by focussing on cost cutting, rationalisation, downsizing and offshoring. Nor are we going to, in the long run, add value to our business by doing so.

I know that I run the risk of being called naïve here. But is chasing short-term share holder return really less naïve than building long-term structural value in your business? I think not.

Rick asked if the question made sense given the incentives of those with power. An important question to ask. I would rather know, even if those with power could be convinced, would it matter?

Frankly, the only answer we can give is no. Productive and employment growth is widely distributed. It isn’t just young firms that add jobs or experience explosive growth. Contrary to what you may imagine, high tech firms can grow as sluggishly as any other and big firms can sometimes just get even bigger.

Even if shareholders did have all the power (and management ensure they don’t) then we should still not expect compliance with Neil’s request. Firstly, it is a jungle out there, secondly everyone would be playing for uncertain returns.

It isn’t a case of making short-term sacrifices for long-term gains; it is one of  gambling with your firm’s life. If you are a small firm then life is dangerous, even if you are large you are always at risk of downfall. “Nearly three-quarters of the 100 giant firms had disappeared or were smaller in 1995 than in 1912 [pdf].” In fact, the extinction rate of firms is very similar to that of biological species [pdf]. There is no toughing it out for the greater good; you either survive, which is your aim anyway, or end up make the biggest sacrifice of all.

On the other hand, it may be that “cost cutting, rationalisation, downsizing and offshoring” are bad at producing long run value added for a firm, but it is difficult to establish that in advance. Those horrible euphemisms are bad for those people experiencing them, but they might or might not be good for the firm, only time and firm entry and exit of firms and facilities will tell.

Not very stirring, it certainly gives you no way to beat your manly chest and declare ” I shall save these people from unemployment and short-termism,” but it is a damn sight more useful to know. So what are existing firms for? Same as new firms, to produce, experiment and survive.

Filed under: Economics, Politics

When NGDP is Depressed, Employment is Depressed

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