Tuesday, July 28, 2015

Quarterly capitalism

by Michael Roberts

You see what’s wrong with capitalism is that it is short-sighted.  Apparently, corporate chiefs, investment banks and investors are just after a quick buck.  They never look to the long term, to the bigger picture, to a strategy of investment for sustained growth.

This is what budding presidential candidate from the Clinton royal clan, Hillary, told the very eminent New York University Stern School of Business last week.  ‘Quarterly capitalism’, as she called it, just looks at the quarterly earnings results of a company as a guide to investment.  This works against proper investment.  So Hillary proposes to tax short-term capital gains on the stock market more heavily in return for incentives to invest for the long term.

Hillary Clinton did not invent ‘quarterly capitalism’ as a term to describe what previous observers of capitalism have called ‘short-termism’.  This latest slick aphorism came from the head of McKinsey, Dominic Barton.  McKinsey, as the Goldman Sachs of management consultancy, is always looking to discern and explain long term trends of capitalism.  “Lost in the frenzy [of short termism],” wrote Barton, “is the notion that long-term thinking is essential for long-term success.”

What is puzzling and worrying Clinton and Barton is that capitalism is not delivering sustained economic growth and investment in new technology that can raise the rate of productivity of labour.  Last year S&P 500 companies spent more than $500bn on share buybacks, while investment in productive assets remains in the doldrums.  So capitalism is myopic.

Well, this is not a new message.  And it’s partly true.  An economy that is based on making money or profit is inevitably going to face the continual problem that some will take a quick profit at the expense of the development of human capital and technology for the long term.

The evidence for short termism as the reason for a failure to invest is questionable actually.  One study has confirmed that publicly quoted companies with share prices to worry about tended to invest ‘substantially less’ than privately-owned non-quoted companies (John Asker, Joan Farre-Mensa, and Alexander Ljungqvist did a study). But other studies claim that there is no such evidence.

Andy Haldane, the chief economist at the Bank of England, is more convinced.  Haldane has often been ‘off message’ when it comes to defending capitalism, particularly finance capital (see my post,
https://thenextrecession.wordpress.com/2013/10/31/the-value-of-banking-according-to-mark-carney-and-alan-greenspan/), going so far as to suggest that the financial sector creates no value at all for the wider economy.  Now in a recent TV interview, he argues that firms are “too short-termist, are not spending enough on investment, are returning far too much money to  shareholders, and that we should consider alternative forms of corporate governance to make sure that the wider social good is served.”

Will Hutton, the promoter of an ‘inclusive capitalism’ (see my post,
https://thenextrecession.wordpress.com/2015/06/26/lady-rothschild-thomas-piketty-and-inclusive-capitalism/) that aims to ‘meet the needs of people not speculation’ (an oxymoron, in my view), was quick to latch onto Clinton’s sound bite.  “The market is hopelessly inefficient, greedy and myopic.” Hutton tells us. “Far from market efficiency, the whole system is undermining the legitimacy of capitalism”

Yes, indeed, the legitimacy of capitalism as a productive form of economic organisation is under question.  But Hutton provides a way out.  For him, short termism and financial speculation are products of a deregulated, neoliberal ‘Anglo-American’ model of capitalism. Does that mean there are other more inclusive and productive models that presumably avoid short termism and financial crashes.  What could they be?  Surely not the social welfare model of Europe that has been crushed by the banking scandals there and the subsequent depression?  Or the Japanese corporate capitalist model with its close connections between politicians, the state, the banks and the large corporations that has seen 20 years of stagnation?

Nevertheless, Hutton gushes at Clinton’s radical move.  “She does not want to reinvent the public limited company, but she proposed the most far-reaching tax reforms of any Democrat presidential nominee to change the incentives for shareholders and executives alike.  In American terms, this is a revolution.  It is long overdue and the argument is beginning to get traction in the US.”

But tapering capital gains tax according to the length of holding a share – is that revolutionary?  Actually, it is more likely the Clinton scheme will simply increase profits for long-term shareholders (pension funds) at the expense of short-term holders (hedge funds).  That may even increase the share of capital income going to the top 1%.

The campaign against short-termism is really a diversion from recognising that there is a failure in the capitalist mode of production.  Instead, let’s look for the blame on ‘speculation’ and a bias towards a quick buck.  The fallacy in this argument is that speculation and short termism has always been part of the capitalist accumulation process.  The question is why it is worse now – if it is.

The answer might lie in the failure of the productive sector of capital to deliver high or even rising profitability, thus pushing corporations, banks and investors to speculate in financial assets (fictitious capital) to counteract. The evidence for this is much stronger than the evidence of ‘short-termism’.  See my post,

And compare the rise in financial profits as a share of total corporate profits.  Corporations have been following the money.
US share of financial profits

Although, since the global financial crash, the share of financial profits in total US corporate profits has fallen back.

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