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Don’t complain about tech giants paying out to shareholders – it’s how innovation begins

Critics of publicly quoted technology giants say they should invest profits before paying out to shareholders – but that would stifle innovation elsewhere

The latest complaint about this global capitalism thing is that companies are paying too much out to shareholders. We are told, in the Financial Times of all places, that Apple is the exemplar of the problem.

The iPhone company has only ever once raised cash from the public stock markets – $97m in its original share offering in 1980 – and yet it returned $152bn of share buybacks and a further $54bn in dividends from 2012 to 2017 alone. You and I might think this shows how lovely an investment it was – even with Apple’s hiccups in the middle – but to many people, this is a problem.

For the belief seems to be that money should stay inside large companies, where it can be invested instead of being paid out so that, well, that’s where the error lies. For all a company is, is a grouping of people to achieve some task – the successful ones at least tending to stick pretty closely to their knitting.

If that task is being achieved then that’s it – the job is being done. If there are resources not needed to do that task, then we want them to be used somewhere else to do some other thing. There is no shortage of things we’d like to have done around the world, after all.

As Bloomberg columnist Matt Levine is prone to pointing out, the stock markets have morphed over the decades. The public markets are much more a place where successful companies return capital to shareholders than they are places where money is raised to create new activity.

This has been coincident with the general management method being to stick to that knitting and not attempt to build disconnected empires in the form of conglomerates. It would appear that some have not caught up with this idea – sadly, including rather a lot of politicians and even financial market journalists.

If we think Apple should be investing in something, then what? I’ve no idea and apparently its CEO Tim Cook doesn’t either.
Tim Worstall

Examine what the underlying claim is. Whether we think that Apple struck lucky or is run by geniuses, there is not really anything more it can do in either the computing or telecoms markets. The firm could afford to buy and run airtime providers, there’s no doubt about that. But would it do it well? Perhaps Apple is working on a connected car, but we’re not sure it will thrive there either. And given that Apple is optimised to do handset production, why would we think it would be good at doing something else?

If we think Apple should be investing in something, then what? I’ve no idea and apparently its CEO, Tim Cook, doesn’t either. Which leads to the feeding of that surplus cash back to shareholders, as US politicians Elizabeth Warren and Bernie Sanders so bitterly complain.

Economic mistake

We then come to the economic mistake being made about those payouts. It is entirely true that share ownership is concentrated among richer people – even shareholding pension plans tend to be the property of the richer among us, definitely the above-average – so these dividends are flowing to them. It is also true, as is pointed out, that richer people tend not to spend all their income, so share buybacks don’t lead to surges in consumer spending or demand.

The error is to think that money can only be invested by the company that made it or spent by shareholders receiving it. But consider that you can only do two things with money – you can save it or you can spend it. There isn’t anything else – Scrooge McDuck surfing down his cash pile is a cartoon, not a description of reality.

If you save the money, then you must also be investing it. Even if you just stick it in a current account, the bank will lend it out – that being what banks do; that’s how they make their living.

We can even ask, well, what if they receive money from Apple and buy IBM stock? There’s no new investment there, either – the complaint being to ignore that however many iterations there are, there are still only two things that can be done with money. Whoever sold their IBM shares now has the cash, which they can spend or save. If they buy Facebook, then the seller there can only spend or save. Eventually, however many times the money changes hands, we can only have spending or investment – there’s nowhere else for it to go.

This is how all those startups get funded, of course. And that actually is where we’d like the investment to be going too. For the dirty little secret about big business is that it’s not where economic growth comes from.

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Companies generally become more efficient at doing things over time, and productivity rises. Thus companies that stick to their task tend to have falling payrolls over time. It is also true that the invention and technological change which ultimately propel living standards ever upwards tend not to come from large companies.

Apple here is one of the significant outliers, but given the company’s parlous state when Steve Jobs returned as CEO, we might really think that it was more like a startup inventing the iPod and then the iPhone. It wasn’t one of the big incumbents like Nokia that jump-started the change, after all.

Employment growth and technological change really do tend to come from new market entrants, not those already extant. And as with new ideas that advance one death at a time as the academic establishment winnows itself, so too with companies. When one firm optimised for a specific task finds that task no longer needs doing, then corporate death is the correct response. Distribute the assets again into new places so that other problems can, and will, be addressed.

The current complaint about modern capitalism – that large companies just pay out to shareholders instead of investing – is the very thing we want capitalism to be doing. Taking the surplus, the profits, from the last generation of successes and recycling it into those new companies that may or may not turn out to be the next – intermediated by those shareholders spending or investing as they see fit. This isn’t a problem – it’s the point.

This was last published in October 2017

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