New in­dus­trial rev­o­lu­tion is here – so where is the in­vest­ment that can make it hap­pen?

Com­pa­nies pre­fer to hand cash to their share­hold­ers and bosses, rather than put it into emerg­ing tech­nolo­gies, writes Larry El­liott

The Guardian - - FINANCIAL -

Pre­pare for the age of the driver­less car and the ro­bot that does the house­work. That was the mes­sage from the World Eco­nomic Fo­rum this year as it hailed the start of a new in­dus­trial rev­o­lu­tion. Ac­cord­ing to the WEF, the fourth big struc­tural change in 250 years is upon us. The first in­dus­trial rev­o­lu­tion was about wa­ter and steam. The sec­ond was about elec­tric­ity and mass pro­duc­tion. The third har­nessed elec­tron­ics and in­for­ma­tion tech­nol­ogy to au­to­mate pro­duc­tion. Now it is the turn of ar­ti­fi­cial in­tel­li­gence, nan­otech­nol­ogy, biotech­nol­ogy, ma­te­ri­als sci­ence, 3D print­ing and quan­tum com­put­ing to trans­form the global econ­omy. “The speed of cur­rent break­throughs has no his­tor­i­cal prece­dent,” the WEF said. “When com­pared with pre­vi­ous in­dus­trial rev­o­lu­tions, the fourth is evolv­ing at an ex­po­nen­tial rather than a lin­ear pace.”

But if this re­ally is the dawn­ing of a new age, it seems some­body for­got to tell the peo­ple with the power to turn ideas into prod­ucts. The multi­na­tional com­pa­nies that bankroll the WEF’s an­nual meet­ing in Davos are awash with cash. Prof­its are strong. The re­turn on cap­i­tal is the best it has been for the best part of two decades. Yet in­vest­ment is weak. Com­pa­nies would rather save their cash or hand it back to share­hold­ers than put it to work.

One pos­si­ble ex­pla­na­tion for this cor­po­rate cau­tion is that busi­nesses think bad times are just around the cor­ner. If, for ex­am­ple, com­pa­nies thought the tepid re­cov­ery from the fi­nan­cial cri­sis was a brief respite be­fore an­other down­turn, it would make sense to stash some money away now. Any UK com­pany that fan­cies a risk-averse ap­proach has the per­fect ex­cuse for sit­ting pat: the un­cer­tainty caused by Brexit. But this is not an en­tirely con­vinc­ing ex­pla­na­tion. As the econ­o­mist Paul Ormerod noted in a re­cent ar­ti­cle for City AM, cor­po­rate hoard­ing was go­ing on well be­fore Brexit be­came an is­sue and it af­fects all western cap­i­tal­ist coun­tries, not just Bri­tain.

Ormerod il­lus­trates the point by con­trast­ing the be­hav­iour of the US cor­po­rate sec­tor over the past decade with that dur­ing the Great De­pres­sion. If ever there was a time when com­pa­nies might have been ex­cused for salt­ing their cash away it was the 1930s, when the US econ­omy con­tracted by a quar­ter.

Yet in the dark years af­ter the Wall Street crash, the US cor­po­rate sec­tor ran down its cash­pile, so much so that it had neg­a­tive sav­ings from 1930 to 1934. The new breed of US ex­ec­u­tives has done things dif­fer­ently. US cor­po­rate sav­ing has been higher since the crash than it was in the decade be­fore it.

An­other ex­pla­na­tion is that the smart peo­ple run­ning com­pa­nies know what they are do­ing, and are sim­ply wait­ing for the right mo­ment to in­vest in the fourth in­dus­trial rev­o­lu­tion. This is not en­tirely con­vinc­ing ei­ther, since one of the core prin­ci­ples of in­vest­ing is that the big­gest prof­its are re­served for those who seize the op­por­tu­ni­ties first. Other rea­sons sug­gested are that cut­ting-edge com­pa­nies need less phys­i­cal cap­i­tal than in the past, and that in­no­va­tive com­pa­nies need money in the bank un­less some­body comes along with a takeover bid.

But the most ob­vi­ous ex­pla­na­tion is that the peo­ple run­ning com­pa­nies are dom­i­nated by short-term per­for­mance tar­gets and the need to keep share­hold­ers sweet. Up un­til the 1980s, in­vest­ment by the US cor­po­rate sec­tor av­er­aged 4% of GDP while div­i­dends av­er­aged 2%. To­day, it is the other way around. Dis­trib­uted prof­its used to av­er­age 35-45% of to­tal US cor­po­rate prof­its in the 1950s, which is why there was plenty left over to in­vest in grow­ing the busi­ness. Yet for the past few decades the trend has been un­mis­tak­able: less money for in­vest­ment, more set aside for div­i­dends. Were he still alive, Mil­ton Fried­man would have said com­pany bosses were do­ing ex­actly the right thing. Fried­man be­lieved strongly in share­holder value max­imi­sa­tion. That model has cer­tainly de­liv­ered for the top 1%. They own 40% of the US stock mar­ket and ben­e­fit from the div­i­dend pay­outs and share buy­backs that drive prices. Those run­ning the top 1% of com­pa­nies have re­mu­ner­a­tion pack­ages loaded up with stock op­tions, so they too get richer as the share price goes up.

But what of the other 99%? What gains they get to the value of their pen­sions from ris­ing share prices are dwarfed by the im­pact of weaker in­vest­ment. And it is the lack of in­vest­ment that ex­plains why the re­cov­ery from the re­ces­sion has been so fee­ble, pro­duc­tiv­ity so poor, why av­er­age in­comes have flat­lined and growth has been ac­com­pa­nied by a buildup in con­sumer debt.

This was not quite what was promised when the Thatcherites and the Rea­gan­ites took con­trol 40 years ago. Then, weak growth was blamed on over­mighty trade unions and a state that spent and bor­rowed too much. Pri­vate in­vest­ment, it was said, was be­ing crowded out by waste­ful pub­lic in­vest­ment. Gov­ern­ments that bor­rowed for their pet pro­jects drove up mar­ket in­ter­est rates, mak­ing in­vest­ment less at­trac­tive for an army of frus­trated en­trepreneurs. This ex­pla­na­tion no longer holds. Of­fi­cial and mar­ket in­ter­est rates have been ul­tralow for a decade; trade unions have been smashed; na­tion­alised in­dus­tries pri­va­tised. So where’s the in­vest­ment?

Back in the “bad old days”, a loose so­cial con­tract ap­plied. Com­pa­nies gave a slice of their prof­its to share­hold­ers but in­vested the big­ger por­tion. Higher in­vest­ment led to higher pro­duc­tiv­ity, which fi­nanced higher wages, de­mand and prof­its. Both cap­i­tal and labour ben­e­fited from this ar­range­ment.

The new model – in which the fruits of weaker growth go dis­pro­por­tion­ately to the 1% – was never likely to work as well and, sure enough, by all the key met­rics – in­vest­ment, liv­ing stan­dards, pro­duc­tiv­ity – growth rates are lower now than they were when Fried­man and his dis­ci­ples took con­trol. What was promised was a new golden age of cap­i­tal­ism. What they have de­liv­ered is a world on the brink of sec­u­lar stag­na­tion – longterm fail­ure of eco­nomic progress due to lack of in­vest­ment.

If in­no­va­tion is go­ing on apace (which it is) and com­pa­nies have cash in the bank (which they do), one so­lu­tion is sim­ply to wait for the mo­ment when en­trepreneurs re­dis­cover what Keynes called their an­i­mal spir­its. An­other would be for gov­ern­ments to say enough is enough. If, de­spite the low­est ever bor­row­ing costs and re­peated cuts in cor­po­rate tax­a­tion, the pri­vate sec­tor won’t in­vest in the fourth in­dus­trial rev­o­lu­tion, the pub­lic sec­tor will. The ar­gu­ment for a na­tional in­vest­ment bank is that en­trepreneurs are not ac­tu­ally very en­tre­pre­neur­ial and that op­por­tu­ni­ties are be­ing squan­dered as a re­sult.

Re­turn on cap­i­tal is the best it has been for two decades. Yet in­vest­ment is weak

Pho­to­graph: Drew Angerer/ Getty Im­ages

Wall Street has seen prices con­tinue to rise, but the money made of­ten goes into share­hold­ers’ pock­ets, rather than be­ing rein­vested

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