The shocks and discontinuities impacting the global economy have led governments to seek ‘business as usual’ as the ultimate desirable state. However, they appear not to recognise that business is not a coherent singularity, but a mess of virtue and vice. Fragile start-ups, innovative fast growing SMEs, and predatory extractors of value for the benefit of “investors”, are all classed as businesses. Few politicians have any direct experience of the virtuous categories, though some have made substantial gains from the vice.
Governments need to diagnose and be specific about what categories they are referring to, before offering their so-called ‘business friendly’ prescriptions. Light regulation may benefit the innovative SMEs earning their keep in highly competitive markets. But that same light regulation, if applied generally, will encourage the monopolistic leviathans to use their market power to exploit their customers and all other stakeholders for the sole benefit of shareholders. That predatory action has a negative impact on the real economy and is damaging the common good.
This is not solely the result of actions by powerful but corrupted individuals. There is a natural evolutionary process leading business along those tracks unless constrained by relevant regulation to prevent monopolistic market abuse.
Business start-ups emerge from a process of developing a business idea which might earn a sufficient profit to satisfy the needs and wants of its founder. It might be based on some new technology, or some new application of existing technology, or it might be simply the setting up of a traditional business serving a new market however geographically or demographically defined. As with all such systems, the birth phase of business is characterised by high infant mortality – 80% of new businesses fail within the first four years. The need of all new business is for support, frequently provided by ‘family, friends and fools’. But government can also support new business, for example, assisting with costs of personnel training and easing regulation and taxes.
Any successful new business entering the growth phase consumes large amounts of money to establish premises and production facilities, as well as for working capital and investment in research and development. These growth phase small and medium sized enterprises provide the dynamic for the real economy, providing both jobs and technological progress. However, in order to continue growth, SMEs require long term investment which could be facilitated by supportive government initiatives regarding tax and regulation. Governments might also fund basic research in relevant areas, being able to invest in risky long term projects beyond the capability of a for-profit business. Governments could also provide direct support for in-company R&D. These businesses are the efficient, innovative, fast moving growth entities which politicians might be envisaging when they proclaim themselves to be ‘business friendly’.
Maturity is when such systems achieve their greatest power and efficiency. Human beings, for example, achieve their greatest physical strength, while businesses produce their greatest efficiency, generating the maximum natural surplus resource and consuming the least, as encapsulated in the term ‘cash cows’. However the phase change from growth to maturity creates some difficulty. It is not usually forecast with any precision, so when it happens it is usually characterised initially as a blip with ‘normal growth’ expected to be resumed in due course.
The loss of growth might be caused by, for example, there being no new markets to be satisfied, or the technology not being capable of further improvement. What ever its reason, it will, in due course, have to be acknowledged as a permanency. Then the people running the business come under extreme pressure to find alternative ways of resuming profitable growth as soon as possible.
Business leaders differ in how they respond. Some seek to maintain an effective and efficient business through the continuous improvement of the product or service and the processes of its production and distribution. These businesses continue to serve the real economy and common good, delivering needed products and services and providing stable employment. Mostly, however, businesses seek to resume growth as quickly as possible, either by diversifying into completely new pastures, or by merger and acquisition of competitor businesses.
Businesses seeking growth by diversification achieve it most easily by M&A of businesses already operational in the chosen areas. For many of these businesses, M&A deal making becomes the prime driving force in their development. The same applies to those businesses seeking to grow by increasing their share of the markets they already serve. Business successfully pursuing this route to growth find themselves increasingly able to control the level of product supply and thus to influence market prices.
These are clearly quicker, easier and less costly ways of increasing profits than the pursuit of continuous improvement of product and process. Though businesses in this situation may not set out intending to act in any way improperly, they may in due course achieve sufficient market power which might be misused to serve the financial interests of their investors.
The focus of such businesses has moved from issues such as technologies, products, customers and employees, onto concern for measures of purely financial progress such as returns on investment, earnings per share, and such measures of prime interest to the intermediaries controlling capital markets, mostly through automated ultra-fast trading systems, operated on behalf of investors.
Such financialised businesses, whether monopolistic or conglomerates, have undergone a process of mutation. From providing goods and services for the general population as well as its employment, thereby contributing positively to the real economy, they have been transformed into a new kind of business, focused on extracting value from the real economy for the short term gain of investors.
That mutation is a natural process deriving from the ever increasing pressure on business management to maintain growth as measured in financial terms. That is as demanded by the financial sector on a quarterly basis for the benefit of capital markets.
Quite apart from these naturally mutating businesses which emerge as financialised entities, there are also businesses which were established as such from their beginning. This is not new. There have always been predatory beasts in the business world, intent on extracting what value they can from their business victims, stripping out their assets, ‘releasing’ their people and pocketing the surpluses realised. These are the exemplars of financial effectiveness which the newly mutated businesses are encouraged to replicate.
The result is a business sector dominated by predatory would-be monopolists and financial opportunists. Their activities are justified by simplistic neoclassical economic theory which can only explain the world in monetary terms. And they are supported by governments which appear not to recognise the distinction between these financialised entities and the fast growth innovative SMEs which serve customers and the broader set of stakeholders.
Governments’ business friendly solutions favour these powerful financialised entities, encouraging their rapacious extraction of value from the real economy and allowing their fraud and criminality to go largely unpunished. That’s ‘business as usual’.