John Kay has a very provocative new article arguing that what we have now is capitalism without capital: the businesses that make profit very often don’t actually own the capital they use – they rent it from a specialist investment vehicle.
The facia identifies the operator, not the owner, of capital. The name of the airline on the side of the plane and the company logo on the back of the truck today give no clue to the ownership of the vehicle.
What this means is that profits can not be described as return on capital:
They talk of profits as returns to capital, although they are really mostly economic rents – returns to brands, reputations, intellectual property, to corporate knowledge and organisation, and the exercise of market power.
That there is some truth in this is demonstrated by the occasional spectacle of a company being taken over, its staff leaving, and the new owner being left with nothing at all since the new subsidiary didn’t actually own anything.
However, I think Kay overstates things. The piece is a variant of the common error of privileging manufacturing over services. What, for example, is the significant difference between capital in the form of a machine, which produces a return, and capital in the form of a reputation, which produces an “economic rent”? The machine is perhaps more durable than than the reputation, but only quantitively – in fact it can catch fire and disappear overnight, in the same way a reputation can, or it can slowly rust and lose value much as a brand declines.
I think the significant fact is that today, more than in the past, most of what we as a society do, in economic terms, are things that we don’t really know for sure how to do well. If everybody knows more or less equally how to produce, say, cotton cloth, then the only scarce thing you need in order to produce it is the machinery. If the knowledge of how to build and run, say, an efficent search engine, is much more rare and valuable than a pile of computers in an office, then the “corporate knowledge and organisation” is the vital capital, and actually financing the premises and the hardware is a “non-core” activity that might reasonably by subcontracted out.
I agree with John Kay that this is a hugely significant change, but I disagree with the tone of the piece which seems to imply that it is a sinister or harmful one. It is a natural effect of automation that once we really know how to do something, it becomes cheap. The early manufacturers Kay discusses carried out mass production with machines that were expensively hand-built by craftsmen – today not only the consumer goods, but the machines that produce them, and the machines that produce those machines are all cheaply mass-produced – that is the difference. What has real economic value in today’s world are good management and technology – and some old things that have held their value: raw materials (but to a lesser extent than previously) and friendly politicians.