Submitted 1 day ago by gigachad@piefed.social to [deleted]
Under capitalism, it seems companies always need to grow bigger. Why can’t they just say, okay, we have 100 employees and produce a nice product for a specific market and that’s fine?
Or is this only a US megacorp thing where they need to grow to satisfy their shareholders?
Let’s ignore that most of the times the small companies get bought by the large ones.
That is a common misconception, very often spread all over the place on Reddit. There is no such requirement.
And corporate case law describes directors as fiduciaries who owe duties not only to shareholders but also to the corporate entity itself, and instructs directors to use their powers in “the best interests of the company.”
Serving shareholders’ “best interests” is not the same thing as either maximizing profits, or maximizing shareholder value. “Shareholder value,” for one thing, is a vague objective: No single “shareholder value” can exist, because different shareholders have different values. Some are long-term investors planning to hold stock for years or decades; others are short-term speculators.
nytimes.com/…/corporations-dont-have-to-maximize-…
caselaw.findlaw.com/court/…/13-354.html
reddit.com/…/eli5_what_people_mean_by_saying_a_co…
You run into a subtext problem here though.
Serving shareholders’ “best interests” is not the same thing as either maximizing profits
Making this argument to shareholders means you’re telling them “I wish to shrink your profits”, no matter what else comes after that comma that’s a non-starter for a CEO. 99% of shareholders don’t give one Kentucky fried fuck about the company, they just want free money. You get between them and their free money and you’re gone, replaced by the next failing-upward ghoul in line on LinkedIn.
The idea of having a well established, respected and non-abusive company is no longer a reality in America. The stock market is a vehicle for gambling on shareholder feelings. It’s no longer about the company at all, just about how much you can hype up the company to then pass the bag along to someone else.
Wal-Mart shareholders don’t care if Wal-Mart craters into Hell tomorrow, so long as they get paid dividends and are able to offload their shares at a profit before it dies.
Public companies are also in competition with their peers to attract folks (read enormous investment forms) to buy their stock. So they want their “shareholder value” to be competitive. Shareholder value is at a high level the appreciation of the stock price plus dividends. So public company management is given the goal of increasing shareholder value. Which is the number that must go up. Otherwise those enormous investment firms will buy their competitor’s stock instead.
Some companies do not pursue further growth, usually because they are not confident they can. They use/harvest their profit stream to repay shareholders. A confident company can spend its cashflow on growth because it expects an ROI for doing so, and so even higher future cashflow.
Shareholders want their shares to increase in value. That means the company needs to earn more profit (more precisely, profit per share). To do that you typically grow, but you can also do it by buying back stock (that increases profit per share), or by “increasing efficiency” which is usually a dead end.
The non-toxic version of this is growth = innovation. The company may make the same money and remain the same size, but the product should constantly improve to remain competitive.
Products get worse all the time to grow profits. You don’t need to improve the product to remain competitive, you can buy innovative startups and get credits for their inventions or worse to simply killing them
I guess it’s mostly because companies that don’t try to grow are eventually pushed into irrelevance by companies that do. So most companies you hear about are growth oriented.
In some sense it can be good for consumers. If you have a nice idea for consumers, it’s good that you are able to reach more of them or become more efficient in doing so.
Also, to start a business you need money. You can get money from investors, but they expect either interests on the loan, or that you grow so that their share is worth more. The latter is attractive, because you don’t have to pay interests that can weigh your company down. But then the value of your company is almost defined by it’s potential for growth. If you then decide not to grow anymore, this will tank the value of the company, and you might be stuck with a huge pile of stinking debt.
It’s perfectly possible to have a company that is not growing and just stays where it’s at. But then the salaries of the employees won’t be growing either, and if it happens that the company has competition, that non-growing will soon change into shrinking.
There are plenty of small companies that don’t grow. Think mom and pop shops and self employed tradesmen.
I’ve you get a bit bigger and you’ve already got the hassle of employing lots of people in multiple places you can’t really balance it to be neutral, you will grow or shrink and it’s a lot more pleasant to grow than shrink.
Disclaimer that I’m not an economist
I believe I have heard a discussion about this before… that the “always grow bigger” model is not only not a necessity under capitalism, it wasn’t even the predominant economic model in the US for a while. Post war, FDR’s New Deal followed the Keynesian model, which from my understanding led to the type of regulated capitalism with a much heavier emphasis on shareholder/employee satisfaction… and also when the extremely high progressive income tax brackets happened. The always need to grow bigger idea may or may not have come from Milton Friedman of the UChicago school: one of the core assumptions of the Neoclassical model is that companies maximize profits.
Also this is definitely not just a US megacorp thing. Other countries have megacorps too. Case in point South Korea…
Inflation, but also scale of manufacturing and tooling.
I was a Buyer for a chain of bike shops. You will not buy the same stuff forever. Continuous manufacturing is also generally much more expensive. Most cheap modern goods are made through contract manufacturing. That creates the cycle of seasonal products. Even something like cars involves a tooling cycle where the same stuff cannot be made indefinitely; the tools wear out with time. The market saturates with any given design. All people do not want to drive a Toyota Corolla from 1992 in beige.
Companies grow and shrink from a combination of market and internal forces. Companies sometimes need to shrink or grow. The economy and culture are constantly changing. That is why it is very hard to predict where things will go.
Your example of having a company with a set amount of employees that produce a set product happens pretty frequently. A lot of employee owned or family businesses are this way.
I think most of you post can be summed up with why do investors want more and more money. The answer is because they can. If your company owes money to investors then they will beholden to them in one form or another.
There is another worthy discussion here and it is about boards. Boards that do not contain equal representation for the employees and the public can be very destructive.
Most of the corporate abuses we have suffered come from having perverse leadership non-representative of these two most important influences.
More money more better…
If the owners primarily want to make money by taking out a portion of revinue as dividends or distributions, like a family business typically does, then stable revenue is more important in some ways than reinvesting in growth.
If the ownership wants to make money by eventually selling their stake (shares or equity) in the company then growth is fundamental to the strategy.
Only workers are expected to be happy with good enough. The elite will never say the balance of thier bank account is good enough. And thus companies always need to grow bigger.
Shareholder primacy. Thank you Dodge v Ford. Thank you Friedman Doctrine.
Exceptt that case is not nearly as clear-cut as people pretend it is. Actually a company boss has a ton of flexibility in how they run their company and spend money because nobody knows the future.
But their goals must align with the shareholders; they must extract maximum value. Or at least be able to explain why they think their actions would be in alignment with that goal. All other stakeholders (workers, customers, business partners, the country, the environment) can go fuck themselves if they find themselves on the opposite side of “value.”
Give a corporation the choice between “continue making beaucoup bucks with this new product” vs “don’t poison literally everyone for all foreseeable generations” and guess what, they’ll choose money. Thanks DuPont.
Profits about all. The size of the company itself, eh. But, profits must grow infinitely apparently.
Eight, but why? Why not create a company that generates, say a $100M a year, building some
Well, companies like Valve are kinda like that.
They can. But that would make you ‘lose’ capitalism.
Why settle for one yatch, when you could have several mega yatchs?
Year over year is what EVERY company looks at.
Making the same amount of money as you did last year is considered a failure in business.
It’s all based around fractional reserve lending and interest. Banks take in deposits and lend several times the deposit amount at interest against that reserve. To pay back the bank the business sector has to grow in order to pay interest on the principal. Make sense?
no. You can pay interest out of your profits. And many businesses don’t have significant loans.
We want strong markers the problem is wages, wealth distribution, uber rich billionaires who want to enslave us for an AI god or some dumb shit idfk
Growth is needed so that Capitalists can make a living.
Without growths, owning companies would only pay dividents which would result in much less income.
Shareholders are always going to demand more profits. There is no mechanism in a capitalist economy that reinforces the concept of having “enough.”
My understanding is that this isn't quite how it is. Shareholders don't demand profits as much as they demand that their share value go up.
I read some time back that this is because of an unfortunate choice in tax law. Dividends are taxed as if they were income, but growth in share value is capital gains and so isn't taxed nearly as much. It does unfortunately make some sense, if share value repeatedly goes up and down I wouldn't want each "up" to be taxed as if you'd accumulated that much additional money. You'd have to be constantly selling shares to pay your taxes on them. But as a result, it means that when a company winds up making a profit and having a big pile of cash they need to decide what to do with, shareholders will usually prefer that the company invest that cash into making the company bigger and more valuable rather than simply giving it back to them as a dividend. So you get companies always trying to grow, because the shareholders demand it for reasons that make perfect sense to each one individually.
I'm not sure what a good solution to this is. Economics is one of those fields that seems simple on the surface but has a ton of gotchas hidden at every variable. It's a special case of game theory.
Growth=good is also a sentiment for whole markets.
In a market where new customers start buying the products every day (growth market), e.g. the smartphone market 20 years ago, you can generally just come up with new products and someone will buy them, if they’re good.
On the other hand, in a market where customers only replace their old devices as needed (market saturation), e.g. basically the smartphone market of today, things are much more tight for companies. They have to primarily be more cost-efficient than their competitors in order to survive.
Depends, but to meet demand seems reasonable?
Imagine you invent something splendid and life-changing. You have your company with a 100 employees but you can’t satisfy the market so you expand.
Like with the safety match.
Under capitalism, companies do what their owners want them to do. The owners can choose to try to grow, to shrink, to sell, or to close.
Publicly owned companies have shareholders, and the shareholders usually want the company to grow so their investment grows. Shareholders can have other values, but anyone can become a shareholder.
Under non-capitalist systems, the government might own some or all companies. Then the companies do whatever the party in power wants. The party in power probably doesn't have time to run all the companies, so they give some level of independence. They can reign that back whenever they like.
The most common motivation in non-capitalist systems is probably greed and growing personal wealth of party leaders via corruption under that system. Luckily, the people can vote in a different party and/or protest against party corruption except in all real-world cases, where that is banned or suppressed.
Because they took the money. If you take the money, the path is inevitable
When you take on investors, you just invited in someone who looks at your company like a farmer does to their crops. They want you to grow as much as possible, but they don’t actually care if you live or die - you’re one of many using up resources
If your growth slows, they’re going to demand more. They might demand you make cuts, they might push you to take loans and expand, they might try to sell to someone else. If your value isn’t increasing faster than other possible investments, they lose imaginary money to opportunity cost
And by virtue of being an investor, they have plenty of money and want to gamble with it. A total loss probably wouldn’t impact their lifestyle, they want invest in Apple at the ground floor and become a billionaire
You can start a company through loans, risk your house and build up slowly, and walk away clear. And people do.
But then they want to retire… And there’s this neat trick you can do if you want to own a small business… You can make it buy itself. You can take out a loan to pay out the previous owner, say 5 years of profit, and make the business take on the loan. But now, just to break even, you’ve got to beat what you paid for it plus interest over the term. And both business and individuals can do this
So in short? The reason is debt. A small business can make you upper middle class, a large one could make your entire family insanely wealthy for centuries.
But once you take the money, the business has to grow, or it’ll be harvested
Note that even if by all practical terms a business isn’t growing, then it’s still growing.
Part of the whole deal is that there’s an intent for the money supply to change for a roughly 2% inflation. In an oversimplified sense, the idea self be that everything gets 2% more expensive, everyone gets 2% raises, and investments at least generate 2% returns.
We’ve basically decided that we need to trick ourselves into feeling progress by making “standing still” look like growth. So if someone had flat income year over year, they actually lost in real terms.
Assume you’re saving X amount of money each month for your retirement.
Your options for storing that money is either:
Assuming you go for option 3, would you choose to invest in a company with zero growth meaning your retirement fund won’t grow, or would you choose a company that is constantly growing?
Nobody would choose to invest in a company with zero growth or which doesn’t return money back in the form of dividends.
You’re objectively better off investing in companies that grow since those are the companies that will grow your investment.
Redacted@lemmy.zip 1 day ago
Fiduciary responsibility. If you own a company that has shareholders they can sue you for refusing money or ‘leaving money on the table’, iirc this was a major reason why they sold twitter to musk
AreaKode@lemmy.world 1 day ago
And why United Healthcare shareholders sued over losing a tiny bit of money while dealing with the murder of their CEO. People are just people; money is the only driving force in our economy.
Melvin_Ferd@lemmy.world 1 day ago
Yes Lefty’s should read up more on actual business because there’s a lot of areas they could be making Phenomenal points but instead we just get “eat the rich” over and over again.