Cooking the Books: Cash Mountains – Why?

In his City column in the London Evening Standard (21 February) Anthony Hilton commented on the fact that at the moment “firms are awash with cash”:

“It is certainly highly unusual for companies to be in such surplus. Over the past half-century in both Britain and America, companies have shown themselves far more likely to be borrowers than savers. It is different now because they are behaving differently. Companies are sitting on mountains of cash because they have decided no longer to invest it. The ratio of investment in GDP in the developed world is about the lowest it has been for 60 years. What we now see – in Britain and the Unites States in particular – are corporates running themselves for cash rather than growth.”

This is indeed how many capitalist corporations are behaving at the moment, but the way Hilton puts it makes it seem that this is a deliberate change of policy objective on the part of those in charge of them: in the past they aimed at growth by re-investing the profits they made; now they have decided to use them to build up their cash reserves instead.

But why? This doesn’t make sense in terms of capitalism as a system where capital is accumulated out of profit and then reinvested in production, (i.e. growth), and where those who Marx said “personified capital” (today the top executives of capitalist corporations more than the individual capitalists of his day) are “merely a cog” in a social mechanism which obliges them to “keep extending his capital, so as to preserve it, and he can only extend it by means of progressive accumulation” (Capital, Vol 1, ch. 24, section 3).

Hilton’s explanation is that a target for building up profits that are not necessarily re-invested is attained more easily and quickly than a target for growing the size of the business; so top executives prefer to set such targets as easier for them to achieve and so claim their bonuses. “The bonus culture,” he says, “is destroying the system. The focus on the short term has led to a calamitous fall in investment which has unbalanced the entire national economy.” In short, it has even caused the present crisis.

The present crisis has been caused by a lack of investment; in fact, that’s what it is, a fall in investment which has had knock-on effects, on consumer demand and government debt as well as on output and employment. So Hilton is not entirely wrong when he writes:

“Conventional wisdom holds that the mess we’re in is the result of governments spending too much. But it could also be thought of as the consequences of firms spending too little.”

This, in fact, is how it should be thought of. The present slump has been caused, and is continuing, because of the reluctance of companies to re-invest any profits they are still making to expand production. But not for the reason Hilton suggests. It’s not because companies have decided to deliberately build up their cash reserves. It’s because they have calculated that they won’t make any or enough profit if they do invest. So they don’t, and as a result their cash reserves build up. Hilton has got it the wrong way round.