The Use of Capital - Accumulate It, or Spend It?

These days the media is paying a lot of attention to large amounts of capital that are in a sense dormant, in that they are not being used in ways that will produce jobs and income through revolutionary products that will improve the quality of our lives as well as the economy.  I recently read an interview  in Wired magazine by Jeff Howe of Clayton Christensen, a professor in the Harvard Business School, and a column in the February 17 New York times by Thomas Friedman, both on this topic.  They are both outstanding thinkers and writers.

 I first became aware of Clayton Christensen in 1997  when he wrote a book that I loved entitled The Innovator’s Dilemma. At the time I was up to my ears teaching at Stanford and consulting in Silicon Valley, and the prevailing feeling was that innovation was bound to win.  This feeling still exists.  Chistensen’s book, wonderfully enough, was a well-backed argument that you could build a company on innovation, do everything right, and still lose.  His thesis was that as businesses prosper, they focus on innovations at the high value-added end of the market to maximize growth and profit, and overlook newer firms at the low-margin end that will come up with revolutionary products that may obsolete the products of the older company . The March 2013 issue of Wired magazine contains the interview with him, which is here.

In his interview (entitled "the Disruptor") he speaks of potentially more socially useful ways to utilize capital than merely aquiring it, and goes so far as to blame business  professors like himself for the phenomenon, since they have traditionally been teaching students and managers to measure profitability based on return on invested capital.  This causes the familiar tendency of businesses to try to make more money with fewer resources, and use the resulting gain in capital to make more capital.  The result is an unwillingness to invest in long-term innovative projects which although they might tie up capital for a longer time, would not only produce growth and profit, but more jobs and income for the average person.  He speaks of migratory capital (it goes to investments that produce a quick return) as opposed to productive capital (it results in major new directions) and clearly believes we need more of the latter. Christensen will have a new book out next year entitled The Capitalists’ Dilemma, and I am eager to read it. I believe in Capitalism, but it doesn’t solve all problems.

 The very next day I read Thomas Friedman’s column in the New York Times, entitled "How to  Unparalyze Us" which focused upon  the present tendency of  individuals and companies to store money. It is here.  He began his editorial by pointing out that in his state of the union speech, President Obama had proposed investing one billion dollars in a National Network for Manufacturing Innovation. He then mentioned the difficulty Obama will face getting the money out of Congress.  He then pointed out that Apple is currently sitting on $137 billion cash in the bank, which if spent would undoubtedly result in more good and remunerative jobs.  Apple is not alone, and Friedman feels that the uncertainty in the nation’s economy, partly due to inability of Congress to act, is responsible for this hoarding mentality, and if people and companies sitting on large piles of money would begin to spend it, more and better jobs would appear, and the recovery would benefit greatly.

 I thought that reading a near simultaneous column by Friedman and an interview with Christensen talking about the same thing made this a good topic to talk about.  I have long believed that since productivity is an efficiency number made from dividing output (products) by input (traditionally labor), one should be careful of increasing it too much by decreasing the denominator, since historically, when labor has gotten  mad enough, bad things have  happened.  And when labor is lowered enough (huge stores with no one to help the customer and ridiculously long checkout lines) everyone gets mad.

 Although certainly capital is needed for rainy days, the health of an economy seems to have to do with money being in motion.  Although I am not an economist, and this is counter to the depression ethic taught to me by my parents, I am a believer. Hopefully business schools are thinking deeply about the issue. Having become annoyed with wealthy individuals using their money to make more money through investments with no “trickle down”, it would not add to our gross national happiness to become annoyed with businesses doing the same thing rather than producing more revolutionary (and of course high quality) products.