Across large parts of our economy, the basic, common-sense relationship between profit and growth (i.e. that profit is required for growth and that profit leads to growth) seems to have started to fall apart.
Small companies in sectors as diverse as technology and food have begun delaying profit in favor of scale and/or sale, while large companies sit on record profits, reluctant to reinvest them in driving growth. The obvious impact of this kind of behavior is that lots of money has been removed from the economy and therefore isn’t being put to work. The less obvious impact is that it’s creating serious economic imbalances that affect everyone.
It’s been well documented that young (as opposed to simply small) companies are our primary job creators. But many of these newer companies are built upon a financial structure that simply isn’t realistic. It has become all too common for early-stage companies to operate at a loss or barely break even in order to pursue growth first and profit second.
In many cases, the strategy is simply to build an organization just to sell it. While these “exits” benefit the founders and investors, they do nothing for anyone else – and, in fact, leave the buyers and remaining employees with a company whose past and future profit potential has probably been gutted in one fell swoop.
The other common strategy is to delay profits until scale is achieved. But Twitter and many other companies illustrate the fallacy in thinking that scale can suddenly create profit where it’s never existed before. Because when a company is started on a profitless financial infrastructure, its habits, processes and practices will be tuned specifically to that infrastructure.
Despite their lack of profits, however, these businesses continue to grow, but from a macro-economic standpoint the money to finance their growth can’t simply appear from nowhere. Instead, it comes at the expense of average workers – real people who suddenly find they can’t live as well as they did before, that there’s less money to go around, and that there are fewer jobs available that pay a living wage.
It’s true that it’s a minority of companies that engage in this particular sin, yet it’s a pattern prevalent enough to force other companies into similar economic structures in order to compete. The advertising industry is a great example. With very very very few exceptions, people start agencies in order to sell them. They don’t expect to make money running agencies; they expect to make money by selling them. In the end, that means a tiny proportion of people in the industry benefit while essentially exploiting everyone else.
Looking at the other end of the spectrum, companies with huge cash assets are largely sitting on them. These are companies who are making a profit – in many cases record profits – but who have chosen not to grow. Obviously, that behavior means more money stays out of circulation, no longer creating jobs or opportunities. On top of that, however, it also has a dampening economic effect, because these vast unspent cash reserves are often being used to “lock in” market leadership, making it very difficult for newer entrants to compete effectively. In turn, this pressure on younger companies exacerbates the need them to run lean, and fuels the economically illogical behavior discussed above.
In our post-post modern world, it’s often useful to separate concepts that were once tied together, like the idea of men being the primary wage earners. But, at other times, it’s important to reinforce connections between concepts – like the link between resources and the health of the planet. Lately, profit and growth have drifted so far apart they no longer seem to be related. I wonder if that’s one connection we should work harder to restore.