The Cooking the Books Column from the April 2015 issue of the Socialist Standard
A study has confirmed that you can bring a horse to water but you can’t make it drink. Or, rather, its modern equivalent that you can reduce interest rates but you can’t make capitalist firms invest.
The study, published last year by three US business studies academics, found that over the period from 1952 to 2010 there was no consistent relationship between interest rates and corporate investment. Corporate investment did not go up when interest rates were low and did not go down when interest rates were high (LINK).
So, what did influence business investment? ‘It turns out’ said the press release on the study, ‘that healthy profits and stock prices are the strongest predictors of corporate investment.’ To Marxian socialists this is rather obvious: the capitalist economy is driven by the quest for profits; so capitalist firms invest when they consider that their investment will bring them a profitable return; an indication that good profitable investment opportunities exist will be that the economy is growing and that firms are already making good profits. Or, as the press statement reported the lead author saying:
‘“What corporations really respond to is what sort of profit outlook they face, and the general environment for growth,” Kothari says, noting that investment also closely correlates with gross domestic product growth. Practically speaking, the results make sense in that companies have more money to invest, more investment opportunities, and more pressure to spend from investors when things are good; all those factors dry up when the economy slows down.’
But there is a downside to this, as the study also found. When the profitable investment outlook is good, capitalist firms act as if this is not going to stop, with the result that they come to invest too much in relation to market demand, so provoking an economic downturn and a consequent fall in profits and profitable investment opportunities:
‘The research reveals that corporate executives have their own foibles, including a propensity to over-invest at exactly the worst time in the economic cycle. While profits and stock prices rise before a spike in corporate investment, both decline almost immediately afterward.’
The authors are at a loss to explain this apparently irrational behaviour:
‘The main reason for the negative relationship between capital expenditure spikes and business performance, Kothari believes, is a behavioural one: irrational exuberance. “As stocks and profits go up, corporations keep investing,” he says. “But rather than stopping at an appropriate point in time, they go a bit too far. If they had stopped at the right point, it could have been great.”
But is this behaviour – keeping on investing while the prospects for profit-making are good – really irrational? Capitalist firms are all competing against each other for profits. For one firm to stop investing when the profit-making outlook is good would be to risk letting its rivals take a share of its potential market. It is that that would be irrational.
In any event, how could capitalist firms know when to stop investing and, if they did, how could they reach a collective decision to all do this. Given the anarchy of capitalism they can’t do either. Once a capitalist horse has started drinking you can’t stop it.