For many of us—especially those lucky enough not to have caught Covid-19—the past year has been as if our lives have been put on hold. The spread of new, more infectious variants of the virus and our callous and incompetent government mean the prospect of this ending has been postponed yet again.
But we shouldn’t imagine that capitalism is on hold. It is always moving, always changing. This came out in a couple of very interesting articles in the end-of-year editions of the Financial Times newspaper.
One reported that, “Bank and central bank policies coupled with shifts in consumer behaviour have accentuated trends that were already putting more wealth and growth in the hands of a few large companies, according to academics, consultants and corporate advisers.”
The pandemic has favoured big companies in key sectors—IT, retail, and pharmaceuticals. Consumers have focused on buying from a limited range of familiar companies with the resources to adapt to the changed situation—most obviously to switch to functioning online.
But the growing power of big firms is a longer term trend. A study published in the Harvard Business Review magazine in 2019 reported, “Large corporations are more and more likely to maintain their dominant positions, while small corporations are less and less likely to become big and profitable.”
The gap between the median return on operating assets between big and small firms rose from 15 percent in the 1990s to 30-35 percent in the 2010s. One factor seems to be that big firms can invest far more in research and development. “On average, a large company spent $330 million on R&D in 2017,” said the Harvard Business Review.
“The average small company spent a paltry $6 million—obviously insufficient to keep pace with a large competitor, except through a fortuitous discovery.”
Investment depends on access to finance. Here too the pandemic has demonstrated the strength of big companies, as another Financial Times article showed.
The past few years have seen a surge in corporate borrowing, as firms reacted to low interest rates and central banks’ policies of quantitative easing—creating new money and pumping it into the financial system.
Meanwhile, companies now borrow mainly by issuing bonds on debt markets, rather than going to the banks.
Last March, as infections spread exponentially, panic gripped these markets and asset prices collapsed. The US central bank, the Federal Reserve Board, stepped in, promising to buy various kinds of corporate bonds and other financial assets. “Without even purchasing a single bond, prices began to recover, bolstered by the Fed’s support,” said the article.
“Investor confidence in corporate America returned and the floodgates opened to fresh corporate debt raising.”
In “the largest corporate borrowing spree on record”, US firms raised $1.8 trillion on the bond market in 2020. Big companies were able to raise money more easily. According to Olivier Darmouni of Columbia Business School, “The more costly bank loans on which smaller companies are more dependent became much harder to access this year as banks tightened their lending standards.
“The increase in bank credit in the first half of 2020 ‘came almost entirely from drawdowns by large firms on pre‑committed lines of credit’, his research concluded.”
Meanwhile, “companies’ ability to pay for the increase in debt has declined, with the number of so-called zombie companies—whose interest payments have been higher than profits for three years running—rising close to the historic peak, according to data from Leuthold Group.”
This traps the Fed along with the other central banks into continuing to prop up the debt markets, as they have in one form or other since the global financial crisis of 2007-9.
“The Fed has created an expectation of a bailout,” Alex Veroude of Insight Investment, told the Financial Times.
So capitalism’s endless flight forward rests on shaky foundations. The challenge for the left was set by the Russian revolutionary leader Vladimir Lenin just over 100 years ago—“to be as radical as reality itself”—to be as radical as this constantly changing system.