One in three companies is loss-making – that’s far too many

 
Allister Heath

IT WAS Milton Friedman, the great Chicago economist, who put it best. Company bosses are employed by shareholders; and management’s responsibility is to follow investors’ wishes, namely “make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom”. Of course, as Friedman also said, some firms are charities and some corporate owners may wish their staff to pursue other, non-pecuniary goals. But in the main, regular companies exist to make as much money as possible legally.

So the news – revealed by the Bank of England -- that the percentage of companies that don’t make a profit reached 35 per cent in 2011, the last year for which figures were available, is depressing. Firms are failing in their central mission. This wasn’t merely a cyclical slump: the share of loss makers has been rising steadily since 1998, when they accounted for just 23 per cent or so of firms. The recession only exacerbated a little-noticed trend.

While profitability has diminished, corporate liquidations haven’t kept up – so loss makers are being kept alive, like zombies in horror films. In some cases, the loss makers are start-ups that have yet to make money. But in many others they are a drag on GDP growth, a parasitic development leaching off capitalism.

This loss-making culture is bad news. It is reducing the potency of price signals and profit and loss as an allocator of resources, it is imperilling efficiency and promoting waste, damaging corporate governance, fuelling our low investment culture and is one of the reasons why productivity growth is so weak. The vital process of creative destruction is being prevented from working its magic.

The other depressing revelation is the share of the public that understands who actually sets the UK’s base rates. I’ve given the game away, of course, but what do you think is the percentage of respondents that correctly say (in an unprompted manner) that it is the Bank of England and/or the Monetary Policy Committee that set the UK’s basic interest rate? 80 per cent? 70 per cent? If only – the actual answer is that only around 39 per cent of the public gets it right. The Bank has polled people about this for a number of years – and while slightly more people understand today than did in 2000-01, the share of right answers has fallen since 2008. Most of the public doesn’t understand one of the basic facts about the economy, a catastrophic failure of our education system, the media and the government.

True, when asked to choose from a list, 65 per cent of respondents selected the Bank, rather than ministers, high street banks, civil servants or the European Central Bank – but that’s too easy. The very fabric of our democracy is being threatened by widespread financial illiteracy. We all have a duty to do more to fix this.

TAX EXILES
AMERICA is first and foremost an idea. “Give me your tired, your poor/Your huddled masses yearning to breathe free” – those are the words so famously inscribed in the base of the Statue of Liberty in New York. Even today, swathes of the world’s population would move to the US tomorrow if they were allowed to.

But the US is also starting to see growing emigration. In 2008, only 231 people gave up their citizenship; three years ago, 1,780 people did; last year the total hit 2,999 and in the first quarter of the year, 1,001 did, up from 679 during the same period of 2013, according to Doug Bandow of the Cato Institute. He also points out that 50 firms have quit the US over the past 30 years, half since 2008.

The reason seems to be taxation, and in particular America’s bizarre worldwide tax system and heavy-handed red tape. The numbers are still tiny, but its a trend to watch.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath