Hamish McRae: We must make global capitalism work better

Alphabet, the new name for the Google group, last week passed Apple to become the most valuable company in the world. It did not stay so for long, for on Friday Apple had jumped back on top. These are just stock market capitalisations, which are capricious at best and have been all over the place in recent weeks.

But, and this is the big point, not only do these two top this league, they are followed by Microsoft in number three place, Facebook at six and Amazon at nine. So half the top 10 are US West Coast companies, all part of the great tech revolution. And they are, in corporate terms, very new. The oldest of them, Microsoft, is only just over 40 years old while the youngest, Facebook, was founded 12 years ago this month.

This is unremarkable at one level, for most of us use the products or services of these tech giants every day. This column is written in Word, and Google has saved a huge amount of time in researching it. Take the products of others in the top 10 — Exxon, Johnson & Johnson and General Electric — well, they are longer-established enterprises but, while we use the products from time to time, they are not so embedded in our day-to-day lives.

But if you stand back, it is remarkable in at least three ways. Two are obvious enough, though they bear repeating. The first is that a small part of one country should so dominate the way we live. Of course, it is driven by self-interest but there is a generosity in hi-tech America in making available to the world the technologies that have transformed and enriched our lives. The second is that just as companies can become huge remarkably quickly, they can also fade even faster. Do not forget that in 2008 Royal Bank of Scotland was very briefly the largest bank in the world. We think of corporate giants as permanent. They are not at all. But the third remarkable thing has attracted less attention. It is that the system, let’s call it market capitalism, has worked.

It is the platform on which Bill Gates, Steve Jobs, Mark Zuckerberg and so on were able to build businesses that have changed the lives of everyone: not just the capital to grow and the incentive to do so but also technical, legal and physical infrastructure of these enterprises. These are not state-owned corporations, co-operatives, not-for-profits, NGOs or family-owned businesses. They are examples of that extraordinary invention, the publicly-quoted company, and not just because by definition these are quoted.

Try to think of another similarly important driver of the IT revolution. Universities have certainly been part of it; open source has been crucial at particular points; the US military has too. They all have their place. But it is really capitalism that has driven through the things that change our lives.

Yet market capitalism is facing a crisis of confidence. This is not just a function of the present market turmoil, or the extent to which the developed world economies have been puffed by central banks printing money. (Mind you, Citibank saying last week that the world economy was “trapped in a death spiral” was pretty strong stuff.) No, it is deeper. Goldman Sachs, red-in-tooth-and-claw exponent of the whole system, put out a paper last week, querying present levels of company profits, and observing: “There are broader questions to be asked about the efficacy of capitalism.”

The Goldman argument is that profits are at the top end of their historical band. But they oscillate, so either they revert to mean, in which case share prices now are not supported by future earnings, or they remain high, in which case the market isn’t working properly.

Is Goldman saying profits may be too high? Yes in the sense that if profits remain high, the market system is not generating the competition that ought to pull them down again. This is not a moral argument about companies making excess profits and failing to share the benefits with workers and customers; it is a practical question as to why the normal checks and balances are not operating, forcing them to pay their people more and/or cut their prices.

On the narrow issue of companies being too profitable, my guess is that profit margins will come down somewhat over the next three or four years. They probably are doing already. There will be some sort of downturn in the world economy, though the “death spiral” stuff is vastly overblown. For all the concern about deflation, the world economy does not feel nearly as fragile as it did in the 1970s and 1980s during the great inflation of those decades.