One of life’s paradoxes is that never have modern companies been so awash with cash, yet never have they been so active in capital markets. Apple last month raised $17 billion by selling bonds because it could, not because the company lacked cash to give its shareholders in exchange for stock. Apple has reserves of $145 billion stashed overseas, but would have to pay taxes on any money it repatriated. By borrowing money it does not need, Apple obtains a business deduction (payment of interest) and avoids payment of taxes on past profits.
British economist John Kay runs through the logic of this, and suggests that we are living in a non-capitalist world, even though we insist on calling the system by its old name.
In the 19th century, railroads raised funds from private investors to finance costly infrastructure. Later, large manufacturing corporations raised capital in much the same way.
But only a few businesses today, mainly utilities, have the capital-intensive character typical of those early days of industrialisation. …. [I]t is now relatively unusual for a business to own the premises from which it operates. Employees today generally do not know who owns the building in which they work, or the desk at which they sit. They do not know because it does not matter. Their boss tells them what to do, not because he owns the means of production, but because he has been appointed as the boss.
A modern company, such as Apple, is knowledge-based, outsources its manufacturing and has little need of any tangible capital at all. A new business will need investment to meet its initial operating losses but can expect to become cash generative at an early stage of its life. If the company seeks a public listing on an exchange, the likely purpose is to provide a liquidity event for early-stage investors, or to reassure employees that their options have value, rather than to raise money to expand the business. Facebook took in cash from investors because it could, while admitting that it had no particular use for it. We still use the word “capitalism” when we refer to the institutions of the modern market economy but it has become a misleading term.
John Kay, “Why business loves capital markets, even if it doesn’t need capital“, Financial Times, 15 May 2013 (ungated).