Edit: This question attracted way more interest than I hoped for! I will need some time to go through the comments in the next days, thanks for your efforts everyone. One thing I could grasp from the answers already - it seems to be complicated. There is no one fits all answer.
Under capitalism, it seems companies always need to grow bigger. Why can’t they just say, okay, we have 100 employees and produce a nice product for a specific market and that’s fine?
Or is this only a US megacorp thing where they need to grow to satisfy their shareholders?
Let’s ignore that most of the times the small companies get bought by the large ones.
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If you have a company in a small town and everything is paid for and the size of the town isnt growing or changing, you actually do not need to grow. There is a company in Leadville, Colorado called “Melanzana”. They make technical hoodies - they’re pretty good. They actively shrank their business by closing their online storefront to reduce demand and reduce the burden of keeping up with that demand.
HOWEVER, if you have a business that is plugged into a larger marketplace and you have investors or have growing rents, etc. your investors expect a return on their investment and your growing costs need to be addressed so the only option is to grow to keep up.
Super interesting topic when you contextualize within a closed, limited, physical space. And by “super interesting” I mean dystopian.
One aspect I haven’t read about: competitive pressure and economics of scale.
So, imagine two carpenters: they both produce one chair a day. They sell it and can sustain their families with that. Now the one carpenter works a little overtime and uses sharper tools: he’s able to produce two chairs a day. He still needs only to sustain his family, so he could sell the chairs at 50% discount. But he goes for 75% of its original price. Still cheaper, he has more.
Everybody wants to buy those chairs now: they’re the same, but one is way cheaper. The other carpenter loses business, he can’t sustain his family anymore, because he needs to sell one chair a day at least. To keep up, his business needs to grow now.
You’re thinking of public companies. They are legally required to make profit for their shareholders to the best of their ability.
That means every fiscal quarter they have to make more money than the last. The line must always go up.
That is a common misconception, very often spread all over the place on Reddit. There is no such requirement.
And corporate case law describes directors as fiduciaries who owe duties not only to shareholders but also to the corporate entity itself, and instructs directors to use their powers in “the best interests of the company.”
Serving shareholders’ “best interests” is not the same thing as either maximizing profits, or maximizing shareholder value. “Shareholder value,” for one thing, is a vague objective: No single “shareholder value” can exist, because different shareholders have different values. Some are long-term investors planning to hold stock for years or decades; others are short-term speculators.
https://caselaw.findlaw.com/court/us-supreme-court/13-354.html
https://insight.kellogg.northwestern.edu/article/shareholder-value-purpose-corporation
You run into a subtext problem here though.
Serving shareholders’ “best interests” is not the same thing as either maximizing profits
Making this argument to shareholders means you’re telling them “I wish to shrink your profits”, no matter what else comes after that comma that’s a non-starter for an American CEO. 99% of shareholders don’t give one Kentucky fried fuck about the company, they just want free money. You get between them and their free money and you’re gone, replaced by the next failing-upward ghoul in line on LinkedIn.
The idea of having a well established, respected and non-abusive company is no longer a reality in America. The stock market is a vehicle for gambling on shareholder feelings. It’s no longer about the company at all, just about how much you can hype up the company to then pass the bag along to someone else.
Wal-Mart shareholders don’t care if Wal-Mart craters into Hell tomorrow, so long as they get paid dividends and are able to offload their shares at a profit before it dies.
Public companies are also in competition with their peers to attract folks (read enormous investment forms) to buy their stock. So they want their “shareholder value” to be competitive. Shareholder value is at a high level the appreciation of the stock price plus dividends. So public company management is given the goal of increasing shareholder value. Which is the number that must go up. Otherwise those enormous investment firms will buy their competitor’s stock instead.
More money more better…
Only workers are expected to be happy with good enough. The elite will never say the balance of thier bank account is good enough. And thus companies always need to grow bigger.
It’s perfectly possible to have a company that is not growing and just stays where it’s at. But then the salaries of the employees won’t be growing either, and often that will lead to the best employees leaving. Which in turn will turn the non-growing into shrinking.
Perhaps you’ve seen a stagnant company and perhaps you have seen a growing company. The one feels like a cemetery while the other feels like a student party. Either can be good or bad depending on what kind of vibe you enjoy.
Note that this is not a feature of capitalism exclusively. Pretty much all systems thrive on growth, it’s more like a law of nature, not something humans created.
Also, capitalism reacts pretty well to downturns: companies shrink or even die completely if they’re not needed anymore. One of the major reasons Capitalism should work better than all the alternatives is that creative destruction. Problem is that governments are afraid of that destruction and usually try to prevent it from happening. I think a better way would be to let companies (including those “too-big-to-die” ones like large banks) die when it’s their time to die, and rather protect the invidiuals from the effects. The longer you support things that should just die the harder the fall will be.
Growth stocks are worth more than mature stocks, because people are more likely to invest if they think they’ll make money back.
Not all companies need to grow. Some do perfectly fine by just maintaining their current output like a owner operated single person plumbing company.
Another example can be Walmart, they don’t need to grow but investors prefer growth so it becomes a focus.
There are some companies that need absolutely to grow to survive. This is seen a lot in tech where in order for the business model to make sense they would need some big quantity of users.
Let’s say you got seeded 10M and managed to get to a minimal product with 10k users that get you $2 in revenue monthly but your cost are around 50k monthly. It means you’re making a loss but with 100k users you’d make a profit. To get to 100k you need more investment but to justify that investment being sound you need show growth.
So in general if being bigger gets you economies of scale then making a loss early is fine as long as you can get the investor money you need to survive. So to survive as a business you need to grow.
Those are two ends of a spectrum and everything in between exists as well. So quick answer would be “Companies don’t always need to grow but some really do because their business model only works at a different scale”.
There are many answers to this.
First, this is not a general capitalism thing. It is more the specific flavor we have. Second, it is not an absolute rule, there are companies that don’t focus on growth, but it is rare amongst massive companies.
The original idea of capital investment is that when you need investment for your company (e.g. to buy better machines, expand production, etc.) you let people invest (by buying shares) and then give them a portion of the profits gained from that investment (in the form of dividends).
However, most companies have figured out that if they don’t pay dividends but re-invest the money, shareholders are still happy because their shares get more valuable as the company grows and they get to grow the company, which is good for CEO paychecks and lot of other things.
There are things like economies of scale (if you produce million units of something per year, it is almost always cheaper per unit than if you produce ten per year). So if you don’t grow, your competitor that does grow could sell cheaper than you and put you out of business.
And a lot more.
I don’t think you can avoid it in a capitalist system, though. The capitalists are greedy, that being the whole point of their position, so they will always want more.
I want a lot of things that I can’t have. They can want it, but the system doesn’t have to allow it or can discourage it.
Because they take investment.
Privately held companies can sit around earning the exact same amount of profit forever.
But if you are publicly traded on the stock market, people are walking up and injecting money into your business. They expect a return for that investment. And that means that the part of your business they’ve bought has to be worth more in the future in order for them to sell it for more than they bought it.
Therefore: growth. Owning 1% of a $100k business isn’t with as much as owning 1% of a $200k business. So if you own 1%, you want it to go from $100k to $200k.
If you aren’t taking outside money, none of this is a problem. Unless the owners just want a raise, which most people generally do over time. If nothing else, inflation is constantly eroding the value of money so you need to grow a little just to stand still. Most people don’t want to make do with less and less over time.
This is also the issue with private investment companies.
When the EA deal was announced, people said more or less “this is proof that private isn’t any better than public”. Well that’s sort of true - there’s no guarantee that private is any better, but it CAN be, depends on who owns it. In the case of EA games, it was bought as an investment by a bunch of greedy investors, of course it’s going to be as bad as, if not worse than, a public corp.
It’s literally sad that the only hope for EA to become less scummy as a privately held company, than it was as a publicly traded company, is for the Saudi Arabian regime to proactively use them to win over gamers through the digital equivalent of ‘sports-washing’.
It’s depressing to think that we are at a point where EA could be considered the lesser evil in comparison.
Re: inflation, growth in pure gross/intake has to increase to match the currency devaluation, and that can mostly be done by adjusting your prices in line with inflation. Employee count, market shares etc. can all hold steady, all else being equal.
Valuation of companies is partially dependent on growth. A company that is projected to grow is worth more than a similarly sized company because it is expected that future growth will make the company earn more in the future, which makes the company worth more now.
I see a great deal of economic rationale being thrown around and usually I love a good discussion on economics, but I believe we are overthinking the question. I would argue any group of people getting together with some shared narrative is going to want to procure more resources for themselves. This can be a family, a tribe, a friend group, a company, a nation, etc. It’s just how we are.
I highly recommend reading this https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.
This, citizens united and credit scores is where it all started to go wrong
I didn’t see a single top level comment be the devil’s advocate so I will give it a try.
Humanity moves forward. Standards are always shifting. New technologies and needs are created everyday and people want to raise their standard of living to accommodate for new things. Also, global population has been growing since we stabilized food production in the 1800’s.
If companies don’t grow at least with population, that means tomorrow we will have less than today. If companies don’t also grow with raising standards of living, that means someone stays poor. If companies don’t also grow to match the complexities of producing new technology, that means we stopped in time technologically.
In a competitive system such as capitalism, you don’t wait for more competitors to show up and fill this new ever-growing demand; you take that demand for yourself. So everyone seeks growth.
When a society does not grow (i.e. japan) for too long, capitalism doesn’t break down immediately, but you clearly see it stagnates. Japan’s population is not stable and their economy is facing major problems.
Whether growth is organic or fabricated is a related, but different, topic
I work in a mid size company that is a leader in the niche market that we do. However we need to innovate and acquire other small companies and expand because we do have competitors. So the world around us is telling us to innovate or lose the market.
It’s not “companies”, it’spublicly traded companies.
And the answer is quite simple really: the moment you become publicly traded your stock becomes your product, and everything else becomes a means to deliver better stock prices to your investors.
Not all companies are publicly traded, I patronise privately held companies wherever possible because as a client I’m still at the core of their business strategy, and I’m wary of the alternative.
At the end of the day, bad strategies result in bad products and services. Vote with your wallet, it’s very possible.
That is a myth. The law is actually far more complicated, at least in the U.S., and presumably elsewhere too.
Please elaborate because everything written above is correct. Companies must maximize value.
The leading statement of the law’s view on corporate social responsibility goes back to Dodge v. Ford Motor Co, a 1919 decision that held that “a business corporation is organized and carried on primarily for the profit of the stockholders.” That case — in which Henry Ford was challenged by shareholders when he tried to reduce car prices at their expense — also established that “it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others.”
I work for a privately owned company and we’re absolutely expected to grow. Being privately owned doesn’t change that.
Growth and *endless" growth are not the same.
Obviously growing a business is positive in some circumstances, the point is that growth for growth’s sake becomes the name of the game once you go public, whereas when privately held the company can decide whether it makes sense to grow in that moment or focus on other goals in the short term to benefit a long term strategy.
Right but you don’t have a basically legal obligation to if you’re private
??? Of course you do. Investors don’t just buy their way into hypothetical future profits, they buy control over the company. The specifics depend, whether it’s voting shares or the looming threat of debt collection, but the courts will 100 % enforce investors’ right to demand things from companies.
Furthermore the idea that publicly traded companies have some kind of obligation to make as much money as quickly as possible is a reddit-born myth. Shareholders will bring in a CEO, who will be tasked to do whatever and can be fired from the shareholders at any time. Grievous mismanagement and intentional damage can expose a CEO to legal action, just like intentionally destroying tools can expose a worker to legal action. But a CEO acting in good faith has no other obligation than to fulfill the tasks asked of them by shareholders. The problem is that goes wrong when large shareholders plan to sell their shares and need the numbers to look a little better to sell a little higher. But this phenomenon absolutely happens with PE as well – in fact it’s arguably way worse because publicly traded companies at least have legal obligations of financial transparency. Private shareholders can do whatever the fuck they want, including secretly selling their shares to Evil Inc. for them to strip the company for parts and not a single employee has the right to even know who the majority shareholder even is, nervermind what their plan is.
Furthermore the idea that publicly traded companies have some kind of obligation to make as much money as quickly as possible is a reddit-born myth.
Shareholder primacy wasn’t born on reddit, it was actually Milton Friedman who theorized of it, the Michigan Supreme Court who wrote it into precedence, and now American citizens who have to live under the consequences of publicly traded corporations having a distinct legal obligation (against the belief of some legal academics who argue otherwise, in bad faith nonetheless) to provide a profit for shareholders. This also applies to PE, who take this notion of a, once again, distinct legal obligation to provide profits for shareholders above all else, as what you would call a “Get out of jail free card,” i.e. fraud and thievery is completely fine if you’ve got shareholders to feed.
But a CEO acting in good faith has no other obligation than to fulfill the tasks asked of them by shareholders.
Shareholders: “We demand more profits, please start acting in bad faith so I may purchase another boat this afternoon”
CEO: “ok”Alternatively:
Shareholders: “Profits, please”
CEO: “no”
Michigan Supreme Court: “The death sentence is on the table”This is how this has played out since 1919, Dodge v. Ford Motor Co. Wax poetic about theory, in reality people are starving over the sheer necessity that the shareholders want another buck.
