Comment on Why do companies always need to grow?
boolean_sledgehammer@lemmy.world 3 weeks ago
Shareholders are always going to demand more profits. There is no mechanism in a capitalist economy that reinforces the concept of having “enough.”
Comment on Why do companies always need to grow?
boolean_sledgehammer@lemmy.world 3 weeks ago
Shareholders are always going to demand more profits. There is no mechanism in a capitalist economy that reinforces the concept of having “enough.”
FaceDeer@fedia.io 3 weeks ago
My understanding is that this isn't quite how it is. Shareholders don't demand profits as much as they demand that their share value go up.
I read some time back that this is because of an unfortunate choice in tax law. Dividends are taxed as if they were income, but growth in share value is capital gains and so isn't taxed nearly as much. It does unfortunately make some sense, if share value repeatedly goes up and down I wouldn't want each "up" to be taxed as if you'd accumulated that much additional money. You'd have to be constantly selling shares to pay your taxes on them. But as a result, it means that when a company winds up making a profit and having a big pile of cash they need to decide what to do with, shareholders will usually prefer that the company invest that cash into making the company bigger and more valuable rather than simply giving it back to them as a dividend. So you get companies always trying to grow, because the shareholders demand it for reasons that make perfect sense to each one individually.
I'm not sure what a good solution to this is. Economics is one of those fields that seems simple on the surface but has a ton of gotchas hidden at every variable. It's a special case of game theory.