Growing profits on a damaged planet

What is the main purpose of the multinational corporation? To maximise profits for its owners, according to the theory of shareholder value which has infused mainstream discourse about the corporation since the 1980s.

The default assumption among policymakers still seems to be that profits in general can grow without limit, constrained only by market forces and some legal or reputational constraints on the most egregiously abusive corporate behaviours.

You can see this assumption in the language of multinationals’ annual reports and politicians’ speeches about “growth”. But what if this thinking belongs to a particular period in history which must, of necessity, end?

Profits have indeed grown a lot for a very long time. Researchers Ludvig Wier and Gabriel Zucman found in 2022 that they grew much faster than global income between 1975 and 2019, with an increasing proportion being booked outside corporations’ home countries.

Some pundits have been arguing for a while that there’s been a long boom in profits which is going to end. Management consultants Bain and Company suggested this in 2020 and another consulting firm, McKinsey, made the same pitch back in 2015.

Corporate profits aren’t obviously in decline, however: in the United States, far from it. But what might it mean for multinationals if the world is indeed entering an era when profits can’t – and can’t be allowed to – grow without limits?

 

Why might corporate profits have grown so much?

Let’s look back a few decades. The Soviet Union’s collapse cleared space for free-market thinking to be turned into global orthodoxy. The opening-up of China’s economy provided multinationals from the Global North with a huge new source of cheap labour and customers.

Regulations were loosened, unions were weakened and capital was free to flow as its owners wanted. Privatisation shifted public assets into private hands in many countries.

And along came the internet, reaching technological maturity at the right moment to be taken to global scale by a new breed of empire-building private corporations.

All this enabled a lot of profit, some of it lightly taxed if at all.  A 2023 research paper from the US Federal Reserve calculated that more than 40 per cent of the rise in US (net) corporate profits between 1989 and 2019 has been due to lower taxes and cheaper borrowing.

After the global financial crisis of 2007/8, when greedy financiers nearly crashed the banking system, central banks opted to prop up the economy by keeping interest rates at rock-bottom. As a result, large corporations and tycoons have been able to borrow huge sums for next to nothing and invest the money for much higher returns.

 

US interest rates since the 1980s. Look at what happened after 2008.

 

This phenomenon helps to explain the staggering fortunes amassed by the world’s richest men and the relentless hunt by private investors for profitable assets to put their money into, including public services like healthcare.

Cheap money has also helped digital platform companies to sustain years of losses while they built up lucrative monopolies. Uber, for example, racked up nearly US$33 billion of accumulated losses in its bid to corner the global taxi market. (Uber is now in profit).

 

But now …

As the graph shows, the era of low interest rates seems to be coming to an end (bringing pain to poorer countries with sovereign debts to service).

There aren’t obviously more China-sized markets for Northern multinationals to expand into. Indeed, they now face such stiff competition from Chinese firms that the US has responded by starting to dismantle the orthodoxy of open markets which it did so much to foist on the world.

Big Tech is evidently betting that AI will become a vital gateway to the internet and other things besides; the biggest tech corporations are jostling to become the gatekeepers so they can extract more lucrative tolls from all of us.

However, sceptics wonder how profitable AI will actually turn out to be and for whom. Big new technologies usually make money for someone, but it may take a while before we can clearly see the economic effects of AI. Until then, excitable punditry from sources with a vested interest in the outcome is probably best stored on a shelf somewhere in a box marked: “We’ll see.”

 

Profiting from a damaged planet

The biggest obstacle to limitless profit growth is that profit-making has already pushed past the boundaries of what nature can support, as anyone can see from viewing a global weather chart or looking at what’s washing up on their nearest beach.

Maybe one day in future, advanced technologies will allow sales and profits to grow indefinitely without further damaging the natural world on which we all depend for survival. But if so, that day seems far away: even industries which exist entirely inside computers still have massive physical footprints.

Some may get rich at times of shock and bottleneck in global supply chains, but it seems intuitive that multinationals in general will find it harder to keep increasing their profits as disruptions from nature and geopolitics multiply and interact with each other.

As temperatures rise and our bodies fill with tiny bits of plastic, it feels as if we’re moving closer to that famous American cartoon of a man in a ragged business suit, telling some children in a post-apocalyptic wasteland: “Yes, the planet got destroyed. But for a beautiful moment in time we created a lot of value for shareholders.”

Even so, the assumption in official circles still seems to be that crises created by relentless maximisation of profit can be solved by the profit motive. “Green new deals”, now in fashion in the global North, offer public subsidies and other encouragements to private capital to invest in clean energy, so as to (eventually) put fossil fuels out of business.

But relying on state-sponsored market forces to avert the worst of the climate crisis looks like a risky gamble and a race against time: even as the signs of the crisis grow more stark around the world, annual investment in fossil fuels is actually still growing.

We need to recognise that protecting the natural bases for humanity’s future must be put before the expansion of profits, rather than being made subordinate to it. That will have implications for the profit-driven empires which are multinational corporations.

 

Time to rethink the multinational

Against the background of debate about degrowth and the steady-state economy, it’s a good time to be asking searching questions about the multinational corporation.

Imagine a world – the world we need - in which profit-making is limited to what nature and society can support. In that world, would we really need thousands of giant private firms all aggressively competing to capture more of the same restricted pool of profits?

Better to ask what kinds of institutions we might actually want, in that world, to manage trade and investment across borders in a more just and sustainable fashion.

That is: what should be the aims of multinational corporations, as set out in company law? What should they be permitted to do and forbidden from doing? Who should own them and collect their profits? How should they relate to their workers, society and nature? Should they ultimately give way to some less rapacious kind of institution and, if so, how would that happen?

These are big questions without simple answers, but we shouldn’t shy away from asking. Homo sapiens has been around for 300,000 years, whereas the joint-stock company has existed for a tiny fraction of that time. When we talk about corporate power, some of the problems we talk about are younger than we are.

There’s nothing natural or inevitable about the domination of huge and profit-hungry entities which chiefly exist to enrich a small portion of humanity.

So, what better ideas do we have?

The Editor

 

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