The two primary characteristics of this “new” Modern Corporation was that it dealt in intangibles, which exhibited substantial scale economies, and that it was extremely good at financial engineering.
I have written at least a dozen more posts since then about the “new” Modern Corporation and how it was impacting the corporate and financial worlds.
Because of this, I could not pass up writing about an op-ed piece in the New York Times this morning.
The title of the article is “Why Apple is the Future of Capitalism.”
The op-ed piece is written by Mihir A. Desai, a professor at Harvard Business School and Harvard Law School.
Mr. Desai suggests that one “look inside (Apple’s) sleek exterior and you’ll find an elegant financial machine that has become the ideal for corporate America. Without investing significantly in hard assets, Apple spins cash and returns it to shareholders at a stunning rate. It’s difficult not to admire.”
Well, that pretty well captures the story. Apple focuses on intangibles and financial engineering…and it is very, very good at what it does.
Mr. Desai, however, just concentrates on the financial engineering part of the story.
In this he captures what I have been calling the “new” Modern Corporation.”
I, too, will just concentrate on the financial engineering part of the story.
The United States economy has been heading in this direction for the last fifty- or sixty-years. Again, this is a familiar story to most of the people who read my posts.
What happened over this particular time period? Well, over this particular time period the United States economy became addicted to the credit inflation that was created by the federal government.
The era of credit inflation began in the early 1960s when the government adopted as its fundamental policy the goal of using fiscal stimulus in a cyclical fashion to put unemployed workers back into the jobs they had been laid off from during a recession.
By the late 1960s, this policy approach had been extended to keep the US economy as highly employed as it reasonably could at all times, not just in cyclical cases. The support of this effort was the research that produced the “Phillips Curve,” which purported to show the tradeoff between inflation and unemployment.
That is, it seemed as if, empirically, the government could reduce unemployment a little bit more if it was willing to accept a little bit more of inflation.
So the economic policy of the federal government, both Republican and Democratic, emphasized the almost continuous effort to keep unemployment as low as it could both during economic recoveries as well as in economic recessions.
But, this almost continuous credit inflation created a new dynamic in the world of assets. By the early 1970s, more sophisticated investors began to anticipate this policy thrust and took advantage of it by “speculating” on housing prices, gold, art, and other assets that rose in value as the credit inflation progressed.
In the 1980s a revolution began as credit inflation continued and the wave of financial innovation came into being. And, the wise and sophisticated became better and better at the practice of “playing” the constant wave of credit inflation that the federal government underwrote.
The one exception to this was during the administration of Bill Clinton, when, under the leadership of Treasury Secretary Robert Rubin, the federal government actually ran a couple of balanced budgets.
These changes, however, brought changes to the corporate behavior. More and more emphasis was put upon how to manage cash flow, and less and less emphasis was put on the acquisition of physical assets. As a consequence, the thrust of fiscal and monetary policies flowed more into the “financial circuits” of the economy, and less into the “industrial circuits.” Physical capital expenditure became less robust, stock buybacks and dividend payments became greater, the growth of labor productivity declined to almost zero, and economic growth remained modest.
Some companies became experts in financial engineering, in some cases resulting in the physical side of the business taking a back seat.
Apple continued to use its engineering talents to build product but it benefitted greatly from the networks that it could build that gained so much from scale economies. And, Apple created one of the best financial areas, which brought it to the top of the heap. The $1 trillion market capitalization could not have been achieved without the financial wing.
And, financial engineering is going to be an integral component of the “new” Modern Corporation.
But, Mr. Desai puts out a warning: “The model that has been perfected at Apple is risky and imitated poorly by many American corporations.”
He goes on that “the financial strategy that has worked so well at Apple is a risky one for less capable companies with weaker strategic positions. For them, aping Apple can just as easily result in too much debt, precarious supply chains, and deferred opportunities for investments.”
Mr. Desai recommends, “Boards should guard against the temptation to follow Apple’s path blindly. Big investors, especially mutual funds and pension funds that represent so many individuals, should question the management of any company that does.”
And, yet, the Apple model represents the “new” Modern Corporation. That model seems to be where the future is.
Furthermore, we haven’t dealt with the other part of the “intangibles” of the “new” Modern Corporation. Here we are seeing these companies build networks that focus on ‘intangibles” and tie together areas that in the past seemed to be independent of one another. The General Electric (NYSE: GE) “conglomerate” represents the past. The Apple and Amazon (NASDAQ: AMZN) model represents the future.
How the legacy models adapt to the model of the “new” Modern Corporation is going to determine how they will be able to compete in the 21st century. Not everyone will make the transition.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.