Ha Joon Chang on dividends and stock buybacks

The resulting depletion in retained profit, traditionally the biggest source of corporate investments, has dramatically undermined these corporations\’ abilities to invest, further weakening their long-term competitiveness. Therefore, I concluded, unless we significantly restrict the freedom of movement for shareholders, through financial reregulation, and reward managers according to more long term-oriented performance measures than share prices, companies will continue to be managed in a way that undermines their own viability and weakens the national economy in the long run.

Oh dearie me. Oh dear, oh dear.

The assumption is being made that the health of the national economy depends upon the rate of reinvestment by extant companies. Only if those companies which already exist reinvest the profits they make will the economy grow and we all, in aggregate, get richer.

But this is not a sound assumption. The health and growth of the national economy is much more about the availability of capital for the starting of new companies. New ways of doing things, new entire fields of business, entirely new ideas.

Given this, that investors are paid out their profits from past investments via dividends and share buybacks so that they can then invest anew in new ideas, new companies, is much more important for that growth and health of the economy.

In this reading it\’s the existence of AIM, angel networks, OFEX (now called something different), VC funds, heck, CrowdCube, where an entrepreneur can raise £50k to £50 million to try out some whacky new idea which is much more important than the retention of profits inside a multi-billion £ corporation.

In fact, we\’d rather like those multi-billion profits to be paid out exactly so that they can be recycled back into the new investments in the economy.

And this is much more important in an economy at the technological frontier than it is in one which is still playing catch up. That is, it\’s much more important in an economy like the US or UK than it was in South Korea during Professor Chang\’s formative years. Playing catch up can require, or at least benefit from, capital accumulation in those large corporations. Because that\’s largely what catch up is, that capital accumulation. But the inventing of new things, that\’s very different indeed.

In short, the paying out of past profits and their reinvestment fuels the creative part of the creative destruction that is capitalism.

GE paying out profits which are then invested into Facebook does more for the economy than say Apple\’s retention of $100 billion in cash on the books does.

8 thoughts on “Ha Joon Chang on dividends and stock buybacks”

  1. People who look at, say, Germany and Korea and say this is how we should structure our economy because they have been really successful have got things completely arse about face.

    Germany is successful not because of how they are structured, but because they have a fucking work ethic.

  2. And what Tim said is also why we shouldn’t tax reinvested dividends.

    Currently the tax system favours dividend retention (where it’s only taxed at the comparatively low corporation tax rate); as soon as it’s paid out as a dividend it’s taxed again under income tax. So reinvesting in another company costs more in tax than leaving it in the old company.

  3. “Germany is successful not because of how they are structured, but because they have a fucking work ethic.”

    Dr Chang knows a lot more about this than you do, he makes quite a few important points about the supposed work ethics of other cultures:

    This was not just a Western prejudice against Eastern peoples. The British used to say similar things about the Germans. Before their economic take-off in the mid-19th century, the Germans were typically described by the British as “a dull and heavy people” “Indolence” was a word that was frequently associated with the Germanic nature. Mary Shelley, the author of Frankenstein, wrote in exasperation after a particularly frustrating altercation with her German coach-driver; “the Germans never hurry”. It wasn’t just the British. A French manufacturer who employed German workers complained that they “work as and when they please”.


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