Matt Yglesias has this interesting post on how a firm never really needs profit because what it needs is revenue in excesses of cost which can either become profit or become capital which adds to the value of the firm. This is true and it also raises additional theory-of-the-firm questions along the lines I was discussing earlier. One possible reason for firms is that firms are a mechanism to make managing large portfolios of intertwined capital possible and manageable. That’s interesting!
More interesting, though, are firms that are not like Amazon. Amazon is a firm that has a lot of stuff – a lot of warehouses and robots, for example. Some firms, though, don’t have that – they mostly consist of people and their computers and sundry office supplies. Good examples of this might be Google or Facebook – they’re not valuable companies because they have lots of material stuff (though they do, primarily server farms) but because they have lots of really smart people managing a digital system, as well as patents. That is to say, human capital – and what is a patent if not a quantum of human capital preserved in carbonite?
The question is – unlike Amazon, if these firms were to stumble or even fail, what is there left? The smart people with computers? They would scatter. Patents? Even absent reform, those expire within a very definitive time horizon. Even Apple’s physical infrastructure is mostly predicated on relationships with contractors and partners – the Appleness of Apple is mostly in Cupertino, not Shenzhen.
This isn’t a new question, per se – it’s a question that applies to all kinds of white collar firms, firms that do law and design and architecture and advertising. What makes the newer firms distinct, though, is their scale – even the largest human capital-oriented firms of the past tended to be private partnerships and remained that way even if they achieved national scale, and never achieved national dominance, whereas today’s human capital firms are massive dominant firms that represent large and increasing share of total equity on stock exchanges.
The weirdness of human capital also gets to the issue of student loans, which I’ve discussed before and which Matt Taibbi has recently penned one of his patented jeremiads on. The question of student loans, on the individual level, is the micro twin to the macro question of a firm like Google – how do you stake a claim on what lies within the human mind? You can seize a car or a house for failure to pay (or occasionally these days because whoops type) but you can’t seize a person’s brain or de-educate them if they default on their student loans. When the big automakers went bust a few years ago they were saved from liquidation which was probably a good thing but had they been liquidated there would’ve been, you know, lots of auto plants to liquidate. How do you liquidate Google? What secures your investment? It makes me think that, just as we need methods of financing education that sensibly grapple with the nature of the thing rather than impose existing models of finance that existing institutions were comfortable with even though the adverse consequences are indeed proving severe, we may need to think longer and harder about corporate financing as corporations, more and more, aren’t secured by physical capital.