Middle-aged capitalism

ON ANY given day, you can expect news of major corporate mergers. Last week, we had decisions from FedEx to buy the Dutch delivery company TNT for US$4.8 billion and from Royal Dutch Shell to acquire the BG Group, a British natural gas company, for US$70 billion. Mergers and acquisitions (M&A) have become a staple of modern capitalism. In 2014, worldwide M&A totalled US$3.5 trillion, up 47 per cent from the year before, reports Thomson Reuters.

Now, there are many motives for mergers: to minimise competition; to reduce costs by eliminating overlapping operations; to acquire a hot product or technology; to enter new geographic markets; or to get bigger. Some M&A deals make sound business sense; others suggest managerial empire-building.

But a larger issue transcends individual deals. The popularity of M&A actually involves economic weakness. Unable to expand internally companies rely on M&A for growth. However, what works for the firm may work less well for society. Although buying another company may enhance the acquiring firm's innovation, it doesn't add much to society's. And society's capacity to innovate is crucial. It generates the wealth needed to raise incomes and dampen social conflicts. This is important. In the wake of the Great Recession, economists have reduced forecasts of future economic growth. Even before the financial crisis, an ageing society was expected to lower growth. Relatively speaking, there will be more retirees and fewer workers. But the recent reductions in forecast growth imply a dimmer outlook for innovation, as measured by labour productivity. Weaker productivity growth in turn means weaker wage and income growth.