Edit: This question attracted way more interest than I hoped for! I will need some time to go through the comments in the next days, thanks for your efforts everyone. One thing I could grasp from the answers already - it seems to be complicated. There is no one fits all answer.
Under capitalism, it seems companies always need to grow bigger. Why can’t they just say, okay, we have 100 employees and produce a nice product for a specific market and that’s fine?
Or is this only a US megacorp thing where they need to grow to satisfy their shareholders?
Let’s ignore that most of the times the small companies get bought by the large ones.
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Shareholder demands are part of it, but also consider the pressures from competition, inflation, and debt.
If a firm isn’t growing, competition will outgrow them and then gobble up their market share. If you have 100 employees and produce a nice product, you’ll lose out to the firm that has 1000 employees and produces a nicer product. The competition is always growing, so your firm has to grow too. This leads to inflation - as every firm grows in competition with each other they heat up the economy and create more demand for fiat currency - so that means a firm needs to bring in more money every year just to stay afloat. And lastly, companies start out in debt and have to pay it off, and then accumulate more debt in order to outgrow the competition and outgrow inflation, which then in turn heats up competition even more and also causes more inflation.
Competition, inflation, and debt are part of a feedback loop that eventually results in overproduction and market collapse, the surviving firms buy each other out, and the process starts all over again. This is why markets go through boom and bust cycles.
It’s a very irrational system that produces a lot of waste.
Extremely oversimplified:
-for Public Companies: CEO and executives are obliged to pursue maximum profit (either short-term or long-term) for the shareholders, thus the company must grow. - - For shareholders its Cost of capital (basically shareholders want bigger returns than the investment they made) and Opportunity Cost (lose money because you don’t move your investment to a company that is more profitable or gonna be more profitable)
-for private companies: Competition (grow or die from your competitor), efficiency (reducing cost), exit (sell it big and retire), psychological reasons (better safe than sorry), etc…
There are many family business or small companies that function as you describe, but they get replaced and driven out of business in a matter of years or decades (with exceptions). But being stable in an growing economy is very hard and risky. And Capitalism by definition must grow or it gets in crisis.
There are many answers to this.
First, this is not a general capitalism thing. It is more the specific flavor we have. Second, it is not an absolute rule, there are companies that don’t focus on growth, but it is rare amongst massive companies.
The original idea of capital investment is that when you need investment for your company (e.g. to buy better machines, expand production, etc.) you let people invest (by buying shares) and then give them a portion of the profits gained from that investment (in the form of dividends).
However, most companies have figured out that if they don’t pay dividends but re-invest the money, shareholders are still happy because their shares get more valuable as the company grows and they get to grow the company, which is good for CEO paychecks and lot of other things.
There are things like economies of scale (if you produce million units of something per year, it is almost always cheaper per unit than if you produce ten per year). So if you don’t grow, your competitor that does grow could sell cheaper than you and put you out of business.
And a lot more.
In the strictest definition, they don’t.
Capitalism is minimally fulfilled when a business sells something for a profit and reinvests the profit (now capital) in the business. Hence the term. It doesn’t have to grow the business, make new products, or do anything beyond maintenance of its processes, be that fixing or updating machinery or training employees. A single person selling tomatoes in a market in Madagascar that fixes of their tomato table with profits is perfectly capitalist.
Expecting constant growth is not a requirement of anything.
A farmer selling their produce is not necessarily a capitalist. A farmer toiling on their own field sells the fruit of their own labor, so to speak. One step up are what Marx calls “Little Masters”: They own and work their means of production, but sometimes have employees such as farmhands or apprentices (Think companies where the owner still works in the workshop). Actual capitalists are detached from the production process: They no longer work, but simply own the so-called means of production and exploit others by buying their labor force for less than their produced result is worth.
If we are going by the original definition of the word, it is. The farmer here is growing produce to sell it in exchange for money; they are not sharing it with their community, bartering with it, growing it to eat themselves, or giving it to their liege lord.
I’m not sure why people always insist if money is involved that it’s capitalism. Money is an abstract form of trade. No one is suggesting that trade will cease to exists in a world without capitalism.
It’s not about money, it’s about private ownership of capital. https://en.wiktionary.org/wiki/capitalism
Well, if you assume the farmer excludes others from using the means of production i.e. the fields, then yes you can argue that they are acting as capitalist. But you have to make the distinction between private and personal ownership: Private ownership of the land and personal ownership of the produce. The former is what communists reject. The latter is fine in their books.
What resources would you recommend to someone wanting to learn about this?
I.e. the TV channel Arte, which is a cooperation of French and German state media has a multipart documentary called Work, Salary, Profit that touches on a lot of fundamentals.
Of course there is always the option just to straight up read the original works by Marx, Smith and so on, but they are not for the feint of heart.
Because they take investment.
Privately held companies can sit around earning the exact same amount of profit forever.
But if you are publicly traded on the stock market, people are walking up and injecting money into your business. They expect a return for that investment. And that means that the part of your business they’ve bought has to be worth more in the future in order for them to sell it for more than they bought it.
Therefore: growth. Owning 1% of a $100k business isn’t with as much as owning 1% of a $200k business. So if you own 1%, you want it to go from $100k to $200k.
If you aren’t taking outside money, none of this is a problem. Unless the owners just want a raise, which most people generally do over time. If nothing else, inflation is constantly eroding the value of money so you need to grow a little just to stand still. Most people don’t want to make do with less and less over time.
This is also the issue with private investment companies.
When the EA deal was announced, people said more or less “this is proof that private isn’t any better than public”. Well that’s sort of true - there’s no guarantee that private is any better, but it CAN be, depends on who owns it. In the case of EA games, it was bought as an investment by a bunch of greedy investors, of course it’s going to be as bad as, if not worse than, a public corp.
This mostly only happens to companies with outside investors, and it’s in order to make the investors happy.
Companies owned privately by one or a handful of people who all just want the company to keep going, make a decent profit, and be sustainable, don’t always exhibit the “need for growth” behavior.
It’s usually because the investors don’t really give a shit about the company or its mission, they just want money. Often this kind of “need for growth” bullshit is just short term growth, since that’s what most investors care about. It stifles the company’s ability to plan for long term growth and make the right decisions to achieve it.
There are also stable companies with a solid revenue stream that don’t have much growth potential, so pay out the profits as dividends. These are more in demand for retirement funds or individuals who get to point in life they need to start living from their investments. Yield is always a calculation of dividend + growth.
Tech companies that don’t pay a dividend and reinvest everything into growth is a relatively new concept
It’s not “companies”, it’spublicly traded companies.
And the answer is quite simple really: the moment you become publicly traded your stock becomes your product, and everything else becomes a means to deliver better stock prices to your investors.
Not all companies are publicly traded, I patronise privately held companies wherever possible because as a client I’m still at the core of their business strategy, and I’m wary of the alternative.
At the end of the day, bad strategies result in bad products and services. Vote with your wallet, it’s very possible.
