A Schumpeterian view of zombie companies

Andrew Smithers
Financial Times - Letters, 29th June 2020


Your leader (“Reasons to fear the march of the zombie companies”, FT View, June 25) confuses companies with their businesses. You rightly argue that companies, which can cover their variable costs, should not be closed as this would cause unnecessary unemployment. You could go further and point out that the resulting weakness of demand would be likely to cause further falls in investment and thus productivity.

In conditions of full employment, businesses which can cover their variable costs at current levels of real wages, and do not invest to improve their productivity, will go bust if real wages rise. Contrary to your apparent belief, their viability is independent of the rate of interest but falls as productivity and real wages improve.

When economies are growing, wages rise and businesses become insolvent as their costs rise faster than their competitors who have invested in more efficient equipment.

Those who lost their jobs are readily employed in an economy where demand is growing by companies which are more efficient than the recently insolvent. This is the process described by political economist Joseph Schumpeter as creative destruction.

Over the past 20 years UK business tangible investment has fallen from 5 per cent of net output to under 1 per cent, and productivity has weakened with it. Weak companies are surviving for longer but, as they don’t invest, they are not the cause of low investment.

They have low productivity and as their proportion rises productivity is generally weak. An increase in the proportion of weak companies is the result of low investment, not its cause.

In periods when labour productivity improves slowly, their rise will be an accompaniment but also not a cause.

Andrew Smithers
London W8, UK