The $1 trillion company

It's the most expensive game of Snakes and Ladders in history. On Thursday the market value of Facebook dropped by around $100bn (£76bn) after the social media leviathan reported an unexpected decline in user growth numbers to the US stock market.

The very next day Twitter's shares fell 20 per cent, though this meant a slightly less impressive $6bn drop in market capitalisation. Meanwhile, Amazon shares were popping higher after reported quarterly profits exceeded $2bn, reigniting media speculation that it could beat Apple to become the first company with a $1 trillion valuation.

But what does a one trillion dollar valuation mean? Rather less than the media commentary would lead you to believe. The truth is nothing happens when the threshold is crossed. There's no prize awarded.

Shareholders don't receive a cent more in dividends than when the company's value was $1 trillion minus $1. At least not automatically. It's just a big and round number.

The significance of the first $1 trillion company even as a meaningful numerical landmark is overstated. In 1999, at the apex of the dotcom bubble, Microsoft was worth more than $613bn. Adjusted for inflation, that's $927bn in today's money; so in line with both Apple ($954bn), Google ($888bn) and Amazon ($877bn) today. This is not uncharted territory for corporate valuations.

What does "market capitalisation" mean anyway? There are two traditional ways of valuing a company.

The first is to simply ask what someone else would be willing to pay for its shares. If you can sell the share for $10 it's worth $10.

The second is based on calculations of the value of all its future expected profits, adjusted for how much those revenues would be worth today. So if a company makes $10 in earnings per share today and you think this will grow by five per cent a year for the next 50 years you might value the share today at around $200.

It's important to bear in mind the pretty speculative nature of this second method when considering media reports about the value of fast-growing technology companies. In a world of massive uncertainty over digital disruption and the potential for sudden shifts in online consumer behaviour such estimates are inevitably going to be highly volatile.

The valuation of a company such as Amazon is based not on its current profits but on its profits later this century when, many assume, the "everything store" will have pushed aside almost every other retailer on the planet. That's certainly the trajectory. But it may not work out like that. As we've been reminded this week, it can be easy come, easy go in the Silicon Valley valuation game.

But there's probably another motivation for the obsessive media interest in the ups and downs of tech company valuations, and that's the ability to personalise the stories. Amazon, Facebook and Google have outsize founder share ownership stakes. Jeff Bezos owns 16 per cent of Amazon. Mark Zuckerberg owns 28 per cent of Facebook. Larry Page and Sergey Brin own 11 per cent of Google. This lends itself to eyecatching calculations of swings in personal wealth on the back of share price movements. It makes for a striking headline to report that Mark Zuckerberg lost $15bn in wealth in a single day. Or that Jeff Bezos gained $12bn in an afternoon.

But these are not losses and gains in the way that most people understand them. There's nothing those two individuals could suddenly afford after a good day, or which they could not afford after a bad one. These are paper fortunes that they could never spend over their lifetimes, even if they shopped like Michael Jackson in Las Vegas.

This fixation on personal wealth is, in some respects, socially useful. With this kind of corporate paper wealth tends to come control. And with control, rightly, comes responsibility. It's good that when Amazon fulfilment centre workers strike over their brutal working conditions they have a flesh-and-blood person like Bezos to direct their complaints to, rather than an anonymous board. It's useful that, when Facebook becomes a vector for democratically damaging misinformation on an industrial scale, pressure can be brought to bear on a powerful individual like Zuckerberg rather than a committee.

Yet, at the same time, there's also something slightly socially unhealthy about fixating on the paper wealth of individuals, at least in the celebratory way that one often encounters in news reporting. As Adam Smith, the father of economics, wrote: "This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition is the great and most universal cause of the corruption of our moral sentiments."

Something to bear in mind next time you are invited to enjoy a game of Silicon Valley billionaire snakes and ladders.

Politicians should listen to big businesses – but not too much

Businesses have been sounding a Brexit chorus of warning. 

In recent days Airbus, BMW, Siemens and Jaguar Land Rover have all raised their voices to highlight the severe economic damage that will be done to their operations if the cabinet's hardline Brexiteers get their way and wrench Britain out of the EU's customs union and single market. Some have even said the harm could be so grave that they would pull out of the UK altogether, costing jobs and investment.

Choruses need a conductor. And it's more than likely that these interventions were coordinated to prepare the ground for Friday's Chequers meeting to force a cabinet agreement on what proposal the UK government should submit for a post-transition Brexit trade deal with the rest of the European Union.

But not everyone in the audience has been appreciative.

"Fuck business" was the concise review of one of those cabinet hardliners, Boris Johnson. The pro-Brexit Conservative internet entrepreneur Tim Montgomerie sought to present this four-letter reaction from the foreign secretary last week in the grand tradition of Adam Smith, citing the father of economics' renowned alertness to firms' tendency to anti-competitive behaviour.

Others have made the point that the voice of a handful of large pro-EU multinationals could be drowning out a different perspective from smaller firms.

It's a curious consequence of Brexit that it has got "pro-business" right-wingers to pay attention to the dangers of monopolisation and lobbying by big firms. The fact that such concerns have surfaced now that businesses are warning about Brexit puts one in mind of the jailed dictator who suddenly becomes an advocate of prisoners' human rights.

Yet even if the source of the argument is dubious, that doesn't mean it's an empty one. No serious person disputes that businesses often lobby in their own narrow interest. And it's a fact of life that large firms with tens of thousands of employees usually have a degree of political access that smaller firms with only tens of workers lack. Even those who welcome big businesses' interventions over Brexit would have to acknowledge these truths.

But that leaves us with a dilemma. When should politicians listen to big business? And when shouldn't they? When should the public pay particular attention to their arguments? And when should we discount them? How can we distinguish relevant interventions from irrelevant special pleading? 

One sound criterion would seem to be when a question of public policy directly impinges on a particular firm's operations, giving them a special expertise. That's clearly the case with Brexit. No one is better placed to talk about the impact of customs delays than a car manufacturer which runs a "just in time" assembly plant. When businesses write letters to newspapers supporting the Conservatives because of the general thrust of their tax policies the voice of business should command less reverence.

Jeremy Hunt, the health secretary, has called Airbus and BMW's airing of their perspective on the dangers of leaving the customs union "inappropriate". He would be more credible if a record could be found of him telling businesses to pipe down in the past. Yet proximity to the consequences of policy can't be the sole criterion of when we should listen to businesses' views.

Soft drink manufacturers know a great deal about how the soda tax is likely to affect the public's consumption of their wares. Cigarette manufacturers know all about the impact of plain packaging rules.

Banks are experts in how regulatory requirements to increase their capital safety buffers will impact their profits. And so on.

But as all those examples show, having a financial interest in a policy doesn't necessarily equate to that interest aligning with the broad public interest. Other criteria are necessary when it comes to evaluating lobbying.

The first is transparency. Private lobbying by big money is particularly insidious. If Jeremy Hunt wants to talk about inappropriate behaviour he might consider David Cameron's non-disclosed "kitchen suppers" in Downing Street for Conservative Party donors.

Transparency relates to another vital criterion: equality of access. If a minister only listens to one section of business, such as large firms or finance, there is a danger that they start to see the world through the eyes of that section. We saw this clearly with Gordon Brown's ultimately ruinous love affair with the City of London.

If ministers only hear from businesses and shut out other social stakeholders, such as trade unions and charities, that too is liable to be distorting and dangerous. Transparency about how often ministers meet various groups is a vital defence against this kind of capture.

But, in the end, there is no foolproof rule, or set of rules, that can reliably separate social useful business lobbying from the socially useless kind. It will always depend on a judgement about context.

Business has a right to a voice in politics. And sometimes that voice deserves a special hearing. But it should only ever be one voice among several.

If a minister only listens to one section of business, such as large firms or finance, there is a danger they see the world through the eyes of that section

Lenders shouldn't always get back what they're owed

What should happen to people who can't repay their debts? In the ancient world it was common to enter "debt bondage", a form of slavery. More recently we had the debtor's prison, of the sort with which Charles Dickens' unfortunate father found himself acquainted.

Personal bankruptcy acts over the 19th century phased out such severities. And for people who formed companies, funded by borrowing, the major legal innovation was modern "limited liability" in 1855. This restricted the claims of creditors to the funds you had invested in the company - in other words, aggrieved lenders couldn't move onto your other savings after they'd exhausted the assets of the firm.

The perennial objection to such protections is what economists call "moral hazard": the idea that they give people an incentive to take excessive risks, knowing that they can walk away from the financial consequences if they go wrong, while others have to pick up the tab.

"The directors of such companies - being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own," griped Adam Smith in The Wealth of Nations back in 1776. "Negligence and profusion," predicted the Scottish father of economics, "must always prevail, more or less, in the management of the affairs of such a company."

We're hearing an echo of that moral hazard argument today, with the swell of complaints about Company Voluntary Agreements (CVA) on the British high street. The House of Fraser department store chain, struggling like much of the rest of the retail sector, entered a form of insolvency last week. But instead of opting to wind up the company and liquidate its assets to pay creditors, it is instead attempting a CVA.

This means the historic retail name (now Chinese-owned) is asking all its creditors, including its landlords, to agree to a reduction in their claims so the company can continue trading.

Landlords say CVAs have become a form of shakedown for them. A CVA requires only 75 per cent of support of all creditors to be approved. But the creditors who take the biggest financial hit are them, in the form of lower rents than previously agreed. House of Fraser is looking for a 25 per cent rent cut on the stores it will keep open. It's suggested that CVAs are being instigated cynically by firms, not as a last ditch bid for survival, but as a way of simply cutting their costs.

Some other retail firms who don't enter CVAs also detect unfair competition. Why should they, successful businesses, continue paying their agreed level of rent, while a competitor who has overextended themselves gets a rent cut to help finance a turnaround? Isn't this moral hazard in blazing neon? Only up to a point. A government review of the CVA regime, something the British Property Federation wants, seems warranted. Yet some of the claims of abuse are overblown. Entering a CVA is not a cost-free option for any firm, just as declaring personal bankruptcy is not cost-free for the over-indebted individual.

Both will find it more difficult to borrow again for their next venture. And if they can borrow it will be at a penal interest rate.

There's reputational damage for a retailer, too. For a store with a higher-end reputation, such as House of Fraser, last week's headlines are not exactly desirable PR. Similarly, when it comes to personal bankruptcy, we are a still, here in the UK, a long way from the American culture of wearing them as a badge of pride for the serial entrepreneur. The days of the debtor's prison may be gone, but bankruptcy is not the subject of loud dinner party boasts.

It's also important to think about incentives on all sides when it comes to a CVA proposal. Landlords would certainly take a financial hit if a tenant went into liquidation, as they would have to re-let the property, possibly after a long and costly vacancy period. And the new rental agreement with a fresh tenant might be at a lower rate anyway. If the troubled tenant genuinely signed up to a rent that was economically unsustainable for any firm, a CVA can be regarded as a useful institutional solution which allows market forces to operate while also minimising wasteful adjustment costs.

This leads to a related point: moral hazard is also not a one-way street. For every irresponsible borrower, there is usually an irresponsible lender. We saw this vividly in the eurozone crisis with Greece. German and French banks lobbied for full protection for their unwise investments in Greek sovereign bonds and the European Commission and the International Monetary Fund strove, for far too long and at great social cost in Greece and the wider eurozone, to give it to them.

As Ashoka Mody, a former IMF economist argues compellingly in his new book EuroTragedy, it would have been better for the inevitable default to have been allowed to happen much earlier.

It's impossible to entirely divorce morality from the repayment of debt, whether personal or corporate.

And we shouldn't try to: moral hazard exists. But, by the same token, it behoves us to also recognise that, sometimes, we're all better off if creditors don't ultimately get back what they might have once expected.