Towards The Asset-Light Economy

The last two decades of low-interest rates have seen a vast increase in the world’s stock of assets, measured at market value, largely matched by a corresponding increase in debt. However, the increase has not raised global productivity growth, which has slowed as the asset glut has increased. This points to a core economic secret: large agglomerations of assets are a drag on growth, wealth and productivity, and lead to repeated financial crises through their obsolescence. Going forward, we must devise ways to move towards an asset-light economy.

The fashion for assets is not new. In the 1950s, the archetypal company was not some start-up – indeed, there were very few start-ups — but General Motors and General Electric, the heads of which, both called Charles Wilson, were known as Engine Charlie and Electric Charlie. GM had 576,000 employees in 1955, deployed in a network of huge automobile plants. When Engine Charlie opined that “What’s good for General Motors is good for America” he spoke no more than the truth.

The fate of General Electric in the last six decades, even more than that of General Motors, is illustrative of what went wrong with the Big Assets model. With 210.000 employees in 1955, GE was modestly less asset-heavy than GM. For the next quarter-century, it flourished, growing by acquisitions carefully related to its strategic business and spinning off some businesses such as mainframe computers (sold to Honeywell in 1970) in which it found itself unable to compete effectively.

Then in 1981 “Neutron Jack” Welch became CEO. He disregarded such old-fashioned concepts as strategic fit, buying and selling assets and operations according to two criteria: whether they were #1 or #2 in their business and whether they added to GE’s earnings per share. The result was an unholy mess; GE divested many businesses in which it had built up a long and honorable track record and diversified into areas such as media and finance in which its top management completely lacked expertise (and quickly proved it by a series of spectacular blunders.) As an old and dear friend employed by the top-flight investment bank Kidder Peabody remarked when Welch parachuted in the former CEO of Illinois Tool Works to run the thing: “Just what this place needed: a good tool and die man.”