Not all zombies are created equal. A Marxist-Minskyan taxonomy of firms: United States, 1950-2019

ABSTRACT

The ‘zombie’ literature emphasizes the financial characteristics of firms and focuses on financial channels to explain their rise. This is incomplete because it conflates together firms with very different productive characteristics. Drawing on Marx and Minsky’s insights, we build a taxonomy of firms showing both their productive and financial characteristics based on the rate of profit of enterprise and the interplay between its three determinants: the profit rate, the difference between the profit and the interest rate, and the leverage ratio. Considering the different possible combinations of these variables, we classify firms into seven types: normal and regular small capitals (hedge finance); speculative small, super small, and leveraged small capitals (speculative finance); and financially stressed small and zombie capitals (Ponzi finance). We show the composition and evolution of U.S. listed firms as well as relevant descriptive statistics by type of firm from 1950 to 2019. Our main finding is that the principal problem of U.S. firms is productive, not financial, as there is a high share of firms with increasingly negative profitability even before the payment of interest and despite having relatively low leverage.

KEYWORDS:

• Marx
• Minsky
• taxonomy of firms
• financing regimes
• zombie firms

JEL CLASSIFICATION:

• B51
• O16
• D22

Acknowledgements

We thank the two reviewers, Costas Lapavitsas, Joel Rabinovich, and the participants of a Centro Interdisciplinario para el Estudio de Políticas Públicas (CIEPP) seminar for comments on earlier drafts that helped us to significantly improve our arguments in this article. All the remaining errors are our own.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. For a Marxist understanding of the rate of interest, its determination, and role in capitalism, see Águila and Graña (2020); Evans (2004); Lianos (1987); Lucarelli (2010); Fine (1985); Itoh (1988); and Lapavitsas (2017).

2. While several scholars have recently made important contributions emphasizing the increasing role of non-financial corporations’ investment in financial assets leading to financial profits (including capital gains) as well as their increasing financial costs (Duménil and Lévy 2004; Krippner 2005; Orhangazi 2008; Stockhammer 2004; Tori and Onaran 2018), here we present a general framework considering all sources of profits (both productive and financial) and the interest rate on loans as the only financial cost. The framework allows for adding layers of complexity by dividing profits into productive and financial, considering other financial costs, and discussing the uses of profits of enterprise (retaining earnings, paying dividends) and their consequences on capital accumulation in a dynamic model.

3. Only in particular economic situations such as a crisis, the interest rate could increase above the profit rate of normal capitals but this is likely to be temporary.

4. It is mathematically possible to have high leverage with a large difference and still a positive rate of enterprise with our empirical definition of ‘high’, although the number of cases in this situation is not large. Because of this, we choose to leave open the classification, allowing for both a large and small difference, instead of stating that firms in the third case are necessarily high leveraged with a small difference.

5. In the appendix we present the criteria used to filter the database.

6. As the lending rate is different for each firm, we impute it by calculating the effective interest rate $i_e$.

7. For firms with less than three years in the database, and in order to keep as many observations as possible, we consider the average result of two or one periods depending on how long they have been on the dataset.

8. Our results are quite similar to those of Pedrosa’s (2019) analysis of Minskyan regimes from 1970 to 2014, with minor differences in levels. However, for Davis, de Souza, and Hernandez (2019) speculative firms have the largest share throughout the period, from some 70% in 1970 to above 40% in 2014 but the evolution of the shares of the three types of firms is close to ours. The similarities with these resultss, at least as far as trends are concerned and given the difference in empirical criteria, suggests that our taxonomy remains sufficiently close to Minsky’s original classification.

Additional information

Funding

Juan M. Graña was supported by Agencia Nacional de Promoción de la Investigación, el Desarrollo Tecnológico y la Innovación under grant PICT-2018-02562; and Universidad de Buenos Aires under grant University of Buenos Aires UBACyT 20020190200019BA. Nicolás Águila received access to the Compustat database through King’s College London institutional subscription, where he worked as a Graduate Teaching Assistant during the first stages of the writing of this paper.