An addendum to my post yesterday in response to the argument that Google should discharge its cash reserves to its shareholders because ‘that’s what companies exist to do.’ This is from a Matt Yglesias article a while back:
…what economics does not recognize is the fundamental role of commitment in all aspects of our commercial as well as social lives, and the way in which institutions contribute to the creation and preservation of commitment…When what you’re interested in is innovation—new ideas—then efficient allocation of capital just doesn’t matter that much. What matters is ideas. And you tend to see new ideas championed by CEOs with some appropriate combination of megalomania, charisma, and vision to take people along for a ride. Ex post, the visionary megalomaniacs whose ideas pan out tend to make a lot of money for their investors. But it just doesn’t seem to be the case that backing visionary megalomaniacs is really a sound investment strategy. It’s almost certainly good for America that nobody can really stop Sergei Brin from investing search profits in heads-up displays and driverless cars, and nobody can stop Jeff Bezos from playing out his vision of a all-growth no-profits world-destroying retail monster. Any normal person would rather see Apple blow tens of billions of dollars on a crazy moonshot new product category than pay out a bunch of boring old dividends.
This isn’t to say that it is never appropriate for companies to return cash-on-hand to investors. However, I think that corporations exist to do far more than just return value to shareholders, and I think that in the long run both the world and Google’s investors will be better off if Google continues to throw money at R+D rather than shareholders.