Book Review:
Capitalism without Capital
John D. Ayer, Professor of Law Emeritus
Capitalism without Capital1 is the best (chapter 11) bankruptcy book I’ve read since I can’t remember when. This is no small achievement in that the word “bankruptcy” never once appears in the text. What we have here is a broad tour d’horizon of what the authors understand to be a new commercial and financial reality—a world organized around ideas, rather than things. They proceed by giving us the best account that I’ve seen of that new world’s financial plumbing. Along the way, they provide—perhaps without even knowing it—a superb account of the dynamics of the new world of financial distress. It’s the kind of book I’d cheerfully inflict on a youngster trying to get a toehold in that world. Also, for the geriatric set (aka, a majority of ACB
Fellows), it’s a helpful reminder and recap of how things have changed since our youth.
Ideas, but not things. If you owned a business 60 years ago, you owned some inventory, some equipment and likely some “receivables”—claims against customers for goods sold and delivered. You might (or might not) have owned some real estate. As to obligations, you probably owed some payables, the micro image of the receivables. You might have had a loan from a bank which claimed first dibs on the receivables and inventory. If you owned real estate, you were probably hocked up to the eyebrows to the lender. You might be a corporation, but if so, the lead lender also had a guarantee from the owner, with a mortgage on the owner’s personal residence.
But you’re in trouble, and want “relief.” The nitty gritty issue is just this: is the business worth more alive than dead? Or more precisely, can you convince those supplier-creditors that it is worth more alive than dead? You can think of those suppliers as essentially co-venturers. If it was in their interest to keep you going, then they’d agree to share the pain. If not, not.
Think of how many elements of this story sound today like something that arrived from another planet. Of course, the business itself very likely disappeared years ago into the belly of, first Walmart, then Amazon. But even if some vestige remains, both the receivables and the payables have transmogrified themselves into credit card debt. The inventory has vanished into the funhouse mirror of just-in-time.
The equipment; ah, now at last we are getting to the point. The fulcrum of the old chapter 11 was the “liquidation value”—how much can we get for this stuff if we just throw in the towel? The point is: in the old days, we usually had an answer. If the debtor owned a forklift truck, the chances were that you could make a pretty reliable estimate of how much it would fetch in the secondary market. If he inventory was soybeans, you could get a price on the exchange.
The point is not that it is hard to price soybeans or forklift trucks. Rather, it’s that so much of the value of any business these days is tied up not in these humble physical objects, but in stuff you cannot kick or scratch—the “intangibles.” These might include long-recognized categories like patents, trademarks and copyrights. But it also includes a large (growing?) menu of items which, though they probably existed before, we simply thought of as “assets” before. Methods, for example: Starbuck’s magic formula, taught to every barista the world over for keeping the customer happy. Supply chain management: Apple’s knack for getting a new product off to every customer on the planet within a nanosecond of introduction. And the bane of the accountant’s existence, “goodwill” — the stark fact that for any number of businesses the market value of the whole will be wildly in excess of the sum of its parts.
1Jonathan Haskel and Stan Westlake, Princeton University Press (2018)
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