Darwin and the Zombie Companies

The issue of the zombie economy is one feature of the new economic situation we are in as the crisis extends over time. In the short term, lenders and banks can wait for the good times to return but as the depression extends and more debts fall due they start to accumulate and undermine more companies. It appears to have been zombie companies that busted the Co-operative Bank, inherited from the Britannia Building Society.

Mark Thomas of PA Consulting invented the idea of the Zombie Economy, with companies refusing to die because of the devastating social consequences but failing to thrive because of carrying massive levels of debt. The zombie company can earn enough to service its debt but it cannot invest or grow. It can only struggle along but cannot innovate. It is a drag on the functioning of a capitalist economy. The data on corporate insolvency and personal bankruptcy clearly indicate the massive impact of the financial crisis but appear to show that the peak is past. The contrast between the high rate of personal bankruptcy and the relatively low comparative rate of corporate failure suggest that the thesis of a zombie economy may have some basis.

During a Radio 4 documentary on the issue last winter John Moulton used Darwin's phrase 'survival of the fittest' to describe the need for financial institutions to abandon these companies that cannot repay their debts and whose assets are not worth even a fraction of what they were before the crisis. Solving the crisis, he claimed, required the law of the jungle to be allowed to reign. The bankrupt companies should go to the wall, releasing economic energy.

here is a practical problem with this, because if the banks pulled the plug on the zombie companies that have borrowed their money the disastrous relationship between their liabilities and assets would become apparent and we might find ourselves in Financial Meltdown II: Revenge of the Zombies.

But what about the question of which business is the 'fittest'? Darwin would be more use to us if his phrase were interpreted as he intended: fit does not mean healthy but rather appropriate. In this sense the phrase might usefully guide us to question what sort of business is appropriate to the just and sustainable economy that we should be building in response to the disasters of recent years. It could guide us to the changes we need to make to corporate law to introduce appropriate and socially beneficial motivations to the heart of the enterprises that form part of our economy, rather than the short-term and selfish motivations that dominate within the existing corporate legal structure.