Archive for May, 2018


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First there was the Great Gatsby curve. Then there was the Proust index. Now, thanks to Neil Irwin, we have the Marx ratio.

Each, in their different way, attempts to capture the ravages of contemporary capitalism. But the Marx ratio is a bit different. It was published in the New York Times. Its aim is to capture one of the underlying determinants of the obscene levels of inequality in the United States today—not class mobility or the number of years of national income growth lost to the global financial crash. And, of course, it takes its name from that ruthless nineteenth-century critic of mainstream economics and capitalism itself.


Now, to be clear, there are lots of ratios that can be found in Marx’s critique of political economy—for example, the rate of exploitation, the intensity of labor, the technical productivity of labor, the exchange-value per unit use-value, and the value rate of profit (as illustrated above in a fragment from one of my class handouts)—and the ratio Irwin presents is not one of them.

But that doesn’t make Irwin’s ratio wrong, or uninteresting. On the contrary.

Basically, what Irwin has done is take the data from corporate financial reports (net income and the number of employees) and from a minor provision of the Dodd-Frank Act, which requires that publicly traded corporations reveal the gap between what they pay their CEOs and their average worker (and thus they need to report median worker pay), and calculated a number:

The Marx Ratio, as we’re calling it, captures the relationship between a company’s profits — the return to capital, on a per-employee basis — and how much its median employee is compensated, a rough proxy for the return to labor.

Thus, for example, Wells Fargo, which reported $22.2 billion in net income in 2017, with 262,700 employees and median worker pay of $60,446, had a Marx ratio of 1.40. Similarly, we have the ratio for other corporations—from the relatively small real estate investment trust Duke Realty (37.7) to independent energy company Hess (-12.2).

Irwin is clear: notwithstanding the limitations in the data, “companies with high Marx Ratios offer particularly strong rewards to their shareholders relative to workers.”* But that doesn’t mean, contra Irwin, that “Numbers below 1 signal the reverse: a more favorable return to labor.” Any positive number indicates that, after paying all expenses (including workers’ wages, taxes, interest on debt, deductions for depreciation, and CEO salaries), the net income or profit per employee is positive.

In fact, with a little algebraic manipulation, Irwin’s Marx ratio turns out to look a lot like Marx’s rate of exploitation.**

They’re not the same, of course. First, because corporate net income leaves out many of the distributions of surplus-value corporate boards of directors make—such as interest payments, taxes, and managers’ salaries—and the number of employees refers to all workers, not just nonmanagerial workers. Second, because the Irwin ratio is calculated for all publicly traded companies and therefore makes no distinction between finance, real-estate, insurance and companies that actually produce goods and services. From a Marxian perspective, the former capture surplus-value that is produced and appropriated and distributed elsewhere in the economy (both nationally and globally).

So, the Marx ratio is not Marx’s ratio.

But Irwin’s Marx ratio does tell us a great deal about how wildly profitable American corporations are, especially in comparison to how little they pay their employees—to the tune of 3, 4, 30 times what the average worker makes. And that’s one of the principal causes of the obscene and growing levels of inequality we’ve seen in the United States for decades now.

I, for one, would love to see the Marx ratio reported in the financial news on a regular basis. Alongside the ratio of CEO to average worker pay. And, even better, Marx’s own indicator of capitalist class injustice, the rate of exploitation.


*The data are a bit of a problem, especially because median worker pay is based on self-reporting:

The denominator is the compensation to the median employee, as disclosed in the company’s proxy statement, which can create distortions in representing rank-and-file employees.

Companies also have some degree of flexibility in how they calculate median pay, so comparisons are not necessarily apples-to-apples. For example, they may choose to use statistical sampling instead of actual payroll records, and may exclude non-U.S. employees depending on privacy rules in overseas markets.

A better number for the idea we’re really trying to get at would be average compensation for nonexecutive employees, but companies aren’t required to report that publicly.

**Mathematically, Irwin’s Marx ratio is (NI/L)/(W/L), which turns out to be NI/W, where NI is net income, L is the number of employees, and W is the wage bill (calculated by multiplying median worker pay by the number of employees). Marx’s rate of exploitation is S/V, where S is the amount of surplus-value and V is the value of labor power.


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Austin O’Brien is a J.D. Candidate (Class of 2019) at the Fordham University School of Law and a former student of mine at the University of Notre Dame. He sent the following response to my recent piece on “utopia and markets,” which I am pleased to publish here as a guest post.

Dear Professor Ruccio,

I have been enjoying your recent blog posts on various dimensions of utopia. The one about “utopia and markets” struck a particular chord with me as I had my Corporations exam last Tuesday. Throughout the course, I noticed that corporate law itself has certain utopian elements. The very notion of a fiduciary duty to the corporation and shareholders (and creditors, when the business is on the brink of insolvency or is insolvent) enshrines the notion that an officer or director should maximize shareholder value, that is, the surplus to which they have access through their holdings and dividends. But, what I find to be most interesting is the flipside of this: it is not only the case that officers/directors should maximize value, but also that they are obliged to do so and, when a shareholder prevails in demonstrating that this duty has been breached, the breaching party must be punished. I think this counters the notion that profit-maximizing behavior is “natural.” The utopia that these duties try to build is one where officer/directors maximize (surplus) value at the behest of those who have claims on the surplus. So, the maintenance of capitalism takes extraordinary (legal) efforts just to compel officers/directors to act in the manner prescribed (as opposed to merely discovered or described) by neoclassical theory. Thus, the hegemonic economic utopian project is an active project that makes legal recourse an option when officer/directors take actions that do not allow investors to benefit from the exploitation that is at the heart of the firm’s consumption of labor power.

Let me try to explain what I mean. Corporate law is premised on the notion that it governs voluntary exchanges among sophisticated parties who seek to maximize profits.  Those individuals subject to corporate law are none other than the economic actors that fit neoclassical economists’ understanding of human nature: rational decision-makers who maximize utility or profits under conditions of scarcity. Well, that is at least the set of individuals corporate law deems itself to oversee. Perhaps it is more likely that this type of actor is the type of actor that corporate law intends to create. This rational actor is the dream of corporate law. Indeed, perhaps this homo economicus is proscribed by corporate law. In fact, if corporate law is largely in place to assist in profit-maximization, then this is the type of actor it must demand so that its project may succeed

The very heart of corporate governance lays bare corporate law’s project. At least with regard to the enforcement of particular norms among corporate officers and directors, the notion of a fiduciary duty is central to corporate law. Fiduciary duties arise in many contexts. In corporate law specifically, a fiduciary duty typically refers to the duty owed by a corporate officer or director to the corporation’s shareholders. The duty of care (i.e., the duty to make informed business decisions) and duty of loyalty (i.e., the duty to not use their position as officer or director to further their private interests) are hallmark examples of such a fiduciary duty. Now, the idea of these fiduciary duties is that they protect a corporation’s shareholders by ensuring that a corporation’s officers and directors are actually acting for the benefit of the shareholders and, more generally, the corporation itself. And what is the benefit of being a shareholder of a corporation? In short: a share of the profits. Shareholders benefit from a corporation’s increasing (rate of) profit(s), especially when profits are used to issue dividends.

This seems fairly innocuous at first glance. It is this mass of shareholders, after all, who vote for and elect the directors. And, it is this group of directors who select the corporation’s officers. But the tension is hidden in plain sight. If corporate law (and neoclassical economics) takes as given the idea that firms maximize profit and that such behavior is natural, then why the need to ensure that profit-maximization occurs? While corporate law is premised upon the notion that it oversees the activities of sophisticated rational individuals interested in profits, the ultimate scandal is when an officer or director is this very individual who behaves accordingly but to the detriment of the class that has claims on a corporation’s profits. See, the problem for corporate law is the possibility that a rogue officer or director might maximize their own gains to the detriment of the shareholders.

In trying to address this tension, corporate law, by way of imposing and enforcing fiduciary duties, unwittingly brings in class through the back door. One of the many problems with capitalism is, of course, rooted in the fantastical belief that self-interested individuals acting selfishly somehow bring about, in the aggregate, the best possible social results. Well then, why the need to punish these self-interested officers and directors? Shouldn’t it be the case that, by the invisible hand, capitalists benefit in the aggregate when capitalists act selfishly? The answer is, simply, no because capitalism is a class system that must be vigorously maintained to reproduce itself across time. In this case, it is maintained not only by proscribing (as opposed to merely discovering) how corporate officers and directors behave, and not only obliging them to act to the benefit of a specific class of capitalists, but also legally punishing such officers and directors when they do not act to the benefit of corporate shareholders. For the maintenance of capitalism, this is a necessary fix. It is a needed measure to build the neoclassical utopia by ingraining specifically neoclassical values into the decision-making of corporate officers and directors. So, when corporate officers and directors do act for the benefit of the corporate shareholders, they are not doing so because of some innate nature, but rather according to a specifically proscribed set of values that are enforced by the specter of shareholders seeking legal recourse for a breach of a fiduciary duty.

It becomes increasingly clear that corporate law itself is an active project shaping the way corporate actors behave as economic agents. In the end, if corporate shareholders are not able to successfully lay claim to a share of the profits arising out of the private and productive consumption of labor power, then what good is it to be a capitalist? For capitalism to (re-)produce itself across time and space while maintaining legitimacy within the capitalist class itself, capitalists must be able to do as capitalists do: extract surplus-value from the production process through the consumption of labor power.

Thus, celebrating when ill-behaved corporate directors are caught and punished as if such a victory is yet one more blow to the legitimacy of capitalism misses the point: punishing such actors maintains, indeed even reinforces and reinvigorates, the capitalist organization of society. Shareholders taking legal actions for a director’s or officer’s breach of a fiduciary duty is part and parcel of furthering the utopia envisioned by neoclassical economists. The ideal corporate officer or director, according to the neoclassical utopian vision, is a quasi-religious one that directly contradicts the neoclassical view of human nature: an officer or director who acts selflessly to the benefit of the shareholders. Of course, such directors and officers are far and few between. It should then come as no surprise that corporate directors regularly bestow lavish compensation packages upon corporate officers to ensure that these officers take actions to maximize (surplus) value for shareholders. And, if a director or officer does breach their duties, they are a bad capitalist who are nearly certain to be replaced by a good capitalist, that is, one who maximizes corporate profits. So, a bad corporate actor, at least in the terms of corporate law, is really an actor who fails to uphold specifically neoclassical values that sustain the capitalist system of relations. And one should not forget that, in light of the Marxian critique of these capitalist social relations, this fight over profits is a fight over the surplus-value extracted from workers.

Perhaps one can readily imagine a different set of values and an alternative alignment of duties. Imagine a scenario in which workers are the shareholders and elect the boards of directors. This would be remarkably different. Rather than being incentivized to further extract value in the consumption of labor power, directors (and their corporations’ duly appointed officers) would have an incentive to reward workers with the value created by the workers’ very labor. But this is antithetical to capitalism and corporate law as they stand today. This set of values would turn the system on its head. And turning this system on its head means first pointing out corporate law’s blind spots, tensions, contradictions, and values that it takes for granted yet furthers in its quest to build a very particular vision of society. This task of criticism is rooted in the recognition that corporate law actively maintains capitalism all the while providing active measures to bring legal actions to those with claims on the surplus against those officers and directors who stand in the way of shareholders enjoying the fruits of others’ labor.


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