Posts Tagged ‘inequality’

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welfare-vs-wealthfare

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Clay Bennett editorial cartoon

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global wealth

The premise and promise of capitalism, going back to Adam Smith, have been that global wealth would increase and serve as a benefit to all of humanity.* But the experience of recent decades has challenged those claims: while global wealth has indeed grown, most of the increase has been captured by a small group at the top. The result is that an obscenely unequal distribution of the world’s wealth has become even more unequal—and, if business as usual continues, it will turn out to be even more grotesquely unequal in the decades ahead.

The alarm was most recently sounded by Michael Savage, in the Guardian, who cited a projection produced by the House of Commons library to the effect that, if trends seen since the 2008 financial crash were to continue, then the top 1% will hold 64% of the world’s wealth by 2030.”

Byrne

I finally managed to track down that report, which was commissioned by MP Liam Byrne, who is the chair of the All-Party Parliamentary Group on Inclusive Growth. It relies on data compiled by Credit Suisse and a projection assuming that total wealth grows at the same rates as during the period 2008-17.

The problem, of course, is global wealth is notoriously difficult to calculate—for both empirical and theoretical reasons—and Credit Suisse doesn’t reveal its methodology.

That’s why the work of the World Inequality Lab is so important.** They’re doing the painstaking work of calculating the wealth that has been generated by global capitalism and how its ownership is distributed.

Thus far, they have reasonably good data for a selection of nations: China, Europe (represented by three countries, France, Spain, and the United Kingdom), and the United States. Those are the numbers illustrated in the chart at the top of this post (with the vertical green line, at 2015, separating past trends from future projections). What they find is that

At the global level represented by China, Europe, and the United States), wealth is substantially more concentrated than income: the top 10% owns more than 70% of the total wealth. The top 1% wealthiest individuals alone own 33% of total wealth in 2017. This figure is up from 28% in 1980. The bottom of the population, on the other hand, owns almost no wealth over the entire period (less than 2%).

The share owned by the top 1 percent is less than reported by Byrne but it’s still an one-third of global wealth. (The share for the top 1 percent in the United States is even higher: an astounding 41.8 percent in 2012.)

But the projection looking forward is similarly dramatic: according to the World Inequality Lab, if present trends continue the share of each of the top groups—the top 1 percent, the top 0.1 percent, and the top 0.01 percent—would growth by one percentage point every five years. What that means is that, by 2050, the share of each group would increase dramatically. In particular, the share owned by the top 0.1 percent would eventually match that of the declining middle group—at a quarter of global wealth.

What we’ve been seeing in recent decades is that an unequal distribution of wealth leads to even more inequality, since wealth inequality is amplified as wealth is concentrated in the hands of a small group at the top. First, past wealth is capitalized at a faster pace, since the rate of return on wealth is faster than the rate of growth of the economy. Moreover, this effect is reinforced by the fact that rates of return tend to increase with the level of wealth: the rates of return available to large financial portfolios are usually much higher than those open to small bank deposits and the other savings vehicles available to everyone else.

None of this is new. Those in the small group at the top have long been able to put distance between themselves and everyone else precisely because they’ve been able to capture the surplus and then convert their share of the surplus into ownership of wealth. And the returns on their wealth allow them to capture even more of the surplus produced within global capitalism.

In short, unless radical economic changes are made within nations, the unequal distribution of global wealth created by contemporary capitalism is both the premise and promise of an even more unequal distribution of wealth in the decades to come.

 

*To be clear, the “wealth of nations” that Smith referred to was current production or, as it is currently measured, Gross Domestic Product—the “immense accumulation of commodities” produced and exchanged in a country’s economy over a particular period of time. Mainstream economists (such as Robert Barro) often claim that inequality in global capitalism is decreasing, because of “convergence,” that is, growth rates in developing countries of the Global South are faster than in the developed North and the gap in GDP per capita is closing. Today, wealth refers to the ownership of assets, both financial (stocks, bonds, etc.) and nonfinancial (especially housing)—as against income (flows of value associated with either doing or owning) or sums of transactions (which is what is captured in GDP).

**The other major sources of information on global wealth are Forbes (which publishes global rankings on the world’s billionaires) and the French business consulting company Capgemini (which issues an annual World Wealth Report focused on the wealth of global High Net Worth Individuals).

powmarx2

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.

Marx

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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