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MASSIVE PROFITS!!! But from Where?

The answer depends on two things: how those profits are derived, and what happens to them. Last week we noted how the senior executives and shareholders of banks are able to award themselves absurd remuneration packages and inflated dividends out of the profits extracted by a banking system geared principally towards generating huge rewards for the already wealthy.

Profits so generated certainly constitute unearned wealth, but elsewhere things are less clear, because the market mechanism doesn’t necessarily assure the correct allocation of rewards between the providers of capital and labour.

Money vs. People

The relative value of the contributions of these two factors of production are impossible to determine objectively, but during periods of high unemployment (the whole of the last three decades, and most of preceding human history) the market has generally rewarded capital at the expense of labour. Notwithstanding any state-funded safety net, an unemployed person has little choice but to work for whatever wage is on offer. To the extent that the market drives down wages beyond the true value of the wage earner’s contribution, the additional profit retained must, if it is paid out as dividends, be unwarranted and therefore unearned.

In the case of an owner who works in the business, their contribution of capital in the form of experience, expertise, ideas and creative inspiration is clearly deserving of additional reward; that is to say a share of the profits. But many businesses are wholly- or part-owned by absent shareholders: people who contribute funds towards the acquisition of additional capital, but otherwise have little or no input.

It’s perfectly legitimate for a business owner to seek further funds for investment through the stock market; but here, again, it seems that the market is biased against the legitimate claims of the wage earner. In 2006, British Gas, which at the time was employing 5,390 people, earned a staggering £445,200 of profits per employee.

This may be an extreme case, but examples abound of more modest appropriations by capital of the rightful earnings of labour.

Abolish Monopoly & Unleash the Entrepreneurs

There are various steps we might take to redress the balance: We could tackle the problem of monopoly landownership. Many people who would like to, but cannot get started in business because of the barriers to entry. Facilitating a wider distribution of land ownership, perhaps via the levying of a tax on land values, would bring the option of self-employment within range of more budding entrepreneurs.

We could adopt Thomas Palley’s recent proposal for a global minimum wage, tailored to the circumstances of individual nations, but linked to productivity growth. We could also take measures to encourage the adoption of different models of business ownership. One of Britain’s most successful retail chains, John Lewis, has no absent shareholders: Instead, once a share of profits have been retained for investment, the balance is distributed among its partners – the entire staff – in proportion with their basic wage.

20:1 – Recourse to Morality

Finally, we could recognise that from a moral perspective, while not everyone’s contribution to a business is equal, all should receive a fair wage. A simple multiplier would assure that the earnings (through salaries and dividends) of the highest paid are linked to the wages of the least well paid. If the pay of top earners were limited to twenty times the earnings of those at the bottom, then not only would the steadily growing gap between rich and poor be brought under control, but many of the problems currently undermining the economy, and fracturing society, would begin to be  addressed.


Thomas Palley proposal in the FT:

Link to British gas story:

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