Do corporations increase inequality?Wednesday 8 July 2015

International Labour Organisation,4th Regulating Decent Work Conference

ewan.mcgaughey@kcl.ac.uk

T Piketty, Capital in the Twenty-First Century (2014)

Inequality increases when the returns to capital exceed growth (r > g).

Theory of marginal utility does not define prices in practice, because it’s uncertain. In fact, prices are shaped by bargaining power. (212, 312, 331)

Markets are always ‘embodied in specific institutions’ & ‘hierarchical relationships’ (331).

So r > g is ‘historical fact, not a logical necessity’ (358)

Piketty: problems and solution

‘stratospheric pay of supermanagers’ (417) the ‘drift toward oligarchy’ and ‘age of

inheritance’ (512-4) ‘crisis of globalized patrimonial capitalism’

(318) ‘only dissuasive taxation of the sort applied in

the United States and Britain before 1980 can do the job.’ (473)

But do corporations increase inequality?

Piketty recognises importance of institutions, labour law, corp governance, and points to long term reform, but he (and other economists) have not been disposed to do a ‘detailed history’ which is ‘more complex’. (311 and 218)

We can all recognise tax is important, but if institutions drive inequality at the outset, tax is logically performing an unnecessary task: papering over institutional and market defects.

So, what role did the structure of corporations play in long run changes in inequality of income (+ wealth)?

Main argument

Corporations can become institutions that promote social justice.

If we change the structure of corporations, then maybe r < g or r = g ...

... but also, potentially inequality could decrease when r > g !

Corporations could be ‘... a vehicle for rationalized wealth distribution’ serving the ‘ideal of a just civilization.’ Berle (1965) 65 CLR 1, 17

Corporations as social institutions Following the majority view,

e.g. Berle & Means (1932), Strine (2006) etc: a corp is ‘instituted’ by investors of capital+labour.

Also follows the orthodox view that inequality damages the economy by (1) demotivating underpaid (2) demotivating overpaid (3) decreasing effective aggregate demand.

Three sets of ‘significantly distributive rules’

(1) Executive pay – who sets director pay: shareholders or directors or someone else?

(2) Employee and union rights – to what extent can workers vote for, or influence directors?

(3) Shareholder and beneficiary rights – what voice does the ultimate investor have against asset managers and banks?

Basic method is to compare historical change in those rules with changes in inequality: if correlations close + theory persuasive = causal.

(2) Employee and union rights

Company directors invariably have a basic power to manage a company: UK, Model Articles, para 3; Germany, AktG §76; US, DGCL §141(a).

This includes hiring and firing, and setting company wage policy: through contracts with employees.

But directors will be more influenced if employees have more bargaining power because they are in a union. They will also be influenced if employees can vote them out, in a codetermination system.

UK: single channel model

Germany: a second channel

US: single channel again

Four main rule categories

1. Government support for union organising (UK Ministry of Labour; US NWLB and NLRB).

2. Closed shop use, or recruitment policy (UK till 1980, US till 1947, but states vary).

3. (Anti-)Strike legislation (secondary action, balloting rules).

4. Codetermination (work councils and board representation) provides a base for union membership organising (Germany since 1918, and 1947) + minimises volatility of single channel.

Normative conclusion

Labour’s voice within the corporation is possibly the most important area of policy for controlling (pre-tax) inequality.

To reduce inequality, labour power within the corporation should be increased, and unions should collectively agree for all employees to be automatically enrolled in their union (with a right to opt out).