Capital

The Guardian recently reported on a report by the Institute for Public Policy Research (IPPR) which made the uncontentious statement that “The unequal ownership of capital in the economy is a powerful driver of inequality”. However, they then went on, not surprisingly, to propose ownership reform to: “give more people a share of capital, both as useable wealth and for its income returns; and to spread economic power and control in the economy”.

Is this not like using a sledge-hammer to crack a nut? I strongly suspect that if you ask employees, what they want is a pay rise rather than a share in the ownership. Sure, if they can sell that share then they are not averse to a quick handout. But the key is getting money into their bank account, rather than giving them power and control in the economy.

The report [rightly] extols the virtues of employee ownership trusts, cooperatives, and mutual. It also proposes a UK Sovereign Wealth Fund, which they call a Citizens Wealth Fund. Which is fine, though the UK government is not flush with the means to fund that idea just now. And has not had such funds for many decades.

Surely the key here is “income”. What if a more favourable tax regime existed for companies that gave a share of the profits to employees?

Shareholders might not like it, but remember that shareholders a generally not investors in a company. They buy shares off an existing shareholder, so the money they “invest” goes to the previous owner of those shares not to the company. And, returns on equity (ROE) have historically been high compared to other forms of saving. A McKinsey study found ROE to be 5.0% over 116 years. That is huge, and definitely leaves room for a more equitable sharing of profits whilst retaining the incentive to invest in productive assets.

Value in any business derives from; capital, labour and scarcity. Scarcity would be things like; mineral rights, technology, brand, intellectual property. It seems to me that the owners of capital are entitled to a return on their capital, but a return on the labour of their employees as well? In what way is it right that the owners of shares should have the right to claim 100% of the profits of a business?

Capitalism has definitely out-performed communism, but that was last century’s debate. In the 21st century the debate is about what form capitalism should take. The rules of capitalism are not fundamental laws of nature and should be open for review. In that, even if the IPPR over-reaches with suggestions on ownership, it is surely right to propose changes to the way that profit is shared.

 

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