The gap that has appeared in the constitutional appraisal of trends in constituent wellbeing is that policy is failing to curb rising inequality both in terms of wealth and income. The need is self-evident in the sense that it is necessary to reduce disparity. The common outcome of the national account approach to macroeconomic analysis is that any such adjustment is a zero-sum game where if this process takes place some will lose to the extent that other gain. Under the RIO Real Incomes Objective the tactical approach is to achieve a "Positive systemic consistency" whereby all constituents benefit from rises in real incomes whereas the relative rates would be designed to raise the real incomes of lower income segments at a relatively faster rate to attain levels necessary for them to gain access to a minimum consumption of goods and services for survival.
ConstraintsConstraints are general conditions that create disincentives or difficulties in the achievement of objectives.
Schumpeter on profitJoseph Schumpeter made an important observation that the significance of profit is that it is the guarantee of future activities (through investment) and of future employment (through a rational choice of technologies). This has been cited by Peter Drucker in a paper published in Forbes in 1983 ( see Schumpeter and Keynes ).
If this became the exclusive purpose of profits then the Marxist analysis concerning excess production would have no basis in fact.
This rationale supports what I have called the profit paradox (see main article left) in that this aspect of Schumpeter's view is at odds with current concepts of the role of profit. The concept of profit is poorly defined and its role devisive in terms of the operational efficiency and transparency of the economy. In my opinion, limiting the role of profit to the aspects expressed by Schumpeter's observation is entirely valid and it opens a doorway to the resolution of this confused resource allocation issue that circulates around profit.
This is achieved by substituting the quest for profits by a quest for real incomes.
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In the case of wages, the impact of monetarism on real incomes arising from diversion of funds into asset inflation and inflationary leakage has been mentioned. However, in order to encourage companies to share any increased real incomes arising from currency valuation with employees faces constraints imposed by accountancy regulations and government revenue-seeking in the form of taxation.
Accountancy regulationsCorporate accounts come under a legal and regulatory framework that establishes how each outlay is classified, grouped and handled in accounting terms. Profits are calculated as the margin remaining after deducting operational costs from income. So variable input costs, wages and capital item depreciation is deducted from revenues to generate a gross profit, which is then subjected to taxation. A proportion of the resulting net profit can be distributed as dividends to shareholders. In this accountancy formula there is a tension between the wage bill and profits which means that decisions need to be taken with respect trading off wages and numbers employed against likely profits. This is part of the
"Profit paradox" which results in a frustration of the more strategic role for profits elaborated by Schumpeter (see box on right).
Government revenue-seekingGovernment revenue-seeking is most commonly represented in the form of levies and taxation. The accounting system arranges the state of a company's finance and cash flow to facilitate the calculation of tax. However in this system, taxation, like wages, is in tension with profits. So the higher the profit the higher will be the tax take. In reality the operation of a company creates a tension between taxation, wages and profits. In terms of incentives for management decision making, the non-payment of due tax incurs sanctions and shareholders can have a deciding influence over corporate executive positions to the extent of removing those who do no perform. The handling of wages, besides having to pay at least some minimum level of wages and uphold minimum working conditions related to health and safety places wages at the bottom of the pecking order in terms of action. This is part of the
"Fiscal paradox" which results in a frustration of more productive human resources allocation.
ShareholdersAs has been observed, the flow of funds into stock markets under QE, for example, has resulted in a speculative inflation in share values so that irrespective of the performance of a company, in terms of net profits and dividend payments, the wealth of shareholders is increasing as a direct result of monetary policy. In the past shares were purchased on the basis of the performance of share related to the relationship of the share price to dividends paid out (return) but monetary policy has destroyed this yield relationship to one of asset value, i.e. price only. Corporate executives have taken advantage of this situation by raising very low interest loans from banks and buying their own shares to create a "demand" in "bids to buy" which drives up share prices. The income of many executives has been transformed through the provision of share options which they are given if shares attain a specific price. Clearly the switching of share "performance" from being the dividend return on the share price to simply the level of the share price has created an easy means of executive and selected shareholders to gain exceptionally high transfers of wealth. Rather than rely on dividends, the strategic sale of shares can realize high returns on the original purchased value and the rest of a collection of share will often rise in value to cover the value of the portfolio lost as a result of the previous sale.
Under such circumstance the rise in income disparity is directly related to the impact of policy while the system prejudices wage earners whose options decline. During the last 30 years profits as a proportion of GDP have constantly risen and wages have stagnated.
AnalysisThe problem is income disparity is clearly related to monetary policy and the isolated and weak position of wages within the accountancy and taxation framework and the lack of policy incentives to raise wages, indeed policy and regulatory frameworks are the main constraint. Under such circumstances the most rapid way to solve this issue within existing law and regulations, is for people to collaborate to establish mutual organizations for the production of goods and services where they are the main shareholders. It has been calculated that mutual organizations in the form of building societies, for example, operate at a net 11-15% lower cost than public limited corporations in the same sector because there is no external shareholder overhead. This provides such organizations with a reasonable advantage. Mutuals would be able to operate under RIO-Real Incomes Objective policies more easily since the share of bonuses from price performance levies would only go to those who are wage earners in the mutual. A national policy to encourage the formation of mutuals or a mutual development bank for mutuals could help accelerate this process. The transformation of existing companies into mutuals could also accelerate the needed change so that the generalized impact of technological innovation, enhanced productivity and unit price declines would contribute to a rise in real incomes and a decline in disparity.
1 Hector McNeill is the Director of SEEL-Systems Engineering Economics Lab.
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