Figure 34.1 American corporate amalgamation, 1895–2013 Source: Carter et al. (2006); Gaughan (2007, Figure 2.7, Tables 2.3, 2.5); Kuznets (n.d.); US Bureau of Economic Analysis (Table 1.1.5); Wilmer Cutler Pickering Hale & Dorr LLP (2014).
How the governance of large firms shapes prosperity and inequality
Jordan Brennan
In a system of corporate concentration the result of competition is some sort of planning; and planning does not reduce power but increases it. . . . The corporation is now, essentially, a non-statist political institution.
Adolf Berle 1955: 38, 44
Contemporary corporate governance literature tends to focus on, inter alia, intrafirm authority, board member composition, the incentive structure decision-makers face, and norms around compensation and accountability (Lütz et al. 2011). Some studies compare models of corporate governance across cultures to determine how differing structures affect business behavior and performance (Roe 1993), while others broaden the scope to include the interplay between corporate governance and political power (Gourevitch & Shinn 2005). For the most part, though, the discipline has evolved to focus on ‘governance’ in the most straightforward sense of the term applied to activities within the firm.
In some ways the term ‘corporate governance’ is an uneasy assemblage. The word ‘corporate’ conjures up modern notions of the economy, while ‘governance’ has connotations that are bound up with the polity. Contemporary presuppositions suggest that, in liberal capitalist settings at least, the economy is the domain of freedom insofar as order is generated through voluntary association. The polity, by contrast, is the domain of obedience insofar as order is generated through coercive laws.1 The term ‘governance’ means “to rule over by right of authority” (Harper 2016). Derived from the thirteenth-century Old French governer, which meant ‘to steer,’ ‘rule,’ ‘command,’ and ‘direct,’ the verb ‘to govern’ is unambiguously bound up with notions of authority, obedience, and power. It is partly because mainstream economists tend to ignore or dismiss institutional power, even in corporate governance literature, that it has been left to heterodox economists to integrate power into the analysis of modern capitalism.
The innovative studies of the original institutional economists and Post Keynesians differ from contemporary corporate governance scholarship in two crucial respects: first, they explore corporate authority as it manifests itself both inside and outside the firm; second, their analysis recognizes that the modern corporation fundamentally altered the power dynamic in American political, economic, and social life. From the standpoint of the original institutional economics, ‘corporate governance’ is inextricably bound up with corporate power.
This chapter reviews some of the most profound heterodox thinking on corporate governance, including insights from original institutional economics, neo-Marxism, and Post Keynesianism. Rather than being bound by contemporary suppositions, ‘corporate governance’ will be viewed in an expansive manner and will include aspects as diverse as industrial production, market structure, price formation, business investment, and the distribution of income. The first section reviews some of the assumptions and concepts deployed by twentieth century heterodox economists—notably the original institutional economics of Thorstein Veblen and J.K. Galbraith, the neo-Marxism of Michał Kalecki, and the Post Keynesianism of Adolf Berle and Gardiner Means—to understand the power underpinnings of the modern corporation. The second and third sections utilize the ideas of the aforementioned thinkers to empirically explore the interplay between large firms and labor unions, on the one hand, and Gross Domestic Product (GDP) growth and income inequality, on the other. The fourth section closes by reflecting on how twenty-first century capitalism might be progressively transformed. The core argument is that the modern corporation may be validly understood as a power institution and that the amassment of this form of power has simultaneously depressed GDP growth and exacerbated income inequality. Meaningful attempts to transform neoliberal capitalism must find ways to constrain or redirect corporate power.
Berle (1955: 1) posits that “no adequate study of twentieth-century capitalism exists” for the singular reason that mainstream economic thinking has failed to come to a satisfactory account of the modern corporation. Instead of economic activity being coordinated through the push and pull of market forces, and instead of business decisions unfolding under conditions of fundamental uncertainty, Berle claims that large firms plan supply and demand, shield themselves from market discipline through internal financing, make decisions under fairly predictable conditions, and administer prices. The modern corporation, Berle (1955: 44) concludes, should be treated as a “non-statist political institution.” Berle’s position is in large measure consistent with the original institutional economics founded by Veblen ([1904] 2005, [1923] 2004) and popularized by Galbraith (1952), which offered the most stinging critique of capitalism since Karl Marx.
As Veblen (1908a, 1908b) observes, neoclassical doctrine has failed to keep pace with changes in the institutional and behavioral realities of American capitalism, a failure most clearly manifest in the theory of capital. For neoclassical economists, capital is produced means of production or artifacts (output) used in the production process as inputs (as later reiterated by Samuelson & Nordhaus 2010: 352). Veblen argues that this definition of capital is untenable for two reasons. First, the assertion that capital is a material-productive entity breaks down in the face of ‘capital mobility.’ Veblen’s acute vision notes that when capital ‘moves’ from one location in the industrial geography to another, this does not necessarily entail the movement of physical objects. The continuity of capital is not predicated on a transfer of stuff, but is derived from the maintenance of ownership—something that is not a physical fact. The continuity of capital is of an immaterial character, for it centers on legal rights and control ([1908] 2003: 196–197). The second argument centers on the recognition that ‘capital goods,’ understood as physically abiding productive entities, cannot be aggregated because they lack a homogeneous quality. Capital as a monetary magnitude may be homogeneous, but physical equipment is heterogeneous. This fact makes the aggregation of capital in neoclassical production functions impossible, thus undermining the marginal productivity theory of distribution.
One of Veblen’s core contentions is that private ownership of industrial objects and land effectively enables proprietors to control the community’s technological inheritance through the limitation of access. In Veblen’s ([1923] 2004: 65–66) words:
any person who has a legal right to withhold any part of the necessary industrial apparatus or materials from current use will be in a position to impose terms and exact obedience, on pain of rendering the community’s joint stock of technology inoperative to that extent. Ownership of industrial equipment and natural resources confers such a right legally to enforce unemployment, and so to make the community’s workmanship useless to that extent. This is the Natural Right of Investment.
Every definition of capital, be it neoclassical, Marxian, or institutionalist, recognizes the centrality of private ownership. The word ‘private’ is derived from the Latin privare, which means “to deprive,” and privatus, which means “withdrawn from public life” (Harper 2016). ‘Owner-ship,’ to own, is derived from late Middle English ownen, which signifies “power,” “authority,” “dominion,” or “to be master of.” The popular understanding conceives of private ownership as a useful institution because it enables those who own, but Nitzan & Bichler (2009: 228) argue that its overriding purpose is to disable those who do not own. Institutionalized exclusion, they assert, is always a matter of organized power.
Without private ownership, capital could not exist. And without the modern state, private ownership could cease to exist. And the modern state, Weber ([1919] 1946: 82–83) argues, is a power institution whose authority rests on its monopoly on the legitimate use of violence. So Veblen is analytically and etymologically correct, in that the reality of capital makes no sense apart from private ownership and private ownership has no force or effect apart from the state and its monopoly on the legitimate use of violence. Power is ‘in’ the state and the state is ‘in’ capital. In sharp contrast to the neoclassical school of thought, Veblen ([1908] 2003: 200) contends:
the substantial core of all capital is immaterial wealth . . . if such a view were accepted . . . the ‘natural’ distribution of incomes between capital and labor would ‘go up in the air’. . . . The returns actually accruing to [the capitalist] . . . would be a measure of the differential advantage held by him by virtue of his having become legally seized of the material contrivances by which the technological achievements of the community are put into effect.
In this passage Veblen complicates, if not severs, the link between production and distribution. Using Veblen’s ([1904] 2005, [1923] 2004) conceptual scheme, the modern corporation may be validly understood as a business institution, not an industrial unit. ‘Business’ is distinguishable from ‘industry’ in the same way that the legal, organizational, and institutional structure of the economy is distinct from its material, productive, and technological sphere. Business centers on pecuniary distribution and is institutionally embodied in the modern corporation. Industry centers on production and is most clearly manifest in the ‘machine process.’ From this perspective, the modern corporation governs industrial production for the purposes of pecuniary distribution. And contrary to the view that the distribution of income is a consequence of the innate productivity of the various ‘factors of production,’ using Veblen’s ideas we may validly see the distribution of income as partially manifesting the (institutional) power of the firms’ owners.
While Veblen supplies some of the language necessary to integrate power into economic analysis, the causal channels that link institutional structure, market power, and price formation remain unclear in his account. On the subject of price formation, Means (1935) supplies evidence indicating the existence of bifurcated price behavior in the United States. In concentrated markets with a few large firms, ‘administered prices’ prevail during the period of his study. An administered price is set for a period of time across a number of transactions. This rigidity suggests a degree of pricing discretion on the part of the seller. In less concentrated markets, classical competition and price formation are on display. Classical prices are flexible and change frequently, implying that the seller has little or no pricing discretion.2 Means (1972) re-tests his hypothesis four decades later and finds that it has not been refuted.3
While Means establishes points of contact between market structure and non-classical price formation, it remains unclear how to rigorously conceive and empirically measure market power. It also remains unclear what the macro-distributive implications of oligopolistic market structures are. The Neo-Marxian economist, Michał Kalecki (1938, 1943), crystallizes the relationship between market power and distribution through his conception of the ‘degree of monopoly.’4 Kalecki argues that large firms in semi-monopolistic market structures set prices by marking up their average prime costs (materials and labor), with a higher mark-up signaling a greater degree of monopoly. Kalecki (1943: 51) imagines the strength of trade unions acting as a check on the market power of large firms insofar as a greater degree of monopoly “strengthens the bargaining position of trade unions in their demands for wage increases since higher wages are then compatible with ‘reasonable profits’ at the existing price levels.” For Kalecki, the degree of monopoly is positively associated with corporate concentration and negatively associated with the national wage bill.
Galbraith (1952) agrees with the view that large firms no longer accept prices that are set in perfectly competitive markets and are therefore not socially optimizing, and posits that alternative institutional arrangements are needed to make modern capitalism more functional and fair. Because businesses combine with a view to administering profit-friendly prices, wage earners ought to combine in unions with a view to elevating the conditions and compensation of work. Galbraith utilizes the term ‘countervailing power’ to denote an institutional setting in which the power of large firms is offset by the power of labor unions and a welfare state. In the general evolution of policy, politics, and culture, labor unions act as a check on the commodified power of large firms, and this counterbalance is felt in ways as diverse as social policy, politics, and culture, not just wages.
This synopsis has furnished some examples of how the language of corporate governance may be infused with the language of institutional power. The following two sections apply these concepts to the empirical domain in order to determine their explanatory value.
The following two sections explore the commodified power of large firms, the countervailing power of organized labor, and the effects of these counteracting forces on GDP growth and income inequality. The empirical analysis is confined to the United States of America (USA).5 However, since the USA is the most economically significant country of the past century, standing at the center of the global capitalist system, the conclusions may well extend beyond its borders.
A key growth pathway for large firms is through mergers and acquisitions (Nitzan & Bichler 2009). The narrative around the development of mergers and acquisitions (M&A) over the past century is one of a series of ‘waves,’ with each wave leading to different organizational forms and market structures (McCarthy 2013; Jo & Henry 2015). At a minimum, explanations for M&A usually try to account for two things: merger motives (causes) and post-merger outcomes (effects). Growth and efficiency are two of the most commonly cited motivations for M&A activity (Gaughan 2007). But from a heterodox perspective, larger relative firm size and the attendant market power that greater size bestows is the real amalgamation prize. One way of measuring M&A is to contrast it with investment in fixed assets. A ‘buy-to-build’ indicator captures the basic calculation open to proprietors, which is to purchase existing industrial capacity on the market for corporate control or pay to have it built anew. The evolution of M&A activity in the USA is captured in Figure 34.1.
Three things stand out. First, the series clearly demonstrates the wave-like pattern of M&A over the past century. The second feature to note is the increasing importance of M&A relative to investment in fixed assets, especially in recent decades. Between 1895 and 1990, for every dollar spent on building new capacity, US businesses spent an average of just 18 cents on M&A. In the quarter-century since the so-called ‘free trade’ era began, average M&A increased to 68 percent of fixed asset investment—a fourfold increase over the previous century. The third thing to notice is the sustained nature of M&A activity in recent decades. Of the six peak merger wave values since 1895, three have come in the past 15 years. Even though 1999 represents the historic high, the period since 1990 has been unprecedented in the corporate history of the USA.6
Figure 34.1 American corporate amalgamation, 1895–2013 Source: Carter et al. (2006); Gaughan (2007, Figure 2.7, Tables 2.3, 2.5); Kuznets (n.d.); US Bureau of Economic Analysis (Table 1.1.5); Wilmer Cutler Pickering Hale & Dorr LLP (2014).
These merger waves have restructured the US corporate sector in a growth-decelerating, inequality-exacerbating manner, and power appears to be an important causal element. By capturing the overall position of large firms in the corporate universe, aggregate concentration is one way of measuring corporate power. Figure 34.2 contrasts the buy-to-build indicator with aggregate asset concentration, the latter measured as the total assets of the top 100 US-listed firms as a percentage of total corporate assets in the USA. The two series are tightly and positively correlated over six decades, which implies that amalgamation fuels asset concentration.7 In tandem with the ‘conglomerate’ merger wave, asset concentration increased by one-half between 1950 and 1970, having risen from 8 to 12 percent. With the subsiding of merger activity between 1970 and 1990, asset concentration fell by one-quarter, from 12 to 9 percent. Then, with the onset of the most sustained period of merger activity in US corporate history, asset concentration more than doubled, having risen from 9 percent in 1990 to 21 percent in 2006. There are roughly six million registered corporations in the USA, but the 100 largest account for roughly one-fifth of total assets. This is a stunning degree of concentration and it represents a post-war high.
Figure 34.2 Amalgamation and concentration, 1940–2013 Note: Top 100 firms are ranked annually by equity market capitalization. Source: Compustat database through Wharton Research Data Services; US Bureau of Economic Analysis (Table 1.1.5); US Federal Reserve (data codes: Z1/Z1/FL102000005.A and Z1/Z1/FL792000095.A).
If, as Veblen (1908a, b) posits, capital is a claim on earnings—legal title to an income stream— then the concentration of corporate assets should be associated with the redistribution of income. Figure 34.3 contrasts aggregate asset concentration with the income share of the top 100 US-listed firms, the latter measured as the percent of net income in GDP (outlaying data points, 1992 and 2002, were removed). The two series are tightly correlated over six decades. The income share of the top 100 firms is stable over the early post-war decades, having averaged 1.9 percent of GDP between 1950 and 1990. The elevated merger activity of recent decades and the associated concentration of assets have coincided with a doubling of the income share of the largest firms, peaking at 3.9 percent of GDP in 2013.
For institutional power to be a meaningful category in heterodox economics, it must include control over—redistribution of—income. The facts in Figures 34.2 and 34.3 are significant because they suggest that the structure of the corporate sector, which is fueled by amalgamation, leads to both asset and income concentration. Insofar as the distribution of income reflects market structure, ‘power’ becomes a meaningful heuristic.
Figure 34.3 Top 100 firms: concentration and income share, 1950–2013 Note: Top 100 firms are ranked annually by equity market capitalization. Source: Compustat database through Wharton Research Data Services; US Bureau of Economic Analysis (Table 1.1.5); US Federal Reserve (data codes: Z1/Z1/FL102000005.A and Z1/Z1/FL792000095.A).
How do these processes affect economic growth? Since Adam Smith’s Wealth of Nations ([1776] 1994), economists have told a story of development that puts the capitalist at the center of economic progress. By converting savings into investment and by submitting to the discipline of intense price and product competition, capitalists help set the economic wheels in motion and ensure the efficient use of socio-economic resources. Part of this story is investment in fixed assets (industrial capacity), which has long been understood as a key determinant of GDP growth (De Long & Summers 1992; Jorgenson 1997, 2007). Contrasting the rate of growth of business investment in non-residential structures and equipment with the rate of growth of GDP, both adjusted for inflation and smoothed as ten-year moving averages (to capture the secular trend), yields a correlation coefficient of 0.80 from 1960 to 2013—a sufficiently strong relationship to take up nearly all of the explanatory space. In the early decades of the post-war era, the USA and other Organization for Economic Cooperation and Development (OECD) countries experienced rapid growth and in the decades since 1980 there has been a shift to comparatively sluggish growth. The inflation- and population-adjusted rate of US GDP growth averaged 2.8 percent between 1940 and 1980 and was more than halved between 1980 and 2013, falling to just 1.3 percent.
Figure 34.4 Top 100 firms: investment decomposition, 1950–2013 Note: Top 100 firms are ranked annually by equity market capitalization. Source: Compustat database through Wharton Research Data Services; US Federal Reserve (data codes: Z1/Z1/FL102000005.A and Z1/Z1/FL792000095.A).
Figure 34.4 decomposes investment among the top 100 US-listed firms over the post-war era by plotting investment in fixed assets and stock repurchase (both as a percentage of revenue), a buy-to-build indicator for the top 100 firms, and a metric capturing notional total investment, the latter measured as fixed asset investment plus acquisitions and stock repurchase all as a percent of revenue. Notional total investment indicates the different ways that firms can deploy available assets for the sake of growth. In the two decades between 1950 and 1970, fixed asset investment trended upward, having risen from 6 to 13 percent of revenue, only to trend downward in the decades after 1970, having fallen to a post-war low of 5 percent over the past decade. This suggests that large firms may be leading the stagnation tendencies of recent times through fixed asset under-investment.
Stock repurchase was virtually non-existent in the 1970s, but has grown in significance in each subsequent decade, having risen from less than 1 percent of revenue in the 1970s to 7 percent by 2007.8 This means for the first time in US corporate history, large firms spent more money repurchasing their own stock than on the expansion of their industrial base. Large firms have also been on a buying spree in recent decades, plowing enormous resources into M&A. The national total investment series clearly shows that if large firms had spent all their acquisition and stock repurchase resources on fixed asset investment, the downward trend in fixed asset investment would have actually been an investment boom.
To summarize, large firms are spending comparatively less on the expansion of industrial capacity, which puts downward pressure on growth, and comparatively more on acquiring other firms and on inflating their share price via stock repurchase. Corporate amalgamation fuels asset concentration and asset concentration redistributes income. Elsewhere I have documented the strong, linear, and persistent relationship between corporate concentration and the earnings margins, profit, and cash flow of large Canadian-based firms (see Brennan 2012). Large firms merge not only to absorb their rival’s income, but also to reduce competitive pressure, which thickens earnings margins. So the causal pathway runs from amalgamation through concentration toward elevated market power.
The facts portrayed in the national total investment series in Figure 34.4 demonstrate that corporate America does not suffer from a ‘shortage of investment’ in the general sense. Rather resource redirection within large firms, with comparatively less going towards growth-enhancing industrial expansion and comparatively more going towards asset-concentrating amalgamation and share price-inflating stock repurchase, is a key culprit in the under-investment and stagnant growth of the neoliberal era. There has been an investment boom in the USA, albeit an invisible one, because it has been hidden in amalgamation and stock option-related activities. The former upwardly redistributes corporate ownership claims between proprietors and the latter inflates share price. From the standpoint of the average US worker, this massive resource redirection has resulted in declining job opportunities and soaring inequality.
But why the frenzy for stock repurchase? Central to Berle & Means’ ([1932] 1967) ‘separation thesis’ is the positing of a three-pronged process: an increasing concentration of corporate assets, coupled with an increasing dispersion of stock ownership, resulting in a separation of ownership from control. Putting aside the validity of the claim that control has actually detached from ownership, the idea exerts considerable influence on economic theorists and policy makers. If the large corporation is no longer under proprietary control, having fallen under managerial control, the incentive structure no longer compels those exercising corporate authority to steer the firm in a profit-maximizing direction, thus threatening the (alleged, according to neoclassical doctrine) equilibrium-seeking nature of laissez-faire capitalism. Managers might instead steer the firm in a direction that enriches themselves while sacrificing the interests of stockholders, who are too numerous and dispersed to challenge managerial authority.
Figure 34.5 Stock price inflation and American income inequality, 1960–2013 Note: Top 100 firms are ranked annually by equity market capitalization. Source: Compustat database through Wharton Research Data Services; US Federal Reserve (data codes: Z1/Z1/FL102000005.A and Z1/Z1/FL792000095.A); Piketty & Saez (2007); World Wealth and Income database.
The rise of stock options in the 1980s and their explosion in the 1990s may be thought of as one institutional response to the alleged separation of ownership from control (for historical overviews, see Frydman & Jenter 2010; Murphy 2012). By compensating managers with stock, their interests and attendant behavior presumably realign with those of stockholders, thus transcending the separation thesis and ensuring firms behave in a profit-maximizing manner (again, according to neoclassical assumptions). Figure 34.5 plots the value of stock repurchase (relative to revenue) among the top 100 US-listed firms with the income share of the top 0.1 percentile income group in the USA (including capital gains). The two series are almost mirror images of each other. This suggests that the redirection of resources away from fixed asset investment toward stock repurchase has not only slowed growth; it has exacerbated inequality. There is clearly more to income inequality than stock options, but insofar as top income earners drive inequality trends, and insofar as corporate executives make up a substantial proportion of the top income group, the evolution of executive compensation plays a key role in determining the overall level of income inequality.
Income within the firm is shared between workers (wages and salaries) and capitalists (profit). Kalecki (1938) argues that the degree of monopoly has a bearing on the relative share of wages, and in so doing, shapes the distribution of income between these two groups. At a national level, the total wage bill and profit share capture these proportions. When we divide aggregate corporate profit by the national wage bill for the bottom 99 percent of the workforce, excluding the richest one percent income group to approximate the class-based distribution of income, we arrive at a metric which approximates the distributive struggle between capitalists and workers over profit and wages. When this metric rises, capitalists redistribute national income from workers; when it falls, workers redistribute income from capitalists. Figure 34.6 plots the mark-up of the top 100 firms—a proxy for Kalecki’s degree of monopoly and measured as the percentage of net profit in revenue—and the capital-labor redistribution metric.
Figure 34.6 The ‘degree of monopoly’ and capital-labor redistribution, 1940–2013 Source: Compustat database through Wharton Research Data Services; Piketty & Saez (2007); US Bureau of Economic Analysis; US Bureau of Labor Statistics; World Wealth and Income database.
The two series are tightly and positively intertwined over six decades. Between the 1940s and 1980s, the capital-labor redistribution metric trended downward, which signals that workers tended to win the distributive struggle in that period. The 1980s serves as an inflection point, with capitalists tending to win the distributive struggle after 1990. If the mark-up is a proxy for the market power of large firms, and if the capital-labor redistribution metric captures the national struggle between proprietors and workers, it is highly significant that the former moves in tandem with the latter because it suggests that Kalecki’s thinking on this matter is empirically valid—that is, corporate power is one determinant of the distribution of income in the USA.
If amalgamation-fueled asset concentration regressively redistributes income, are there centrifugal forces that progressively redistribute income? We have already seen that, in the USA at least, the institutional-organizational structure of the corporate sector (measured through aggregate concentration) is closely shadowed by the market power of large firms (profit share of national income and the mark-up). Is there a similar set of relationships for organized labor? Galbraith (1952) would have us believe that labor unions act as a ‘countervailing power’ to oligopolistic corporations.
This view stands in opposition to neoclassical economics, which views the market price of labor power like other commodities: in the short-run it is determined by supply and demand and in the long-run the ‘absolute’ wage rate and the national wage bill reflect the proportional productive contribution of labor. For neoclassical economists, organized labor may be able to elevate labor compensation to ‘artificially’ high levels, but it does so at the expense of non-unionized labor and/or employment. In other words, unions can only redistribute income within a given national wage bill; they are unable to redistribute national income as such (Samuelson & Nord-haus 2010: 321). If this is true then the organizational capacity of labor institutions should have no discernable effect on the distribution of income. The facts tell a different story.
Figure 34.7 Organized American labor strength and income equality, 1880–2013 Source: Hirsch & Macpherson (2003); Mayer (2004); Carter et al. (2006); Piketty & Saez (2007); US Bureau of Labor Statistics; World Wealth and Income database.
Figure 34.7 contrasts union density—a proxy for the institutional power of organized labor— with the Pareto-Lorenz coefficient, a metric which captures the concentration of income among the rich (the higher the coefficient, the lower the concentration). The two series are tightly intertwined over the past century. Density increased modestly and in a non-linear fashion between 1880 and 1930. Then, with the advent of New Deal legislation and the National Labor Relations (‘Wagner’) Act, density increased fourfold, having risen from 7 percent in 1933 to a historic high of 29 percent in 1954, before falling to a post-war low of 11 percent by 2013. The concentration of income among the rich was significantly eroded in the decades that US labor built their unions, while in the decades that trade union power diminished, income re-concentrated among the rich.
Let us take stock. The centripetal forces of corporate amalgamation lead to the centralization of corporate ownership, manifested in asset concentration. Increased concentration reduces competitive pressure, increases the degree of monopoly, and enlarges the income share of large firms. The diversion of corporate resources away from growth-expanding industrial projects puts downward pressure on growth and leaves even more corporate income in the hands of large firms. With the rise of stock-based forms of compensation, corporate executives are given an incentive to divert corporate income into share price-inflating stock repurchase, which increases executive compensation and exacerbates inequality. It is in this way that the creation of a top-heavy corporate distribution puts downward pressure on growth and elevates inequality. On the other side of the ledger, the trade union power manifest in union density has progressively redistributed income, such that the weakened power of unions in the USA since the 1970s has contributed to heightened income inequality.
In comparison with the Keynesian state-led model of capitalism that predominated between 1935 and 1980, the neoliberal corporate-led model in the USA (and elsewhere) has, since 1980, been notable for its slower growth and soaring inequality. It appears that a top-heavy market structure in conjunction with declining unionization has played a causal role in this double-sided phenomenon. A suite of policies are required to unleash growth and reduce income inequality, the combined effect of which would be to democratize, and thus transform, twenty-first century capitalism: state commitment to full employment, an amplified voice for labor, and capital controls.
Chronic unemployment (and under-employment) is one of the most socially damaging features of neoliberal capitalism. The state commitment to full employment would dramatically alter the labor market in a way that empowers workers, unleashes growth, and reduces income inequality. Recall Veblen’s ([1923] 2004) claim about the ‘natural right of investment’: private ownership of industrial equipment grants proprietors the legal right to enforce unemployment, which is an act of institutionalized exclusion that restricts production below full socio-economic potential and alters the distribution of income in a proprietary-favoring manner. Now consider the reconfigured role of the state in the USA during World War II, the prime historic example of the state commitment to full employment. Until 1939 employment (‘industry’) was firmly under the control of private proprietors (‘business’). World War II partially changed that insofar as the federal government oversaw the move towards a centrally planned economy. Business considerations, although not totally eliminated, were greatly diminished vis-à-vis industrial considerations and capitalists lost (some) control over employment and pricing.
The consequences for the power elite in the USA were devastating, as evidenced by a halving of the income share going to the richest 1 percent from 1939 to 1945. In terms of price formation, wage ceilings were imposed, producer and consumer prices were frozen, exchange rates were controlled, and the rate of profit was capped. As a result, unemployment shrank from 12 percent to less than 2 percent and income inequality fell by more than a third. GDP (adjusted for inflation and population) grew by 10 percent annually, on average, rising from $94 billion in 1939 to $228 billion in 1945.9 Without exception the 1940s represents the most rapid growth period in US history and the closest it ever came to full employment.
The capitalist power manifest in unemployment was severely curtailed through the use of state power and the consequences included rapid GDP growth and a radical redistribution of income. In the contemporary milieu, pathways to full employment could include policy tools as conventional as infrastructure investment and growth-friendly monetary policy (Stiglitz 2015: 73–77) or as unconventional as the creation of a national development bank and public ownership in strategic industries like energy or advanced manufacturing.
If the state commitment to full employment would help solve the problem of stagnation, a stronger voice for labor would help ensure the gains from growth are widely distributed. But labor unions need a nurturing policy environment to grow. The Wagner Act (1935) enshrined the right to bargain collectively and compelled private sector employers to recognize the representatives of unionized workers. The National War Labor Board’s ‘maintenance of membership’ rule (1942) automatically included new hires in the union so long as they had been recognized by the employer. It was partially because of these (and other) policies that unionization more than tripled between 1935 and 1945, rising from 8 to 25 percent. Labor unions in tandem with the exercise of the strike weapon have a demonstratively and progressively redistributive property. Anti-union legislation like the Taft-Hartley Act in 1947 and similar contemporary manifestations have aided in the demobilization of organized labor in the post-war era, with regressively redistributive consequences.
Another pathway towards the rebalancing of power between labor and capital is to have worker representation on corporate boards. This model of corporate governance—the stakeholder as opposed to shareholder model—is common in Germany (Clarke & Bostock 1997). Besides tending to flatten the compensation scheme within firms, this model reduces the proclivity of management to engage in high-risk activity that may be lucrative for shareholders in the short-run, but which threaten employment and the long-term viability of the organization. Volkswagen (VW) has worker representation on its board of directors and is 20 percent owned by the state government of Lower Saxony (the ‘VW law’)—an additional layer of stakeholder accountability. And while North American auto makers have been closing assembly plants for decades, because VW has labor and government representation on its board it has managed to block hostile takeovers and has not allowed a single VW assembly plant to close in Germany since 1945, despite the fact that German manufacturing workers are paid roughly one-quarter more than their North American counterparts.10
Another democratizing policy pertaining to labor would see the establishment of sector development councils in strategic areas, comprised of representatives from unions, employer associations, government, colleges, universities, and trade schools. These multi-stakeholder councils could undertake simple initiatives such as long-term skills training programs (to better manage innovation and emerging labor market needs) and more radical initiatives such as the setting of sectoral standards, including minimum standards pertaining to the conditions and compensation of work. Historically, unions provided workers with some degree of control over the labor process in their own workplaces. Sector development councils would provide workers with some degree of control over the evolution of entire industries.
A third transformation would constrain the size and market power of large firms through aggressive antitrust legislation. In the 40 years between 1940 and 1980, M&A activity constituted just 20 percent of investment in fixed assets. In tandem with capital controls, this period was remarkable for its elevated levels of GDP growth and reduced income inequality. In the decades since 1980, large firms have ploughed enormous resources into acquiring competitors. The resulting semi-monopolistic market structures and attendant market power concentrates income among large firms. By restricting the oligopolistic drive of M&A, the intention would be to unleash the centrifugal forces of fixed asset investment, which are associated with higher levels of GDP growth, job creation, and an inclusive prosperity.
Early merger waves in the USA tended to be followed by antitrust legislation. US legislators were fearful that centralized corporate authority would harm the public good. The drive for monopoly associated with the first merger wave, for example, led to the Sherman Antitrust Act in 1890, which was instituted to combat the power of large firms. A generation later, the US Congress passed the Clayton Act (in 1914), which also made it more difficult to merge for monopoly (Gaughan 2007: 33–38). Anti-monopolistic policies designed for the twenty-first century could help diffuse the increasingly centralized corporate power manifest in large firms, which would help accelerate growth and diminish inequality.
The state commitment to full employment, a rebuilding of the trade union movement, and increased restrictions on business consolidation are three transformative policies that would democratize neoliberal capitalism, widen economic opportunity, and create an inclusive prosperity.
The author would like to thank Joseph A. Francis for sharing his data files on the Historical Statistics of the United States and for forwarding a copy of Simon Kuznets’ estimates on US business investment. Jim Stanford’s feedback helped refine the argument and the Handbook’s editors deserve thanks for their manuscript-condensing recommendations.
1 Nitzan & Bichler (2009) stress the polity-economy dualism in their writing. They argue that the separation of the two domains creates numerous theoretical and empirical difficulties for the study of modern capitalism.
2 In today’s globalized marketplace, where large firms in concentrated markets still face competitive pressure (and can even fail, as the North American financial and auto bailouts of 2008–2009 illustrate), the manifestation of administered prices may be more complicated than Means’ original findings suggest without undermining his basic claim that large firms are subject to differences in business behavior.
3 See Downward & Lee (1999) for additional confirmation.
4 Even though the concept of the degree of monopoly was borrowed from Abba Lerner, Kalecki’s modification of the concept allows him to explain the distribution of income (partially) through the market power exercised by oligopolistic corporations. See Rugitsky (2013) for an illuminating discussion.
5 Given space constraints, the description and accompanying analysis will be brief and the conclusions reached will be suggestive rather than conclusive. A more detailed explanation of the data, including sources and estimation techniques, are located in an appendix available on the author’s website, http://www.jordanbrennan.org/#!publications/cee5.
6 Similar results are found for Canada in Brennan (2014, 2015).
7 All correlation coefficients are Pearsonian and are significant at 1 percent (two-tailed).
8 As Jo & Henry (2015) explain, it was only in 1982 with the adoption of Rule 10b-18 that the SEC formally permitted share buybacks (up to 25 percent of the stock’s average daily trading volume).
9 GDP data from Bureau of Economic Analysis, Table 1.1.5., income inequality data from the World Wealth and Income Database and unemployment rate from Carter et al. (2006, 470–477), Table Ba.
10 Bureau of Labor Statistics’ International Labor Comparisons, available at: http://www.bls.gov/fls/country.htm.
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