Forum Post: Income Inequality and Worker Self Directed Enterprises

By Richard Wolff

In the United States as in many other capitalist countries, recent decades have seen a growing distance between higher and lower personal incomes. Income inequality and poverty levels have risen. Occasionally defended as necessary, natural, and even desirable by some, most citizens have expressed more or less dismay and opposition to ever-greater personal income inequality. They see that inequality as helping to cause the severe global crisis since 2007. They believe that it strains the implicit social compacts holding contemporary capitalist societies together. Finally, by the association of income inequality with capitalism as a system, rising inequality provokes questions about and criticisms of capitalism in general.

As has happened repeatedly in US history, criticisms of inequality evolve gradually into broad popular recognition of the problem. Poverty and economic inequality get rediscovered as major and urgent social issues. That rediscovery paves the way for proposals of major, new government programs meant to end poverty or rescue or revive the “middle class.” Such programs recur across the history of capitalism everywhere, but they do not often succeed in significantly reversing the inequality. And when occasionally they do, the effect proves temporary as underlying tendencies rooted in the capitalist system resurface to resume growing inequality.

For example, during the Great Depression of the 1930s, a powerful social movement from below suddenly and sharply reduced personal income inequality that had grown across previous years. The alliance of the Congress of Industrial Organizations (CIO) and socialist and communist parties presented a powerful demand to the then president, Franklin D. Roosevelt (FDR). The alliance demanded the opposite of austerity, namely massive new federal outlays to offset the mass suffering from economic depression. FDR complied by establishing the Social Security System, the unemployment compensation system, and the federal jobs program from 1934 to 1941. Washington paid for those outlays by very high taxes on the highest personal incomes as well as upon corporate profits – as well as borrowing from corporations and the rich. One result was a reversal of income inequality that proved temporary. After the war ended in 1945, a renewed capitalism resumed its tendency toward greater income inequality to the present.

A key influence on the distribution of personal income in modern capitalist societies is how corporate boards of directors distribute enterprises’ surplus or net revenues (sales receipts less direct production costs). Corporate boards of directors decide the salaries paid to managers and executives, and they decide whether to pay dividends to shareholders and what size dividends to pay. They also decide how much to invest in enterprise growth as well as other outlays of net revenues that impact share prices and thus shape the role of capital gains in the distribution of personal income. Since the 1970s, as real wages for most US workers stagnated, while labor productivity kept rising, corporations consequently realized rapidly rising surpluses or net revenues.

Major shareholders and their boards of directors used their positions within the capitalist organization of corporations to distribute large portions of their enterprises’ surpluses as follows since the 1970s: (1) dividends paid to shareholders, (2) increasingly large “remuneration packages” paid to the upper layers of corporate managements, and (3) outlays for share buybacks, investments, and other uses that generated capital gains for shareholders. These three types of distributions from corporate surpluses represented income mostly for the top 5 per cent of individuals inside most capitalist countries.

The surplus-distribution decisions made by these corporate leaders were thus major determinants of the rising inequality of personal income in the US and elsewhere across recent decades. In other words, the capitalist structure of enterprises assigns to specific groups (major shareholders and boards of directors) the decisive power to determine dividends, managerial salaries, bonuses, and incentive payments, investments, and so on. If the resulting distribution of personal income displays extreme and/or unwanted inequality, one logical response would be to question the capitalist structure of enterprises and to examine how alternative enterprise structures might be at least less conducive to extreme personal income inequality.

However, that logical path was not followed for most of the post-1945 period. Because of the Cold War, anti-communist hysteria, and their combined legacies, it was not possible to question, criticize, challenge or debate capitalism in relation to alternative economic systems. To do so brought intense and immediate criticism that one was uneducated, stupid, and/or disloyal. This meant that for those who were critical of income inequality, the range of solutions they articulated or explored systematically excluded system change. It was simply not possible to examine how, for example, a transition from capitalist enterprises to WSDEs might impact personal income distributions.

However, precisely such a transition could make the personal distribution of income less unequal. If the workers in an enterprise together, collectively and democratically, decided on wages and salaries of all workers it is highly unlikely that they would replicate the capitalist pattern. They would not likely give a few top executives many millions while most workers lack the income to pay for their children’s post-secondary educations. We know from the actual practice of WSDEs in the world today that their pay structures are far less unequal than those normally found in capitalist enterprises. The workers of the huge Mondragon Cooperative Corporation in northern Spain have long worked with a pay-scale (that their votes established) that limits the highest-paid among them to no more than 6.5 times the lowest-paid. That is a small fraction of the typical distance between the payments to the CEO of a large multinational corporation and its lowest-paid employee.

Even if members of a WSDE were to decide to permit share-holding (in exchange for capital investments from non-members), it is unlikely that they would distribute surpluses to shareholders in the manner of capitalism. After all, in WSDE’s workers function as the board of directors rather than persons elected by the share-holders. The parallel argument applies to distributions of enterprise surpluses in ways generating gains in the prices of shares. Given the reduced power and influence of shareholding in WSDEs – as compared to capitalist enterprises – surplus distribution would less likely be directed to achieve capital gains.

The conclusion follows: a transition from capitalist enterprises to WSDEs is a basic structural change that can reduce or even (with suitable accompanying political and cultural changes) largely eliminate extreme or deep personal income inequalities. The long history of capitalism’s failures to do that support the notion that system change is the better route to achieve that end.

http://rdwolff.com/content/income-inequality