The world is ready for profit sharing to reduce inequality
By Kaushik Basu, former Chief Economist of the World Bank and former Chief Economic Adviser to the Government of India, currently Professor of Economics at Cornell University and non-resident Senior Fellow at the Brookings Institution.
New York – At the British Labour Party’s annual conference in Liverpool this month, the shadow chancellor of the exchequer, John McDonnell, proposed a profit-sharing scheme that would grant workers equity in the firms where they are employed. McDonnell raised this idea in what was decidedly a political speech; and policy experts and economists have reacted skeptically. While a poorly executed profit-sharing program could do serious damage, that is no reason to reject the idea altogether. It is in fact a good sign that the idea is being publicly defended by a political leader.
Many mainstream economists, from Martin Weitzman and Richard B. Freeman to Joseph E. Stiglitz, Debraj Ray, and Kalle Moene have proposed variants of the concept. And with many advanced economies at a critical juncture, with unconscionable levels of inequality threatening to shred the very fabric of democratic politics, “equity for the poor” is an economic principle whose time has come.
As this month marks the tenth anniversary of the collapse of Lehman Brothers, it may help to go back a decade and pick up the story from there. The post-2008 Great Recession affected all sections of society, including the rich. In fact, it was a rare period when the number of millionaires in the world actually declined. But fret not for the wealthy. They have recovered well: whereas the world’s richest 1% of households owned 42.5% of all wealth in 2008, they own 50.1% today.
No matter how you slice the data on wealth and income, the super-rich are doing very well, and the gap between them and median-income earners – not to mention the poor – continues to widen. The near-unprecedented levels of inequality within countries today helps to explain the past decade of political upheaval and social strife, from the open-ended conflicts in the Middle East to the rise of populism and xenophobia in the West.
The rise in inequality today is largely due to technological change, such as rapid advances in robotics and digital technology, and it has been aggravated by heightened awareness on the part of the poor. For much of history, the powerful managed to persuade the slaves, outcasts, and downtrodden that their poverty was a “natural” result of their own inferiority, laziness, and – testing the limits of human gullibility – sins committed in past lives. But with the diffusion of information technology, the poor no longer have the wool pulled over their eyes.
Economic change is thus necessitating new ideas – and not for the first time. The Industrial Revolution is often remembered for its “Satanic mills”; but it was also a time of radical new thinking in economics, spearheaded by Adam Smith, John Stuart Mill, David Ricardo, Antoine Cournot, and many others. Governments eventually pursued revolutionary reforms of labor laws and other social-welfare measures.
Moreover, it was during this earlier period of change that the income tax was introduced. Until then, income taxes had been used only sporadically to raise funds for wars. But in Britain in 1842, the income tax became a systemic, permanent feature of the economy. Many at the time rejected the policy altogether, warning that it would destroy incentives and bring the economy to a halt. Fortunately, their hue and cry went unheeded.
Owing to today’s technological advances, the share of total income accruing to labor (as opposed to capital) is declining worldwide. It is only reasonable, then, that workers should be granted the right to some share of the economy’s profits. That is why McDonnell’s proposal deserves consideration, provided that we remain alert to incentives and the laws of the market.
To that end, it would be better to pursue a fractional form of profit sharing, rather than large-scale nationalization. If all of a country’s wealth were to be aggregated into one pot, the temptation for looting would be too great. In the case of the Soviet Union, a small group quickly captured the pot. If history has taught us anything, it is that the last stage of Communism is crony capitalism.
A better alternative is to address the problem with a scalpel, rather than an axe, by having the state grant workers equity, from which they can earn a supplementary income. The standard objection – that people are robbed of their dignity when they are given money without having to work – is ahistorical. Under feudalism and slavery, suzerains and plantation owners grew enormously wealthy from the unremunerated work of serfs and slaves. No one ever pitied the them for missing out on the “dignity of labor.”
For whatever reason, it does make a difference psychologically whether one earns by dole or ownership. That is why I personally have reservations about a universal basic income. Equity and a claim on some share of profits, however, would bypass the problem completely. Workers would have a genuine sense of ownership, which will become increasingly important in a world of diminishing work.
Much will depend on how such profit-sharing schemes are designed and implemented. But, whatever we think of proposals like McDonnell’s, we no longer have the luxury of dismissing the idea as a non-starter.
Copyright: Project Syndicate, 2018.