Capital in the Twenty-First Century

One of the novel features of late 20th and 21st century capitalism is extreme levels of income inequality. As Piketty highlights, for example, “the top thousandth in the United States increased their share from two percent to nearly ten percent over the past several decades” (402). Put in concrete terms, this means an income one hundred times the average for this group. So, if the national average is thirty thousand euros, this person would, on average, be earning three million euros a year. Nor is this level of inequality unique to the US. While not as high, similar increases can be identified in all developed nations since the 1980s, with especially steep rises in Britain, Canada, and Australia.

Can such levels of inequality be justified? And is this specific inequality compatible with contemporary liberal democracy? To address these questions, it is necessary to first point out, as Piketty does, that “the primary reason for increased income inequality in recent decades is the rise of the supermanager” (398). In other words, the people who have seen this astronomical rise in incomes are the managers and CEOs of large companies. There has been a specific argument put forward to justify this, the argument of marginal productivity. On this theory, “a worker’s wage is equal to his marginal productivity, that is, his individual contribution to the output of the firm or office for which he works” (383).

This idea is combined with an observation about improvements in technology. Technological innovations since the 1980s, for example in computing, have meant that the additional productivity a skilled manager brings to a firm is higher than in the past. This is because of the greater complexity of decisions and the speed at which they must be made due to faster communications and processing of information. Higher salaries reward this. If top managers are paid more, it is because, in a fast paced and quickly evolving business environment, their skillset is more essential than ever.

This argument has several drawbacks. First, it does not account for the differences in average salary increases between nations. As Piketty points out, in terms of information technology, “technological change has been the same more or less everywhere” (405). Yet the increase in the top one percent’s income in the US was double that of the rise in the UK and Canada, and triple that of Australia and New Zealand. The theory of marginal productivity therefore would need to show that that marginal returns on management due to the same technology available everywhere are higher in the US or that US managers are just simply better at dealing with the challenges created by it. This is implausible, however.

This theory also assumes that it is possible to accurately assess the marginal productivity of a top manager, and therefore pay them accordingly. Yet, as Piketty points out, “a precise, objective answer to this question is clearly impossible” (418). In large, complex firms, with thousands or tens of thousands of workers, other managers, middle managers, and specialists, it becomes hard to say what difference one specific manager makes. One could, in theory, experiment. That is, one could bring in different managers for a year, and see how this affected the company stock price. An estimate of a “good” manager’s marginal worth could then be made.

In reality, such experiments can themselves only give extremely crude and speculative estimations of marginal product. Aside from the risk and expense of this experimentation, it is impossible to extricate any manager’s impact on stock price from a range of other variables. These could be, “the general state of the economy, raw material price shocks, variations in exchange rate, average performance of other firms in the same sector” (422) and several other ever-fluctuating factors. This means that managerial renumeration, in terms of marginal productivity, is always a result of shooting in the dark or simply rewards people for being in the right place at the right time.

A more realistic explanation for increased executive incomes than marginal productivity is that top managers help determine their own pay. Corporate compensation committees decide manager salaries, and these usually involve the executives themselves, and managers in similar positions. It is hardly surprising that they have a generous view of their own productivity. This is not to say that top managers contribute nothing. Nor that they are engaged in a purely cynical bid to get as much money as possible. However, increased managerial incomes since the 1980s do have less to do with marginal productivity increases and more to do with changing societal norms. In other words, since the neo-liberal “revolution” of the 1980s and the “greed is good” mantra, high levels of pay have become more acceptable within companies and wider society. Lower marginal rates of income tax have also provided an incentive to demand more. Whether this can last is up for debate. In the long run such ultimately unwarranted inequalities of income may become just as destabilising as inequalities of wealth were in 19th and early 20th century societies.