TCS Daily

A European Ownership Society

By Johnny Munkhammar - March 14, 2007 12:00 AM

As the EU Finance Ministers met on February 27, they expressed worries about profits rising faster than wages in Europe. The conclusion was that the current global economic boom mostly benefits owners rather than workers. This led the German Finance Minister to warn of an upcoming crisis of legitimacy for the current economic and social model. The Ministers jointly stressed that wages should grow in line with productivity.

This resurrects an old ghost. Will Karl Marx, the man who has so far been wrong about most everything, finally have a point about usurpation, in today's global economy? Politicians could meet this alleged development with the same measures as they have done in the past, such as increasing taxes (on profits, for example) or growing government to redistribute money to wage earners.

To find out what they should do, we need to find out, What is actually happening? According to the EU Commission, real wage costs in EU-15 - the European Union before the latest enlargement, for which there is comparable historical data - is expected to rise by 0.8 per cent annually 2000-2008. This might seem to be a low level. But the average annual increase in EU-15 between 1991 and 2000 was 1.1 per cent and 1981-1990, it was 0.8 per cent.

Thus, real wage costs are rising roughly at the same pace as they have been for a few decades. But people's disposable incomes might not be notably increasing. As the OECD concluded in their "Taxing Wages," the average tax wedge is 42.6 per cent in EU-15. Almost half the wage cost is taxes. Thus, politicians who worry that people's disposable incomes are not rising have the power to change that.

But how, then, are the shares of profits and wages respectively developing in the economy?

In 2008, the wage share of the economy in EU-15 is predicted to be 66.7 per cent, down from 67.7 per cent in 2000. In 1990, the wage share was 69.7 per cent and in 1981, it was 75.3 per cent. The share of wages in the European economy is thus decreasing slowly. For many developing countries with a high economic growth rate, the trend is the opposite. Foreign investments in labour-intensive production drive up the wage share in those countries. What are the implications of the decreasing wage share in the European economy?

Mainly, it shows that Europe has moved towards a more advanced, capital-intensive production. By any measure of prosperity, that is very good. But it also implies that many owners of companies are very successful in today's global economy. As companies find new places to produce goods and services cheaper, profits rise - faster than wages. That creates a political dynamic towards redistribution of resources through more government. Why should the rich get richer fast, but ordinary working people merely get crumbs from the table?

The image is not really true. We all benefit from this development as consumers, since prices of many goods fall. Lower prices are just as important as higher wages, especially for people with low incomes. Furthermore, we are all substantial owners indirectly, since pension funds get a large share of the profits. But accepting that politicians should act, more government intervention would be counterproductive. Higher taxes in general would slow down growth and employment. And higher taxes on capital would decrease investments in Europe.

European governments should do the opposite. They can always make it more beneficial to work, by decreasing labour taxes. Profits are, however, likely to continue rising faster than wage costs. But ownership is not static. There are many ways for politicians to make it easier for more people to become owners and take part in the rapidly rising profits:

  • Decrease taxes on capital and investments.

  • Give the state-owned companies to the citizens.

  • Take away obstacles for entrepreneurship.

  • Simplify home ownership.

  • Let people keep more of their income.

  • Give people the right to invest at least part of their pension funds.

Substantially more people would get opportunities to become owners as a result of reforms like these. There would be money to invest and it would be more beneficial to do so. In more of an ownership society, most people would have incomes from both wages and profits. And in time, there would be more opportunities to create private wealth and thereby economic security for ordinary people.

Johnny Munkhammar is Program Director, Timbro, a free-market institute in Sweden.



Risk, return and ownership.
There are three rules determining why most employees' capital is dedicated to consumption or low-risk investments like residential real property: Every productive endeavor is a risky one (Frank Knight), no risk no return, and most people are loss averse.

Employees take fewer risks when they produce given the property they apply to productive endeavors is not their own. Lower risk, lower return, which is fine by them because they're loss averse. This is why increasing property ownership among employees doesn't necessarily increase the capital stock applied to productive endeavors, thereby increasing wealth. Consumption and low-risk applications like home ownership are safer than starting a company or owning one.

In Europe, employees have seized profits from productive endeavors and applied them to the consumption of social services. This has reduced the capital available for application to productive endeavors, choking off the creation of new wealth. In return, they've gotten declining societies dedicated to risk-aversion and consumption.

Turning this around in Europe requires more than broadening the base of property ownership; it requires changing people's basic attitudes towards the application of capital to uses other than consumption and loss-averse investment.

I wonder if they get this vexed
when in slow economic times, profits fall faster than wages?

Isn't this the type of problem that you want to have?
Only in OLD Europe is making too much money a problem. This is the goal for a company. Their problem is that because of the stupidly high capital and wage taxes the profits are sucked out of the country by investors without that tax burden. This is further exacerbated by the fact that the citizens do not have access to financial markets where they can invest in and get some gain from their own capital.

Risk, again...
When you talk about the decision to consume wealth rather than to deploy wealth as working capital (in an income producing endeavor) you imply that the worker makes a choice and that he choses the path of less risk. Similarly, when the worker buys a home that becomes both his residence and his (low risk) investment you suggest that he has made the "safe" move.

When a worker has disposable income that might either be consumed or invested he is not avoiding risk by consuming those funds. That money is simply gone. Further, when the worker decides to purchase a home rather than to pay rent he is still pouring his cash flow into someone else's pool of working capital in the form of interest payments. Indeed, his "down payment" capital and principal payments are tied up as a long term investment the outcome of which is completely out of his hands. His money is completely at risk. He hopes that real estate values will appreciate faster than inflation and his interest rate.

Genuine low risk investments are government bonds. Of course, the upside with an interest bearing Treasury instrument is limited. On the other hand, holding your cash is guaranteed to cost you money as inflation takes its share. No risk there. Dead nuts certainty.

If you have money to invest beyond what you need to consume to live in this world and you are not willing to settle for interest payments then you have either equities or entrepreneurship. Purchasing equities puts your money into someone else's hands for him to use as his working capital. Such an investment feels very risky to me.

If you invest your funds into your own venture and if you become a capitalist yourself then the risk you face is related to your own ability to manage that operation. If you climb behind the wheel of a startup that you do not know how to drive then, yes indeed, you have significant risk. Of course, this happens all the time. People want to "be their own boss" and they open a small business in a high mortality, low barrier to entry, competitive industry they know very little about. And they typically lose their investments. They say that they were bold and that they accepted risk...but really they were simply self-indulgent and foolish.

A skilled, professional manager, operating a competitive operation in an industry he understands is not accepting much risk. He should be working in a business where he already knows how to make it work.

Because the art of management is not intuitive such managers should spend enough time working inside the culture of their chosen industry, creating wealth for other people, until they are ready to launch their own ventures.

Of course, you are correct, Robert, that to give your working capital to the government to redistribute is simply consumption. But most people do not have access to sufficient working capital to fund a competitive startup.

If they try to start something that could move up the foodchain into the global market but they do not have the funding to actually make such a move, then they are trying to get lucky. That is also not so much risky as foolish. They are certainly going to lose their money. They have a better chance at Monte Carlo.

If company profits increase faster than employee wages then the companies can reinvest those profits into other businesses thus creating more jobs and more wealth for the country. You must understand that this is antithetical to the European vision of wealth creation where only the State can create wealth.

The European system doesn't work but it's their system and they're rightfully proud of it. You can't expect them to throw decades of failure away on a whim, or maybe you can - they don't seem to be influenced by facts.

You can't possibly believe these things, forest
Come on now, forest, think.

"When a worker has disposable income that might either be consumed or invested he is not avoiding risk by consuming those funds. That money is simply gone."

So workers get nothing in return for their cash or credit? No goods and no services? No mortgage obligation fulfilled? No public goods and services for their taxes? Is this what you really meant?

"Further, when the worker decides to purchase a home rather than to pay rent he is still pouring his cash flow into someone else's pool of working capital in the form of interest payments."

One component of a lender's interest demand represents profit. The rest represent an ongoing bet on inflation and risk, rated at premium. Moreover, lenders set interest rates in a competitive market, which competition tends to suppress the profit component while discounting risk premiums. This all sums up to mean that interest payments are not pure profit for lenders, and they certainly aren't pure losses for borrowers, as evidenced by the mortgaged homes they presently enjoy.

"Indeed, his "down payment" capital and principal payments are tied up as a long term investment the outcome of which is completely out of his hands. His money is completely at risk."

How can this be true if your worker is a worker and a voter? Doesn't he work to create wealth and vote to secure or seize it?

"If you have money to invest beyond what you need to consume to live in this world and you are not willing to settle for interest payments then you have either equities or entrepreneurship."

Who needs a Ferrari? Who needs a condo in Sun Valley? Who needs bigger breasts, less wrinkles, poofy lips or a bum that doesn't jiggle incessantly? Who needs what? The point: Tell me why entrepreneurs forgo consumption for investment.

"Purchasing equities puts your money into someone else's hands for him to use as his working capital. Such an investment feels very risky to me."

Other than being voluntary rather than forced, how is this any different or less risky than paying taxes, that is, sending money to politicians, thereby putting "your money into someone else's hands for him to use as his working capital"?

"A skilled, professional manager, operating a competitive operation in an industry he understands is not accepting much risk. He should be working in a business where he already knows how to make it work."

Knowledge is no certain replacement for information, the most useful of which always lies in the future. Yet as you accurately point out, it's what typically distinguishes a rich risk-taker from a poor one. Capitalism allows knowledge rather than political dogma (fantasy) to offset risk, which is why it outperforms every other kind of economic system.

"But most people do not have access to sufficient working capital to fund a competitive startup."

I disagree. Most people don't have the access to sufficient knowledge and the cojones to fund a competitive startup. This is my point.

On the other hand, those who did, such as Bill Gates, Bill Walton, Thomas Edison, L.M. Ericsson, Alfred Nobel and Ingvar Kamprad, now employ or serve billions. It only takes six such men to define an era. Any dogma that depreciates their contributions to mankind while elevating the likes of FDR, JFK or Woodrow Wilson misleads deplorably.


These are so obvious...
*Decrease taxes on capital and investments. *Give the state-owned companies to the citizens. *Take away obstacles for entrepreneurship. *Simplify home ownership. *Let people keep more of their income. *Give people the right to invest at least part of their pension funds --

...that it is sad that anyone has to even write about them.

Stay with your called it...risk...
Let's not get off your subject of risk. "Every productive endeavor is a risky one... no risk no return, and most people are loss averse."

Your point is that individuals are not becoming entrepreneurs by launching their own "productive endeavor" because they are risk averse.

One fundamental problem with money is that it serves as both the currency for consumption and as the storege medium of wealth to be engaged as working capital.

An interesting analogy is the competing institutions of military imperialism versus financial capitalism during the Bronze Age. This copper based metal itself was the raw material for state-of-the-art arms and armor. Alternatively, bronze was employed as specie/bullion to underwrite large commercial transactions. The entrepreneurial warlord who put his conquered resources to work creating wealth had to decide whether to keep his expeditionary forces under arms or to melt their arms and armor back into bullion and go buy something. At another moment he might decide to take his copper billets out of the treasure room, forge fresh weapons and go to war.

He had to chose. A army standing under arms tied up his money and too many business deals cut into his ability to defend himself. Then came iron and the Iron Age.

Iron was not often used as specie. Once it was forged into weapons and armor the leader was able to maintain a standing army under arms as long as he wanted without sacrificing his working capital. Armies grew larger and civilization prospered under the fruits of military imperialism.

We earn money. We must consume some or all of it to live. Beyond that we have choices. We could save our disposable incomes, invest in our own businesses, invest in someone else's businesses or we might simply consume more. It is like with the bronze. We must chose.

However, if we already operate a business some of our wealth is a sunk cost, fixed asset that is carried on the balance sheet at a certain dollar value but that might not be so valuable if liquidated as it is as a factor of production. We might get at the money by borrowing cash against the business or even by selling the business but, failing that, the choice to consume or to invest has already been made and this money no longer does double duty. Like iron, once cash assets are converted into capital equipment and material inventories we can equip a permanent standing army of industrial workers and launch an expedition of conquest into global markets.

Workers and the media look at the capitalist and they imagine that he can simply spend all his wealth. But if the capitalist wants to stay in the game he needs to continue reinvesting most of his earnings back into the business as he grows into more competitive arenas.

The worker who would become a capitalist has a dream and he launches himself into his venture as soon as he can assemble enough "start up capital". But if the business is worth doing and if the larger market is calling his name then the entrepreneur will need to pass through his transition from a small player (who has succeeded against the other small companies) to compete with established, medium-sized operations. At some point he will need financial resources beyond his own personal wealth or he will not be able to continue growing. Typically, this happens early on. The capitalist needs to increase his working capital by borrowing someone else's invested funds.

You can sit on one side of this table or the other. Your invested money is either your own working capital or it is the working capital of someone else. And if you are not a capitalist then you are bound to work for one.

I am an experienced, careful driver. When I leave the driveway I do not know what challenges I might face but I do not feel particularly at risk when my hands are on the wheel. However, some other people are terrible drivers. If I put myself into their vehicles and at the mercy of their skills then I may be at more risk than if I drove myself.

Similarly, my working capital is invested in my own businesses because I am at least as good at managing my operations as anyone out there would be working with my money. And I am far better than most. It is much less risky to create wealth myself with my money serving as my own working capital (and to borrow the rest) than to buy real estate and hope the market goes up.

Good manager
You sound like a good manager who's got his head screwed on right. Putting money in your business sounds like a sound bet.

You're right about employees having the wrong impression regarding how capital works. They may not understand that guy who is worth millions on paper actually has only hundreds to divert to consumption, just like most other people. But I think they do understand that there's security in using one's own human capital to produce wealth for another's account, that is, being employed in someone else's productive endeavor because at the end of the day, someone's got to make payroll and pay the suppliers even if the inventory doesn't get sold. Employees simply don't want to undertake that kind of risk.

I've worked with lots of entrepreneurs, and one thing that invariably differentiates them from employees is their personalization of the productive processes whose outcomes they own. As a result, they go the extra mile, work the extra contact, forgo vacation, and consume no more out of the wealth they create than can't be profitably reinvested in their business.

In contrast, many of the employees I've known see the universe as a place that owes them a comfortable, non-demanding job, a nice coffee machine, health & dental, five weeks vacation, and no overtime. They've also personalized the productive process, imagining that it's all about them and class war and social justice. Consequently, suchlike are inclined to consume as much as they can, seeing no limits other than what they can earn or seize at the ballot box.

So it turns out that the capitalist and worker usually don't resemble their populist descriptions. This is one reason why I can't buy into the BS worldviews the media/left-wing political parties/politicians are selling, or hate successful people.

One more step...
Most workers don't have a good idea that, if developed, would create a brilliant new business that could grow and keep growing. Indeed, even if they did have such an idea they typically would not have the general management skills necessary to be competitive.

However, those who do conceive of something that would thrive and who do have the ability to go all the way with it do not often have access to the capital required to get past a kitchen table startup.

Operations, marketing and finance. You must have all three. (These challenges are far greater for entrepreneurs in the developing world.)

The world is very good at taking all of the cash flow a worker might generate. Even in the United States. Fortunately, American workers have become so affluent that spending for residential real estate has shifted from survival type housing up through paying rent and into home ownership. And such homes have increased dramatically in both quality and resale value since 1950. At this point the American working family has substantial net worth as a result of equity built up in the housing market. They also have a mortgage to meet if they want to hold onto that asset and they will certainly need more than Social Security to live on when they retire.

The frustration is that a worker may be skilled at his job and able to make a lot of money for the company. But his personal cash flow is often "paycheck to paycheck". Therefore, his financial security depends on staying employed.

Even if a worker has no good business idea of his own and could not run a company if he launched one, he might be very good at what he does and he would far prefer working as a partner in an operation than as an employee. A number of Silicon Valley startups approached this concept with stock options for everyone in the founding group, including the clerical staff. Many secretaries became millionaires when venture funded, high tech firms went public in the late 1990's. But that was an anomaly.

Failing such an opportunity workers sell their labor to capitalists who manage them as human resources. Workers are period expenses. Line items to be controlled and minimized.

Individual working family households are uniquely powerless in our society. Almost everything bad that might happen to them would immediately be beyond their ability to survive financially. They need insurance policies for their homes, their automobiles, their health care and, indeed, for their lives. If the IRS comes after them they must settle and pay. If the credit card companies increase their APR or minimum payments they must write those checks.

After everything the worker is lucky to have $100 in his pocket at the end of the month. And there is not a lot he can do about his situation. This is true for the line worker with a high school diploma and for the middle manager with a Masters degree. Of course, he is cynical.

Such conditions must continue as long as workers are human resources for capitalists. However, the solution is not to destroy the institution of capitalism, the process of financial capitalization and the capitalists themselves (as Karl Marx suggested.) The answer is simply to stop working for strangers.

The technology of banking might be downsized to suit only the capitalization needs of a large partnership entity, lending mortgage money for personal properties, working capital for business operations, securing such loans against real estate and liquidatable assets. The partnership would own a minority stake in all such properties and businesses. The bank itself should be owned as one of the businesses of the corporate partnership. Every family would be a full partner. (Projected appropriate scale should be 300-500 families and 4000-5000 total people.)

Individual parties would never be at the mercy of outside entities (including governments) but would be protected by the resources of the corporation.

Such partnership entities would be competitive in the businesses they engaged in with the unfair advantage of a rich, internal talent pool and virtually unlimited financial depth.

A company is people. Capitalism is money. Freedom is elusive.

Power is elusive
I like the idea you propose, and it's already in action in some immigrant communities in the US and elsewhere. Honor is all that's required to secure startup loans, oh yeah, and belonging to the right community.

Elsewhere, intricate networks between corporations, affiliated companies, distributors, exporters, traders and families have grown up to facilitate the cross-border torrent of goods and cash we call Globalization. Long-term business relationships have grown up relying on the trust, good faith and fair dealing built up over time. New entrants to the network must, however, incur near-ruinous transaction costs by offering favorable terms or remain outside the lucrative flow.

Now to my point: Capitalists are often portrayed as ruthless, heartless, inhuman exploiters of humans. But the two groups of capitalists I've described above are motivated just as much by loyalty, honor, trust and good faith as by anything else. Yet the people who stand outside these groups, many of whom speciously call themselves "workers", often refuse to see or acknowledge this. They'd rather see the world in terms of two camps, them (the bad guys) and us (the good guys), locked in a perpetual struggle, greed against social justice. Worse, many "workers" have decided to pool their power and place it in the hands of crooked political parties, selfish millionaire politicians, corrupt union leaders, ideologue PACs intent on breaking eggs to make omelets, and over-billing lobbyists.

In sum, what stands in the workers' way isn't capitalism or capitalists, it's power: The power they've misplaced, the power they believe they don't have, and the power others, with whom they must compete, have used wisely. Human capacities are limited and power is always relative to applications and competitors (e.g. global warming and China), which is why those with the least power must use it most wisely. That's why a worker who votes Democrat, pays his union dues, leverages credit cards to live beyond his means, ignores his community, and sacrifices his mind to the boob tube, has misspent his capacities, piddled away his power, and must stew in his own discontent.

We seem to be getting closer...

Perhaps you have never known the frustration of selling your labor and trying to "make ends meet" in spite of what seems to be a lot of money passing through your hands.

With two Masters degrees, an excellent entry level start (8 solid years) at a Fortune 50 industry leader, unassailable chops with one of the Big 8 (now the Final 4) and twenty years of general management decision making and I was not able to break out financially until I launched my own business (this one). And that only happened because one of my back-burner design projects happened to give birth to a technology that gave me an unfair advantage in a completely different industry. So I got lucky. Here. Kind of late in life.

I did not go to Wall Street and make all that Junk Bond money as some of my friends did. I did not stay in consulting and rise up to Partner. I am a manufacturing general manager, I run operations in Asia (so that should be good, right?). I was never part of the founding group for a high tech, funded venture with stock options. I'm the guy they hired to build their products after all the equity had already been passed out.

If it has been this difficult for me all these years with all my credentials and as long and hard as I've worked then it must be much worse for those workers you seem to feel have used their power (such as it is) unwisely.

Of course, such a worker does not have your competitive motivation. Does this mean we should enslave him to serve as our "human resource"? If he must join the union to drive a truck then this makes him irresponsible? If he votes for one party over the other in our two-party (sham democracy) republic this means he deserves the foolishness our government puts us all through?

This is humanity. These are people. Such is the way our species behaves. The natural model, before military imperialism enslaved all of us into civilization, had men finding an appropriate role in one work group or the other within the tribal society that they were born into. Their government was a hierarchy of their own relatives and they fit into that cultural dynamic somewhere. They did not need a contract, a hiring manager, a policeman or a judge to tell them what was expected of them.

Most people want an easy life and most people need responsible, selfless leaders who can be trusted without question. In our modern society a young man might not even be able to trust his own Catholic priest.

You might justify the continued marginalization of the worker as someone who "has misspent his capacities, piddled away his power, and must stew in his own discontent" because he cannot compete for power with you, Robert. And so he must always be subordinate in your world and this is his own pathetic fault (Christians love to assign blame).

You said that "power is elusive". No, Robert, power is momentary at best. It is freedom (as I said) that is elusive. And freedom, once gained, makes my children free. Forever. Free from anyone's power. Free to be strong. Free to be weak. Free to make money. Free to make art. Free to sit with an old woman dying.

Power does not produce freedom
Here's where your train of thought derails, forest: Power doesn't produce freedom. In fact, just the opposite is true: Freedom arises where power is applied to limiting power. If the power of sin is the law (1 Corinthians 15:56), then turning the law against itself, with one set of laws forbidding entire classes of others, produces freedom. Of course, this doesn't stop the sinning or its costs (e.g., but it does produce freedom. Skim the Bill of Rights if you're not sure what I'm talking about.

This is a basic truth of Christian doctrine that most Christians never understand, not to mention Christianity's more virulent critics such as you, forest. Perhaps not understanding power's limited applications and elusiveness explains your skewed view of religion, many of which amount to virulent critiques of power, including Christianity, Islam, Judaism, Buddhism and Taoism. Ever wonder why secular religions such as socialism (AKA "Progressivism", "Liberalism", "Communism") must set themselves up as the enemies of sectarian ones? One word - power: The former worship and seek power at all costs while the latter criticize power and see their legitimacy disintegrate when they seek it.

Story: I've gone through periods where I've been homeless, lived in a mini-trailer or slept in my car. Although these periods occurred during college while I was working on summer break and was in no real danger or need, they nevertheless forced me to live simply, expect little and desire less while enjoying every enjoyable moment, every small pleasure, particularly the free ones like a gulp of crisp mountain air, a warm sunbeam finding me through the rain clouds, or a baseball game on the radio.

Moreover, I have never been freer than I was then, when I had little, desired little, and was bound by nothing more than need. I had no power over others, no financial independence, and very little stuff or money, so I lacked the means to make the world do what I wanted it to. And in the absence of such power, I was free, free like I'll never be free again.

Those who seek power, whose lives' aspirations is to lord over others, who can't imagine living at peace with the world without it, have fallen into a bondage more terrible than they can imagine. Better yet, they suffer accordingly, as is just. Workers who piddle away their power, bury their capacities under layers of sloth, envy, greed and hopeless desire, are suchlike and must also suffer accordingly, as is just. These remarks aren't the proclivity of a judgmental Christian assigning blame for misery, but rather the mechanics of how people and the universe work as discovered by a guy who's been around the block and paid attention.

Put your assumptions and judgments aside, forest, and pay attention, and you'll come to the same conclusions.

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