Home > Plutonomy, upward income redistribution > Capital and distributions of the surplus in the 21st century

Capital and distributions of the surplus in the 21st century

from David Ruccio


Thanks to Thomas Piketty’s new book, the returns to capital are now back on the intellectual—if not the political—agenda. But, as one of my students (who just completed a wonderful senior thesis on “The Gilt and the Glitter: Thorsten Veblen, The Theory of the Leisure Class, and the Second Gilded Age”) noticed, the composition of incomes of the leisure class changed between the first and second Gilded Ages: in 1916, most of their income came from “capital”; now, a large portion comes from “salaries”—although, as we can see below (in data from 2007), that’s less true of the top 0.1 percent than of the rest of the top 1 percent.


Robert Solow, in the clearest review of Piketty’s book to date, is the first to notice this change.

You get the picture: modern capitalism is an unequal society, and the rich-get-richer dynamic strongly suggest that it will get more so. But there is one more loose end to tie up, already hinted at, and it has to do with the advent of very high wage incomes. First, here are some facts about the composition of top incomes. About 60 percent of the income of the top 1 percent in the United States today is labor income. Only when you get to the top tenth of 1 percent does income from capital start to predominate. The income of the top hundredth of 1 percent is 70 percent from capital. The story for France is not very different, though the proportion of labor income is a bit higher at every level. Evidently there are some very high wage incomes, as if you didn’t know.

This is a fairly recent development. In the 1960s, the top 1 percent of wage earners collected a little more than 5 percent of all wage incomes. This fraction has risen pretty steadily until nowadays, when the top 1 percent of wage earners receive 10–12 percent of all wages. This time the story is rather different in France. There the share of total wages going to the top percentile was steady at 6 percent until very recently, when it climbed to 7 percent. The recent surge of extreme inequality at the top of the wage distribution may be primarily an American development. Piketty, who with Emmanuel Saez has made a careful study of high-income tax returns in the United States, attributes this to the rise of what he calls “supermanagers.” The very highest income class consists to a substantial extent of top executives of large corporations, with very rich compensation packages. (A disproportionate number of these, but by no means all of them, come from the financial services industry.) With or without stock options, these large pay packages get converted to wealth and future income from wealth. But the fact remains that much of the increased income (and wealth) inequality in the United States is driven by the rise of these supermanagers.

And Solow’s interpretation?

It is of course possible that “supermanagers” really are supermanagers, and their very high pay merely reflects their very large contributions to corporate profits. It is even possible that their increased dominance since the 1960s has an identifiable cause along that line. This explanation would be harder to maintain if the phenomenon turns out to be uniquely American. It does not occur in France or, on casual observation, in Germany or Japan. Can their top executives lack a certain gene? If so, it would be a fruitful field for transplants.

Another possibility, tempting but still rather vague, is that top management compensation, at least some of it, does not really belong in the category of labor income, but represents instead a sort of adjunct to capital, and should be treated in part as a way of sharing in income from capital. There is a puzzle here whose solution would shed some light on the recent increase in inequality at the top of the pyramid in the United States. The puzzle may not be soluble because the variety of circumstances and outcomes is just too large.

Solow seems to be onto something: the source of the salary incomes of the top 1 percent is just as much capital as are the other sources of their income, such as profits, dividends, interest, rent, and capital gains. All of them—including the salaries of “supermanagers”—represent distributions of the surplus initially appropriated by capital.

Therefore, as Solow concludes, “it is pretty clear that the class of supermanagers belongs socially and politically with the rentiers, not with the larger body of salaried and independent professionals and middle managers.”

  1. April 30, 2014 at 7:24 pm

    We all work for the rentiers. It’s just that those who do so explicitly, the supermanagers, the political class, and the sold-out formerly liberal professional class, are more handsomely rewarded for their fealty.

  2. May 1, 2014 at 3:23 am

    It is virtually certain that the historical data do not tell the full story and therefore could be potentially misleading. The academic idea that capitalism (in its pure sense) must necessarily lead to inequality should be challenged. What about fraud and corruption? May be capitalism periodically leads to innovative fraud and corruption?

    The reason for the reservation is the example of current situation which is developing right before our eyes. Most people seem to be totally blind to what is going on and the data for understanding this are not being collected for future analysis. Future academic equivalents of Piketty would draw the same conclusion: need for wealth redistribution and taxes, rather than stamping out fraud and corruption.

    We know for a fact that had the US government not interfered with the workings of the stock markets,the tech bubble bursting would have decimated the return on capital. But under Krugman’s advice, Greenspan replaced the tech bubble with the housing bubble. Clearly, the fraud related to subprime mortgages revived the fortunes of capital and led to accelerating inequality.

    Again return on capital would have been decimated had the housing bust been allowed to follow its natural course and capitalism would been allowed to work like it supposed to. Not only are failures by the banks not being punished by the markets, trillions of dollars of public money were transferred to private banks. The rich bankers became richer with record bonuses. There has been never greater acceleration of inequality than in the last two decades.

    Clearly financial innovations (since 1970s) such as stock options, credit default swaps, collateralized debt obligations and derivatives generally have provided new instruments of fraud. But boom and bust of the scam would have merely redistributed wealth between capitalists, without permanently raising the return on capital, had it not been for government interference.

    Without trillions of dollars of “Quantitative Easing” money the stock market would have collapsed by now and with it the collapse of return on capital. The observed inequality has very little to do with the entrepreneurial spirit of capitalism, but has a lot to do with the fraud and corruption which accompanied the financialization of the 1970s.

    As a general observation on research, by selecting only partial information and data (and not all information), it is possible to reach any conclusion you like. I believe I have falsified at least this particular “proof” of the thesis that capitalism = inequality, necessarily.

    • Dave Raithel
      May 1, 2014 at 12:14 pm

      “Again return on capital would have been decimated had the housing bust been allowed to follow its natural course and capitalism would been allowed to work like it supposed to. ” Which I guess is all fine to teach capitalists a lesson. Pity the working class – which is not necessarily to endorse the particulars of what was done instead of letting things “work like it supposed to.” It is now more than half a dozen years since whatever happened happened, and about all we’ve settled is where we started: People who own more will usually get more, regardless, Versus: Things would have been better without the crooks. I still don’t believe a band of Bernie Madoff’s explains it….

      • May 1, 2014 at 6:58 pm

        Bernie Madoffs are small-time crooks who have no ability to steal trillions of dollars from ordinary citizens to line the pockets of their rich cronies.

        Richard Fisher, Dallas Fed President, has publicly admitted that US monetary policy (quantitative easing) has helped the rich. On 21 March this year, he said,“QE enabled the rich and the quick, was a massive gift…was deliberate to create the wealth effect”

        Central banks, particularly the US Fed, work for the rich bankers. Their actions such as QE (watch Japan also) have negative effects on the economy and create gross inequality by “privatizing profits and socializing losses”, which is not capitalism.

  3. Thorfinnsson
    May 1, 2014 at 12:13 pm

    The share of income represented by capital gains and salaries are pathological. In the case of capital gains, it represents what leftists often call “financialization” and is indicative of our bubble economy finance. In the case of salaries, it represents outrageous executive compensation which is simply looting inattentive stockholders.

    The income of the top 0.1% ought to be largely capital income and business income.

    It would also be nice to see a graph going back earlier, as in 1916 the top 0.1% income was grossly inflated by the superprofits to be had from gouging the Entente on war materiel.

  4. May 1, 2014 at 6:40 pm

    Another angle onto it is to separate waged work into “production” such as cooking, driving, retailing, making, caring for, performing on stage, etc. and “capital creation” such as management, R&D, invention, reputation building, creating copyrighted works, etc.

    It should then be clear that not only are the vast majority of rewarding jobs associated with capital creation, but the rewards too are concentrated there. If you’re in the operations side of a business you’re a worker. If you’re in capital creation, good for you, and your labour is indistinguishable from capital.

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