First there was the Great Gatsby curve. Then there was the Proust index. Now, thanks to Neil Irwin, we have the Marx ratio.
Each, in their different way, attempts to capture the ravages of contemporary capitalism. But the Marx ratio is a bit different. It was published in the New York Times. Its aim is to capture one of the underlying determinants of the obscene levels of inequality in the United States today—not class mobility or the number of years of national income growth lost to the global financial crash. And, of course, it takes its name from that ruthless nineteenth-century critic of mainstream economics and capitalism itself.
Now, to be clear, there are lots of ratios than can be found in Marx’s critique of political economy—for example, the rate of exploitation, the intensity of labor, the technical productivity of labor, the exchange-value per unit use-value, and the value rate of profit (as illustrated above in a fragment from one of my class handouts)—and the ratio Irwin presents is not one of them.
But that doesn’t make Irwin’s ratio wrong, or uninteresting. On the contrary.
Basically, what Irwin has done is take the data from corporate financial reports (net income and number of employees) and from a minor provision of the Dodd-Frank Act, which requires that publicly trade corporations reveal the gap between what they pay their CEOs and their average worker (and thus report median worker pay) and calculated a number:
The Marx Ratio, as we’re calling it, captures the relationship between a company’s profits — the return to capital, on a per-employee basis — and how much its median employee is compensated, a rough proxy for the return to labor.
Thus, for example, Wells Fargo, which reported $22.2 billion in net income in 2017, with 262,700 employees and median worker pay of $60,446, had a Marx ratio of 1.40. Similarly, we have the same number for other corporations—from the relatively small real estate investment trust Duke Realty (37.7) to independent energy company Hess (-12.2).
Irwin is clear: notwithstanding the limitations in the data, “companies with high Marx Ratios offer particularly strong rewards to their shareholders relative to workers.”* But that doesn’t mean, contra Irwin, that “Numbers below 1 signal the reverse: a more favorable return to labor.” Any positive number indicates that, after paying all expenses (including workers’ wages, taxes, interest on debt, deductions for depreciation, and CEO salaries), the net income or profit per employee is positive.
In fact, with a little algebraic manipulation, Irwin’s Marx ratio turns out to look a lot like Marx’s rate of exploitation.**
They’re not the same, of course. First, because corporate net income leaves out many of the distributions of surplus-value corporate boards of directors make—such as interest payments, taxes, and managers’ salaries—and the number of employees refers to all workers, not just nonmanagerial workers. Second, because the Irwin ratio is calculated for all publicly traded companies and therefore makes no distinction between finance, real-estate, insurance and companies that actually produce goods and services. From a Marxian perspective, the former capture surplus-value that is produced and appropriated elsewhere in the economy (both nationally and globally).
So, the Marx ratio is not Marx’s ratio.
But Irwin’s Marx ratio does tell us a great deal about how wildly profitable American corporations are, especially in comparison to how little they pay their employees—to the tune of 3, 4, 30 times what the average worker makes. And that’s one of the principal causes of the obscene and growing levels of inequality we’ve seen in the United States for decades now.
I, for one, would love to see the Marx ratio reported in the financial news on a regular basis. Alongside the ratio of CEO to average worker pay. And, even better, Marx’s own indicator of capitalist class injustice, the rate of exploitation.
*The data are a bit of a problem, especially because median worker pay is based on self-reporting:
The denominator is the compensation to the median employee, as disclosed in the company’s proxy statement, which can create distortions in representing rank-and-file employees.
Companies also have some degree of flexibility in how they calculate median pay, so comparisons are not necessarily apples-to-apples. For example, they may choose to use statistical sampling instead of actual payroll records, and may exclude non-U.S. employees depending on privacy rules in overseas markets.
A better number for the idea we’re really trying to get at would be average compensation for nonexecutive employees, but companies aren’t required to report that publicly.
**Mathematically, Irwin’s Marx ratio is (NI/L)/(W/L), which turns out to be NI/W, where NI is net income, L is the number of employees, and W is the wage bill (calculated by multiplying median worker pay by the number of employees). Meanwhile, Marx’s rate of exploitation is S/V, where S is the amount of surplus-value and V is the value of labor power.
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The balance between the total production cost and the average commercial price of the product should theoretically always be equal to one. This is because the 3 returns in the use of the Smithian factors of production (rent, wages and interest) are what caused the produce to have a total cost and an associated price. Because Marx (and certain other socialists) omit rent, which is actually his undefined surplus value, the ratio derived from taking the other two will always exceed 1.0 . In the algebraic formula 1.0 = N/(R + W + I) where R, W and I are these respective returns of rent, wages and interest respectively for the use of Land Labor and durable capital goods. This is Georgist economics.
Hi, David, how do you deal with the economies of Venezuela (communist), China (ditto), Brazil (super corrupt capitalism), Russia (ditto)?
In these economies the level of corruption means that much of the money is being diverted from its more correct functions particularly as a mean of saving. Although this diversion process also involves the use of land, labor and durable capital goods (cost of maintaining corruption), the process means that the associated deliberate high rate of inflation (introduced so as government to retain its purchasing ability, by hyper-inflating the currency) means that anybody having some of this money in his hands is continuously (from day to day) suffering a loss. The purpose of savings is completely spoiled and the benefit effectively passes to the corrupting forces. This is not so obvious until you think of all transactions being double-sided with the money value in a reciprocal flow to that of the goods, services, etc.There is also a strong tendency to use a more stable foreign currency, which may even be unlawful!
From one of these so-called “corrupt” countries: inflation is not produced here by printing money. It´s a feature of an oligopolistic economic structure where the “price-makers” never lose. The government runs behind the price-markers when it´s against them, and alongside when it´s part of their team. The old Keynesian tools are not what causes our bouts of inflation. Corruption is not only taking 10% of a contract: is also (a wild imaginative example) allowing the existence of Mortgage Based Securities in numbers that can break the global economy. Guess which countries did that?
Nor Venezuela or China are “communist” economies. In fact, as per Marx, there has never been a communist economy till now. Except for primitive communism, that is before a steady surplus existed and civilization developed. Socialist economies did exist, however. And probably we could still say Cuba is a socialist economy. That means most of means of production are in the hands of the State. Big chunks of the economy being in private hands is completely against a socialist economy. In Venezuela 70% of GDP was produced by the private sector. Don’t know the numbers for China, but some people owning multibillion fortunes completely deny socialism.
Good observations… However, «imho», it is not so much the title of ownership but rather the control of resources (and the final destination/use of the societal surplus) that characterizes if a country is «in the path» to Socialism or is a country that wants to remain a Capitalist country. For the sake of brevity we ignore here the «agency» aspect of a country, and will merely assume that the «agency» function is exercised by its more active minority or leadership. In that context, what to do with the «national» (or «societal») economic surplus is – again «imho» – the defining characteristic of a country being «in the path» of Socialism (or not). This is (or should be) the criteria to use to qualify China as a socialist country. It seems (according to most reports) that the central committee of the Chinese Comunist Party continues to be the entity that decides what to do with the overall Chinese surplus. In that sense I believe China to be a «communist» country whose leadership has managed (so far…) to instrumentalize the «management tools» of a market economy.
Hi, William, I don’t disagree, but was looking toward self-definition as a start. China is opaque as many organizations are organized with public money & loosely connected with a state body. Then they seem to be run as a private organization, as I gather from Chinese government articles. It seems to me that ownership is less important than who controls operation & reeps the largest economic rewards. You, for example, can own 100% of a firm I run for you, but as long as I take more than half of the net profits over time I am totally happy. Since most managers have shorter incumbancies, they go for stock options which then they can cash in when they depart the firm or whenever it is allowable/advantageous.
An interesting take on exploitation is that most large capitalist companies return about 10% profits, meaning $10 profits on every $100 of revenue. It could be that Capitalism is only 10% exploitative, or it could also be inefficient wasting a large part of the surplus it exploits.
If you worked in any corporation you would suspect this: they pay themselves huge amounts of money, the spend like there is no tomorrow, and they maintain big structures with the objective of closing the door to any possible competition. Capitalist companies are very inefficient. Their objective is not to survive, but to ensure profits for the longest time before succumbing to technological or financial change.
Yes, I know. The observation is capitalist firms tend to grow into that ceiling of inefficiency. If a firm makes $1m in revenue with $300k in profits it won’t stay there but will try to grow to $100m in revenue with $10m in profits. Arguably in a better economic system the firm would stay small.
10% loss through exploitation is good!! Its usually far more!!
Wow… The New York Times?!… Really?… Unbelievable…
But then there is the (in)famous «law of the falling tendency of the rate of profit» (or LFTRP) which can be dynamically expressed in the ratio «r=e/(k+1)»…
That would really be the original «Marx Ratio».
Looking at the capitalist economy as a global system (where there are no exports or imports of any “goods” with any other planets…) we are currently in the throes of a long term down turn of the global economy: that (in)famous LFRTP in action…
Okishio notwithstanding, after a certain number of yearly iterations (and a systemic recurrent destruction of accumulated capital), we are back in the «Marxian» part of the cycle.
Nothing new under the stars. As Adam Smith has noted over two centuries ago, the rate of interest is a good proxy of the rate of profit… Due to the weakness of organised labour, the owners of Capital are (or merely continue) reaping the benefits of the vast majority of any increments in societal productivity.
Marx should have put his money where his abstract mathematical ( and no doubt clever) formulae were, like his financier and closest friend Engles did.
Hi, Helen, I think we have been heavily affected by all the goodies which industrialization & electronic goodies have offered us. Much of this has been supported by credit buying which the Atlantic community really got into after WW II. In America I lectured it as the “Madison Avenue’ effect”.
That said, the income/wealth distribution standing behind it is probably not that much different from the better times/places of 16th C Western Europe. With a wild guess: 5% at the top (mostly ennobled), another 10-15% of large merchants/bankers/bishops, another 10-15% of professionals (doctors, lawyers, engineers, professors, religious orders). That’s 25-35% of the “well enough off”. The rest are tied to debt, unstable income or low,low income.
Those of us who grew up in America after WWII in particular witnessed the union movement flourishing, which for many decades made for a far larger group of a “Middle Class”. Today, while free education allows virtually anyone in Germany, for example, to have such a life, much of the affluence comes globally, which is why America’s Silicon Valley & its successors is doing so well. EVERYMAN globally is on their way to a cell phone & at least social media if not yet online buying, In other words, the West has mostly slowed down its spreading of wealth, while the rest of the world is gaining in many places.
But, unfortunately for his family, Marx did not have much money to put «where «his formulae were». And Engels was not a «financier» (not in today’s meaning, anyway).. He was an industrialist (manager of his father’s factory).
Sure, he did manage to have so many children though poor chap!
And a wife to look after him and the kids.
On Engles I agree. But I would also say that it would be utterly illogical to compare industrialisation then with finance capital now.
I am not a Marxist, but I do feel eternally indebted to Lenin, for example, for his book “Imperialism, the Highest Stage of Capitalism”, which predicted all those years ago exactly what we are witnessing this very minute, including ethnic wars, the rise of finance capital and so on.
I think what really matters is authentic contributions to any science or discipline, social or natural.