Corporate Inversions

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The emergence of economic inequality as a public policy issue grew out of the wreckage of the Great Recession. And while it was protest movements like Occupy Wall Street that brought visibility to America’s glaring income gap, academic economists have had a near-monopoly on diagnosing why it is that inequality has worsened in the decades since 1980.

Monopolies rarely deliver outstanding service, and this is no exception. The economics profession is fond of believing that its theorizing is an impartial, value-neutral endeavour. In actuality, mainstream (‘neoclassical’) economics is loaded with suppositions that have as much to do with ideology as with science.

Take the distribution of income, which economists argue is (in the final analysis) a consequence of production. Whether one earns $10 per hour or $10 million per year, the presumption is that individuals receive as income that which they contribute to societal output (their ‘marginal product’). In this vision, the free market is not only the best way to efficiently divide the economic pie, it also ensures distributive justice.

But what if income inequality is shaped, in part, by broad power institutions—oligopolistic corporations and labor unions being two examples—such that some are able to claim a greater share of national income, not through superior productivity, but through market power? In a study recently published with the Levy Economics Institute, I explore the power underpinnings of American income inequality over the past century. The key finding: corporate concentration exacerbates income inequality, while trade union power alleviates it.

Mass prosperity — the fabled ‘middle class’ — was largely built between the 1940s and the 1970s. When President Roosevelt created the New Deal in 1935 union density was just eight percent. Density soared to nearly 30 percent by the mid-1950s, and the period spanning the 1930s to the 1970s would bear witness two major strike waves.

The combined effect was a surge in the national wage bill. In 1935 the share of national income going to the bottom 99 percent of the workforce was 44 percent. In tandem with strong unions and intense strike activity, the wage bill rose to 54 percent by the 1970s. In the period after 1980, union density and work stoppages both plummeted, pulling the wage bill down with them. American unionization is now just 11 percent and the wage bill sits at 41 percent—a seven decade-low for both metrics.

The declining power of the labor movement has many causes, but a series of state policies in the early 1980s hastened the demise. President Regan’s penchant for union-busting and the crippling effects of overly restrictive monetary policy (the infamous ‘Volcker shock’) broke the back or organized labor. As trade union power declined, a crucial mechanism for progressively redistributing income began to fade in significance.

The decline of trade unions did not lead to an economic golden age, as some would have hoped. In the decades after 1980, business investment trended downward, job creation slowed and GDP growth decelerated—a phenomenon often referred to as ‘secular stagnation’. Many economists have wondered why, given business-friendly policies in Washington, investment declined so precipitously after 1980.

My study reveals that America does not suffer from a shortage of investment in the general sense. The American corporate sector has been spending more money than ever, but instead of ploughing resources into job creation and fixed asset investment, historically unprecedented resources are flowing into mergers and acquisitions (M&A) and stock repurchase, the combined effect of which has been slower growth and rising inequality (a finding which also applies to Canada—see here and here).

Unlike an investment in fixed assets, which is linked with job creation, M&A merely redistributes corporate ownership claims between proprietors. The motivation for M&A is straightforward: large firms absorb the income stream of the firms they acquire while reducing competitive pressure, which increases their market power.

In the century spanning 1895 through 1990, for every dollar spent on fixed-asset investment, American business spent an average of just 18 cents on M&A. In the period since 1990, for every dollar spent on fixed-asset investment an average of 68 cents was spent on M&A—a four-fold increase. The explosion of M&A since 1990 has led to the concentration of corporate assets (power, in other words). In 1990 the 100 largest American firms controlled 9 percent of total corporate assets. Asset concentration more than doubled over the next two decades, peaking at 21 percent. The creation of a concentrated market structure, which has gone largely unnoticed by the economics profession, is one reason inequality has worsened in recent decades.

With more market power-generated income at their disposal, large firms have paid comparatively more to shareholders in the form of dividends (the enclosed figure contrasts the income share of the richest 1 percent of Americans with the dividend share of national income). At the same time, the 100 largest firms have spent more repurchasing their own stock than they have on machinery and equipment. And because many executives have stock options in their contracts, the share price inflation associated with stock repurchase has led to soaring executive compensation.

It is in this manner that increasing corporate concentration has simultaneously slowed growth and exacerbated inequality. None of these developments are inevitable, but if we are to meaningfully confront the dual problem of secular stagnation and soaring inequality we must begin to understand the role that power plays in driving these trends.



The rise of the 1% was the result of interaction among several systems. It was not technologically determined, though technology helped implement and amplify some of its elements. It was not driven by a right-wing conspiracy of elite businesses, although business lobbying played an important role at critical junctures. It certainly built on the intellectual ascendance of neoliberalism, but also emerged from left-wing skepticism about regulation and consumer-oriented drives for deregulation. Changes in popular culture that tied social status to money more directly than had typified the prior three decades, particularly perceptions of superstars, their importance, and the legitimate levels of compensation they could expect played a critical role. The dynamic reflected both intended and unintended consequences.

And it introduced dynamics that likely reduced productivity growth, rather than enhancing it. The story is not one of skills and technology leading to winner-take-all markets that lifts all boats as long as we have enough redistribution. It is a story of power and rent extraction by those who were in the position to take advantage of broad social and intellectual dynamics, political shifts, and organizational transformations to capture the overwhelming majority of the gains from market production. Throughout the era of oligarchic capitalism claims that technology was the central cause of rising inequality—skills-biased technical change in the broad economy, and winner-take-all markets at the top of the income distribution—were the dominant explanation in economics and policy circles.

Arguments about technology, efficiency, and growth served to legitimate growing inequality and limit the range of policy responses to the massive extraction of value by a managerial and financial class at the expense of working families, consumers, fiscally constrained communities and government services, and even saver-investors and their retirement security. The economic insecurity that the policies so justified wrought for the majority of the population has now bled into political instability as large numbers of voters across the most established democratic market societies are turning to xenophobic finger-pointing to explain why they are on the losing end of an economy that fails to provide them with security and paths for growth.

A political economy of the rise of oligarchic capitalism suggests that the radical shift from an era of high productivity growth and lower inequality to a period of slower productivity growth, widespread economic insecurity, and extreme concentration of wealth reflected a shift in power across several dimensions—knowledge, institutions (politics, law, organizational practice, social norms, markets), and technology.

Academic Solution

Where do we go from here?

If we are to overcome the democratic crisis that mature Oligarchic Capitalism has wrought, we will need solutions that operate across all the various dimensions of power that built that system. Here's a brief sketch covering elements of an alternative approach.

One class of approaches that the analysis I offer here is intended to exclude is, broadly speaking, techno-liberalism. These mix libertarian and progressive ideals (although there is a more explicitly techno-libertarian version, most prominently embodied by Peter Thiel) that take the settlement of the past forty years as given, and project that with enough economic dynamism, technology will lead us to an age of abundance so that will eliminated economic insecurity. The primary institutional proposals shared by these approaches are a much deeper investment in education, particularly a belief that better educational technology will improve outcomes,1 and a universal basic income that will redistribute the gains from those who are the winners in a “naturally” winner-take-all economy, to those who lose out in it, so that those who lost are free to develop their own projects and continue to innovate, feeding the virtuous cycle.

There are deep divisions regarding just how generous the basic income should be; how public the education; how big a role technologically-enhanced municipal government can be and so forth. But part of what is interesting about this class of answer is that it is effectively a continuation of the elite détente of the past forty years (leave the institutional foundations of oligarchic extraction largely untouched but assure equal dignity to diverse ethnic, gender, race populations; and strive for equal opportunity to compete in the otherwise-unperturbed market structures), coupled with a Panglossian progressivism about the power of technology to liberate humanity from want.2

But there is another answer that assumes that scarcity will not be repealed, and yet we must find a model for an open social economy that will provide broad-based economic security without sacrificing dynamism and without resurrecting ethnic and patriarchal sources of solidarity. It combines insights that emerge from the mainstream of the economics profession under the moniker “inclusive growth” with foundational challenges from networks, commons, cooperation, and complexity aimed at creating an open social economy. It insists that markets are arenas of power, not spontaneous order; that economic security and equality are integral to the institutional design of markets, and that the two cannot be separated, analytically or practically; that diversity of institutions, motivations, organizational forms, and normative commitments is the normal state of affairs, and that there is no convergence on an efficient equilibrium on any of these dimensions.

We have seen remarkable victories in the form of the Fight for 15 movement through agile advocacy, networking collaborations across locations, sectors, and targets wherever it can be most effective. We have seen local victories, most clearly that of the Barcelona en Comu party, now translating into significant efforts at integrating municipal with non-governmental efforts to build a collaborative economy. These victories represent the feasibility of a combination of strategies for economic reorganization, including action focused on private firms, municipalities, and states, and perhaps most importantly a reshaping of broad social norms and the basic intellectual beliefs that govern public and private, political and economic decisions.

Just as managerial capitalism was based on progressivism, and oligarchic capitalism was based on neoliberalism, the open social economy is based on developments across a wide range of academic disciplines that offer micro, meso, and macro-level understanding of human motivation and action. These have not to date been articulated as a coherent alternative, but taken together provide a way of understanding economic production and growth that neither collapses back to the expertise-based command and control system that typified old progressivism nor perpetuate the myth of efficient markets that has been the legitimating force of oligarchic capitalism.

We have seen a shift in the nature of our understanding of rationality from homo economicus, a uniform model of self-interested rational action, to homo socialis, who has diverse motivations that are socially-oriented and respond to the social setting and situation. We have seen a move from competition as the sole organizing concept of economic activity, to seeing cooperation and competition as complements. We have seen a move from optimization based on property and contract as the fundamental institutions of interaction, to a mix of commons and property, or governance and participation rather than arms-length bargaining as the core model of organizing production. We have seen a shift from optimization to experimentation and learning as the core model of technical design—most clearly of the Internet itself—and organizational strategy. More generally, the past quarter-century marks a broad shift from the idea of uniformity of optimal solutions—of motivations, institutions, and organizational forms—to diversity and continuous experimentation.

Rather than understanding the investor-owned firm as the core economic organization in modern economy, we are seeing an explosion of experimentation with organizational forms. Firms themselves have persistently diverse organizational models—the management science literature is rich in examples of firms that sustain “good jobs” or “high-commitment, high-performance” strategies to outperform their competitors while offering higher wage, greater stability, and greater autonomy to workers, gaining in return a more knowledgeable workforce with higher initiative, a cooperative dyanmic, and the team gains they yield. Long ignored by mainstream economists and policymakers, the non-profit and government sectors have been absolutely central to the core growth areas of economy and society—healthcare, education, and innovation. On the flip side, we are seeing experimentation with using LLCs, B-corps, and other fully or partly for-profit forms instead of the purely for-profit form to attain social goals. We are seeing a resurgence of interest in cooperative ownership by workers or consumers. And we are actually seeing a range of unincorporated networks of individuals working together to organize productive activity, again, most clearly with free and open-source software, but now moving to real-world models like emerging makerspaces or urban farming.

In all these areas, from “hard-nosed” business disciplines and hard science evolutionary biology to ethically-driven activist practice, we are seeing that uncertainty and human fallibility cannot be solved by perfecting property and contract or getting self-interested incentives just right. We are seeing that identity and participation are central to the flourishing of business firms no less than they are to the flourishing of communities. We are seeing that values-orientation, flexibility, autonomy for self-motivated exploration and cooperation combined with economic security, rather than contingency and competitive self-interest drive functionally superior economic performance. From these building blocks we can, and must, synthesize a much more foundational alternative to both the settlement of the past forty years and the rising economic nationalism in the United States and Europe.

These foundational and social-practice changes must then be integrated with the emerging program that developed under the “inclusive growth” paradigm within more traditional economic work—covering reforms of labor and employment law, national and international tax regimes, and macro-economic policy-oriented equally toward labor market effects as towards inflation, rather than the present strict emphasis on inflation. Only be integrating some of these macro-policies that can only be implemented at national or even international scale, with the meso-organizational and micro-behavioral changes toward a more social economy, can we break the systemic effects that led to the rise of oligarchic capitalism. Failure means that continued broad economic insecurity and sustained identity threat to pluralities in the populations of market societies will continue to generate fertile ground for parties and leaders all too happy to exploit these anxieties to divert attention from oligarchic extraction to enemies of the state and the people, both internal and external.

1 This strong emphasis on technology as the solution to fundamental broad social problems is the core of Morozov's critique of Silicon Valley-centered progressivism. See Evgeny Morozov, To Save Everything, Click Here: The Folly of Technological Solutionism, Reprint edition (New York: PublicAffairs, 2014).

2 Gregory Ferenstein 11 08 15 11:00 AM, “The Politics of Silicon Valley,” Fast Company, November 8, 2015,