TY - UNPB
T1 - The Share of the Top One Percent: Is It Due to the Marginal Product of Labour or Financialisation?
AU - Mccombie, John Stuart Landreth
AU - Spreafico, Marta
PY - 2016
Y1 - 2016
N2 - The last thirty years or so have seen the rapid increase in the share of income of the top one
percent, especially in the United States. This has led to increasing concern about the
consequences of the degree of income and wealth inequality and whether or not policies
should be introduced further to reduce it. However, for a long time neoclassical economics
has ignored the problem, generally because of its uncritical acceptance that individuals are
paid their marginal products in largely competitive markets. It is a short step from this to
John Bates Clark’s normative argument that this is what they should receive, a view
espoused recently by Mankiw (2013) together with the ‘just deserts’ ethical argument.
Nevertheless, it is shown that the marginal productivity theory is deeply flawed empirically
and cannot, as a matter of logic, be substantiated theoretically. The rise in the share of the
top one percent is largely due to the increase in chief executive officers’ salaries which was
due to institutional factors, notably the role of remuneration committees and the widespread
adoption of stock options in the 1990s. These were introduced in a mistaken belief that they
would overcome the principal-agent problem. There was also a rapid change in the
economic mileux with the rise of financialisation, defined broadly to include the increasing
role of financial markets. The neoclassical approach is of limited use in explaining these
phenomena.
AB - The last thirty years or so have seen the rapid increase in the share of income of the top one
percent, especially in the United States. This has led to increasing concern about the
consequences of the degree of income and wealth inequality and whether or not policies
should be introduced further to reduce it. However, for a long time neoclassical economics
has ignored the problem, generally because of its uncritical acceptance that individuals are
paid their marginal products in largely competitive markets. It is a short step from this to
John Bates Clark’s normative argument that this is what they should receive, a view
espoused recently by Mankiw (2013) together with the ‘just deserts’ ethical argument.
Nevertheless, it is shown that the marginal productivity theory is deeply flawed empirically
and cannot, as a matter of logic, be substantiated theoretically. The rise in the share of the
top one percent is largely due to the increase in chief executive officers’ salaries which was
due to institutional factors, notably the role of remuneration committees and the widespread
adoption of stock options in the 1990s. These were introduced in a mistaken belief that they
would overcome the principal-agent problem. There was also a rapid change in the
economic mileux with the rise of financialisation, defined broadly to include the increasing
role of financial markets. The neoclassical approach is of limited use in explaining these
phenomena.
KW - CEO pay
KW - aggregate production function
KW - financialisation
KW - income distribution
KW - inequality
KW - marginal productivity
KW - CEO pay
KW - aggregate production function
KW - financialisation
KW - income distribution
KW - inequality
KW - marginal productivity
UR - http://hdl.handle.net/10807/99186
M3 - Working paper
BT - The Share of the Top One Percent: Is It Due to the Marginal Product of Labour or Financialisation?
ER -