The Share of the Top One Percent: Is It Due to the Marginal Product of Labour or Financialisation?

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.