Motives for wage earner funds

In the above, I have described companies as organizations which have contractual relations that provide both payments and influence to various parties. This set of contracts should be considered as a holistic solution where each party finds an optimal relationship be-tween, on the one hand the level of economic return and associated risks and, on the other hand, a corresponding level of influence. The form of contract is dependent on the form of all other contracts.

A standard example is a traditional lender whose interest in direct insight and influence is in inverse proportion to the borrower’s fi-nancial solvency or his equity capital. It is not unreasonable to expect that some kind of equilibrium will be established in the long run.

Another conclusion to be drawn from this reasoning is that there will obviously be substantial variations in the optimal degree of insight between different companies dependent on the perceived stability of the employment contract. It is conceivable that the demands for uniform legislation to be applied to all companies will fail to provide sufficient flexibility in this context.

The solidaristic wage policy

Meidner raises three different types of argument in support of the creation of wage earner funds. The first and most provocative point is the hypothesis that the solidaristic wage policy creates

“excess profits” as a result of employees in profitable companies demanding less than they are entitled to.³ An obvious corollary, which is not mentioned in the Meidner report, is that the solidar-istic wage policy must give rise to corresponding losses in other companies. Generally speaking, it is assumed that the unrealized wage demands that accrue to the shareholders are equivalent to the losses made in other companies. It is also assumed that the average distribution between labor and production capital is largely independent of the success of the solidaristic wage policy.

A serious discussion of the solidaristic wage policy is also made more difficult by the lack of an explicit theory of wage forma-tion. If we assume that labor is paid according to its marginal productivity and that wage drift adjusts to some extent for the inflexible wage levels that resulted from the collective bargaining process, there is no prima facie case to believe that there is a close relationship between “unrealized wage demands” and company profits. A high level of profits in the forestry industry in 1974 was presumably unrelated to the labor force receiving wages below their marginal productivity. The profit levels might simply be explained with reference to a lack of production capacity at a given point of the cycle, which resulted in the creation of large quasi-rents. The lower profit levels in 1975 may in a similar way be explained with reference to the large production capacity in the industry in relation to demand. I would not wish to reject the argument that a lack of

3 Editors’ note: The Swedish trade unions, inspired by the work of the trade union economists Gösta Rehn and Rudolf Meidner in the 1950s, pursued a “sol-idaristic wage policy” in the sense that wage increases were held back among the most profitable firms while wages were raised in less profitable firms. The purpose was to establish greater equality among wage earners. Profits became in this way “excessive” in sectors of high profitability, a problem that Meidner tried to solve by his proposal for wage earner funds.

wage adjustment temporarily may improve profit levels. However, profit levels may also deteriorate symmetrically. It is likely that growing employment security has increasingly made labor a fixed cost for companies. As a result, profit levels will become more variable which would tend to support the argument that the risk premium for shareholders should be raised.

Even if one, for my part most unwillingly, accepts the Meidner contention that the solidaristic wage policy gives rise to unilateral increases in wealth for shareholders, the problem remains that this effect of the solidaristic wage policy hardly can be expressed as a part of the return on equity capital.

A power station with an enormously high capital input per em-ployee would according to the Meidner model be treated in the same way as an engineering industry with a high degree of labor input. If it was decided to transfer company profits, in some way due to the solidaristic wage policy, it would have to be done on the basis of the total sum of wages rather than the size of the equity.

If the solidaristic wage policy is considered to be a high priority on grounds of internal unity within the trade unions, it seems natural that the Swedish trade union movement collectively applies some form of taxation where the aim is to achieve equilibrium wage levels and a system of direct transfers from high to low wage earners. Another factor that strikes at the Meidner argument is that it is practically completely impossible to determine em-pirically the difference between market-based wages and wages determined by collective wage agreements based on the principle of solidarity.

The tax system and low rates of interest

Meidner’s second argument is that companies are able to use the design of the tax system – rules of depreciation, appropriations to particular funds etc. – to accumulate capital. Subsidies in the form of industrial development grants etc. may also be included. Consum-ers also contribute to profits “by paying the prices that the company charges for its products” according to Meidner (1975, p. 23). I do

not want to get involved in a dispute about price formation theory but one might regret that Meidner repeats such vulgar arguments in a widely distributed work. For those readers who are unused to economic analysis, these arguments are most likely to lead to confusion. In relation to the tax system, Meidner’s arguments have considerably more relevance. Through its generous depreciation al-lowances and double taxation of profits, the tax system does indeed encourage the retention of profits within companies. However, in the long run, share prices will be determined by the payment of dividends rather than the net asset value. Consequently, it is also likely that the entire profit created by the tax system does not end up in the hands of the shareholders. It is highly possible that share values systematically underestimate net asset values. As a result, we get a system subject to anonymous ownership.

It is naturally a sensitive issue that Meidner raises regarding the Swedish tax system. The high degree of self-financing to which he refers may lead to a distorted choice of investments or strange amalgamations of companies in conglomerates where some of them are responsible for ideas and others for finance. However, this problem cannot be dealt with by means of wage earner funds.

Indeed, the Meidner proposal would actually tend to increase the degree of self-financing.

It would seem more natural to work with less generous depreci-ation reguldepreci-ations and appropridepreci-ations to internal funds if one wishes to achieve greater mobility of financial capital. Similarly, a more consistent use of tax relief on dividends from right offerings would also be an effective means of reducing the effects of double taxation.

Meidner is also completely justified in pointing out that com-panies pay extremely low real rates of interest on borrowed capital in credit markets where nominal rates of interest hardly cover inflation. However, this type of increase in financial wealth, the leverage effects of high lending, has hardly any connection with the question of wage earner funds. If complaints are to be made, it should come from small savers and insurance policy holders who are forced by current credit policy to lend at extremely low real rates of interest. A rational consequence of this situation would be

to support arguments for a higher real interest rate or possibly to create small-saver funds rather than wage earner funds.

Wealth and power

The third group of arguments in support of wage earner funds in Meidner’s report concerns problems such as a more widespread dis-tribution of wealth and power in society. Firstly, the formulations used by Meidner to suggest that shareholders and the owners of the physical means of production can be treated as being identical is an argument with which I disagree.

I have from the outset tried to play down the role of the share-holder by treating him as a financier who has clearly defined tasks in the company. Here I have support from company law, which has established strictly defined regulations in relation to the role of the shareholder. It is clearly stated that the shareholder is only entitled to make a claim concerning the profits of the company. A serious discussion of wage earner funds requires that one avoids describing reality by the use of a terminology that belongs to the cafés of the left-wing student movement.

I have tried in the above to put forward the argument that the distribution of power in a company may be viewed as an equilib-rium solution in relation to the overall contract structure of the company. At this juncture, I do not wish to develop these argu-ments any further. However, I would like to consider some aspects of the argument concerning a more equal distribution of wealth.

In the case of Sweden, companies exhibit a significant ownership concentration. Excluding a rapidly disappearing number of large family asset holdings, these major shareholders are however mainly institutional investors, foundations or insurance companies who in turn represent a large number of co-owners or interest groups.

It is completely misleading to treat a life insurance company as a single owner while at the same time arguing that a Trade Union Confederation fund represents a diversity of ownership.

Firstly, insurance companies and unit trusts have an indirect veto principle which allows them to cancel the contract. They are

therefore able to use a hyper democratic rule compared to that used by the majority group in a series of representative votes that characterize the trade union organizations. Secondly, the welfare of the individual is dependent on how well the unit trust or in-surance company manages its investments. In the anonymous and collective wage earner fund that Meidner discusses, there are not any connections to the welfare of the individual. It is my contention that share ownership, direct or indirect, has nowadays a substan-tially wider distribution than is generally assumed to be the case.

Hence it is a matter of urgency to obtain a more secure empirical basis for these matters.

At the same time, it is necessary to point out that an excessively wide distribution of ownership may lead to potential efficiency losses. The role of the shareholder in the capitalist economy assumes some form of commitment to the need to control and monitor the company’s management. The incentive for these types of activities will be reduced if many small shareholders have portfolios that are diversified throughout the entire list of stocks on the stock ex-change. Poor results in a company will not lead to essential counter measures. Problems may also be found in passive funds that seek to avoid making portfolio changes or fail to take an active part in the appointment or dismissal of top management. Nor can problems of this type be solved by means of centralized public ownership or through a wage earner fund run by the trade unions.

A record loss of SEK 200m. in NJA (Norrbotten Ironworks) would amount to SKR 50 for each taxpayer.⁴ Few people would think it worth their while to write angry letters to the newspapers to protect such a small sum of money. Small private economic returns substantially reduce the shareholder’s interest in monitor-ing. I cannot come to any other conclusion than that problems of this type will become grotesquely enlarged in a centralized wage earner fund. The only alternative, in terms of finding active share-holders who have their own incentives, would be to strengthen

4 Editors’ note: NJA was a government owned company, known for running substantial losses in the mid-1970s.

local representation among employees. However, that would take us close to the Yugoslav system of locally owned worker enterprises, a system that is emphatically rejected by Meidner.