Name and shame the scroungers
This FT article is not what is seems. The scroungers in question are the overpaid executives in the boardrooms of British companies. According to the article, which refers to an another published last week called The Trickle-up Effect, “the chief executives of FTSE 100 companies saw their pay rise last year by a median 32 per cent. That compares with 2 per cent for most workers. This was not a blip. In 1998, the average pay of these business leaders was 47 times higher than that of employees. By 2010 the multiple had soared to 120. Yet the real value of their companies hardly changed. So much for claims that pay matches performance.
“The upshot has been a new plutocracy whose interests and incentives are wholly detached from the rest of society. The share of national income taken by the top 0.1 per cent has returned to the level of the 1940s. Soon we will be back in Victorian times.”
Most discussion of this phenomenon, including this otherwise excellent piece, does not examine how it is that companies are able and willing to squander their money in this way?
It appears to us that a possible explanation is that the companies concerned have got control of that stream of wealth known as “economic rent of land”. Although the concept was well understood by the classical economists such as Ricardo, it was to all intents and purposes erased from economics theory at the end of the nineteenth century.
Enterprises whose revenue consists substantially of economic land have a “cushion” which allows their executives to raid the till or perform inefficiently or both. At the smallest scale, this can be a family-owned business that owns the premises it occupies and does not have to pay rent. It can continue to function complacently for decades before economic reality intrudes.
This explanation becomes plausible when one looks at which are the companies that reward their boardroom members over-lavishly. These include retail outlet chains with big property portfolios, utility suppliers with near-monopoly trading advantages, and financial institutions including the banks. The latter, through their model of moneylending, using created money, on the security of real estate, are de facto owners of that real estate for the duration of the loan. The “interest” payable on those loans is, we would argue, mostly nothing other than economic rent of land.