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Post details: The fruits of our labor

The fruits of our labor

It's tax time again, and with it comes the annual opportunity to reflect on how we - as a society - distribute the fruits of our collective labor. Since most of the products of modern era involve some form of collaboration of people, the problem of sharing the resulting revenues naturally arises. If you think that such task is trivial and hardly worthy of any neural activity, consider this simple example.

Let's say that Joe inherited a farm implement called "plum picker" from his grandfather and, as you might imagine, he wants to pick some plums with it. But he needs two associates to help him - perhaps he needs to stand on their shoulders while operating the devise. So he calls two of his friends and offers each 30% of the plum proceeds. Once they reach the orchard, however, Joe starts having second thoughts about his generous salary offer, and he downgrades it to only 10%. His friends gracefully decline and Joe has to find new partners. Fortunately, the village is full of people looking for work and eventually he finds two guys who will do that for 15% and that's the end of that.

In this case Joe has the decisive say, because he is the sole owner of the "means of production", so he determines who gets what. This may not always be in the best interest of the larger society or even fair. Joe may decide that he has enough money for now and let the plum harvest rot on the trees - leaving the villagers completely plumless. Also, the two helpers may work harder towards the final outcome and face significant risks, yet their negotiating position is hamstrung by the abundance of cheap labor in the village. If this simple example can produce uncertainty in the profit sharing conundrum, imagine the Gordian knot we'd have to untangle in cases where the individual contributions and ownership stakes are much less clear. Leaving the final distribution in hands of those who control the very last link of the production may be short sighted and simplistic.

For instance, consider a large semi-conductor company. The firm just designed a new production line, whose technology was inspired by recent theoretical breakthroughs in particle physics. They set up a semi-automated circuit etching plant and before you could say "chip", the upper management is making tons of money, some of which they reluctantly share with their underlings. Now let's take a look at two possible problems in the corresponding "fruit distribution" scheme.

First and obvious problem rests in the price the management paid to engineers who devised and constructed the production lines. Did they pay the engineers enough? Or did they short change them (in the obvious profit maximization effort), knowing all too well that if these engineers wouldn't assemble the machines, some other group would. This is essentially the same dilemma as with the plum pickers. At the end of the day, it is the top dog who holds the carving knife.

The second problem is more subtle: Did the management share their profits with all the parties involved in the product development? This is where the tracking of shares gets pretty murky. You can't really produce a complex object like say integrated circuit without contributions from a whole host of people, some of whom may be long dead. There were engineers who tried similar designs in the past and their failures paved the way for the eventual success. Did they get paid? There were physicists whose basic research in the field of quantum mechanics enabled the emergence of semi-conductors. Did all the researchers and scientists who worked towards that goal get paid? And we can go even further. Quantum mechanics as we know it would not exist without a rather esoteric mathematical discipline called complex analysis. There were mathematicians who worked out its rules in the 19th century unaware that 100 years later someone would use the fruits of their labor for practical application. Should their heirs be remunerated too?

Economy is a complex discipline and one of its more difficult tasks is to figure out not only how much to pay those who help in the production - the workers - but also how much to give back to the society whose treasure trove of knowledge enabled it. And something should definitely be given back. Otherwise those who elbow their way closer to the feeding troughs will have ever increasing advantage. To help quantify the attendant income disparity problem, we can take a look at the quantity called CEO-to-worker pay (the ratio between the CEO compensation and median worker wages). It used to be around 20:1 in the 1950s, then 42:1 in 1980s, 120:1 in 2000s and nowadays it is about 200:1. Amazing, isn't it? Sure running business is more complex these days, but the management apparatus which helps making the right decisions is more complex too.

Unfortunately, rather than starting a debate on what is the optimal range for this ratio, we hope against hope that the incarcerated market (sorry, but contemporary "market" is no longer free) will figure it out for us. But it won't. All it will do is further enrich the thin top layer of the society who figured out how to monetize something that grew out of our own long term endeavors (in the previous example the knowledge of complex analysis and quantum mechanics for instance). To be sure, I am not advocating egalitarianism. The entrepreneurs do deserve a huge chunk of the pie for their courage, talent and organizing skills, but whether their needs should be the only factor dictating the shares of the common pie I am less certain of. In my opinion, more of the spoils should come back to the community and help fund public infrastructure, education and basic research, even if it takes another 100 years for it to bear fruits.

As long as production was simple, like collecting plums, capitalism handled the necessary logistics quite well. But with globalization and automation on the move, the network of interrelationships is so intricate that a narrow group of directors, mostly focused on immediate profits, can hardly comprehend all its ramifications and social implications. However, relying on heavy taxation by central governments may become counterproductive, as bureaucrats do not have stellar reputation for efficiency. Perhaps some form of rotating collective ownership will usher the third way. That is the $64,000 dollar question teasing our generation's best economists.

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