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About the “Fair” Sharing of Economic Value Added

About the “Fair” Sharing of Economic Value Added Economy Near Us (XXXV)

Periodically, economists put on the table a remarkably interesting (and disputable, as well) topic, that of model for sharing the value added between labour and capital. The subject is present both on the work table of theoretical scientists and on that of researchers interested in the social justice echo of the income/wealth distribution inside the society (like Piketty, for example). In this intervention, I am interested not in the social justice considerations on the evoked topic, but in a very “ideologically free” approach. More exactly, I shall discuss the possible fair sharing of the value added between labour and capital (as main production factors) from the perspective of economic sustainability. This is distinct from economic optimality or economic fairness, although, as it is well-known, there is a so-called trade-off between equity and efficacy as impact of economic distribution. Without any doubt, the social justice angle of the topic is of multiple interests (including the scientific one) but, as said, this perspective will be postponed for the moment. 

The value-added concept 

As known, some added values items of the entrepreneurial action are related to cost (wages/salaries, depreciations of fixed capital, interest assigned to financial capital), and some are related to profit (as difference between revenues and costs – although, from an accounting perspective, there are certain methodological nuances which are not relevant for the present discussion). Simplifying somewhat the issue, the problem is: how (or in what ratio) the total value added by the economic activity is distributed among labour (wage/salary) and capital (profit). Methodologically, I shall consider only two value added items, more precisely, the wage (the salary will be included in the concept of wage, despite the obvious difference between them – wage is a direct cost with labour, while salary is an indirect one), and the profit. Regarding the profit, a question arises: what is relevant in the discussion, the gross profit (i.e. profit before taxes, EBT, or profit before taxes and interest, EBIT), or net profit (i.e. profit after taxes, EAT, or profit after taxes and interest, EATI). A brief digression is necessary:

- firstly, as wage is considered a cost in its gross value (particularly, for today all of the tax burden on personal income is transferred onto the employee), for methodological compatibility, the profit should be considered in its gross value as well;

- secondly, however, what remains at the disposal of economic actors (employee, and entrepreneur, respectively) is the net value of their gains from economic activity; more exactly, the economic impulse (and even the subjective perception of the gains) is depending on the net values of those gains, not on the gross ones;

- after all, it seems justified to take into account the net values of both wage and profit, in order to make comparable the two items in the analysis both methodologically and economically;

- this way, the other two tools (at the Government’s disposal) enter the problem, namely the two discretionarily tools to pass from gross values to net ones, for both wage (tax on personal income – fiscal and para-fiscal) and profit (tax on profit); we must notice that the interest rate is a market ”tool”, so it will be taken as given and will not be discussed further as such.

 

Brief discussion

 

Therefore, we have come to the conclusion that the issue of “fair” sharing of the amount of wage and profit between the two factors of production (labour force and entrepreneurship, respectively) are the result of two stages: a) the distribution of economic product (added value); b) the redistribution of the distributed product. These two stages are, of course, well-known in economic theory. The question is: how should they be correlated so that the “fairness” of surplus sharing that we are searching for can come into being? From a methodological point of view, the two items – wage and profit – will be considered as costs, under the reasonable assumption that the entrepreneurship is, in turn, a production factor, so that the wage and the profit are, in fact, remuneration of production factors involved. On the other hand, wage and profits are incomes for the two production factors (we have here the famous double face of the economic variables from the sphere of production and beyond).

I shall start from the assumption that the distribution (more exactly, the primary distribution) of that value added is fairly performed. More exactly, I presuppose that both wages and profits, in their gross amount, are established based on their marginal productivity (which is assumed to be computable).

From these points, we end up with the following elements of a thought process on the subject:

(a) about a (possible) reason: while the price of goods is self-regulating by the invisible hand of markets, the price of the labour force (i.e. wage) is not so (or, at least, it has more rigidity than the prices of goods). This means that, on the labour market, the positive feedbacks are dominant, which generate, as known, escalation processes (hubbing effect). So, the reason searched is anchored in the non self-testability of wage and profit dynamics;

(b) about the perspective of justification: a justification connected to the reason for redistribution of (gross) wage and profit cannot be of any other nature than a social justice one. More precisely, in the social/economic area or processes which are non self-testable, state intervention is not only legitimate, but, more than that, is mandatory;

(c) the justification: to formulate the justification in the topic discussed, it must address two points: 1) the purpose; 2) the mean for accomplishing the purpose. I think the purpose is to provide the minimal bases of economic sustainability. Regarding the means, I think it consists of the breaking of the escalation processes of the hubbing effect and, therefore, in introducing in that area a visible hand of regulation;

(d) about the practicability: the practicability of the visible hand’s introduction in the non-self-testable area of primarily distributing wage and profit is, obviously, the most difficult issue in our topic. To this issue, I shall dedicate a follow-up intervention. However, I would sketch some coordinates of such a practicability:

- from public policy perspective, the state intervention must be of fiscal policy type. In other words, by working the dual levers of personal income tax – corporate profit tax, the Government should introduce sustainability impulses into the economy;

- from a social justice perspective, the state intervention must only correct (if it is the case) an unjustified asymmetry in sharing the economic valued added inside the primary distribution; such asymmetries should be evaluated based on both sustainability principles and ethical ones;

- from the perspective of the economic process, the state intervention must not perturb the free market. This means Government must carefully avoid to intervene in those area in which leading economic variables are self-testable, on the one hand, and must not avoid intervening in those areas in which leading economic variables are non-testable.

 

 
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OEconomica No. 1, 2016