Illustrations © byTony Biddle

Session 4

Class:Workers,

Bosses, and Owners

Readings:Chapters 7-8

Please Note• This curriculum material is

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www.economicsforeveryone.com © Canadian Centre for Policy Alternatives, 2009

Key Topics Covered• How companies are organized• The ownership of companies• How companies behave• The logic of profit• Labour as a commodity• How labour is different from other

commodities• Labour extraction under capitalism• Employment and conflict• Unions and collective bargaining

Key Terms Introduced• corporation• capitalist class• stock market• return on equity• depreciation• interest• top managers• major owners• private costs and benefits• social costs and benefits• retained earnings• capital gain

• commodity• full employment• unemployment• labour extraction• labour discipline• labour intensity• labour market

segmentation• unit labour cost• cost of job loss• unions• collective bargaining

The Private Company• One of the defining features of capitalism: most

production is undertaken for private profit• The private company is the entity through which

that profit-seeking activity is organized• Private companies come in all shapes and sizes:

– Large global corporations– Medium-sized firms (most work done by paid workers)– Very small firms (most work done by owner & family)

• All companies have two key features:1. Somebody owns them, and hence claims its profits2. The owner directs the firm in their interests

Types of Companies• Individual proprietorships

– Individual owner owns & controls it directly• Partnerships

– Joint owners share the investment & profit• Corporations

– Separate legal entity which limits the liability and potential losses of the owners

– Large corporations are usually owned through joint-stock (issuing equity shares)

– The biggest global corporations are economically larger than many countries, and operate through tight central plans

The Biggest of the Big

Category Large Company

Equivalent Country

Value-Added ExxonMobil

($195 billion)

Finland

($195 billion)

Employment Wal-Mart

(1.9 million)

Ireland

(1.9 million)

Assets General Electric

($675 billion)

Austria

($650 billion)

2006 data, $US.

(p.86)

Who Owns Corporations?• Ownership of joint stock companies is

dispersed– Shares are bought & sold on the stock market

• Problem: how to ensure company acts in owners’ interests– Problem solved through major share ownership and

executive compensation– Top managers of the firms are major owners, with

huge personal stake in share price

• Ownership of business wealth as a whole is concentrated among a small elite– It’s a myth that the stock market, mutual funds,

etc., have allowed everyone to become “owners”

The Shocking Concentration of Business

Wealth (p.92)Distribution of Financial Wealth

Top10%

Top1%

Billion-aires

Bottom 50%

Canada 58% n.a. 5% (54) 3%

U.S. 71% 34% 6% (≈500) 2%

Australia

53% n.a. 7% (37) 6%

U.K. 71% 34% 10% (169) 1%

World 57% 32% n.a. 4%

• Most financial wealth is owned by the top 10%.• The bottom 50% own almost no financial wealth.• A handful of billionaires own more than the majority.

Meet TheModern Capitalist

• Less than 2% of advanced capitalist population owns enough wealth to not have to work– Many do work anyway, but they are not compelled

to work for survival

• This small group owns a controlling interest in the private business sector

• Large overlap between this group and top executives of large and medium companies

• “Major owners and top managers” = the modern capitalist class

Measuring and Paying Profit

• Profit is the surplus left after a business has sold its output and paid its bills (including wages)

• Various ways to measure profit:– % share of revenues (called the “profit margin”)– % return on capital (considers all capital, incl. loans)– % return on equity (profit that goes to shareholders)

• Some profit is paid out to owners of capital• Some is kept by firm to pay for future

investment (“retained earnings”)• Various ways to pay out profit:

– Interest (income to investors who loaned money)– Dividends (cash payments to share owners)– Capital gains (rising value of shares & other assets)

The Logic of Profit• Competition forces companies to meet the

“going rate” of profit or go out of business– This imposes a logic & discipline on the system– This logic (not the personal views and actions of

CEOs) explains why capitalism does so much harm

• Under capitalism (“production for profit”) something is done if it is profitable– Not necessarily if it is useful

• We cannot assume that profitability is a measure of an activity’s value– “Production for profit” does not guarantee that

human needs are being met

Things That Are Profitable(but Useless or Destructive!)

1. Advertizing2. Spending to develop copy-cat products3. Excess packaging4. Maintaining excess capacity5. Planned obsolescence6. Selling unsafe or harmful products7. Tricking consumers8. Spending to deliberately harm competitors9. Blocking others from producing a useful

thing10.Shifting production costs to the public

(p.95)

Can you list other examples?

Work and Production• Conventional economics treats

production like a “black box”– In goes labour & capital– Out comes output

• In reality it’s a complicated, conflictual process

• The features of the employment relationship determine many aspects of how capitalism works

Why Labour is “Different”• Wage labour is a commodity (like anything

else that’s bought & sold for money)• But it’s a unique commodity:

– Labour is alive. Workers can think (and resist)– Labour is not produced in the economy. It is

reproduced in our families.– Labour is “produced” by “consumers.” But the

“consumption” of labour (employment) depends on production!

– The labour market never “clears.” And there are many different labour markets.

– What the purchaser buys (labour time) is different from what they want (labour effort).

Trying to get maximum effort for minimum cost is the capitalists’ “LABOUR EXTRACTION

PROBLEM”

• Employers aim to minimize unit labour cost of output (ULC)

• Productivity is as important as wages

ULC = Compensation Productivity

Workers & Employers

Bosses want more effort for less money …

Creating an inherent source of CONFLICT

Labour Extraction Strategies• “Carrots and sticks”

– Positive incentives– Negative punishments

• Goal: Get maximum labour effort out of purchased labour time (“intensity”)

Productivity = Intensity * True Efficiency

ULC = Compensation Intensity * True Efficiency

Employers want less compensation and more intensity; workers want the

opposite.

Employers manage workers like a farmer manages a donkey: with “carrots and

sticks”!

Ways to Reduce Compensation

• Cut wages & salaries• Cut fringe benefits / pensions• Increase hours of work for “core”

workers who get benefits– Reduces hourly cost of benefits

• Shift more work to “non-core” workers who don’t get benefits

• Outsource/offshore work to cheaper suppliers/countries

Ways to Increase Intensity

• Speed up pace of work (eg. faster assembly line)

• Tie pay to pace of work (piece work)• More supervision & monitoring• Reduce breaks (lunch, rest)• Reduce paid time off• Require unpaid overtime• “Lean production”• Increase cost of job loss

Ways to Increase“True Efficiency”

• Labour-saving capital equipment• Ergonomic improvements• Produce higher-value and more innovative

products

…These are the sources of true long-run economic progress, but capitalists don’t always want to spend the money required to increase true efficiency.

…And this is one way of improving productivity that could be beneficial for workers.

“Cost of Job Loss”• A tool for motivating / disciplining workers• Determinants:

– Legal power to fire– Risk of “getting caught”– Absence of social benefits for fired workers– Difference between wage and replacement

wage (segmentation)

• Neoliberal policy has tried to increase the cost of job loss:– Reduce social benefits for working-age adults

(justified by ideological attack on recipients)– Make it easier for employers to fire workers

The Asymmetry of theEmployment Relationship

• Workers and bosses need each other, but in different ways

• Individual workers: they face economic compulsion (work or starve)

• Employers do not need any particular worker (unless they have a totally unique skill of some kind)

• But employers DO need workers in aggregate (otherwise there is no producton, and hence no profit)

Fixing the Asymmetry

• Workers must speak with one voice:… COLLECTIVE BARGAINING

• Workers need an ability to impose a cost of disagreement on the employer

• Workers learned this early in the history of capitalism– Initial efforts to form unions were banned

as a “barrier to competition”• No society has attained mass prosperity

without unions & collective bargaining

Goals of Collective Bargaining

• Increase wages• Improve other forms of compensation

– Benefits– Pensions

• Reduce hours of work• Health and safety / working conditions• Job security / outsourcing / work ownership• Union representation• Equality / non-harassment / equity• Technological change

Determinants of Union Power

• Legal climate• Worker attitudes (“solidarity”)• Cost of job loss• Productivity• Competition

Conflict and Cooperation• Capitalism creates an inherent workplace battle

over compensation and labour intensity• There is some potential common ground in

higher productivity– True efficiency can be beneficial– Increases in intensity can “buy” compensation (within

limits)

• Employers promote a “false” commonality– Support “my employer” against other employers– Solution: Take wages out of competition

• “Solving” the inherent conflict of the workplace means building independence for workers:– Developing our own capacity to invest, organize work

Session #4, Student Exercise:

Your Collective Agreement Under the Microscope

• Examine your labour contract of collective agreement (or a sample from someone else).

• Review which sections of the contract address:– Compensation– Work rules and productivity– Other issues

• Answer several questions, and estimate the “cost” of the contract to the employer.

• See www.economicsforeveryone.com for copies of the full exercise set and instructions.

www.economicsforeveryone.com © Canadian Centre for Policy Alternatives, 2009