The hidden distortion of equity markets

The structure of our capital markets and norms in accounting practises have led to an hidden distortion in our companies. Put simply, investors look for returns to equity which involves driving down labour’s share of income in favour of capital’s share.

These selection pressures have, as billionaire Hedge fund manager Paul Tudor Jones II has pointed out in his TED lecture on ‘Why we need to rethink capitalism’, led to a significant decline in US share of income going to labour from north of 64% in 1974 to less than 57% today*. As Jones goes onto say ‘higher profit margins do not increase societal wealth. What they actually do is exacerbate income inequality. And that’s not a good thing.’ The profound implications of this is that if labour (through human capital investment) was put at the heart of the investing world, not as a cost but as a potential return to investment, then for the first time you might expect to see those companies that reward their staff the best to be those that are the best financed. The result of this may not just be a significant changes in the incentives structure of our companies but even have consequences on the level of income equality and meritocracy in our societies.

*And by implication, potentially a way to change Piketty’s formula from r > g to one where labour’s share increase and perhaps r</= g