A blog about the mechanisms behind capital allocation and the solution we offer at Share Council; employee participation. As long as the return on capital(R) is higher than economic growth (G), inequality in capital will always increase. As a result, the share of capital automatically increases. The French professor Thomas Piketty refers to this fundamental inequality in his book Capital in the 21st Century with the formula: r > g. Unfortunately, this is the current way capital is distributed in Europe.
I’ve read through Mr. Piketty’s 700-page book again, mainly to find out more about capital distribution in Europe. Besides, it had been almost five years since I had read it. That was too long ago to easily write an article about it. Rest assured, I am not going to cover the entire book here, but I am extracting Piketty’s clear conviction about the origin of the skewed capital distribution within our society (63% of capital in Europe in the hands of 10% of the people).
If you have a good understanding of the mechanisms behind capital (wealth) and income, you increase the chance of finding solutions for the unequal distribution of capital within Europe – if this is important to you. Piketty explains some of these structures and his main mechanism is the aforementioned r > g. In other words, where the return on wealth (r) is higher than the growth of national income and production (g), the share of capital automatically increases. Only a small amount needs to be saved for the capital stock to grow faster than the economy. Moreover, if that r is considerably larger than the g for a while, it follows that inherited capital grows faster than the economy. Anyone who invests a small part of his inheritance when growth is low will soon notice that this capital grows faster than the income and production in his or her country. Legacy capital then always yields more than a lifetime of diligent labour. Personally, I find that difficult to accept and in my opinion, it paints a sad picture.
In my opinion this should be different. Fortunately, I am not alone in this. In his book Thomas Piketty speaks about the following solution, which he prefers: “There must be a progressive tax on wealth”. The government can indeed work on a high tax on top wealth, in order to force a ‘redistribution of capital’. A basic income could potentially close the inequality gap – and that is also being looked at. Although I understand that approach, these solutions do not seem feasible to me at the moment, both politically and socially. All you have to do is look up the literature and follow current opinions in the media.
Fortunately, Piketty also leaves other avenues open. In his book he makes a clear argument about ‘money makes money’. The example of the advantage of inherited capital is discussed several times. He first describes, for example, that inherited capital is a determining factor for building up capital when economic growth is low. Later he alludes to ‘marrying with inherited money’ as a solution to participate in capital. But everything points to the fact that it is a quest for passive income based on ‘acquired or earned’ capital.
In my opinion, this is also the solution at the moment, which is both politically and socially feasible and workable. It is about acquiring capital with which passive income can be developed. So the point is that everyone can participate on the side of the r from the formula r > g. This is about saving and about achieving the exponential acceleration of savings. In my view, this can be achieved pragmatically with a better distribution of corporate co-ownership.
Co-ownership is more common; a number of companies give employees access to participation in their shares. This allows them to build up capital that grows with the growth of the company. However, this has so far been allocated in Europe, mainly to the multinationals (EFES – EMPLOYEE SHARE OWNERSHIP THE EUROPEAN POLICY). Since only 1% of European employees work for multinationals, this does not help. However, it does show that there is still a tremendous amount of ground to be gained. Namely: the other 99% of European workers who work for small and medium-sized enterprises. The focus should be on employee participation in SMEs.
Piketty looks to increase the number of people who join the r- side of his formula – through redistribution, fueled by taxation. This could also be achieved by stimulating collaborative participation in SMEs. Of course, this is not immediately blissful, since the ‘whims’ of SMEs are not corrected. Some companies are growing fast, others are going bankrupt. It is true that 80% of the European economy runs on SMEs, which ensures that 99% of European employees could theoretically own 80% of the European economy. Given the whims of the market, co-ownership can thus change the distribution of capital in our society.
When you see through these mechanisms, it becomes clear that the ‘well-intentioned financial regulator’ (the AFM and DNB) currently ensures – under the guise of ‘protection of the citizen’ – that these participations in SMEs remain completely out of reach of the average employee. When a regulator determines that only securities above €100,000 can be freely traded outside the regulated exchanges, that same regulator creates a situation in which only large capital can create more capital. With Share Council we try to make a difference. We want to make it easy for SMEs in particular to share ownership of a company. And yes, I’m doing this because I’m looking for a better distribution of this capital.
Even if you are skeptical as an entrepreneur and do not believe in redistribution, you will benefit from this solution. After all, there is something to gain for everyone. The employee can have a capital for passive income, and the entrepreneur can gain loyal employment, so as to be able to grow stably and strongly.
Piketty does not say it in so many words, but has never been so promising as in the world of today, with the current skewed capital distribution. Of course they are all communicating vessels. If we could be a little bit more on the r side of the r > g formula, it would make our society and the Europe we live in a lot more beautiful again. Do you want to learn more about employee participation, r > g and the mechanism behind capital allocation? This is possible at our Share Academy. Read more blogs, take a look at the knowledge base and check our social media. Does this article raise any more questions or are you thinking about starting your participation plan? Make an appointment with one of our Share Council heroes.
Share Council’s participation platform ensures that, after setting up the structure and selecting the contracts, there is no need to think about administration. Everything is arranged and maintained for you in the background. We have a range of payment plans available, so no matter what your budget is or how much time you have to spend on participation, we have a plan that will work for you.
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