Corporate Finance and Income Distribution in aGrowing Economy

Bla ne , Niklaus A icle Co po a e Finance and Income Dis ibu ion in aG owing Economy Zei sch i ü Wi scha s- und Sozialwissenscha en (ZWS) - Vie eljah essch i de Gesellscha ü Wi scha s- und Sozialwissenscha en, Ve ein ü Socialpoli ik P o ided in Coope a ion wi h: Duncke & Humblo , Be lin Sugges ed Ci a ion: Bla ne , Niklaus (1975) : Co po a e Finance and Income Dis ibu ion in aG owing Economy, Zei sch i ü Wi scha s- und Sozialwissenscha en (ZWS) - Vie eljah essch i de Gesellscha ü Wi scha s- und Sozialwissenscha en, Ve ein ü Socialpoli ik, ISSN 0342-1783, Duncke & Humblo , Be lin, Vol. 95, Iss. 3, pp. 223-238, h ps://doi.o g/10.3790/schm.95.3.223 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/291355 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. 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I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by/4.0/ Co po a e Finance and Income Dis ibu ion in a G owing Economy* By Niklaus Bla ne How do co po a e in es men and inancial decisions a ec he dis ibu ion o ac o incomes? This ques ion is analysed wi hin a Kaldo ian amewo k, which allows he es ablishmen o a link be ween he heo y o he g ow h o he i m and he heo y o mac o g ow h and dis ibu ion. 1. In oduc ion R. Ma is ecen ly in es iga ed he p ope ies o "A Ten a i e Mic o- Mac o Model o he G ow h o he Fi m and o he Economy"1. Ma is a emp ed o link his own heo y o he g ow h o he i m wi h a Kal- do ian mac o model in o de o show how mac o g ow h could possibly be explained as a esul o he in e ac ion o co po a e managemen and p i a e in es o s in he capi al ma ke . Wha ega ds he dis ibu ion o ac o incomes he Ma is model is no speci ic. In he p esen pape we add ess ou sel es o he solu ion o his p oblem. We, oo, do his wi hin a Kaldo ian amewo k which has long been ecognised as being especially sui able o he explici discussion o he e ec s o an income gene a ing and income dis ibu ing co po a e sec o 2. We shall i s build up a basic model and shall hen p oceed o dis- cuss al e na i e solu ions. The selec ion o a pa icula solu ion has im- po an consequences o he de e mina ion o income dis ibu ion. Which o he solu ions has o be p e e ed depends on he heo y o he capi al ma ke adop ed. We hope ha by s essing income dis ibu ion his ime we a e making a s ep owa ds he ul ima e goal o a simul aneous explana ion o g ow h and income dis ibu ion in a co po a e economy. * The au ho would like o hank P o esso D . Go ied Bombach (Basel), P o esso D . Klaus Jaege (Be lin), D . Robin Ma is (Camb idge) and M . Ch is oph Baue (Basel) o many help ul and c i ical commen s in he p e- pa a ion o his a icle. Responsibili y o emaining sho comings emains solely wi h he au ho , o cou se. 1 Ma is (1972), especially pp. 341 - 52. 2 This is pa icula ly ue o N. Kaldo (1966). Bu see also Bombach (1959 a) and (1959 b). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.95.3.223 | Gene a ed on 2023-04-04 11:51:53 224 Nikiaus Bla ne 2. Basic Model We s a in he usual way wi h he iden i ies (1) Y = W + P and (2) P = R + D Na ional income Y is equal o wages W plus p o i s P. P o i s a e ea ned by he co po a e sec o o he economy and spli in o e ained ea nings R and di idends D paid o he sha e owning wo ke s. The e a e wo g oups o pe sons: wo ke s and co po a e managemen . The e a e no capi alis s — o , as Kaldo pu s i mo e p ecisely: he e a e no he edi a y capi alis s3. Wo ke s sa e and hence own he co po a e sec o . They also enjoy he di idends. Managemen is in cha ge o he ope a ion o he co po a ions. Managemen is dis inguished as a sepa- a e g oup o pe sons only inso a i ega ds i s unc ion o con ol. As ea ne s o income manage s a e conside ed as pa o he g oup o wo - ke s. Manage s ea n wages — o sala ies — and hey sa e. They own pa o he co po a e sec o as wo ke s do. Manage s a e di e en om wo ke s inso a as hey wield execu i e powe while wo ke s' in- luence is limi ed o he legisla i e pa o he p ocess. Managemen has h ee ins umen s a i s disposi ion o which only wo a e independen wi h gi en p o i s P. The i s is he p opo ion o na ional income in es ed (3) a = J/Y The second is he e en ion a io (4) = R/P and he hi d is he ac ion i in which in es men is inanced by issuing new sha es ins ead o using e ained ea nings (5) i = (I — R)/I = (q Á)/I q ep esen s he cu en sha e p ice and A = dAld he numbe o sha es issued pe ime pe iod . To al sa ings a e de ined as (6) S = SW + R i. e. as he sum o wo ke s' sa ings ¿Mi plus e ained ea nings R. 3 Kaldo (1966) p. 311. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.95.3.223 | Gene a ed on 2023-04-04 11:51:53 Co po a e Finance and Income Dis ibu ion in a G owing Economy 225 Wo ke s' sa ings a e explained in he Keynesian way. Wo ke s a e assumed o sa e a cons an and equal p opo ion sw ou o hei wage and di idend income. In addi ion, hei sa ing beha iou is a ec ed by al e a ions in he alue o hei accumula ed weal h. I is assumed ha wo ke s consume a cons an ac ion (1 — s^) o hei capi al gains G enjoyed. I capi al gains a e ze o wo ke s' sa ings a e equal o (swW + swD). Up o his amoun hey would like o pu chase new sha es. Buying sha es is assumed o be he only o m o placing sa ings. The e a e no inancial ins i u ions, like banks. When sha e p ices ise and capi al gains become posi i e wo ke s consume he p opo ion (1 — sw) o hese capi al gains. They do his by dissa ing, i. e. by selling sha es up o [(1 — s^)G] pe pe iod. Ac ual wo ke s' sa ing is equal o ne sa ing, i. e. equal o sa ing ou o income plus dissa ing ou o capi al gains. We ind (?) Sw= swW + swD-( 1 - sw) G Fu he mo e, we ha e he de ini ion o capi al gains G (8) G = qA whe e q = dq/d which can be w i en as (9) G = l - qA = ( -i) I This ollows om he de ini ion o he alua ion a io (10) ~ qA/K which gi es us an exp ession o q. The la e , a e di e en ia ing wi h espec o ime, ea ing as a pa ame e and aking accoun o (5) leads o (9). The alua ion a io is an impo an concep in he p esen con ex . I ep esen s he a io o he alue o he co po a e sec o as seen by he s ock ma ke o he alue o he co po a e sec o as seen by he co po- a e sec o i sel . qA is he o al numbe o sha es mul iplied by he cu en p ice o sha es. qA is he esul o inancial ansac ions e- lec ing income- and capi al gain-induced ne demand o sha es as well as in es men -induced supply o sha es. K, he denomina o o he alua ion a io is he alue o he co po a e sec o as seen by i sel . K can be in e p e ed as a close ela i e o he Hicksian concep s o o wa d- and backwa d-looking measu es o he alue o capi al4. 4 Hicks (1973), pp. 157 - 63. 15 Zei sch i ü Wi scha s- und Sozialwissenscha en 1975/3 OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.95.3.223 | Gene a ed on 2023-04-04 11:51:53 226 Nikiaus Bla ne J. Robinson poin ed ou al eady ha in equilib ium o wa d- and backwa d-looking alues o capi al a e equal5. In a p o i -maxi- mising sys em in es men is ca ied ou up o ha le el which leads o he equalisa ion o expec ed p esen alues o in es men ne e u n and o in es men cos . I we assume equilib ium in his sense K no only measu es he backwa d-looking alue o co po a e asse s bu also he o wa d-looking alue o he same asse s. We now p oceed by s a ing he equilib ium condi ions. We can o mu- la e wo o hem, namely he usual IS-condi ion being he condi ion o ci cula low equilib ium o he economy as a whole, and a less usual condi ion s anding o equilib ium in he s ock ma ke . Ci cula low equilib ium equi es I = Y + (1 - sw) R - (1 - sw) ( -i) I o (11) gK = swY + (1- sw) R — gK (1 — sw) ( - i) whe e g = UK The second condi ion s a es ha in s ock ma ke equilib ium he o al supply o sha es — i. e. emissions o new sha es by he co po a e sec o plus dissa ing by wo ke s o cash in on capi al gains — mus be equal o o al demand o sha es — i. e. wo ke s' sa ings ou o wages and di idend income. We ha e il + (1 - sw) ( -i)I = swY - swR o (12) igK = swY — swR — gK (1 - sw) ( - i) Fo he pu poses o dis ibu ional analysis he dependen a iable is he a e o p o i g = P/K. The solu ion o he wo equilib ium con- di ions yields _ g x [1 + (1 - sw) ( - i)] - sw (13) x(l-sw) whe e x = K/Y o ci cula low o IS-equilib ium and - Q « [i + (1 - sw) ( - i)] + sw (14) p — o s ock ma ke o AM-equilib ium. 5 J. Robinson (1953-4), p. 51, w i es: In equilib ium "... he a e o p o i uling oday is he a e which was expec ed o ule oday when he decision o in es in any capi al good now ex an was made, and he expec ed u u e eceip s, capi alised a he cu en a e o p o i , a e equal o he cos o he capi al goods which a e expec ed o p oduce hem". OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.95.3.223 | Gene a ed on 2023-04-04 11:51:53 Co po a e Finance and Income Dis ibu ion in a C owing Economy 227 Gene al equilib ium equi es he simul aneous ul illmen o (13) and (14). This model seems o lead us somewha in o he neighbou hood o he amilia Hicks-Hansen IS-LM app oach, bu i has o be made clea ha his is no eally ue. While he IS-equilib ium ela ion is e y much akin o he Hicks-Hansen IS- ela ion, he AM- ela ion has no much in common wi h hei LM- ela ion. Thei LM- ela ion s a es he equilib ium p ope ies o he money ma ke and is he e o e de e - mined by money supply and demand o money o ansac ion and specula i e pu poses. Ou AM- ela ion e lec s he equilib ium in he s ock ma ke which is a ma ke o p ope y igh s in a model igno ing money in he sense o an ins umen use ul o ansac ion pu poses. In wha ollows we a e going o discuss al e na i e applica ions o he model p esen ed so a . In (13) and (14) he e a e six po en ially in- dependen a iables, i. e. g, x, sw, i, and o which we ha e o assume i e as cons an in o de o sol e he wo equa ions implying he gene al equilib ium alues o g and o he independen a iable chosen. No e e y selec ion made leads o he same heo e ical insigh s. The selec ion is impo an and has o be p ope ly de ended by heo e ical a gumen and — ul ima ely — empi ical judgmen . 3. The Kaldo ian Solu ion Kaldo , o whom he o mal s uc u e o he basic model discussed is due6, sugges s g as dependen and as independen a iables and ea s he es as pa ame e s7. The IS- ela ion (13) becomes g K [1 — i (1 — sw)] — sw g (15) e = '= ^ — + -z- x (1 - sw) and he e o mula ed AM- ela ion is 1 — g x i (1 — sw) a (16) q= - — — u x sw The IS- ela ion (15) and he AM- ela ion (16) a e ep esen ed g aphi- cally in Figu e 1. « Kaldo (1966) pp., 307 - 13. 7 This p ocedu e appea s o be odd i we emembe ha he de i a ion o (9) which is inco po a ed in (15) as well as in (16) is based on he assump ion o a cons an . 15* OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.95.3.223 | Gene a ed on 2023-04-04 11:51:53 228 Nikiaus Bla ne p AM IS 0 V Figu e 1 Wha is he economic jus i ica ion o he posi i e slope o he IS- cu e and o he nega i e slope o he AM-cu e? Le us discuss he IS- ela ion i s . I he alua ion a io ises, sha e holde s a e ex- pe iencing capi al gains (see equa ion 9) and a e, he e o e, inc easing hei dissa ing. This all in wo ke s' ne sa ing can be compensa ed by a edis ibu ion o income om wages o p o i s. I p o i s and hence q inc ease, e ained ea nings a e going up. This p ocess only s ops when o al sa ings, i. e. pe sonal sa ings by wo ke s and sa ings in o m o e ained ea nings by he co po a e sec o ha e eached he ini ial high again. In he s ock ma ke ising p o i s, i. e. ising g, a e des abilising. An inc ease in he alua ion a io leads o ealisa ions o capi al gains and o a supply o mo e sha es. These addi ional sha es can only be ab- so bed by addi ional sa ings ou o wo ke s' income. This means ha wages mus ise o ha he p o i a e q mus all i shall be able o s ay a inc eased le el. The i s equi emen o an in e sec ion o he IS- and he AM- e- la ion in he posi i e ange o - and g- alues is g x [1 - i (1 - sw)] - s,( 'w 1 — g x x{ 1 - sw) which can be educed o (17.1) gx EE o < 1 The second equi emen is g x [1 - i (1 - sw)] -sw (1 - g xi) sw g x(l-sw) g x (1 - sw) OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.95.3.223 | Gene a ed on 2023-04-04 11:51:53 Co po a e Finance and Income Dis ibu ion in a G owing Economy 229 This means ha he IS-cu e has o in e sec he x-axis le om he in e sec ion poin o he AM-cu e. This condi ion can be educed o (17.2) i < 1 By sol ing (15) and (16) simul aneously we each he gene al equili- b ium alues * (18) 2* = and (19) g k l -sw gx These alues a e exp essions o s able equilib ium. This can be made clea by in oducing specula o s and by desc ibing he consequences o ising expec a ions in he s ock ma ke . The specula o s a e adding sha es o hei s ocks because hey expec u he p ice inc eases o occu . This bull ma ke leads o capi al gains and hese imply an inc ease in q in o de o keep o al sa ings a hei ini ial le el. Bu while his edis ibu ion has secu ed IS-equilib ium he si ua ion in he s ock ma ke becomes mo e and mo e despe a e. A ising Q implies a educ ion in wo ke s' sa ings and hence in demand o sha es and unless specula o s a e accele a ing hei own pu chases o sha es ( > *) canno be kep o long. A look a (19) shows ha only a ise in he wo ke s' p opensi y o sa e and/o a decline in o = g x, g and/o x can e e jus i y he specula o s' ac ion. The esul s (18) and (19) a e gi en by Kaldo who calls (18) a Neo- Pasine i Theo em8. This, i seems o us, is a kind o an exagge a ion. Fi s o all, wo ke s a e he only sha eholde s apa om he quan i- a i ely negligible specula o s and al hough hei sa ing p opensi y sw does no show up in (18) hei in luence s ill ma e s inso a hey a e ol- e a ing a ce ain alue o he e en ion a io o be ixed by managemen . Secondly, we wonde wha bea ing his ype o model could e e ha e on he con o e sy a ound he Pasine i pa adox. Pasine i and An i- Pasine i esul s eme ge in esponse o al e na i e s eady s a e alues o weal h dis ibu ion9. In he p esen model in he in e p e a ion o which we ha e ied o s ay as much as possible wi hin he bounds o explici heo ising he e is only one signi ican g oup o weal h owne s: wo ke s. Howe e , we may s ill wan o look o some kind o Pasine i in e - p e a ion o (18). In his case we could hi dly poin o he ac ha 8 Kaldo (1966), especially oo no e 8, p. 311. ® See Meade (1963). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.95.3.223 | Gene a ed on 2023-04-04 11:51:53 230 Nikiaus Bla ne inso a as wo ke s as sha eholde s do no con ol managemen ac ion, i. e. he de e mina ion o he e en ion a io , he unc ional dis ibu ion o income is independen o wo ke s' beha iou . Bu so a , he Be le and Means diagnosis o a sepa a ion o owne ship om con ol canno be mo e han wha we may call one o he s ylised ac s o manage ial economics10. The g ea es di icul y in connec ion wi h he Kaldo ian solu ion dis- cussed so a is his use o he alua ion a io as an independen a iable. To his we u n in he ollowing pa ag aph. 4. The Doub ul Rele ance o he Valua ion Ra io as an Independen Va iable Kaldo is using he alua ion a io as an independen a iable in o de o sol e he basic model. Can his be jus i ied on he basis o ou in e p e a ion o he alua ion a io? Can a y eely o a e he e limi s o be conside ed? We hink ha he e a e limi s and p e y se e e ones e en. Ou a gumen goes as ollows: A changing alue o implies changing cos o in es men inance. I we ake (10) and exp ess i in e ms o p opo iona e a es o g ow h we ind l = q/q + A/A - K/K I we accep he di e ence be ween g ow h in he numbe o sha es (A/A) and g ow h o asse s (K/K) as gi en, g ow h o he alua ion a io ( / ) is in p opo ion o he g ow h o sha e p ice (q/q). A ising alua ion a io — based on ising sha e p ice — implies ha he co po a e sec o has o sell less sha es in o de o inance he same amoun o in es men . Gi en a ce ain cus oma y amoun o di idends o be paid ou pe sha e he cos o in es men inance is educed. The opposi e applies o a down u n o he alua ion a io. Ou in e p e a ion o K, he denomina o o , ca ied he s a emen ha he co po a e sec o is in es ing up o he poin whe e he o wa d- looking alue o i s capi al is equal o capi al cos . This ollows om he assump ion o p o i maximisa ion. In es men plans a e in equilib- ium only i o wa d- and backwa d-looking alues o capi al a e equal. I he o wa d-looking alue is g ea e han he backwa d-looking one, inc eased in es men is p o i able and ice e sa. In es men in (3) has been assumed cons an , i. e. cons an a he p e ailing o wa d- and backwa d-looking e alua ions o capi al by he co po a e sec o . Fo a e se c i icism o his s ylised ac , see Tullock (1969). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.95.3.223 | Gene a ed on 2023-04-04 11:51:53 Co po a e Finance and Income Dis ibu ion in a G owing Economy 237 7. Conclusions We eel ha he e a e implica ions o he Ma is ype o heo ies o mic o as well as o mic o-mac o g ow h and dis ibu ion ha sugges he necessi y o e iew he use made o he concep o he alua ion a io. Ce ainly mo e weigh has o be placed on he alua ion a io as indica ing he cos o inance. This could be done by inco po a ing an explici in es men unc ion in o he models o he heo y o manage ial economics. The dis ibu ional esul s wo ked ou abo e— see equa ions (23) - (29) — poin o he impo ance o wo hings: O some impo ance is he knowledge o he ac ual alue o he alua ion a io. O o e iding impo ance, howe e , is he unde s anding o he p ocesses a wo k when he co po a ions ix hei inancial policies ( and i). Is owne ship eally sepa a ed om con ol and i so, how does his a ec co po a e inance and, hence — along he lines discussed —, dis ibu ion? Summa y Wi hin a amewo k o mula ed by Kaldo he e ec s o co po a e inance on income dis ibu ion a e in es iga ed. The discussion shows he impo - ance o he assump ions on he wo king o he capi al ma ke . The de e - mina ion o he a io o he sha e alue o he alue o eal capi al o he co po a e sec o is c ucial. Conside ably di e en in e p e a ions o he model ollow om ea ing his a io ei he as an endogenous a iable o as a pa- ame e . The esul s also highligh he impo ance o he alleged sepa a ion o owne ship om con ol. I his sepa a ion a ec s co po a e inance i also in luences income dis ibu ion. Zusammen assung Die Ve eilungswi kungen de un e nehme ischen Selbs inanzie ung we - den im Rahmen eines on Kaldo o mulie en Modells un e such . Dabei wi d die Wich igkei de Annahmen übe die Funk ionsweise des Kapi al- ma k es deu lich. Die Bes immung des Ve häl nisses zwischen dem Ak ien- we und dem Realkapi alwe des Un e nehmenssek o s is dabei en schei- dend. Es e geben sich ganz un e schiedliche In e p e a ionen, je nach dem ob dieses Ve häl nis endogen e klä ode als Pa ame e o gegeben wi d. Die E gebnisse zeigen daneben die Bedeu ung de Behaup ung on de T en- nung on Eigen um und Kon olle. Falls die T ennung die Selbs inanzie ung angie , beein luß sie auch die Einkommens e eilung. Li e a u e Bombach, G. (1959 a), P eiss abili ä , wi scha liches Wachs um und Einkom- mens e eilung, Schweize ische Zei sch i ü Volkswi scha und S a- is ik 95 (1959). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.95.3.223 | Gene a ed on 2023-04-04 11:51:53 238 Nikiaus Bla ne Bombach, G. (1959 b), Die e schiedenen Ansä ze de Ve eilungs heo ie, in: Schneide , E. (ed.), Einkommens e eilung und echnische Fo sch i , Be lin 1959. Hicks, J. R. (1973), Capi al and Time. A Neo-Aus ian Theo y, Ox o d 1973. Kaldo , N. (1955 - 6), Al e na i e Theo ies o Income Dis ibu ion, Re iew o Economic S udies 23 (1955 - 6). — (1957), A Model o Economic G ow h, Economic Jou nal 67 (1957). — (1966), Ma ginal P oduc i i y and Mac oeconomic Theo ies o Dis ibu ion, Re iew o Economic S udies 33 (1966) (ci ed acco ding o ep in in: Ha - cou , G. C., and N. F. Laing (eds.), Capi al and G ow h, Ha mondswo h, Bal imo e, Ringwood 1971). Kaldo , N., and J. A. Mi lees (1961 - 2), A New Model o Economic G ow h, Re iew o Economic S udies 29 (1961 - 2). Ma is, R. (1972), Why Economics Needs a Theo y o he Fi m, Economic Jou nal 82 (1972), pp. 341 - 352. Meade, J. E. (1963), The Ra e o P o i in a G owing Economy, Economic Jou nal 73 (1963). Pasine i, L. L. (1974), The Ra e o P o i in an Expanding Economy, in: Pa- sine i, L. L., G ow h and Income Dis ibu ion — Essays in Economic Theo y, Camb idge 1974. Robinson, J. (1953 - 4), The P oduc ion Func ion and he Theo y o Capi al, Re iew o Economic S udies 21 (1953-4) (ci ed acco ding o ep in in: Ha cou , G. C. and N. F. Laing (eds.), Capi al and G ow h, Ha monds- wo h, Bal imo e, Ringwood 1971). Tullock, G. (1969), The New Theo ies o Co po a ions, in: S eissle , E. (ed.), Road o F eedom — Essays in Honou o F. A. on Hayek, London 1969. Weizsäcke , C. C. on (1974), Subs i u ion Along he Time Axis, Kyklos 27 (1974). Wildsmi h, J. R. (1973), Manage ial Theo ies o he Fi m, London 1973. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.95.3.223 | Gene a ed on 2023-04-04 11:51:53