Fixing Capitalism Through GAAP
It's time to tweak capitalism to reward labor at the source of wealth creation.
Say what you will about it, but capitalism is exceptional for its ability to build wealth. It intrinsically rewards ownership by aligning efficiencies with wealth creation. The one place capitalism fails horribly is how it values human capital, more commonly referred to as “labor”. It fails because it doesn’t inherently, or naturally, place labor as a driver of wealth creation. Indeed capitalism places labor in direct opposition to ownership.
This can be fixed.
Tweaking capitalism by a simple adjustment of Generally Accepted Accounting Principles (GAAP), would reward labor at the source of wealth creation.
PROBLEMS
PROBLEM I: Labor and Ownership are not aligned.
PROBLEM II: Organized labor, regulation, and taxation are notoriously inefficient systems.
SOLUTIONS
SOLUTION I: Align labor and ownership toward a common goal.
SOLUTION II: Place the redistribution of wealth at its source: at wealth creation.
GAAP
In GAAP there is income from which you subtract cost of goods sold and expenses to achieve profits. The higher the income and the lower the COGS and expenses, the higher the profits.
The problem is that labor costs in this system lie in COGS. If you want profits to go up, COGS need to be as small as they can be. If it costs $2 to make $10, great! If it costs $1 to make $10 even better. Capitalism has a baked in need to keep labor costs low. This isn’t necessarily a bad thing. The desire for efficiency is one of the things that makes capitalism such a powerful system, but you can easily see how capitalism is incentivized to push labor costs down.
Businesses are compelled to offer jobs at the lowest rate possible. Businesses will adjust pay rates until they find the absolute bottom price a person is willing to do a particular job. That price will then permeate across the labor market. If McDonald’s can pay someone $10.00 an hour to flip burgers, and Burger King can get someone to do it for $9.50, then Burger King will have a competitive advantage and McDonald’s will start lowering their pay.
You can say that that is wrong or even evil, but it’s not. Capitalism doesn’t have emotions. It doesn’t care about anyone’s feelings. Income inequality is part of the “game” of capitalism, and there is no designed mechanism in the rulebook that naturally raises wages for labor. Yet we are the ones who make the rules. GAAP is “generally accepted”. There needs to be a Generally Accepted Accounting Principle that inherently raises the value of human capital.
MN-ESOTA
(Minnesota - Employee Share Of Tax Abatement)
In MN-ESOTA (I am from Minnesota, and thought this name was funny, or at least clever) labor costs are shifted below net profit and come out as a distribution of profits earned at the company. This simple adjustment to GAAP places the redistribution of wealth squarely at the source of wealth creation and therefore forces an alignment of labor and ownership.
A MN-ESOTA company would function as any other company but with an agreement to share profits between labor and ownership:
Labor is paid wages (as they are now).
Net profit is split 50/50 between labor and ownership.
Employee distribution is shared with employees equal to the percentage of wages earned.
Employee distributions taxes are paid on a pass-through basis.
Depending on corporate structure, ownership distributions are paid either after tax or as pass-through.
COMPARISON TO OTHER EMPLOYEE OWNERSHIP STRUCTURES
The primary difference of MN-ESOTA from ESOPs or Co-Ops is that it is not an employee ownership program at all, but an adjustment to GAAP to cause the redistribution of wealth to happen at the source of wealth creation and to align labor with ownership.
CURRENT SYSTEMS FOR THE REDISTRIBUTION OF WEALTH
The present solutions to the misalignment of labor and wealth creation is through organized labor, regulation, and taxation. These are each unnatural solutions in that they are not baked into capitalism itself. Also, as they are not inherent to the system, there is no mechanism for them to achieve efficiency. Organized labor, regulation, and taxation, as methods for aligning labor with ownership and for the redistribution of wealth, are wildly inefficient.
ORGANIZED LABOR
Unions replace individual human potential with the strength of the group. They arise out of ownership/labor disputes which, as mentioned, are not aligned in GAAP. Also, they’re not naturally occurring. They arise only after labor costs have been pushed too low. Unions are not baked into the system.
REGULATION
Government regulation, while well meaning, can and will overreach and/or cause unintended consequences which may place undue burden on businesses. There is a place for regulation and oversight, but it can get ugly quick. This, again, is not baked into the system
TAXES
Taxes are a wildly inefficient system, both in the collecting and redistribution. It leads to a whole lot of infighting about how much we’re going to tax and how we’re going to spend the money. In many ways taxes are the worst mechanism for raising the value of human capital because it really isn’t meant for that.
Businesses fight against organized labor, regulations, and taxes because they are inefficient systems. The most efficient way of redistributing wealth is by allowing businesses to pay employees directly. Skip the tax part altogether and give it to labor. In fact, our conversation should NOT be about how much we should tax business, but how much they should value human capital.