Unexpected Marxist utopia on Wall Street

Karl Marx believed that workers created all true value in corporations, and so corporate profits amounted to employee deprivation. He saw that capital was required as an input, but felt that true value was created by employees, not capitalist owners.

In capitalist economies, you might think it\’s impossible for employees to hog all the cash surpluses at the expense of owners. Wrong. The top financial companies of Wall Street, whose borrow-to-gamble spree caused the 2008 financial crisis, are outstanding examples of employees walking off with millions while the owners-the shareholders-were left with enormous losses and decimation of wealth. This was a Marxist dream of employee rights come true, in rather unexpected fashion.

Wall Street bankers have rightly been castigated globally for the 2008 crisis. However, many Indians are under the wrong impression that the bankers in question are owner-capitalists, because they are familiar with Indian companies that are typically owned and run by oily capitalists. In fact, the top bank honchos are highly paid employees.

Once, western finance was also dominated by capitalist owners like Nathan Rothschild and JP Morgan. But such big capitalists don\’t own top financial companies any more. Share ownership is widely dispersed among millions of shareholders, ranging from Arab sheikhs and sovereign wealth funds to big pension funds and small investors. Not even the biggest sheikh or pension fund owns more than a small fraction of the Wall Street giants.

These giants are run by professional managers. In general, top professional managers have high reputations. But in Wall Street\’s financial corporations, the top executives focused on extracting enormous salaries and bonuses rather than promoting shareholder interests.

Taking advantage of financial deregulation in the 1990s, they borrowed enormous sums-sometimes 50 times the value of owned equity capital-to invest in a bubble market. As long as the boom continued, the top executives, traders and other employees got huge salaries and bonuses, which they justified as reward for supposed sagacity. But when the market bubble burst, such risky over-borrowing caused the collapse of one giant after another. The top honchos and other employees kept their huge incomes and bonuses. But the shareholders-owners of capital-were largely wiped out.

Consider Citicorp, the biggest financial giant of all. It was rescued by the US government, as were many other financial companies. But despite the rescue, Citicorp\’s share price crashed by almost 95%, from over $500 in 2008 to just $28 today. This happened to most other financial giants, notably AIG, formerly the world\’s biggest insurance company. Government rescues kept the companies afloat, but the shareholders-the owners of capital—nevertheless suffered huge losses. Only the highly paid employees kept their millions.

Karl Marx theorized that only employees created real value, not owners. The greedy executives of Wall Street agreed fully with him! As employees, they commandeered all the surpluses for themselves, leaving virtually nothing for shareholders.

This was an unanticipated sort of Marxist utopia, where the employees cornered all the surpluses. Of course, Marx thought of employees as armies of unskilled workers. He could not have conceived of today\’s financial giants, whose employees are almost entirely highly skilled professionals demanding millions in bonuses. Still less could he have conceived that his dream of employees getting all the money would one day come true, but be condemned as Wall Street greed! Employee greed proved as bad as capitalist greed.

Governments also contributed to the mess. In a true capitalist system, greedy companies that take on too much risk should go bust. However, today\’s big financial companies have millions of citizens as depositors, mutual fund owners and members of pension funds. So, governments almost always rescue large financial companies from bankruptcy -the political compulsions are overwhelming.

Unfortunately this provides a perverse incentive to Wall Street bankers. In the old days, a JP Morgan or Nathan Rothschild would limit his risks, since bad decisions could lead to his personal bankruptcy. But the professional managers who run today\’s financial giants are not owners but employees, confident of getting fresh jobs even if their companies sink. So they have an incentive to maximize their gains through high-risk gambles (leading to fancy bonuses) in an upswing, knowing that the government will stage a rescue when the inevitable crash follows.

Lesson: contrary to Marx\’s ideals, big financial corporations that maximize employee interests while decimating shareholder interests are scams, not paragons of virtue. Regulators must guard against the risk that professional managers and traders will promote their personal interests over shareholder interests.

Employees should be treated fairly, but so too should shareholders. If not, you will get what we have seen in Wall Street banks-unbalanced employee greed.

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