Douglas McWilliams, the former chief economic adviser to the Confederation of British Industry, claims in a new report published today that the recent outperformance of the US economy is due to a "transformation in the operation of capitalism on a sufficient scale to justify being described as a reinvention".
Professor McWilliams said there has been an "explosion" in mutual funds, the US equivalent of unit trusts, which are now owned by 37 per cent of American households, compared with under 6 per cent in 1980. The managers of such funds are so heavily incentivised that their outstanding share options are thought to be worth between 10 and 15 per cent of the value of the whole US equity market.
"They give them huge incentives. They are massive." Professor McWilliams says. "And so far they have generated the share price performance and the profits performance. The size of the carrot being dangled before them is one they really cannot ignore."
The result has been soaring US share prices and a gross domestic product which has grown by 15.9 per cent in 1990s, compared with 10.9 per cent for Western Europe. At the same time, figures from the Organisation for Economic Co-operation and Development show that return on capital has accelerated from an average of 13.5 per cent in the 1980s to 17.8 per cent during the 1990s so far and 18.5 per cent for 1996, according to the latest estimate.
But this performance has been achieved at the expense of wages, which have risen by 22.4 per cent in the years 1990-96 in the US, below the 24 per cent increase in consumer prices. By contrast, earnings in the European Union expanded by 39.5 per cent in that period, some 16.3 percentage points faster than prices.
"Real pay is rising a lot less fast than productivity [in the US] and the surplus is being handed over to profits ... If that is seen to work as it is seen to work in US financial markets, there will be pressure to extend it to Europe and to the UK in particular."