A Comprehensive Review On Capital Structure Theories

149
The Romanian Economic Journal
A Comprehensive Review on Capital Structure Theories

Asvoaei Alexandru 1
Income inequality and income distribution have always represented a foremost topic with important economic, political and social implications. The large income disparities both at a national and global level present nowadays an even greater importance since after three decades of global capitalism, the anticipated and desired convergence of world economies fails to materialize. In recent decades, the large income gaps still remained: the poorest fifth of the world population possessed in 200 only !."# of global incomes while the richest fifth owned $2.%# of global revenues. The present paper aims to illustrate the underlying causes of the persistent income inequality from the recent decades performing the analysis from the interventionist economic theory perspective developed by &ohn 'aynard (eynes. (eywords: income, inequality, distribution, (eynesian, economic growth. &)* +lassification: ,-!, )!2, .!/, ."-. Introduction The income inequality problem and the distribution of income have been recurrent topics in the history of economics generating diverging
Asvoaei Alexandru, PhD Student at Alexandru Ioan Cuza University of Iasi, Romania, E-mail: alexasavoaei@yahoo.com.
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opinions and lively debates. Nowadays, after more than three decades of economic globalization, the concerns relating to income inequality are more relevant than ever if we take into account the magnitude of the negative effects that inequality has upon economic growth and on the entire development process as a whole. The need for a deeper understanding of the channels by which economic growth and income inequality interrelate has become clearer in the recent years partly as a consequence of the difficulties encountered by some countries once they started the economic liberalization recommended by the Washington Consensus and partly as recognition of the successes achieved by other countries in the same economic liberalization process. The keystone stands probably in finding the optimal proportion of income inequality for each country, without forgetting to take into account its own peculiarities. t is well known by now that opening the national economies by allowing the influ! of private capitals and reducing the customs barrier facilitating the international trade will have a great impact on a country"s economic #take off$. %ut only the market liberalization by itself does not improve the societies" development as a whole. &or this reason, 'ames Wolfensohn, the president of the World %ank during ())*+,--*, proposed in ())) a #comprehensive development framework$ .Comprehensive /evelopment &ramework, ()))0, thus criticizing the compartmentalized way of seeing the development process advocated until then, such as seeking for a single panacea like the #open market # or #getting the prices right$. t was arising so the need for a wider and more pluralistic view on the development process. Within it the income inequality"s evolution, both nationally and globally, should be considered an important landmark in creating a comprehensive framework for economic development. 1n a theoretical level, the relationship between economic globalization, through its high potential to boost the national economic growth, and the evolution of income inequality constitutes a
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controversial topic. 1n the one hand, the neoclassical growth theory argues that in an integrated global economy the levels of productivity and those of average incomes are converging as capital moves from developed countries, abundant in capital, which will record decreasing rates of marginal productivity to less developed countries where each unit of capital will record a higher marginal productivity because of the scarcity of capital. 1n the other hand, endogenous growth theories argue that the decreasing trends of the productivity rates assumed to occur in developed economies is canceled by the technological innovation specific to these countries, e!pecting rather a divergence of global incomes than a convergence of them. 2oreover, the dependency theory and world system theory claim as well that income and productivity convergences are unlikely to occur due to the differential benefits associated to global integration and due to the uneven terms of e!change between the central economies with high levels of incomes and the periphery economies which record low levels of incomes. 3lso, the empirical findings regarding the evolution of global income inequality do not record any change in the last two and a half decades. n ,--4, the richest fifth of the world population owned 5,.4 percent of the world incomes while the poorest fifth 6ust (.7 percent of them .see &igure (0. The most suggestive representation of world income inequality is the +hampagne0glass distribution where each horizontal band represents an equal fifth of the world"s population. Therefore, it was these theoretical controversies regarding the economic development process along with the divergent nature of the theories regarding the impact of income distribution on economic growth and the empirical evidences that are not recording any reduction of global income disparities that formed the basic arguments for the increased attention upon income inequality problems manifested in recent decades. %ut the problem is far from being new and it is hard to believe that it could be settled sometime in the
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foreseeable future. t can be found in a concrete form in the writings of some famous mercantilist authors such as William 8etty, 9regory :ing or 'oseph ;ouis ;agrange, then even more debated in classical writing of 3dam <mith and /avid =icardo, 'ohn <tuart 2ill or :arl 2ar!, and from then on in the neoclassical writings or :eynesian works. Figure 1 Champagne-glass distribution o the global incomes in !""#
1ource of data: /alton, ,--5, p. >),
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$e%nes& perspective on income ine'ualit% 3lmost a hundred years ago, :eynes identified as one of the biggest economic problem of his time the inability of the free market economy to ensure an equitable distribution of the national income and since the issue of high income disparities still persists, finding solutions concerning it still has that high priority nowadays as well as on :eynes" time. 3t the beginning of the twentieth century, the persistence of some large disparities of income levels was reflecting a different reality from the one envisioned by the #invisible hand$ theory and neoclassical economics. t was this reality that led 'ohn 2aynard :eynes to state in the end of his 2eneral Theory of )mployment, Interest and 'oney that #for my own part, believe that there is social and psychological 6ustification for significant inequalities of incomes and wealth, but not for such large disparities as e!ist today$ .:eynes, ,--?, pp.>7,+>7>0. Thus, along with the onset of the 9reat /epression from (),)+()>> and as the mainstream economics was proven weak in offering viable solutions for the new economic problems :eynes intervenes and offers a radical vision on the entire economics, bringing along a new vision and a new methodological apparatus. 3rdent believer in the economic interventionism politics, favoring the involvements on the markets to a public benefit purpose on behalf of the government, :eynes does not renounce though on the #good old doctrine$, nor does he sympathize with the communist supporters, but instead achieves a brilliant synthesis that offers a unique interpretation of the classical economic theory pleading in favor of the state only as far as it helps the private initiative to manifest. n his attempt to understand the triggering mechanisms of crises and the ways of minimizing their negative effects :eynes is at the same time performing a pertinent analysis on the causes of poverty. @is first writings on poverty and its link to inequality of incomes appear therefore in the early ()>-s in an effort to combat the consequences
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of the 9reat /epression by emphasizing the relationship between economic growth and employment levels thus providing a series of solutions for reducing the high unemployment rates. :eynes"s policies concerned the increasing of government e!penditures during recession periods in order to reestablish the economic growth. @owever they should not be understood as an impulse for a wasteful state, but rather as a government intervention during crisis meant to restore the equilibrium of a national economy. :eynes believes, and for good reason, that it is precisely the ma6or inequity of income distribution e!isting in a society, that is the main cause for the occurrence of the recession phase of the business cycles. @e supports his view by formulating what is today known as psychological fundamental law, which states that #when aggregate real income is increased aggregate consumption is increased, but not by so much as income$. .:eynes, ()4-, p. ?70 1f course, :eynes was thinking especially of the consequences that either the increases or the decreases of aggregate demand will have on the essential economic parameters, such as the level of employment. %y formulating this law, :eynes notes that the increase of the marginal propensity to hoard, which implicitly coincide with the decrease of the propensity for consumption or investment, is even more pronounced as the individual incomes are higher. Therefore, :eynes believes that it is precisely the richest people who live in a certain society that are those responsible for the occurrence of macroeconomic imbalances like those that caused the outburst of the 9reat /epression of (),) A ()>>, but which also started the current economic crisis. The :eynesian reasoning is simpleB as the economy begins to falter, both enterprises and consumers A either out of fear of losing their 6obs, or because they are already unemployed A will begin to reduce their costs that will further on cause a fall of demand below the levels of the e!isting supply, e!acerbating the adverse economic and social consequences of the crisis. 9iven this, the only viable solution from
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:eynes"s perspective is the government intervention through macroeconomic policies designed to restore the consumption at current production levels, equalizing savings with investments and achieving a full employment state when the economy is employing all of its available resources. The government spending theory developed by :eynes assumes state intervention on the market through various budgetary e!penditures programs and ta! incentives in order to create a sufficient number of 6obs and to restore the aggregate demand at the same level with the e!isting market supply. %ut :eynes is aware of the fact that economic growth does not necessarily reduce poverty by itself. @is opinions on inequality are found particularly in the last chapter of The 2eneral Theory of )mployment, Interest and 'oney. Cnlike the neoclassical beliefs, :eynes notes that income inequality leads to an economic growth slowdown rather than boosting it. 8eople living in poverty spend all their incomes to purchase the basic goods for their living and any additional income will be spent on basic subsistence goods as well. %ut once a higher level of income is reached, individuals will generally tend to save more and consume less, so that #up to the point where full employment prevails, the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by itD and only in conditions of full employment is a low propensity to consume conducive to the growth of capital$ .:eynes, ,--?, p. >7,0. Therefore, given that the normal state of an economy is to achieve the goal of full employment, it will be public spending that will have a stimulating effect on the economic growth and not the savings as in the neoclassical theory. 3lso, for :eynes the investments .determined by demand size0 represent the active element in their relationship with savings .8opescu, ,--7, p. ?*40 and not vice versa as in the classical and neoclassical doctrines. :eynes frequently stood in favor of a higher ta!ation plan for large incomes and inheritances, thus the solutions proposed by him
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concerned state interventions aiming to increase the consumption propensity, either by fi!ing the interest rate or by other economic and monetary means such as the adoption of a direct ta!ation scheme for the redistribution of incomes. Willing to strengthen this very idea, :eynes militates for the #euthanasia of the renter$ .:eynes, ()4-, p. >450. @e considers that this social class is parasitic, unproductive, and inclined towards the #blocking$ of large amounts of cash, which otherwise could represent a catalyst to economic recovery. n order to achieve this goal of Ecutting the ground from under renter"s feetE .2oldovanu, ())7, p (7>0, the %ritish economist also recommended, especially in times of e!treme economic crisis, a substantial reduction of interest rates, even to the point where they would be close to -F. 3lthough :eynes was fully aware of the inflationary pressures that would result from the adoption of such economic policies, he strongly believed that this was the only way to gradually eliminate the renter class, and thus the important amounts of money hoarded by them could be returned to the economic circuit. %ut even so, :eynes does not forget to emphasize at the end of his 2eneral Theory of )mployment, Interest and 'oney that #apart from the necessity of central controls to bring about an ad6ustment between the propensity to consume and the inducement to invest, there is no more reason to socialize economic life than there was before$ .:eynes, ,--?, p. >740. @ence, :eynes advocates state intervention in lessening the large income disparities for at least three reasons .:irshner, ()))0. &irst, from a pure positive economic perspective, :eynes argues that a heavily unequal distribution of income will lead to an aggregate level of demand under the e!isting level of productivity, thus slowing the economic growth and causing rates of employment below the full employment state. Then, from a normative perspective, the unregulated market forces will tend to realize an arbitrary and unfair distribution of income and wealth by rewarding the ones who are already rich than the poor. &inally, from a practical perspective, large
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disparities of wealth can lead to social unrest and even riots, having strong negative consequences on the economic growth and social development unlike the :eynesian solutions which are #more favorable to peace than the old has been$ .:eynes, ,--?, p. >7)0. The present income ine'ualit% and the actualit% o $e%nesian solutions The issue of income inequality is nowadays at least as relevant, as it was in the 9reat /epression era. 3nd more than that, taking into account the austerity policies adopted by the great ma6ority of economically developed countries from Gurope in recent years, many leading economists believe that the wealth disparities are likely to increase even more in the near future. &or e!ample, one of the latest laureates of the Nobel 8rize for economics, namely the 3merican professor 8aul :rugman, in an article published on >( 2ay ,-(, in the 3merican newspaper #The New Hork Times$, e!presses his concerns about the possibility that the 3merican authorities might adopt a similar line of action for the C. <. economy. n the same article he also launches an interesting hypothesis, about the real motivations behind these political decisions. The 3merican economist believes that the real purpose of those governments which had adopted the #austerity agenda$, was to dismantle many of the active social programs, e!isting in their countries. @e also thinks that the e!istence of deficits was only an e!cuse used by the governments, in order to 6ustify the necessity of implementing such economic policies. Therefore, 8aul :rugman clearly states that the final ob6ective of these decisions is that of #aiding the rich and punishing the poor$ .:rugman, ,-(,0. @e motivates this statement by the fact that, especially in the Cnited <tates, many politicians had proposed, along with the austerity measures, significant ta! reductions for the wealthiest 3merican citizens.
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n spite of the fact that we cannot provide sufficient arguments in order to certify beyond any doubt professor :rugman"s hypothesis, we believe it would be a serious mistake to completely ignore it, especially since in the recent decades, both within the 3merican society and at a global level, the wealth concentration has become more and more pronounced. Thus, in ,--4, according to official statistics, ,-F of the C.<. population held appro!imately 5*F of the national wealth, while the (F corresponding to richest 3mericans would own no less than >7,?F of it. 2oreover, during the years that have passed since the beginning of the current economic crisis, this trend continued to amplify. @ence, in ,-(- the percentage of wealth held by the richest fifth of the 3merican population, reached the threshold of 5)F ./ornhoff, ,-(>0. 1ther statistics show that during the time interval since the early I5-s until now, the net income of the richest (F of C.<. citizens has grown by ,5(F while the revenue increase of the middle class citizens was much lower, of only about ,*F .<herman J <tone, ,-(-0. The entire dynamics of income changes for every category of the C.<. population, from the last >- years is shown in &igure ,.
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Figure ! Income gains at the top dwar ( those o low and middle income households
1ource of data: 1herman 3 1tone, 20!0
3ll this data shows that the wealth concentration process has intensified in the same time interval, when C.<. financial sector regulations were successively abolished, enabling the emergence of those huge private corporations, which were at the same time, e!tremely strong in financial terms. We can also easily infer that the impressive financial strength of this oligopoly formed by giant financial institutions, is able to provide them with a ma6or influence among 3merican politicians, a situation which could provide a strong foothold for the disturbing hypothesis launched by 8rofessor :rugman. t cannot be 6ust a simple coincidence that, at least in the Cnited <tates, there has been only one period in the entire economic history
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that was characterized by a significantly larger discrepancy regarding the national wealth distribution, than the one e!isting nowadays, and those years are 6ust the ones that precede the 9reat /epression of (),) A ()>>. Thus, in (),), the richest (F of the 3merican citizens shared 77,,F of the total wealth of the nation ./ornhoff, ,-(>0. 3nother similarity between these two time periods is that both are characterized by the absence of an efficient regulatory framework, regarding especially the financial sector of the economy, fact which appears to have facilitated the increment of wealth gap between the rich and the poor. The wealth distribution in the Cnited <tates since before the 9reat /epression till the year ,-(-, cat be visualized in the following chart. Figure ) Share o wealth held b% the *ottom ++, and Top 1, in the -nited States. 1+!!-!"1"
1ource of data: ! 220! $ data 0 4olff 5! 67. ! 2020!0 data 0 4olff 520!27.
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2oreover, further analysis has revealed that, in the same period of time, the richest ,7,--- 3merican families earned an income three times higher than the poorest ?,---,--- families settled within the borders of the Cnited <tates .Walsh, ,--50. 1f course, the Cnited <tates is not the only country in the world which is suffering from this #disease$. n almost every country, the income gap between the rich and the poor has increased in the recent years. &or e!ample, in the C:, the share of the national income held by the richest ten percent of the population was significantly higher in ,--) than a decade before. Thus, in only ten years, the richest %ritish citizens e!panded their wealth from ,5F to >(F..sourceB The poverty site, ,-(-0 2ore than that, in the same period of time, the poorest ten percent of the %ritish citizens had e!perienced a fall in their real incomes, while other categories of people had their real income increased, to a greater or lesser e!tent. n &rance the situation is not different. &rom ())) till ,--), the nominal income gains of the poorest ten percent of the &rench citizens were of 5.7F, while the richest ten percent earned, on average, (5.,F more. %ut this average does not reflect the e!isting discrepancy entirely, because the top -.-(F gained much more than the average. 2ore specifically, between ,--7 and ,--5, the richest -.-( of the &rench citizens obtained an annual increase of their wealth of >>F. .sourceB nequality watch, ,-(,0 &or other Guropean countries, the situation is even worse. 3ccording to statistics, in ,-(- the relative median at+risk+of+poverty gap, was the widest in ;ithuania A >,.?F and both in <pain and =omania A >-.?F..sourceB Gurostat, ,-(,0 The e!amples could continue but the conclusion would be the sameB almost everywhere the wealth inequalities has increased. Cnder these circumstances, we consider that the call to the authorities lunched by :eynes against those #blind forces of the market$, which represents the private monopolies of his time is fully 6ustified. 1nly by limiting their power and influence on the healthy free market
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mechanisms, it would be possible to ensure both, a high level of employment and a more equitable distribution of national income between the members of the society. Conclusions n our opinion, the income inequality phenomenon and its implications should be brought again into the attention of economic debates, since in the last decades the statistical facts relating it are revealing some troubling realities. The global income inequality has increased steadily both at a national and international level. Therefore, the present paper aims to highlight that unlike the current mainstream perspective upon income inequality, the keynesian perspective is more economically and socially optimal. n the past decades, the inequality problem has been treated in neoclassical terms, being understood as having one causality direction, from growth to income distribution process. The arguments of the neoclassical theories are based on the inverted C curve hypothesis, advanced by :uznets in ()**, according to which income inequality tends to increase in the early stages of the economic growth, because as it becomes sustainable, the inequality begins to decrease gradually. Therefore, the neoclassical economists do not perceive the widening in income as a serious problem. They assume that the income disparities will inevitably decrease as the society develops, without the need for governmental intervention. @owever, we believe that in the last decades reality has proved e!actly the opposite, namely that income inequality is a real problem whose consequences are at least worrying. &or this reason, we consider it is necessary to remind the recommendations made by 'ohn 2aynard :eynes, concerning the opportunity of state intervention, in order to increase the population propensity to consume. The interest rate mechanism and the implementation of a progressive ta!ation scheme are in our opinion
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the most efficient ways for obtaining a more equitable income distribution.
Ac/nowledgements0
8This wor9 was supported by the )uropean 1ocial :und in ;omania, under the responsibility of the 'anaging <uthority for the 1ectorial .perational =rogramme for >uman ;esources ,evelopment 200%020!- ?grant =.1,;@A+== !0%A,'I !./A1A%$-"2B8. Re erences Conley, /. .,--50, #Hou may ask yourselfB 3n introduction to thinking like a sociologist$, NHB W. W. Norton. /ornhoff, 9. W. .,-(>0, #Wealth, ncome, and 8ower$, /ata base, httpBKKwww,.ucsc.eduKwhorulesamericaKpowerKwealth.html, 3ccessed on 'anuary ,-(>. GC=1<T3T .,-(,0, ncome distribution statistics, /ata base, httpBKKepp.eurostat.ec.europa.euKstatisticsLe!plainedKinde!.phpK nco meLdistributionLstatistics, 3ccessed in 3pril ,-(>. NGMC3; TH W3TC@ .,-(,0, The evolution of income inequality, in &rance, /ata base, httpBKKwww.inequalitywatch.euKspip.phpNarticle)>JlangOen, 3ccessed in 3pril ,-(>. :eynes, '. 2. .,--?0, #The 9eneral Theory of Gmployment, nterest and 2oney$, New /elhiB 3tlantic. :eynes, '. 2. .()4-0. #Teoria generalP a folosirii mQinii de lucru, a dobanzii si a banilor$. %ucureRtiB Gditura StiinTificP. :irshner, '. .()))0, #:eynes, capital mobility and the crisis of embedded liberalism$, =eview of nternational 8olitical Gconomic, ?.>0B >(>+>>4. :rugman, 8. .,-(,0, #The 3usterity 3genda$, /ata base, httpBKKwww.nytimes.comK,-(,K-?K-(KopinionKkrugman+the+ austerity+agenda.htmlNLrO,J, 3ccessed on 'anuary ,-(>.
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2oldovanu, /. .())70. #/octrinele economice$. ChisinPuB Cniversitas. 8opescu, 9. .,--70, #GvoluTia gQndirii economice$, ed. a +a, %ucureRti J Clu6B Gditura 3cademiei =omQne J Gditura Cartimpe!. The 8overty <ite .,-(-0, Cnited :ingdom ncome nequalities, /ata base, httpBKKwww.poverty.org.ukK-)Kinde!.shtml, 3ccessed in 3pril ,-(>. <herman, 3. and <tone, C. .,-(-0, # ncome 9aps %etween Uery =ich and Gveryone Glse 2ore than Triples in ;ast Three /ecades, New /ata <how$, /ata base, httpBKKwww.cbpp.orgKcmsKNfaOviewJidO>,,-, 3ccessed on 'anuary ,-(>. <mith, 3. .()?,0, #3vuTia naTiunilor A cercetare asupra naturii Ri cauzelor ei$, vol. , %ucureRtiB Gditura 3cademiei =epublicii 8opulare =omQne. Walsh, . .,--50, #:eynes and the 2arketB @ow the world"s greatest economist overturned conventional wisdom and made a fortune on the stock market$, NHB 'ohn Wiley J <ons. Wolff, G. N. .,-(,0, #The 3sset 8rice 2eltdown and the Wealth of the 2iddle Class$, NHB New Hork Cniversity. Wolff, G. N. .())?0, #Top @eavy$, NHB The New 8ress. Comprehensive /evelopment &ramework .()))0, /ata base, httpBKKweb.worldbank.orgKW%< TGKGVTG=N3;K8=1'GCT<K-,,c ontent2/:B,-(,-4,*Wmenu8:B7(>)>Wpage8:B7(>?4Wpi8:B*(*>> Wthe<ite8:B7-)7(,--.html, 3ccessed on 'anuary ,-(>.
Year XVI no. 47
March 2013

A Comprehensive Review On Capital Structure Theories

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149

The Romanian Economic Journal