In the developed world, the same alarming diagnosis is repeated. From Brussels to Washington, political and business leaders warn that our economies have lost competitiveness because wages are too high and regulation is excessive. We are told that, if labor is cheapened and regulation is loosened, private investment will flow in abundance.
This diagnosis may seem common sense to some. However, today we have abundant evidence and sufficient accumulated experience to know that it is completely wrong. In a new study for the European Trade Union Confederation, my colleagues and I trace the money to test this hypothesis. To do so, we analyzed the financial statements of the 300 largest non-financial listed companies in Europe over the last 25 years. Our conclusions should worry policymakers, both inside and outside Europe. For two decades, capital has been abundant and cheap and corporate profits have remained solid; despite this, investment, productivity and wages have stagnated. The real brake on growth has not been the cost of labor, but the allocation of capital.
“The real brake on growth has not been the cost of labor, but the allocation of capital”
Our study shows how the large firms maintain solid profit margins, to the benefit of their shareholders, while cutting back their productive activity. A growing share of their revenues comes from their activities as financial agents —from collecting interest on bonds or government debt, from dividends, and from lending to their own customers— and not from production. Consequently, payments to shareholders have grown faster than the profits that finance them. The European non-financial corporate sector not only saves more than it invests today, but since 2009 it has been a net lender to the rest of the economy—a striking reversal of its historical role.
When profits from the largest European companies are directed increasingly toward share buybacks, dividends, and financial assets, rather than toward production and innovation, the result is a growing social cost stemming from a misallocation of capital. As the profitability of productive capital declines, it becomes more attractive to allocate every extra euro to financial assets rather than to invest it in a new factory or a laboratory. Among the companies we studied, productive capital accumulated is being reduced on a net basis. In the European non-financial corporate sector as a whole, net capital formation has fallen by more than half as a share of GDP since 2000: from 3.7% to 1.6%. For each euro of profit earned by European non-financial companies, the proportion reinvested — net of depreciation — into new productive capacity also fell by more than half: from 18.9% in 2000 to barely 7.4% in 2024.
The workers have paid the price of this sustained financial accumulation. The share of labor incomes in the income generated by the real economy —excluding the financial, insurance, real estate and public sectors— is today lower than it was in 2000 and continues to decline in several of the major European countries. More than two-thirds of the companies examined had announced restructuring processes that put 2.7 million European jobs at risk. Almost 80% of those announcements came from companies that had reported profits in that same year.
“From every euro of profit earned by European non-financial companies, the portion reinvested in new productive capacity was reduced by more than half”
This implies that jobs were not eliminated in response to losses, but as a tactic to raise profitability. Over the last quarter of a century, profits grew almost twice as fast as wages in the non-financial corporate sector, while payments to shareholders rose even faster. Profits accumulated during two decades of rising profits went to capital, not to the workers who produced them.
This problem is not, by any means, exclusive to Europe. It reflects the logic of financialization that has taken hold worldwide. But this process rests on a faulty theory of value, unable to distinguish between the creation of value and the extraction of value. As I explain in The Value of Things, economics as a discipline has forgotten the difference between profits derived from production and rents obtained merely by owning assets. Until we correct this fundamental defect, the risks of innovation will continue to fall collectively on taxpayers and workers, and research will continue to be funded with public money, while the rewards are concentrated in an ever-smaller number of hands.
None of this is inevitable. Financialization is the result of political decisions embedded in the governance rules of corporations, tax systems, state aid regimes and fiscal regulations. The task for governments is not merely to cheapen capital or to make it more abundant: cheap capital on its own does not become productive investment. It consists of changing the conditions that govern its use and the distribution of its returns. This requires binding conditions tied to public subsidies; public investment that shares both risks and benefits, rather than merely absorbing risks to guarantee private returns; and corporate governance oriented toward the long term, not the next quarter.
“The economy as a discipline has forgotten the difference between profits derived from production and rents obtained merely by owning assets”
These elements form the core of what I have termed a modern, mission-oriented industrial strategy. The key is not to pick winners, but to back those who are willing to commit: steer investment flows through ambitious public missions and forge symbiotic, well-crafted public–private partnerships that direct growth toward creating genuine social and environmental value. NASA did not dampen innovation when it included clauses against excessive profits in public contracts that made possible to go to the Moon and return in 1969. On the contrary, it created a system aimed at solving concrete problems —what clothes the astronauts would wear, what they would eat, and how they would go to the bathroom— that, at the same time, spurred growth on Earth.
We need similar collaborations to tackle climate change, which obliges us to rethink what we eat, how we get around, and what materials we use in construction. In the face of all these challenges, workers must be at the center, not on the margins. As Damon Silvers and I argued during the 2023 strike by American automotive workers, an ecological transition that does not also create quality jobs will lack the political backing needed to move forward. Workers and unions cannot be relegated to the sidelines: they must be part of the institutional fabric that governs the economy. That is why we need a new social contract between businesses, workers and the State.
I believe that the defense of a new economic thought is beginning to gain ground. In my new book, The Common Good Economy, I propose a compass that can help us steer this process. We must stop merely correcting market failures and begin redefining the objective: what Aristotle called the telos of the polis. Both the what and the how matter. Only if we give equal attention to the relationships between capital and labor, between the public and the private, and between the State and civil society can we begin to transform our economies. Competitiveness and justice are not opposing goals. The true choice is between an economy that rewards value extraction and one that builds the common foundations of lasting prosperity.
© Project Syndicate, 2026.
In collaboration with the La Caixa Foundation
