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Reward

Every morning, people around the world wake up to another day’s work. Across the planet minerals are extracted, machinery operated, goods transported, seeds sown, text typed, houses built, crops farmed, clothes stitched, patients cared for, and children taught. Hours pass and energy is expended. It’s a remarkable fact that at the close of each day people are rewarded so unevenly for their contributions. Billions earn less than $2 a day while, at the opposite end of the spectrum, an American hedge-fund manager like David Tepper bags more than $1 million an hour.¹ The result is that the eighty-five richest people on Earth own as much wealth as the poorest half of the world’s population, and the richest 1 per cent now own more than the remaining 99 per cent combined.²

Disparities in wealth are so pervasive that it takes some effort of imagination to see things afresh, to understand that there is nothing inevitable about poverty or gross inequality in the modern world. There is no immutable law of nature preventing us from sharing things more equitably, so that everyone is fed, clothed, nourished, sheltered and educated. Human choices maintain the current distribution of wealth and human choices can change it.

In pre-capitalist societies, large inequalities in wealth and power were often justified by religious teachings, which claimed that the social and economic hierarchy was ordained by God, so that those with great wealth had a divine right to it. Today’s dominant justification for inequality comes not from religion but economics. Ethical considerations play little or no part in the practice and study of modern economics – you will not find a serious discussion of fairness in any standard textbook. The irony of this is striking given that the study of economics evolved as an offshoot of ethics.³ The father of Western economic thought, Adam Smith, was, after all, a moral philosopher.

The familiar justification for inequality is founded on the principle that people should be rewarded according to the value of their contribution. There is something intuitively compelling about this reasoning: you get what you give. Mainstream (neoclassical) economists tell us that this is precisely what happens in a competitive, free market. The impartial laws of the market determine the value of your contribution and reward you accordingly. If the free market rewards some people hundreds of times more than others, it can only mean the former produce hundreds of times more value than the latter. A worker who adds £50,000 of value to a company is rewarded with £50,000 in wages, so the theory goes. As we will see, this is not actually how people are rewarded but, even if it were, would it be fair?

There are different ways to contribute to the production or provision of something. Suppose we decide to bake a cake: I pay for the ingredients and let you use my kitchen, but you do all the baking. The outcome is a delicious cake but each of us has contributed something quite different. You have put in your time and skills as a chef; I’ve contributed my money and property. In a market economy, both contributions can generate an income. Some people are rewarded for what they do; others for what they own.

If something we own can be traded in a market, generating an income, economists call it ‘capital’.⁴ Capital includes land, real estate, industrial equipment and money. The income derived from it can take a number of forms, such as profit, rent, dividends, interest or royalties. But there are glaring problems with the principle of rewarding people according to the capital they own. Most obviously, it allows some people to grow extraordinarily rich without having to do anything at all. After all, wealth generates wealth. Between 1990 and 2010, Liliane Bettencourt, the heiress of L’Oréal, the world’s largest cosmetics company, increased her fortune from $2 billion to $25 billion without having to lift a finger (more than ever, investment decisions are made by paid experts).⁵

Our economic system delivers vast rewards to the rich not for what they do, but for what they own. What’s more, the greater the fortune, the faster it tends to grow. The largest fortunes can achieve rates of return two or three times larger than those earned by smaller ones (6 or 7 per cent compared with 2 or 3 per cent).⁶ Mainstream economists have long assumed that a natural outcome of the market is a reduction in wealth inequality, which ultimately stabilises at an acceptable level, but in reality this depends on the institutions and policies in place. Historical evidence suggests that over time, and left to their own devices, competitive free markets tend to concentrate wealth in fewer and fewer hands. In his 2013 book, Capital in the Twenty-First Century, French economist Thomas Piketty provided powerful evidence for this. One of the world’s leading researchers into inequality, he argues that unchecked capitalism tends to make the rich richer, producing extremely high levels of inequality.⁷ Although this may seem old news to some, it turns mainstream economic thinking on its head and does so with more data than has ever been collected on the subject, covering three centuries and over twenty countries. The lesson from history is clear: we cannot rely on the ‘invisible hand’ of the market; we must extend the reach of democracy through regulation and taxation.

Vast wealth may take on a life of its own, but how do people come to own it in the first place? One of the main ways is simply by inheriting it. Inheritance is not a peripheral economic issue. In the US, between 1970 and 1980, inherited wealth accounted for 50 to 60 per cent of total wealth – some estimates have put it as high as 80 per cent.⁸ Globally, inherited wealth accounts for 60 to 70 per cent of the largest fortunes. Some of these inheritances represent enormous transfers of economic power. The Walton family, for instance, is worth $152 billion.⁹

As capital accumulates, dynasties form and inherited wealth accounts for a larger proportion of total wealth, giving the richest heirs more wealth than the populations of some countries. This is the main reason why ownership of capital is so extremely concentrated. Historically, the wealthiest 10 per cent have always owned more than half of all capital (and sometimes as much as 90 per cent), while the poorest half owned almost nothing.¹⁰ The pattern holds true today. In most European nations, the top 10 per cent own roughly 60 per cent of the wealth, while in the US they own a little over 70 per cent of the wealth. In both cases, the poorest half of the population own less than 5 per cent.¹¹

The impact of inheritance is felt over centuries. By tracking rare surnames, researchers in the UK found that, over the last 150 years, the effect of inheritance has consistently overcome political efforts to improve social mobility. The two economists behind the study of January 2015, Professor Gregory Clark and Dr Neil Cummins, summed up their results in simple terms: ‘To those who have, more is given.’ There was a ‘significant correlation between the wealth of families five generations apart’. In other words, ‘What your great-great-grandfather was doing is still predictive of what you are doing now.’¹² Today, the descendants of the nineteenth century’s upper classes are not only richer, but more likely to live longer, attend Oxford or Cambridge and end up a doctor or lawyer. And there is no sign of any let-up in the power of inheritance to shape the world. The wealth transferred via inheritance from one generation to the next is set to break all records. A report by the Boston College Center on Wealth and Philanthropy predicts that the US is set for the largest inter-generational transfer in history: $59 trillion passed down between 2007 and 2061.¹³

Why should the lottery of birth have such an impact on what people own and the opportunities they enjoy? Being born to wealthy parents is a matter of blind luck. The typical argument made is that those with wealth have the right to do with it as they please, including passing it on to their children. Even if we accept this as a legitimate right, it is certainly not the only legitimate right. It ought to be balanced against other rights – most pressingly, the right of all children to enter a world of equal economic opportunity, or, at the very least, one in which they have access to clean water, food, shelter, medicine, education and dignified employment. When the two rights conflict, why should the wants of the few outweigh the needs of the many? To the younger generation, equal economic opportunities can mean the difference between health and illness, education and illiteracy, happiness and depression, even life and death. By contrast, reducing great concentrations of economic power by regulating inheritance need not threaten anyone’s health, literacy, happiness or existence.¹⁴

Inheritance isn’t the only way to acquire great wealth: much of the world’s private property was originally attained through violence and exploitation. Slavery, for instance, rapidly accelerated the accumulation of capital in eighteenth-century Britain. Historian Robin Blackburn writes: ‘The thousands of millions of hours of slave toil helped to underpin the global ascendancy of Victorian Britain.’¹⁵ Profits from this exploited labour helped to build many banks (including Barclays), extend vital credit to early industry, modernise British agriculture, finance the experiments of James Watt, and increase economic growth. When a panel of experts attempted to put a figure on the unpaid labour of the slaves who had enriched Britain, they arrived at a figure of £4 trillion.¹⁶ Dr Nick Draper from University College London estimates that as many as ‘one-fifth of wealthy Victorian Britons derived all or part of their fortunes from the slave economy’.¹⁷ Adding insult to injury, when slavery was eventually abolished in Britain, 46,000 slave-owners were compensated for their loss of ‘property’ to the tune of £17 billion in today’s money. Their freed slaves did not receive a penny.¹⁸

What about capital that is secured through talent and hard work – does this entitle an owner to generate unlimited income from it? After a given point, the income generated from capital goes well beyond what is necessary to compensate the owner for any initial effort. As Piketty points out, ‘no matter how justified inequalities of wealth may be initially, fortunes can form and perpetuate themselves beyond all reasonable limits and beyond any possible rational justification in terms of social utility. Entrepreneurs thus tend to turn into rentiers, not only with the passing of generations but even within a single lifetime . . .’.¹⁹

The problems go deeper than this, however. Many who reject the idea that we should be able to generate income simply from owning capital still believe that we should be rewarded in accordance with the value of our personal contribution. But how do we measure the value of someone’s contribution? In 2010, the world’s highest paid footballer earned over £500,000 a week.²⁰ In the UK, in the same year, a nurse starting in her or his first year earned close to £400 a week.²¹ How does the market determine that a footballer’s contribution is worth over a thousand times more than the contribution of a nurse?

The mainstream theory of wages defines ‘contribution’ as the market value of what workers produce as determined by supply and demand, but this value changes with market conditions. If 90 per cent of engineers dropped dead tomorrow, the market value of the skills of the remaining 10 per cent would promptly increase. This would have nothing to do with any change in their efforts or output. Numerous factors beyond our control determine the market value of what we can contribute. Ultimately, as with inheritance, it’s just a matter of luck.

Even the ‘self-made’ rich owe a debt greater than their fortune to those who developed the technologies, institutions, laws and infrastructure that made their enrichment possible. Billionaire Warren Buffett concedes that ‘society is responsible’ for most of what he has earned. ‘If you stick me down in the middle of Bangladesh or Peru or someplace, you’ll find out how much this talent is going to produce in the wrong kind of soil. I will be struggling thirty years later. I work in a market system that happens to reward what I do very well – disproportionately well.’²²

What’s more, what we can contribute is also a matter of chance. The opportunity to cultivate our innate potential depends on conditions we play no part in creating. For instance, in the US, only 9 per cent of students in elite universities come from the poorer half of the population.²³ Another study released in 2015 by the UK Social Mobility and Child Poverty Commission exploded the myth of a meritocratic society.²⁴ According to its findings, children from wealthier families with less academic intelligence than their poorer counterparts were nevertheless 35 per cent more likely to end up becoming high earners. Wealthy parents employ a range of strategies to ensure their children end up in ‘top jobs’ but, whether it’s by tapping into powerful personal networks or subsidising unpaid internships, the result is the same: an absence of downward mobility. And, because high-earning jobs are in limited supply, gifted students from less advantaged backgrounds face an uphill struggle to turn their potential into market rewards.

In terms of economic remuneration, talent and hard work mean little if they are not granted the right conditions in which to flourish. Human potential is squandered on an enormous scale because of the extreme inequalities of opportunity that exist in the world. Countless people have perished from preventable diseases, died in senseless wars and starved in avoidable poverty. Billions have been denied the freedom necessary to realise even a fraction of their promise. Many potential Shakespeares and Einsteins, Maya Angelous and Emmy Noethers must have lived and died without ever knowing the wonders of which they were capable.

Just as we should reject the idea that a person deserves large rewards because of inherited wealth, we should not accept that a person deserves large rewards because of their genetic and social inheritance. Influential neoliberal economist Milton Friedman showed up the hypocrisy of rejecting one form of inheritance and not the other by asking, ‘Is there any greater ethical justification for the high returns to the individual who inherits from his parents a peculiar voice for which there is a great demand than for the high returns to the individual who inherits property?’²⁵

However, there is a distinction to be made between inheriting wealth and inheriting the talent and opportunities to develop it. Becoming rich through inherited wealth requires no effort, whereas becoming rich through inherited talent does. It is not easy to develop talent or to use it to make a valuable contribution. Doctors, lawyers and scientists have to study for years to succeed in their professions; top athletes, artists and musicians must dedicate their lives to cultivating their abilities; and entrepreneurs must often work extremely hard to create successful businesses. But as soon as we bring effort into the equation, we have deviated from the principle of reward according to the market value of contribution. I may dedicate my life to playing tennis but it’s clear to anyone who’s seen me play that I will never be rewarded for my efforts. Top professionals are ultimately rewarded for what they achieve, not how hard they try.²⁶

But would it be fairer to reward people according to effort? We neither choose our innate capacities nor the freedom we’re given to develop them; moreover, once these capacities are developed, we do not determine the value the market will assign to them. It all comes down to luck. So, what about the efforts we make? The first thing to say is that working hard is not in itself a virtue. Financial speculators, arms dealers, corporate lobbyists and fossil-fuel executives may work very hard, but they also make the world a worse place to live in for many others.

Some progressive economists have suggested that people should be rewarded in accordance with their socially useful efforts. However, the ability to make socially useful efforts is, nevertheless, an ability. It may be more evenly distributed throughout the population than other abilities, but, no matter how hard they try, the very old, the very young, the severely disabled and the sick are often unable to contribute in ways the market recognises or remunerates.²⁷ Our capacity to be self-disciplined, to persevere, to focus, is just as much a part of our genetic and environmental inheritance as any other capacity. The treatment we receive as children – and whether we are prone to hyper-activity, have trouble maintaining our attention, lack confidence or self-esteem, suffer from severe headaches or depression, and so on – can all impact on our capacity to channel our energies in productive ways. Both the inclination and capacity to work hard reflect the way we are and, for that, we are not responsible. Even remuneration based on socially useful effort, then, fails the test of fairness.²⁸

The problem lies with the notion of reward itself. A reward is given in return for something. But no concept of reward sits comfortably with our lack of ultimate responsibility.²⁹ Since we are not truly responsible for what we do, it does not make sense to distribute ‘rewards’ on the basis of behaviour. It does not make sense to apportion rewards at all. The intuitively compelling notion of ‘getting what you give’ ignores the fact that what we can give depends on what we get from our genetic and social inheritance. Whichever way we look at it, all paths to wealth, status and success are paved with luck. This fact supercharges calls for increased equality across society.³⁰

The hoarding of vast resources – resources that could save countless people and enrich numerous lives – has been normalised and celebrated in our society, but there is no moral justification for it. No path to extreme wealth entitles us to hold on to it – not in a world in which so many fundamental needs go unmet. The idea that we could ever be entitled to vast wealth – that a disproportionate amount of Earth’s riches could ever really belong to us – is a dangerous fiction, one that has been cultivated to mask naked greed. Great wealth is never deserved. The fact that some people attain it is merely the product of strange institutions, emerging from an odd culture, developed by a flawed species.

For a principle of distribution to satisfy the test of fairness, it has to be based on need. In a world that took a principle of fair distribution seriously, sickness would be reason enough to be treated, hunger would be reason enough to be fed, and homelessness reason enough to be housed. Resources would no longer be distributed according to the arbitrary lotteries of birth and opportunity. Instead, material inequalities would be used as a means of compensating for inequalities in more fundamental domains.³¹ For instance, people with disabilities or health problems may need extra resources to enjoy a similar degree of freedom to the non-disabled and physically healthy. Or imagine a society in which everyone is paid the same hourly wage. Some people may choose to work more hours than others and end up with more money. But those who work fewer hours are not necessarily worse off. The well-being accrued from time off work can offset the benefits of financial remuneration. In such cases, the financial inequality that arises is not a problem if the overall balance of well-being, enjoyment and freedom is roughly maintained.

Fairness is not the only important value. There are still trade-offs to be made and other factors to be considered. For instance, as with punishment, perhaps rewards could be used to incentivise people to behave in socially valuable ways (more on this below). Striking the right balance between fairness and other social goals is an ongoing experiment, one that should be directed democratically. But, in order to make informed judgements about these trade-offs, it is essential to dispense with spurious arguments and self-serving fictions. Accusations of the ‘undeserving poor’ and claims of the ‘wealth-creating rich’ are baseless attempts to conceal the injustice at the heart of the economic system. Arguments put forward to justify inequality based on notions of desert always have been, and always will be, fundamentally flawed.

A fair day’s pay

Rewarding people according to the market value of what they contribute is not fair because the value of our contribution is ultimately determined by forces for which we are not responsible. Whether we inherit a lot of money or property, are free from oppression and prejudice, are well educated, bright, strong, healthy, resourceful or beautiful, is ultimately down to luck.

Yet the idea that we are rewarded according to the market value of our contribution is not just unfair, it’s a myth.

Contribution to output is the key idea presented in economic textbooks to explain the income people receive for their labour (and capital). ‘Marginal Productivity Theory’ came to prominence in the nineteenth century and the idea is that under perfectly competitive market conditions, wages for a given worker are driven towards that worker’s marginal productivity, that is, the amount of value they add to the company or, put another way, the revenue that would be lost if they left. According to the theory, if you remove one worker from a team and the daily revenue drops from $1000 to $900, then that worker is worth $100 a day.³²

If workers were paid according to contribution then two workers doing the same job, using the same tools, should earn the same wage. Entry-level jobs in McDonald’s restaurants across the globe are similar enough to provide a good way to test this prediction. In fact, just such a study was conducted by economists Orley Ashenfelter and Stepan Jurajda.³³ To avoid problems of currency comparison, the study recorded how many Big Macs an hourly wage could buy in several nations. Although the theory predicts that the wage of all entry-level workers should be able to buy the same number of Big Macs, the actual figures varied significantly. In India an hourly wage bought 0.23 Big Macs compared to 3.04 in Japan, a thirteen-fold increase for producing the same thing. Other studies have found similar disparities. Economist Ha-Joon Chang, for instance, points out that a bus driver in Sweden gets paid about fifty times more than a bus driver in India – and no one believes Swedish bus drivers are fifty times more productive.³⁴

Clearly, it is not individual productivity setting the wages. Other factors are at play, one of which is immigration control. If borders were open, large numbers of Indian workers could travel to Sweden and accept a fraction of the wage earned by Swedish drivers, which would still be a significant improvement on their earnings in India. Conceivably, they could replace all Swedish bus drivers since they would be willing to work for so much less. It is the politically determined immigration policies of Sweden – enforced by armed border guards – not a difference in productivity, that allow Swedish bus drivers to earn so much more than their Indian counterparts.

Another factor that influences income is gender. For all the gains feminism has made, men still earn more than women in almost all nations. This disparity exists for a variety of reasons that are not easy to untangle – unequal caring responsibilities, undervaluing work traditionally done by women – but discrimination remains a factor. In the UK, for instance, not only does it take longer in certain sectors for women to be promoted to senior positions, but they are still less likely to receive a bonus in their job, and when they do receive one, it is likely to be significantly lower than one given to a male counterpart.³⁵

The popular myth that wages reflect the value of what we contribute is a powerful one, but the briefest examination of who enjoys most of the world’s wealth reveals it to be a fiction. Nobel prize-winning economist Joseph Stiglitz makes the point well:

Few are inventors who have reshaped technology, or scientists who have reshaped our understandings of the laws of nature. Think of Alan Turing, whose genius provided the mathematics underlying the modern computer. Or of Einstein. Or of the discoverers of the laser . . . or John Bardeen, Walter Brattain, and William Shockley, the inventors of transistors. Or of Watson and Crick, who unravelled the mysteries of DNA, upon which rests so much modern medicine. None of them, who made such large contributions to our well-being, are among those most rewarded by our economic system.³⁶

If our system genuinely rewarded people according to their contribution, then these individuals, with their rare and historic contributions, would have been among the wealthiest in the world. And what are we to make of the fact that Van Gogh, William Blake, Vermeer and Schubert all died in poverty?

One study focused on expert commentators whose analysis and predictions on economic and political events were in great demand.³⁷ These people earn good money for offering insights into their field of expertise. Psychologist Philip Tetlock wanted to know how accurate their predictions were, so he asked each participant in his study to rate the probabilities of three outcomes on a given topic covered by their expertise: the continuation of the status quo, more of something (such as economic growth) or less of something. Tetlock gathered data on 80,000 predictions. The results were not flattering. If the experts had simply assigned a probability of one third to each of the three outcomes they would have had more success. In fact, the more in demand (and presumably highly rewarded) a forecaster was, the poorer their predictions turned out to be.

Another study conducted at Duke University looked at the extremely well paid chief financial officers (CFOs) of large corporations.³⁸ After tracking over 11,000 economic forecasts from CFOs, it found that the correlation between their predictions and what took place was less than zero. In other words, when they said the market would go up, it was slightly more likely to go down. The point is not that these forecasters are stupid (certain things are just too complex to predict reliably) but that the market is rewarding people extremely well for contributions that have no value.

Individuals with strong bargaining power are able to maintain incredibly high wages in the face of significant falls in productivity, corporate CEOs being the obvious example. According to mainstream theory, a CEO’s income should be equal to the value they add to their company. Consider the case of Henry (Hank) McKinnell, former CEO of Pfizer, the world’s largest research-based pharmaceutical company.³⁹ From 2001 to 2006, the share price of his company dropped by 46 per cent, yet McKinnell still pocketed $65 million. No one can prove that he did not contribute $65 million worth of value to the company, but neither common sense nor the economics profession provide any reason to suppose that he did. Instead, it is overwhelmingly likely that CEOs like McKinnell exploit their powerful position to extract ever more money from the corporations they manage, even when those businesses perform poorly.

Falls in profit accompanied by executive salary increases are a regular occurrence. It was reported in 2014 that the board of directors at Barclays Bank awarded a 10 per cent rise in bonuses despite a 32 per cent fall in profits.⁴⁰ High-level executives are essentially able to set their own pay rates, so unsurprisingly they bear little relation to performance. In 1965, the top CEOs in the US were paid 24 times more than the average production worker; by 2000 this figure had risen to 376 times more.⁴¹ (Over roughly the same period, the median American worker has seen no increase in pay at all.) These CEOs have not become 376 times more productive. Robert Reich writes that ‘Anyone who believes CEOs deserve this astronomical pay hasn’t been paying attention. The entire stock market has risen to record highs. Most CEOs have done little more than ride the wave.’⁴²

The mainstream theory of wages cannot explain what we observe in the world but its problems do not end there.⁴³ A core assumption of the theory – that an individual’s contribution is always measurable and distinct – is seriously flawed. We’ve seen that the value of our contribution is ultimately down to luck, and that we cannot separate our own contributions from all those, living and dead, whose knowledge, effort, time and skill have richly benefited us. But even if we could separate these things, it would still be extremely difficult – and in many cases impossible – to define and measure the contribution of a single worker. Most work is done in teams, and often a worker’s contribution is inextricable from the tools, resources and contributions of others. As Piketty notes, in many cases the ‘very notion of “individual marginal productivity” becomes hard to define. In fact, it becomes something close to a pure ideological construct on the basis of which justification for higher status can be elaborated.’⁴⁴

What really determines how income is shared out among those who helped to generate it? The classical economists, from Adam Smith to David Ricardo, had a simple answer: power. Many factors affect how rewards are divided – talent, education and technology all play a part – but power has always been a decisive factor. Smith was explicit about the importance of bargaining power in determining wages:

The workmen desire to get as much, the masters to give as little, as possible . . . It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms . . . In all such disputes, the masters can hold out much longer [because they are wealthier].⁴⁵

Although, as Smith saw, employers have the upper hand because they are able to ‘hold out much longer’ in a dispute, workers have tried to level the playing field by banding together in unions and acting collectively. In doing so, they have fought and won many battles: a shorter working day and week, safer working conditions, pensions, as well as laws against child labour, unfair dismissal and corporal punishment at work.

Historically, dividing revenue between those who contribute capital and those who contribute labour has been a source of great conflict. Throughout the Industrial Revolution it was common for labourers to work excruciatingly long hours in dangerous and uncomfortable conditions for a wage that barely sustained their own existence. In nineteenth-century Britain, workers were devoured by a system intent on maximising profits. In parts of Manchester – one of the engines of the Industrial Revolution – conditions were so bad that the life expectancy in some areas was only seventeen years.⁴⁶

The proportion of income that goes to capital has varied over time. Often it’s been as much as 25 per cent and sometimes as high as 50 per cent.⁴⁷ Of course, the more that goes to the owners of capital, the less the workers receive. If ownership of capital were distributed equally across the population, the split between labour and capital would be unimportant. However, as we’ve seen, inequalities of capital ownership have always been extreme: today, the wealthiest 10 per cent own somewhere between 80 and 90 per cent of the world’s private capital.⁴⁸

For centuries, a concerted effort has been made to prevent workers from unionising effectively. Employers – often working collectively themselves – have used their wealth and influence to harness the might of the state to weaken unions through government legislation, and break up strikes with the coercive power of the police. As early as 1776, Smith saw that big business, the ‘merchants and manufacturers’ of his time, were ‘by far the principal architects’ of national policy, shaping the system so that their interests were ‘most peculiarly attended to’.⁴⁹ By 1800, the British parliament had passed the ‘Combination Act’, which forbade workers from bargaining collectively for higher wages or to improve their working conditions. Since then, the laws concerning collective action have been regularly contested. The battle for profits and wages continues to rage. Sometimes workers are controlled with violence. For instance, in 2012, thirty-four miners striking for a higher wage were shot dead by South African police at the Marikana platinum plant outside Johannesburg.⁵⁰ Sometimes workers are controlled by stealth. In 2014, it came to light that an illegal agreement had been struck between some of the largest tech firms in the world, from Apple to Google, to suppress the wages of hundreds of thousands of their employees.⁵¹ Leaked confidential memos showed how these giants of the tech world agreed not to compete for each other’s workers in order to prevent a bidding up of their wages.

The degree of inequality we see in the world is the outcome of policy. It cannot be rectified by trying to make markets look more like the highly abstract models so beloved of neoclassical economists. The growing concentrations of undeserved wealth are not a sign of market failure but a natural outcome of the power dynamics within a market system. In the real world, deregulated markets favour those who own capital. The state has the power to reinforce this advantage or curtail it. There is no value-neutral way to balance the power of workers and corporations: any attempt requires value judgements to be made and most of the time these simply reflect the power balance of competing forces within society.

For decades, many of the world’s central banks have pursued policies that objectively favour those who derive income from capital over those who earn income through work. For instance, the form of globalization they have championed has eroded the bargaining power of countless workers by allowing capital to move freely across borders but preventing workers from doing so. The result is that companies hold the trump cards in disputes with workers over pay, as they can threaten to leave if they don’t get their way. Ultimately, countries are driven to compete with each other to attract capital by pushing down wages, lowering taxes and reducing regulation. However, if capital lacked mobility and workers were free to cross borders, the dynamic would be reversed: countries would have to compete to attract workers by offering lower taxes, better schools and more attractive working conditions.⁵²

Politics, as the classical economists knew, cannot be removed from economics. It will always play a decisive role in setting wages, determining profit margins and sharing out or concentrating wealth. The strength of unions, the level of immigration control, the value of a minimum wage, the degree of corporate regulation and the structure of the tax system are central to any explanation of inequality and wages – and they are inherently political. Power ought to be as central to the theory of income as force is to the theory of motion. In terms of income derived from labour, the imbalance of power in the economy has resulted in a level of inequality in the US that is, according to Piketty, ‘probably higher than in any other society, at any time in the past, anywhere in the world’.⁵³

When teachers, nurses, doctors, care workers, farmers, artists, street cleaners, bin collectors and builders do a good day’s work, society is better off. But much of the work done in societies merely takes money from some and gives it to others without creating any additional value for that society. As Robert Reich puts it, ‘High-frequency traders who win by a thousandth of a second can reap a fortune, but society as a whole is no better off.’⁵⁴ Although it may boost profits for a few companies, from society’s point of view, this kind of work is a waste of talent, effort and training that could have been used in far more valuable ways.

Expending resources on taking a larger share of existing wealth, rather than creating new wealth, is called ‘rent seeking’: it is an exercise of power. In the 2008 bank bail-out it was the power of the financial sector to shape laws and avoid regulation – not an increased contribution to society – that allowed it to engage in practices that made billions at the expense of ordinary people. Through a range of rent-seeking practices, banks managed to siphon off increasingly large amounts of wealth from the productive economy. These included exploiting buyers’ ignorance in order to sell securities that had been designed to fail; taking reckless risks in the knowledge that a government bail-out would be waiting should the gamble fail to pay off; targeting the desperate and uninformed with predatory loans and exploitative credit card practices; and borrowing money from central banks at extremely low interest rates. The financial sector was amply rewarded for its rent-seeking behaviour before the crash and, because of its political influence, continues to be handsomely rewarded in spite of it. As union organiser Eugene V. Debs put it, those with ‘the power to rob upon a large scale . . . [have] the power to control the government and legalize their robbery’.⁵⁵

How did we end up moving away from Smith’s description of wages, which acknowledged the central role of power, to the assertion that wages are determined by contribution instead? Nineteenth-century economist John Bates Clark pioneered today’s theory of wages. In doing so, he simply ignored what economists before him had recognised: that it’s often impossible to separate one person’s contribution from the team in which they work.⁵⁶ Clark recognised that Smith’s theory of wages had radical political implications, seemingly offering support to the mass of workers demanding higher pay. He believed that a new theory to justify poverty wages was essential to avert revolution. Of the impoverished mass of workers in the nineteenth century, he wrote:

[T]heir attitude toward other classes – and, therefore, the stability of the social state – depends chiefly on the question, whether the amount that they get, be it large or small, is what they produce . . . The indictment that hangs over society is that of “exploiting labor.” “Workmen” it is said, “are regularly robbed of what they produce. This is done within the forms of law, and by the natural working of competition.” If this charge were proved, every right-minded man should become a socialist; and his zeal in transforming the industrial system would then measure and express his sense of justice.⁵⁷

Clark’s theory of wages reframed the debate to suggest that it wasn’t about power but contribution: that workers did in fact receive what they were worth, so they had no cause to demand higher wages. As we have seen, Clark’s theory isn’t up to the task. It is founded on spurious assumptions and bears little relation to the real world. Power – economic and political – very clearly plays a crucial role in determining wages and the overall distribution of wealth. There is no economic law forcing Walmart to pay its workers starvation wages or demanding that CEOs be paid hundreds of times more than their workers. These are political outcomes. But Clark was right about one thing: power is more vulnerable when it is perceived as illegitimate. Moral justifications, if widely accepted, can appear to rationalise extreme poverty and gross inequality.

Carrots and sticks

Every political and economic system has at its core a conception of human nature. The one underpinning the leading economic models of today assumes you are rational and self-interested with unlimited wants and tastes that do not change. There is, as Amartya Sen observes, ‘something quite extraordinary in the fact that economics has . . . evolved in this way, characterizing human motivation in such spectacularly narrow terms’.⁵⁸ Extraordinary as it may be, the extreme and growing levels of inequality in our world are often justified with reference to this ‘spectacularly narrow’ conception of human nature. The argument goes that inequality is necessary to provide the right incentives to increase the overall productivity of the economy. Prevalent assumptions about human nature have led many to conclude that, in order to increase productivity, we should reward what we like and punish what we don’t. However, decades of research have turned these intuitions on their head. External ‘carrot and stick’ incentives often produce the opposite of what their advocates expect.

Behavioural scientists categorise tasks as algorithmic or heuristic. Algorithmic tasks are formulaic in character and can be completed by following a set of instructions; whereas heuristic tasks are creative, requiring flexibility and imagination. Delivering mail is an algorithmic task: it can be broken down into a series of simple steps, a routine to be repeated day after day. Writing a speech is a heuristic task: there is no manual for doing it correctly; each speech requires novel solutions. Research with both children and adults shows that punishments and rewards are effective motivators when it comes to simple algorithmic tasks, but for creative heuristic tasks, they result in poorer performance. Extrinsic motivations ‘crowd out’ our intrinsic motivations. They turn play into work and reduce the satisfaction of that work.

The counter-productive nature of rewards has been observed even with toddlers. A series of experiments at the Max Planck Institute in Germany placed a group of twenty-month-old infants in a room where an adult pretended to need help.⁵⁹ In the first phase of the experiment, some of the toddlers that tried to help (a majority) were rewarded, while others were not. In the second phase, the helpful infants were given further opportunities to be of assistance to an adult in need. The results showed that the vast majority of the unrewarded group continued to lend a helping hand to the adults (above 80 per cent) but in the rewarded group, a significantly lower proportion continued to help (only about 50 per cent). In other words, material rewards diminished the motivation of the toddlers to carry on helping the adults.

Over the course of numerous experiments, Professor of Psychology Edward L. Deci has found that ‘When money is used as an external reward for some activity, the subjects lose intrinsic interest for the activity.’⁶⁰ When we are told ‘If you do this, I’ll give you that’ it undermines our autonomy, diminishing the appeal of what had previously been an intrinsically rewarding activity. Although rewards can deliver a short-term boost, the effect soon wears off and often reduces our long-term motivation. According to Deci, we all have an ‘inherent tendency to seek out novelty and challenges, to extend and exercise . . . [our] capacities, and to explore, and to learn’.⁶¹ An environment conducive to the full flourishing of these capacities ‘should not concentrate on external-control systems such as monetary rewards’. The results of Deci’s studies suggest that, to truly motivate people, it’s best to empty their minds of financial rewards altogether. This frees them up to engage creatively with the task at hand. Thinking about what we are getting, or what we ought to be getting (perhaps because we are anxious about our financial situation), hampers our creativity.

It has generally been assumed that people are driven predominantly by basic biological needs – hunger, thirst, libido – and the rewards and punishments of their environment. But research on human motivation points to a third crucial drive: ‘the innate need to direct our own lives, to learn and create new things, and to do better by ourselves and our world’.⁶² Numerous experiments have shown that not only do rewards reduce motivation, they actually hamper our performance. In one famous study, people were asked to solve a problem that required a creative approach. The people who were offered a financial incentive took, on average, ‘nearly three and a half minutes longer’ than those who were offered no financial incentive.⁶³ A study undertaken for the US Federal Reserve System tested the effect of relatively large rewards on a series of challenging tasks. It found that ‘In eight of the nine tasks we examined across the three experiments, higher incentives led to worse performance.’⁶⁴ Other studies show that this principle also applies to pay-for-performance plans.⁶⁵ Speaking of his own professional performance, former chief executive of Shell, Jeroen van der Veer, once declared, ‘if I had been paid 50 per cent more, I would not have done it better. If I had been paid 50 per cent less, then I would not have done it worse.’⁶⁶

In light of such research, we need to reassess our assumptions about human nature, work and motivation. For instance, fairness turns out to be an important motivator. Workers who believe they are being paid fairly are more productive. One experiment showed that increasing the wages of workers who felt they were being treated unfairly boosted productivity, while raising the wages of workers who felt they were already being treated fairly had no effect.⁶⁷ The implication is that a more equal society would boost overall productivity. It may well be more innovative too. The evidence suggests that the US economy was far more innovative from 1950 to 1970 (when inequality was at a historic low) than it was from 1990 to 2010 (when inequality was growing rapidly).⁶⁸

To change the conditions of work is to change the experience of doing it. Under circumstances that respect human dignity and give us the freedom to pursue our own passions and be led by our own curiosity, work can be a privilege rather than a burden. Even when it places great demands on us, it can have a positive effect on our well-being. If it is meaningful to us, we can enjoy working on the most challenging of tasks. Part of the problem with so much of the work in today’s economy is that it is not very meaningful or useful. According to a YouGov poll in 2015, 37 per cent of British workers said their job makes ‘no meaningful contribution to the world’ (and another 13 per cent said they didn’t know).⁶⁹ Most jobs are created to enable companies to increase profits, often in ethically questionable ways. High salaries can be viewed as a form of compensation for the absence of real purpose in these jobs. The choice facing many graduates is to work for free as interns in roles they find meaningful or start climbing a ladder they don’t really want to be on for a salary. Many others are forced into dull, tiring work for just enough income to survive.

We are all motivated to survive and provide for our loved ones, but other fundamental drives shape our behaviour. Contributing to the lives of others is very rewarding, completing a difficult task can be deeply satisfying, and helping those in need can be profoundly edifying. People give their money, even their blood, to help strangers. Teachers, nurses, artists, scientists, inventors, volunteers and activists do hard and valuable work with modest financial reward or none at all. Every day, people leave highly paid yet unfulfilling jobs to seek work in which they can take pride and pleasure. We forsake higher pay for greater freedom. Developing our minds and bodies, and feeling that we are contributing meaningfully to the world around us, is central to our sense of self-worth and well-being.

A growing body of research suggests that we have evolved to take pleasure from helping others. This pleasure ties communities together in mutually advantageous cooperative relationships. One study found that spending money on others makes us happier than spending money on ourselves.⁷⁰ Another study, by psychologists at the University of British Columbia, showed that before the age of two, toddlers ‘exhibit greater happiness when giving treats to others than receiving treats themselves’.⁷¹ What’s more, ‘children are happier after engaging in costly giving – forfeiting their own resources – than when giving the same treat at no cost’. Of course, culture can channel and mould these instincts in various ways but the evidence suggests that the desire to work together and help each other is part of what makes us human.

Some degree of inequality may be necessary to motivate people to behave in certain socially valuable ways, but the idea that people do not want to work, that they need to be driven by threats and promises to get anything done, is a misconception.⁷² If work enhances our autonomy, if it can be done under dignified conditions, and if we believe it is valuable, most of us welcome it. The Russian scientist and political philosopher Peter Kropotkin held that ‘Overwork is repulsive to human nature – not work . . . Work is a physiological necessity, a necessity of spending accumulated bodily energy, a necessity which is health and life itself.’⁷³

Of course, not all jobs are equally rewarding. Some tasks carry little or no intrinsic reward and are risky and unpleasant. Today, the most undesirable – though essential – work is largely done by those who are paid the least. A subordinate class of people is obliged to accept these jobs or go hungry. This is a coercive form of motivation based on fear and desperation. Kropotkin writes ‘If there is . . . work which is really disagreeable in itself, it is only because our scientific men have never cared to consider the means of rendering it less so. They have always known that there were plenty of starving men who would do it for a few cents a day.’⁷⁴ Given our current technological knowledge (and expanding the point to include women), this is truer today than ever before. As Bertrand Russell observed, if we ‘had to be tempted to work instead of driven to it, the obvious interest of the community would be to make work pleasant’.⁷⁵

What of the unpleasant work left over? It should either be shared out fairly or carry financial incentives to compensate proportionately for the sacrifice entailed by doing it. Other strategies are coercive and incompatible with a free society. The American historian Howard Zinn writes: ‘I worked hard as a college professor, but it was pleasant work compared to the man who came around to clean my office. By what criterion (except that created artificially by our culture) do I need more incentive than he does?’⁷⁶

Incentive-based arguments are often little more than ad hoc justifications for inequality. When examined, they betray a double standard. Cuts to social welfare programmes are justified by the claim they incentivise people out of the ‘poverty trap’ – as though poverty weren’t incentive enough. The reasoning is that if we make poor people poorer by removing their social safety net, they will be forced to go out and find a job or, since many benefit claimants are already in work, a second job. On the other hand, when it comes to discussing incentives for the rich, the opposite reasoning is employed. High salaries for corporate executives are justified as incentivising higher performance, which ends up benefiting the whole of society. The double standard is glaring and ugly. As economist Ha-Joon Chang asks, ‘why do we need to make the rich richer to make them work harder but make the poor poorer for the same purpose?’.⁷⁷

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Plato believed that myths to justify inequalities of wealth and power were essential to preserve order in society. He offered the following story: that each citizen was born with a certain kind of metal mixed in with his or her soul. Natural rulers had gold mixed with their soul, their soldiers and assistants had silver, and natural workers had either bronze or iron. According to a divine oracle, if the city were to be ruled by those who lacked gold in their soul, all would be ruined. Later myths, designed to serve a similar purpose, include the divine right of kings, hereditary nobility and the discredited theory of ‘trickle down economics’.⁷⁸ For millennia, those with power and privilege have used convenient myths to justify their position. Arguably, these myths arise as much to reassure those with wealth as those without it – it’s harder to enjoy privileges if you don’t believe you deserve them. A sense of entitlement to wealth is nearly as valuable as wealth itself.

In his history of economics, John Kenneth Galbraith writes: ‘The explanations and rationalizations of . . . inequality over the centuries have commanded some of the greatest . . . talent of the economics profession. In nearly all of economic history, most people have been poor and a comparative few have been very rich. Accordingly, there has been a compelling need to explain why this is so – and, alas, on frequent occasion, to tell why it should be so.’⁷⁹ Like their earlier elitist, racist and sexist counterparts, today’s justifications of inequality are baseless – yet they provide a veneer of legitimacy to the poverty and oppression around us. They are embedded deeply in the fabric of society, just out of sight, beyond the light of critical scrutiny.

The nineteenth-century English philosopher and father of utilitarianism, Jeremy Bentham, based his moral philosophy on the idea that ‘it is the greatest happiness of the greatest number that is the measure of right and wrong’. According to Bentham, the best allocation of resources is one that maximises human well-being. A key assumption he made was that the well-being a person experiences from an additional dollar decreases as that person becomes richer. That is to say, ten additional dollars produce more well-being in someone extremely poor than in someone very rich. The radical implication is that society as a whole becomes better off as material equality increases. We don’t have to be utilitarians to see the value of this common-sense insight.

Subjective states like ‘well-being’ and ‘happiness’ may be difficult to define and measure, but, as long as large inequalities exist, there is every reason to believe that transferring money from the rich to the poor increases the overall welfare of society. The evidence, in fact, is overwhelming. Many researchers today believe it is possible to collect meaningful data on subjective feelings. Individual self-assessments of well-being are now regarded as an important addition to government statistics, correlating strongly with more objective indicators such as rates of depression and suicide. What the data suggest is that, beyond a certain level of affluence, more money makes no difference to a person’s happiness. One analysis of more than 450,000 responses to a daily survey of Americans in 2010 revealed that ‘The satiation level beyond which experienced well-being no longer increases was a household income of about $75,000 [roughly £47,000] in high-cost areas (it could be less in areas where the cost of living is lower). The average increase of experienced well-being associated with incomes beyond that level was precisely zero.’⁸⁰

For those who are sceptical about the reliability of ‘happiness data’, there are more objective indicators. Based on the analysis of extensive data spanning many countries and decades, epidemiologists Kate Pickett and Richard Wilkinson confirm that reducing inequality benefits the whole of society in fundamentally important and sometimes surprising ways:

In societies where income differences between rich and poor are smaller, the statistics show that community life is stronger and levels of trust are higher. There is also less violence, including lower homicide rates; physical and mental health tends to be better and life expectancy is higher. In fact, most of the problems related to relative deprivation are reduced: prison populations are smaller, teenage birth rates are lower, educational scores tend to be higher, there is less obesity and more social mobility. What is surprising is how big these differences are. Mental illness is three times more common in more unequal countries than in the most equal, obesity rates are twice as high, rates of imprisonment eight times higher, and teenage births increase tenfold.⁸¹

Humanity has the resources to eradicate starvation, illiteracy, extreme poverty and some of the world’s deadliest diseases; it has the means to deepen and expand human freedom for every person on the planet. So why does deprivation and inequality persist? Why do Earth’s bountiful resources and humanity’s endless creativity serve so few at the expense of so many? Not because the rewards in our society go to those who deserve them, not because it’s necessary to incentivise people, and not because it benefits the whole of society. The great imbalance of wealth simply reflects the great imbalance of power.

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Once we discard the myth of responsibility, the framework of desert that leads us to punish and reward also falls away. We’ve seen that the distribution of punishment and reward in society cannot be explained in terms of what people deserve. We’ve also seen that alternative justifications for the outcomes we observe in the world – such as the deterrence argument to justify punishment, and the contribution and incentive arguments to justify extreme inequality – do not stand up to scrutiny.

The distribution of penalties and privileges is ultimately a product of power. Power defines what counts as a crime, who should be punished and how severely. Power shapes the laws which set the rules of the market, strengthening the bargaining hand of some and weakening it for others. The highly skewed distribution of power in our world is central to any explanation of the outcomes we see around us. But how is this unequal distribution maintained? How is it that vast inequalities of wealth and power have survived, even flourished, in the democratic era? Why have people not used the equality of the voting booth to redress the blatant inequalities beyond it?

In Part One we explored the limits on our innate freedom. In Part Two we look at the limits on our political freedom. Numerous social forces vie to shape who we are and influence what we do. Making sense of these methods of control is an important part of changing them. Part Two will take up this challenge.

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