Creating Freedom. Raoul Martinez
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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