How much inequality is acceptable? Judging by pre-recession standards, agreat deal of it, especially in the United Statesand Britain.New Labour's Peter Mandelson voiced the spirit of the past 30 years when heremarked that he felt intensely “relaxed” about people getting “filthy” rich. Getting rich was what the “neweconomy” was all about. And the newly rich kept an increasing part of what theygot, as taxes were slashed to encourage themto get still richer, and efforts to divide up the pie more fairly were abandoned.
The results were predictable. In 1970, the pre-tax pay of a top AmericanCEO was about 30 times higher than that of the average worker; today it is 263times higher. In Britain,the basic pay (without bonuses) of a top CEO was 47 times the average worker’sin 1970; in 2010, it was 81 times more. Since the late 1970s, the post-taxincome of the richest fifth has increased five times as fast as the poorestfifth in the US, and fourtimes as fast in the UK.Even more important has been the growing gapbetween average (mean) and median income: that is, the proportion of thepopulation living on half or less of the average income in the US and Britain has been growing.
Although some countries have resisted the trend, inequality has been increasingover the last 30-40 years in the world as a whole. Inequality within countries has increased, and inequalitybetween countries increased sharply after 1980, beforeleveling off in the late 1990’sand finally falling back after 2000, as catch-up growth in developing countriesaccelerated.
The growth of inequality leaves ideological defenders of capitalism unfazed. In acompetitive market system, people are said to be paid what they are worth:so top CEOs add 263 times more value to the American economy than theworkers they employ. But the poor, it is claimed, are still better off thanthey would have been had the gap been artificially narrowed by trade unions orgovernments. The only secure way to get “trickle-down”wealth to trickle faster is by cutting marginal tax rates still further,or, alternatively, by improving the “human capital” of the poor, so that theybecome worth more to their employers.
This is a method of economic reasoning that is calculated toappeal to those at the top of the incomepyramid. After all, there is no way whatsoeverto calculate the marginal products of different individuals in cooperativeproductive activities. Top pay rates are simply fixed by comparing them toother top pay rates in similar jobs.
In the past, pay differentials were settled by reference to whatseemed fair and reasonable. The greater the knowledge, skill, andresponsibility attached to a job, the higher the acceptable and accepted rewardfor doing it.
But all of this occurred within bounds that maintained some connectionbetween the top and the bottom. Top business salaries were rarely more than 20or 30 times higher than average wages, and for most people differentials were far less. Thus, the income ofdoctors and lawyers used to be about five times higher than that of manualworkers, not ten times or more, as they are today.
It is the breakdown of non-economistic,common-sense ways of valuing human activities –framingthem in larger social contexts – that has led to today’s spurious methods of calculating pay.
There is a strange, though little-noticed, consequence of the failure todistinguish value from price: the only way offered to most people to boosttheir incomes is through economic growth. In poor countries, this isreasonable; there is not enough wealth to spread round. But, in developedcountries, concentration on economic growth is an extraordinarily inefficientway to increase general prosperity, becauseit means that an economy must grow by, say, 3% to raise the earnings of themajority by, say, 1%.
Nor is it by any means certain that the human capital of the majority canbe increased faster than that of the minority, who capture all of theeducational advantages flowing from superior wealth, family conditions, andconnections. Redistribution in these circumstances is a more secure way toachieve a broad base of consumption, which is itself a guarantee of economicstability.
The attitude of indifference to income distribution is in fact a recipefor economic growth without end, with the rich, very rich, and super-richdrawing ever further ahead of the rest. This must be wrong for moral and evenpractical reasons. In moral terms, it puts the prospect of the good life perpetually beyond reach for most people. And, inpractical terms, it is bound to destroy the social cohesionon which democracy – or, indeed, any type of peaceful, contented society –ultimately rests.