By Michael Baxter 14 Dec 2009 [2 Comments | 452 views]
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It’s a funny thing, but if you were asked to think of a newspaper famed for its left wing politics and which is a great advocator of a more egalitarian society, then it is unlikely that the Daily Mail would spring to mind.
And yet this morning, you could be forgiven for thinking otherwise.
The New Economics Foundation (NEF) is not a fan of how can we put it, unfettered capitalism. It’s not really a fan of anything which relates to the free market. This is an organisation that wants to see a cap on executive pay and a dramatic rise in the minimum wage. It sees the super-rich as an anathema.
You may or may not agree with the principles behind the foundation. But what is odd is that its latest report, which was about as left wing and anti establishment as you can get, has drawn a raft of favourable coverage in the very papers you would normally expect to ridicule such a document.
So have the Tory press experienced a road to Damascus moment?
How can you explain such a drastic change? Well there is an explanation, and it drives right to the core of one of the key issues today.
Cleaners, it appears, contribute more to the economy than City bankers. As for tax accountants, they just strip the economy of wealth. At least that’s what the NEF reckons.
The premiss behind the NEF report is that when the free market determines salaries, it gets it wrong. It does not take into account the effect certain jobs have upon the environment, the effect certain jobs have on the rest of the economy and, finally, there is a discourse between the jobs that come with the best pay and the ones which promote social wellbeing across society.
So, let’s rip open the envelope, and reveal who the winners and losers are.
For the prize of workers who do the least for the economy, cue drum role. It’s the… tax accountant.
Tax accountants destroy £37 worth of value for every pound they contribute.
Oh dear, pity the bankers, they had hoped to win that prize. Never mind, maybe they came second. Alas no, second prize goes to advertising execs who zap £11 from the economy for every pound they receive. And in the third place, yes, you guessed it, the City bankers, who wreak £7 of damage to the economy for every pound they earn.
By contrast, those responsible for waste recycling generate £12 of value for the economy for every pound they earn. Child-care workers contribute between £7 and £9.5 for every £1 they earn, and hospital cleaners create £10 of wealth for every £1 they earn.
So how did the NEF arrive at these conclusions? As an example, it says that advertising executives damage the economy because they encourage consumer spending, presumably creating environmental damage.
The NEF reckons it has exposed 10 myths surrounding pay and work. It says that the City has at best contributed a mere 3 per cent in value added to the economy as a whole, whereas manufacturing has contributed 12.5 per cent to the economy. It reckons is has been able to debunk the argument that low pay creates a ladder for people to work their way up. It says it has annihilated the argument that pay differential doesn’t matter as long as we eradicate poverty. It claims to have exposed as a myth the argument that high pay attracts the best qualified people, and says the belief that high pay is the reward for working hard is just bunkum.
Some of the arguments put forward by NEF have merit. It is clearly not the case that high pay is the reward for working hard. After all, there are plenty of people who work hard and are poorly paid.
But the NEF arguments are simplistic.
Maybe advertising has led to the evils of a consumer society. But without advertising there would be an awful lot less media. There would for example be no Investment and Business News (would that be good or bad – Ed?). The launch of the advertising funded ITV had a massive impact on the quality of output from the BBC.
Who is to say what is best for us? Do we want well meaning organisations such as the NEF to decide how much we spend and how much we save; or who should be paid well and who should be paid badly?
The economist Friedrich Hayek, who penned the highly influential book Road to Serfdom over half a century ago, argued that any system of allocating resources other than the price mechanism is just inefficient. He said that if a central body decided what was fair, people would rebel. This would mean the central body would have to become ever more authoritarian.
In his famous book, Hayek quoted the words of a disillusioned Trotsky:
“In a country where the sole employer is the state, opposition means death by slow starvation. The old principle, who does not work shall not eat, has been replaced by a new one, who does not obey shall not eat.”
The snag is, because bankers have messed up so badly the backlash that is resulting is getting out of hand.
Some of the newspapers which reported on the NEF report said that the recent banking bailout has wiped out 10 years or more of banking profits.
And certainly, seeing things from today’s perspective it does seem like bankers were paid a fortune to destroy wealth.
But don’t forget, most of the taxpayers’ money which was used to bail out the banks was in the form of loans. When the government finally sells its stakes it may well end up making a healthy profit.
High pay awards may seem to be unfair, but what about entrepreneurs who sacrifice short-term remuneration in exchange for long-term potential? What about those who are thrifty for most of their life and build up a nice nest egg so they can retire early? Should they be punished?
The point is, the arguments ventured by NEF would have been laughed off a few years ago. Now the Daily Mail virtually regurgitates their report verbatim.
The real problem with banks is that they are so important to the economy we can’t afford to let them fail. Yet capitalism relies on failure as a means of separating the wheat from the chaff. The real causes of the credit crisis were not that capitalism failed, rather that it wasn’t allowed to work in the first place.
You may or may not believe in more equality. But either way, don’t be too heavily influenced by recent events, and don’t view things from the prism of the recession’s aftermath.
Yup banker bashing is popular at the moment. Personally I would love to bash a few politicians as well as their greed is just petty.
However the UK is unique in that, never having been occupied, it hankers for a totalitarian socialist state preferably the Stalinist USRR type.
Unlike the rest of the world, even the 3rd world, it sees wealth as evil and misery and poverty as something good. Obviously they all hope to be employed by the State at good salaries and huge pensions. Never enters their minds that the money must come from somewhere.
Very sensible analysis from your correspondent, but just to further the point, I don’t think the right wing media quite know what it is they are railing against. They certainly don’t want a socialist solution but the idea of 7 digit bonuses being paid out with funds originating from government borrowings is pretty intolerable, not just to the media but to the rest of us as well. My view is that the bonuses are unacceptable because they reflect poor corporate governance. Were these bankers self employed entrepreneurs living on their wits and ingenuity with nothing more than their own resources at stake, then we would all be admiring them and nodding in approval as their good fortunes rejuvenated the economy. But they’re not. They are employees on contracts of one sort or another and have no more enrepreneurial spirit than my postman. I would like to see these bonuses offset against corporate losses from previous years, with the message attached – “this is what you could have won, guys”. This might, just might, generate some incentive for good honest capitalist behaviour over the next few years, bringing us to a position where we can laugh off the NEF without that nagging feeling that they’ve that they’re on to something.