Offer bankers a cleaner’s pay and the choice of either occupation, and most would choose the executive role. More generally, wages rise with power, status and stimulation. It is arguable that jobs would be similarly allocated even without pay differentials.
The difference, of course, is that most bankers are capable of cleaning, whereas most cleaners lack the skills and knowledge needed in banking. And because some bankers make million-pound decisions every day, it makes financial sense to pay them vast sums if you believe in the slightest correlation between pay and performance.
Instead of paying large bonuses to exact decent performance, we could reaffirm the risks associated with high rewards and take away employment rights for anyone paid over £100,000. They would still have protection against discrimination, but would risk losing their job overnight if their performance is deemed unsatisfactory; the 2% of workers who receive such large salaries could rely on savings or insure themselves against a potential loss of income. But the bankers might not fancy it, and their ability to exit any jurisdiction that displeases them gives them considerable bargaining power.
From the furore over bankers’ pay you might think it an aberration in the otherwise blemish-free record of market allocation. Yet bargaining power works very differently at the other end of the pay scale.
When the wealthy trade in the market, they compete with each other. If the poor cannot sell their produce or their labour, and there is no welfare to protect them, their children may go hungry. They compete with each other but must also race against the clock, as needs become more acute with every passing hour. This makes them forced sellers, and the market offers them worse prices as a result. Far from trickling down, the bargaining power that lies at the heart of every transaction drags wealth up from the most vulnerable.
The market would fill a rich man’s pool before quenching a poor family’s thirst because it fails to distinguish between needs and wants, equating them in ‘demand’. It is hard to reconcile this with claims of market efficiency. It also goes to the heart of the moral conundrum that has beset capitalism since its inception.
Adam Smith got round this problem by claiming that “[the rich] are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made had the earth been divided into equal options among all its inhabitants”.(1) History, and the intensification of competition due to the ten-fold increase in the world population, suggests otherwise.
By exempting the market from moral concerns - by allowing us to equate our wants to others’ needs - Smith unleashed unprecedented incentives for output and innovation. Yet, when he pondered his pin factory, could he have ever imagined the excess and squalor that characterise our world?
The advent of neoliberalism marked a return to the classical economics that Smith had begun to envisage. After Thatcher and Reagan brought it to the UK and US, it was foisted on scores of developing countries no longer able to service their debts when interest rates soared during neoliberalism’s failed experiment with monetarism in the early 1980s. By the end of the decade, and with varying degrees of enthusiasm, much of Europe had adopted neoliberalism after finding that the levers of Keynesian demand management no longer worked.
Neoliberal dogma condemns us to taking whatever distribution of resources the unregulated market dictates. Yet its benefits are far from clear. In the UK, many eulogise the 1980s and castigate the 1970s, yet growth was the same for both decades while in the US, without the benefit of North Sea oil, growth fell. Taking the OECD as a whole, and despite the benefits of the digital revolution and cheap oil, average growth fell from 3.8% in the seventies to 3.0% in the 1980s, and has continued to fall in every subsequent decade.(2) Largely immune to the diktats of the IMF, only China and India bucked this trend, suffering considerable criticism for not deregulating and liberalising as rapidly as elsewhere.
In general, markets remain the best way of allocating jobs, productive resources, investment capital and consumer goods. However there is scant evidence that regulations, taxes and subsidies to guide markets towards desirable social outcomes necessarily undermine productive potential.
The lack of regulation over the last three decades has resulted in massive social and economic costs. Judged on its own terms, neoliberalism failed to deliver stronger economic growth. Yet the price of the neoliberal experiment has been huge: there has been a marked increase in inequality both here and around the world, and the global economy has become much less stable, succumbing to frequent currency and banking crises.
Capitalism is a hugely powerful tool; we should use it to get what we want, not get what we’re given. We should determine our goals democratically and shape markets to achieve them, rather than accepting whatever change the market throws up. The market should be our servant, not our master.
(1) Adam Smith, The Theory of Moral Sentiments, Book IV.1.11
(2) World Bank Development Indicators, in constant US dollars.