The distribution of income in society
is controlled by a natural law,
[which] if it worked without friction,
would give to every agent of production
the amount of wealth [added value]
which that agent creates.
J B Clark
J B Clark suggests that there is natural law, the so-called ‘law of marginal productivity,’ which means that in a market economy, each person’s pay reflects the value they bring to society. And many people believe him. In the UK, for example, the government has proposed a new immigration system, aimed at keeping out what Iain Duncan Smith referred to as “low-value people.” And we took it for granted that this meant low-paid people.
Suddenly, with the advent of the coronavirus, we realise that many of the front-line workers keeping us alive are low paid.
For many people, this has made us question who really are the low-value / high-value people?
And once you start to look closely, you see that what people contribute to society is completely disconnected from their financial worth:
- Many ‘high-value’ people have negative value to society;
- Many ‘low-value’ people have enormous value; and therefore
- The System is badly broken
Many ‘high-value’ people have negative value to society
As we discussed recently, not all business is good business. Some businesses externalise a lot of their costs. In extreme cases, a business may have so many externalised costs that it would be better for society if the business had never existed. Tobacco companies, for example, fall into that category.
According to the law of marginal productivity, businesses which create enormous value for society should be hugely profitable and their shareholders should become rich, while businesses which destroy value for society should be unprofitable. And indeed, as we have argued, that would be a good world to live in, because the forces of competition would act in such a way that good businesses would drive out the bad ones.
Unfortunately, the world we actually live in is not one in which the law of marginal productivity applies.
In the US, for example, an oncology nurse can expect to earn between $74,000 and $118,000. But each of the key executives of the tobacco company Philip Morris is paid more than $5 million. To believe the law of marginal productivity, we would have to believe that each one of these executives does more good for society by producing, marketing and selling (carcinogenic) cigarettes than 50 oncology nurses do by tending those with cancer.
In the UK, in 2019, the highest-paid CEO was Denise Coates of Bet365 whose take-home pay amounted to £323 million. In addition, she collected around £46 million in dividends from her 50% share in the company. At a time when problem gambling is growing, it is hard to believe that she brings more value to society than 13,000 nurses – but strictly speaking, to believe in the law of marginal productivity, you do have to believe this.
Indeed, if we imagine a world in which tobacco companies and online betting companies had never existed, most people would think that was a far better world than the one we have today. But financially, there is no denying that the owners and managers of these companies are ‘high-value’ people.
Many ‘low-value’ people have enormous value
The government’s proposed new immigration system set a minimum income threshold for £25,000 per year. Below that, are ‘low-value’ people; and above that, medium- or ‘high-value’ people.
But when we look in practice at these supposedly ‘low value’ people, we see that their work is immensely valuable. A Band 1 nurse starts on £18,005, and even Band 4 only goes up to £24,157 (some nurses are paid more); carers average £12,500; paramedics average £24,214; farmworkers average £14,000 and check-out operators average £7.59 per hour, possibly £14,573 per year (if they work 48 weeks per year at 40 hours a week).
A world without nurses and carers would be unimaginably grim, and lives would be shorter. And in a world without farmworkers, we should all be dead. These jobs are literally vital: life could not go on without them.
But financially, all of these people are ‘low value.’
The System is badly broken
The economy is the system we have collectively put in place to create and distribute valuable products and services to the members of society. Faced with these examples, it is very difficult for a rational person to believe in the ‘law of marginal productivity’ – but as a society, we continue to behave as though we do believe that it is a sound basis for distributing value amongst ourselves. Economists often say, ‘incentives matter’ and the reality is that we give huge financial incentives to prey on the addictions of others, but very little incentive to devote yourself to a life of service to others.
The fact that, faced with the reality of an understaffed NHS, and farms that will struggle to harvest their crops without foreign labour, our government has proposed a minimum income threshold as a guide to immigration suggests that many of its members have internalised this so-called law. They look at reality through this lens, and cannot see it as it is.
More generally, the opinions of ‘high-value’ people are taken more seriously by government and by the media; the resources of the state are more readily deployed protecting ‘high-value’ people; and it is ‘high-value’ people who set the national agenda.
As the book 99% argues, this means that the system is badly broken, that wealth and power will continue to become ever more concentrated, and that if we do not tackle the problem, the UK will end up resembling South Africa: a tiny and extremely wealthy elite, living amidst tight security to protect them from the mass of people who will be living in, or not too far from, poverty.
Fortunately, as the book also argues, although it is serious, the problem is not insoluble. In fact, five, relatively straightforward, actions will enable us to rebalance the system, to reverse the trend toward mass impoverishment and to produce a fairer and more prosperous society.
If this matters to you, please do sign-up and join the 99% Organisation.