Tuesday, January 02, 2007


The Problems Caused by the Filthy Rich

A recent piece by Peter Wilby, suggested that a return to 'the politics of envy' would be salutory in a British socio-political culture apparently so relaxed about people, in Mandelson's infamous phrase, 'getting filthy rich'. He rehearses the most recent unpalatable fact: Goldman Sachs employees sharing £9 billion in bonuses with some getting several millions each. When my Current Affairs class discussed this a month ago, a fair proportion, especially the retired businessmen, argued that distributing the largesse of the few who were rich, would only provide a few crumbs for the poor. Brendan Barber of the TUC however points out that this handout alone would give every British worker £350 each; more than a few crumbs maybe.

Wilby lists some of the harmful effects of the kind of inequality which produced a 28% increase in directors pay while ordinary workers had to make do with inflation plus a bit.

i) House prices in the capital have been ratcheted sky high by the bonus laden mega rich and the consequent ripples have helped push house prices way beyond the means of most aspirant first time buyers without house-owning relatives about to drop of their perches.

ii) Very rich people can monopolise the services of scarce resources like the best surgeons, push up restaurant prices and at the same time minimize their tax liabilities through employing the best accountants; this last meaning that the tax burden falls even more disproportionately on the less well-off.

iii) As political party membership declines the super-rich are able to hold them to hostage in lieu of major donations.

iv) As inequality grows Wilby cites evidence adduced by Richard Wilkinson, social epidemiologist at Nottingham University that as it becomes flagrantly unequal, society becomes less safe, more violent, more racist.

'One man's bonus from Goldman Sachs', asserts Wilby, is almost literally another person's killer'.

Meanwhile, David Bolchover in The Times argues that such extravagant bonuses blunts entrepreneurial endeavour and therefore is essentially anti-capitalist. University graduates simply queue up, salivating at the thought of such easy-money largesse from Mammon and neglect the business of setting up new successful enterprises. He also argues that the huge salaries given to traders by the bosses of big companies is used to justify their own even grosser rates of pay. Wilby is honest about admitting the solution to this problem is exceedingly complex and so far elusive but suggests:

It would be good start if New Labour at least recognised the problem. Let us all make a new year resolution to be seriously unrelaxed about the filthy rich...'

I can't help but agree.

You provide two different arguments here which are, I think, in conflict, and perhaps even contradictory.

The first belongs to the classic socialist critique of capitalism. You talk about "harmful effects" of inequality, with a focus on social cost.

The second accuses the current system of being anti-capitalist. "Extravagant bonuses" are too extravagant, and, rather than reflecting high demand for a particular skill, fat pay packets indicate executives' ability to monopolise power in certain companies.

The first objection utilises socialist ideology; the second capitalist thinking.

As such, the first objection can only be met with similarly ideological arguments - a debate which I shan't get involved in here. The second demands a more practical consideration. Sometimes the argument is used correctly, and sometimes not. It has a legitimate case when, to take an obvious example, chief executives of failing companies nevertheless receive huge salary increases. I don't think the argument works when you try to levy it at a company like Goldman Sachs. Goldman - which, by the way, I am hoping to get an internship at - is a highly successful investment bank which employs (so they say) the elite of the industry. Goldman puts emphasis on its employees' welfare, and so it makes sense for £9 billion to be redistrubuted in bonuses after a lucrative financial year.

Large personal wealth is not a bad thing in itself. It only becomes bad, socially and economically, when it is undeserved.
Oh dear SPL, and I thought you were set to become a political hack-and a good one I'd have thought-or even maybe be tempted by the public service. Read Andrew Adonis's A Class Act before you decide to join the serried ranks of the mega rich.
Re your points
i) I agree I'm attacking 'mega-richness' from the two directions you identify but I feel the 'capitalist argument' actually complements what you call the 'socialist' one in that it suggests that even within its own frame of reference it fails to deliver the goods.
ii) GS puts an emphasis on employees welfare so the £9bill is justified...?? Come on! What aspect of their welfare are GS so concerned about? That their employees should become super, mega stinking rich? Surely this leaves the question very much begged.
iii) As I've tried to show -and feel Wilby has, I think this degree of over remuneration IS a bad thing in itself and is an insidious aspect of our modern life. And I don't think anyone 'deserves' to earn a salary of a factor one thousand times the average income as some senior directors do. In the States it's even worse of course.
Not quite set to become anything yet! As for the argument:

(i) Yes, maybe, although the capitalist might retort that the status quo doesn't actually conform to the ideal of capitalism. Perhaps the shareholders are unable to hold the fact cats fully to account for their fat cheques; perhaps government regulation distorts the market equilibrium. I say "perhaps" because, in truth, my economics isn't sufficient to answer the question of why some fat cats are paid more than they have earned.

(ii) Perhaps the phrase "employees' welfare" was misleading. What I meant to convey was the extent to which Goldman considers itself to be the "best of the best". No one employee in this streamlined institution is superfluous. Therefore, we can expect that the guys at Goldman will be rewarded for their efforts.

(iii) This objection is an ideological one, and it represents a debate which I have yet to take sides on, although I have certain instincts. The conflict, in my mind, is between a certain conception of utilitarianism - £100 has more utility in a poor man's pocket than in a rich man's, so we should give it to the poor man - and libertarianism - people (and institutions, including Goldman) should be free to do as they wish.

If one comes down on the side of utilitarian-socialism, as you do, Skipper, the next questions are thus: If no one deserves to earn a salary 1000 times the average wage, what multiplying factor is acceptable, who is to decide this, and how should the limit be imposed?
Interesting article in The Economist which would seem to suggest that market mechanisms are catching up with fat cats who enjoy large bonuses despite poor performance.

Interesting article in The Economist which would seem to suggest that market mechanisms are catching up with fat cats who enjoy large bonuses despite poor performance.

Interesting article in The Economist which would seem to suggest that market mechanisms are catching up with fat cats who enjoy large bonuses despite poor performance.

This comment has been removed by a blog administrator.
I am sure the GS employees did not earn by cheating anyone or breaking any rules. So why so much of the fuss.
I'm not saying being mega rich breaks any law or even conventions but that the effects of such gross inequality are both socially divisive and unjust.
I don't really see myself as a socialist these days; free enterprise seems the best motor of wealth production-it's the proper distribution of its outcomes which concern me. I'm not saying I have the solution to the problem, which I admit is very complex; merely agreeing with Wilby that there is a problem. I have no idea what is the acceptable 'multiplier' of the average income which senior management should earn- I merely say, as the starting point of the debate, that, say, 1000 is too great to justify.
Ok, we're now in disagreement - Stephen Newton can rest easy. Wilby's piece was a slur, incoherent and an argument without a conclusion. It would attract criticism as a blog posting, it's incredible that it was deemed fit to publish in a newspaper. He was amost blaming murder on "relative inequality". I present to you Dubai - incredibly safe and incredibly unequal.
Dubai may be an exception. I quote the work by Wilkinson but it's very well known among criminologists that high inequality- as measured by genie coefficients- correlate positively with high crime and especially violent crime. It doesn't seem so unreasonable to take Wilby's position it seems to me.
Some good points but at the end of the day societies that pursue hamfisted attempts at market intervention usually end up the poorer overall. It's a shame that there isn't more of a culture of giving. In the US universities, hospitals etc benefit enormously from charitable donations, the same culture doesn't really apply here. All very well saying they only give in America to get kudos and name recognition, but so what - I'm betting the donees aren't complaining.

My only real objection to others getting paid a lot more than me is in the case of those who flagrantly have not done anything to justify it. An investment banker provides a service that others are willing to pay for in a free market, and therefore IMO has the right to whatever return he gets from it. By contrast the head of a monopoly or former state enterprise, say the water company, whose company fails in every aspect - too many leaks, not enough water supplied, whilst making a trading loss at the same time - has no right to a fat bonus. Salary yes, but bonus no. That's one thing that the regulators could look at.

The point about best accountants is a bit facile - even if the rich aren't so rich they will still hire the best accountants (just that the latter won't get as much money). And the answer is simplification of the tax system - which itself is a good example of the bad consequences that flow from ham fisted attempts at equality (eg all those illogical and complex exemptions from VAT) - and better pay, perhaps, for the IRS employees.
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