Against the maximum wage

Egalitarians are enjoying the financial crisis, digging up old ideas that have long since had their day.

Last week Compass launched its campaign for a High Pay Commission to curb “excessive” pay. There is nothing surprising in this; Compass is an avowedly socialist campaign group. But the idea that the government should impose maximum wages upon individuals is a stupid and extremely dangerous idea.

It is based upon two related errors: that earning more than a certain amount is unnecessary, excessive and even obscene; and that there should be a certain proportion between individual earnings. At the root of these lies the belief that there is a decent amount that people should earn, above which one is earning too much. Its origins lie in a puritanical rejection of wealth. A rich man, as we all know, cannot enter the kingdom of heaven, and when one is seeking to make an egalitarian heaven on earth, there is no room for the rich. Basically, it is institutionalised envy.

There is no reason, functionally or morally, why a person should not enjoy any amount of wealth. Wealth is not limited, after all. There is no lump of wealth than needs to be shared out. If you want more money you can make more money: work harder; take more successful risks; use information more efficiently and effectively than others. To decry another’s wealth because they have worked harder or been more successful is not only unprincipled, it is repugnant.

What is more, this activity does not deprive others of wealth. On the contrary: not only does it create more wealth in total, but – because no man is an economic island – it enriches those around the wealth creator too. Critics like to deride this as “trickledown economics” but it is a simple fact that wealth must be used to purchase goods and services, thus creating better-paid jobs.

It is worth noting here that plenty of people take risks and fail. The fact that the successful risked failure is usually overlooked. If the risk-taker had speculated incorrectly, he or she would have lost everything. Would he or she then deserve our sympathy? Would we then bail them out? If not, then we should not envy their wealth or seek to take that wealth away.

The fact that failure has been bailed out should not distract us. The bailouts that have plunged us into hundreds of billions of pounds of debt and made future inflation likely are not the function of a free society but the result of government intervention. Governments are venal organisations in hoc to special interests. Two wrongs do not make a right. We should never bail out failure. Nor should we seek to limit success.

Having said that, consequentialists might argue that what matters is not the freedom of individuals to enjoy their wealth but the effect that this has on society as a whole. If so, then the case for allowing unlimited individual wealth creation is even stronger. One need only compare efforts at untrammelled egalitarianism with free societies to see what the outcome is for wealth creation, distribution and the living standards of the poor.

We do not even need to mention Communism, which so effectively proved the failure of egalitarian politics that socialists now refuse to accept it as an example. The empirical evidence is far more compelling than that. Two separate studies of economic freedom across the world demonstrate that

  • there is a direct correlation between freedom and wealth creation;
  • there is a direct correlation between freedom and the absolute living standards of the poor;
  • there is no direct correlation between freedom and the relative living standards of the poor.

This last finding may come as a surprise, but the proportion of “national wealth” possessed by the poorest decile in the freest quarter of nations is higher than in less free countries. Their absolute level of wealth is three times the level of the next quarter of nations (and dwarfs that of poor people in even less free countries) and – into the bargain – they enjoy more civil and political rights, and a cleaner environment.

I should note here that the economic freedom indexes cited above focus on a broad range of freedom variables of which government-imposed wage limits is only one. However, economic freedom in general is not a bad proxy for a government’s attitude to maximum wage legislation.

 

Like all too many anti-free-market organisations, Compass may be seeking to take advantage of the financial crisis and resulting recession to peddle its own pet projects. But these projects are no more justified now than they were three years ago. A maximum wage is misguided and dangerous and would result in lower standards of living, not only (or even primarily) for the wealthy, but also for the poorest members of our society.

Back in the 1960s, the Labour government thought it would be a good idea to require companies to publish, in their accounts, the amounts that each director was paid. (I think that was the start of the voluminous and incomprehensible ‘information’ now being spewed out in annual reports.)The government thought this would embarrass over-paid directors; and in a way the government was half-right. Publishing the figures did embarrass some directors — not because they were OVERpaid but because they were so pathetically UNDERpaid compared with directors in comparable overseas companies.And in those days the top tax rate was around 90 per cent, so gross salaries were misleading anyway.

One of the most troubling aspects of this campaign is that it has received support from Vince Cable. Will proposals for a High Pay Commission end up in the Liberal Democrats’ manifesto?

“there is no direct correlation between freedom and the relative living standards of the poor.”
Good point. Even if we should care about the relative picture, the situation wouldn’t be as straightforward as most egalitarians think. The world does not just consist of the US and Sweden. Switzerland with its comparatively small state sector has a rather equitable distribution of incomes; big-government Italy and Portugal have a rather unequal one.

This is a self-inflicted wound, is inflicted by bankers on everyone who wants market forces to determine.If a profession wants to be self-regulated, and they should, then it should self-regulate. It is blatantly obvious, banking failed to self-regulate and cost us all a massive fortune. To say bankers will leave the UK if so regulated is simple posturing. It would be a good idea if some of the current bankers raised in a culture of greed, did leave. That would allow new blood who might self-regulation. Anyone who argues these people are ‘gifted’ is the same argument as made by Davis & Moore (1960’s) and rubbished by Tumin (1960’s).Please – Self-regulate or get regulated!

Yes, the HPC is a bad idea. But the IEA must offer an alternative explanation for what to do about the privatized profits and socialized risks of the banking fraternity. Starting from here, it’s a challenge. The best answer would have been not to bail them out, but that option isn’t available now. In the absence of a salutary lesson and creative destruction, massive injections of liquidity are providing renewed fodder for trader irresponsibility and irrationality. We are blowing a new asset-price bubble sooner than was conceivable a few months ago. Without a parallel critique, people will suspect the IEA (unjustly) of being defenders of bankers’ privileges.

Back in the 1960s, the Labour government thought it would be a good idea to require companies to publish, in their accounts, the amounts that each director was paid. (I think that was the start of the voluminous and incomprehensible ‘information’ now being spewed out in annual reports.)The government thought this would embarrass over-paid directors; and in a way the government was half-right. Publishing the figures did embarrass some directors — not because they were OVERpaid but because they were so pathetically UNDERpaid compared with directors in comparable overseas companies.And in those days the top tax rate was around 90 per cent, so gross salaries were misleading anyway.

One of the most troubling aspects of this campaign is that it has received support from Vince Cable. Will proposals for a High Pay Commission end up in the Liberal Democrats’ manifesto?

“there is no direct correlation between freedom and the relative living standards of the poor.”
Good point. Even if we should care about the relative picture, the situation wouldn’t be as straightforward as most egalitarians think. The world does not just consist of the US and Sweden. Switzerland with its comparatively small state sector has a rather equitable distribution of incomes; big-government Italy and Portugal have a rather unequal one.

This is a self-inflicted wound, is inflicted by bankers on everyone who wants market forces to determine.If a profession wants to be self-regulated, and they should, then it should self-regulate. It is blatantly obvious, banking failed to self-regulate and cost us all a massive fortune. To say bankers will leave the UK if so regulated is simple posturing. It would be a good idea if some of the current bankers raised in a culture of greed, did leave. That would allow new blood who might self-regulation. Anyone who argues these people are ‘gifted’ is the same argument as made by Davis & Moore (1960’s) and rubbished by Tumin (1960’s).Please – Self-regulate or get regulated!

Yes, the HPC is a bad idea. But the IEA must offer an alternative explanation for what to do about the privatized profits and socialized risks of the banking fraternity. Starting from here, it’s a challenge. The best answer would have been not to bail them out, but that option isn’t available now. In the absence of a salutary lesson and creative destruction, massive injections of liquidity are providing renewed fodder for trader irresponsibility and irrationality. We are blowing a new asset-price bubble sooner than was conceivable a few months ago. Without a parallel critique, people will suspect the IEA (unjustly) of being defenders of bankers’ privileges.

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