executives are essentially able to set their own pay rates, so unsurprisingly they bear little relation to performance. In 1965, the top CEOs in the US were paid 24 times more than the average production worker; by 2000 this figure had risen to 376 times more.41 (Over roughly the same period, the median American worker has seen no increase in pay at all.) These CEOs have not become 376 times more productive. Robert Reich writes that ‘Anyone who believes CEOs deserve this astronomical pay hasn’t been paying attention. The entire stock market has risen to record highs. Most CEOs have done little more than ride the wave.’42
The mainstream theory of wages cannot explain what we observe in the world but its problems do not end there.43 A core assumption of the theory – that an individual’s contribution is always measurable and distinct – is seriously flawed. We’ve seen that the value of our contribution is ultimately down to luck, and that we cannot separate our own contributions from all those, living and dead, whose knowledge, effort, time and skill have richly benefited us. But even if we could separate these things, it would still be extremely difficult – and in many cases impossible – to define and measure the contribution of a single worker. Most work is done in teams, and often a worker’s contribution is inextricable from the tools, resources and contributions of others. As Piketty notes, in many cases the ‘very notion of “individual marginal productivity” becomes hard to define. In fact, it becomes something close to a pure ideological construct on the basis of which justification for higher status can be elaborated.’44
What really determines how income is shared out among those who helped to generate it? The classical economists, from Adam Smith to David Ricardo, had a simple answer: power. Many factors affect how rewards are divided – talent, education and technology all play a part – but power has always been a decisive factor. Smith was explicit about the importance of bargaining power in determining wages:
The workmen desire to get as much, the masters to give as little, as possible . . . It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms . . . In all such disputes, the masters can hold out much longer [because they are wealthier].45
Although, as Smith saw, employers have the upper hand because they are able to ‘hold out much longer’ in a dispute, workers have tried to level the playing field by banding together in unions and acting collectively. In doing so, they have fought and won many battles: a shorter working day and week, safer working conditions, pensions, as well as laws against child labour, unfair dismissal and corporal punishment at work.
Historically, dividing revenue between those who contribute capital and those who contribute labour has been a source of great conflict. Throughout the Industrial Revolution it was common for labourers to work excruciatingly long hours in dangerous and uncomfortable conditions for a wage that barely sustained their own existence. In nineteenth-century Britain, workers were devoured by a system intent on maximising profits. In parts of Manchester – one of the engines of the Industrial Revolution – conditions were so bad that the life expectancy in some areas was only seventeen years.46
The proportion of income that goes to capital has varied over time. Often it’s been as much as 25 per cent and sometimes as high as 50 per cent.47 Of course, the more that goes to the owners of capital, the less the workers receive. If ownership of capital were distributed equally across the population, the split between labour and capital would be unimportant. However, as we’ve seen, inequalities of capital ownership have always been extreme: today, the wealthiest 10 per cent own somewhere between 80 and 90 per cent of the world’s private capital.48
For centuries, a concerted effort has been made to prevent workers from unionising effectively. Employers – often working collectively themselves – have used their wealth and influence to harness the might of the state to weaken unions through government legislation, and break up strikes with the coercive power of the police. As early as 1776, Smith saw that big business, the ‘merchants and manufacturers’ of his time, were ‘by far the principal architects’ of national policy, shaping the system so that their interests were ‘most peculiarly attended to’.49 By 1800, the British parliament had passed the ‘Combination Act’, which forbade workers from bargaining collectively for higher wages or to improve their working conditions. Since then, the laws concerning collective action have been regularly contested. The battle for profits and wages continues to rage. Sometimes workers are controlled with violence. For instance, in 2012, thirty-four miners striking for a higher wage were shot dead by South African police at the Marikana platinum plant outside Johannesburg.50 Sometimes workers are controlled by stealth. In 2014, it came to light that an illegal agreement had been struck between some of the largest tech firms in the world, from Apple to Google, to suppress the wages of hundreds of thousands of their employees.51 Leaked confidential memos showed how these giants of the tech world agreed not to compete for each other’s workers in order to prevent a bidding up of their wages.
The degree of inequality we see in the world is the outcome of policy. It cannot be rectified by trying to make markets look more like the highly abstract models so beloved of neoclassical economists. The growing concentrations of undeserved wealth are not a sign of market failure but a natural outcome of the power dynamics within a market system. In the real world, deregulated markets favour those who own capital. The state has the power to reinforce this advantage or curtail it. There is no value-neutral way to balance the power of workers and corporations: any attempt requires value judgements to be made and most of the time these simply reflect the power balance of competing forces within society.
For decades, many of the world’s central banks have pursued policies that objectively favour those who derive income from capital over those who earn income through work. For instance, the form of globalization they have championed has eroded the bargaining power of countless workers by allowing capital to move freely across borders but preventing workers from doing so. The result is that companies hold the trump cards in disputes with workers over pay, as they can threaten to leave if they don’t get their way. Ultimately, countries are driven to compete with each other to attract capital by pushing down wages, lowering taxes and reducing regulation. However, if capital lacked mobility and workers were free to cross borders, the dynamic would be reversed: countries would have to compete to attract workers by offering lower taxes, better schools and more attractive working conditions.52
Politics, as the classical economists knew, cannot be removed from economics. It will always play a decisive role in setting wages, determining profit margins and sharing out or concentrating wealth. The strength of unions, the level of immigration control, the value of a minimum wage, the degree of corporate regulation and the structure of the tax system are central to any explanation of inequality and wages – and they are inherently political. Power ought to be as central to the theory of income as force is to the theory of motion. In terms of income derived from labour, the imbalance of power in the economy has resulted in a level of inequality in the US that is, according to Piketty, ‘probably higher than in any other society, at any time in the past, anywhere in the world’.53
When teachers, nurses, doctors, care workers, farmers, artists, street cleaners, bin collectors and builders do a good day’s work, society is better off. But much of the work done in societies merely takes money from some and gives it to others without creating any additional value for that society. As Robert Reich puts it, ‘High-frequency traders who win by a thousandth of a second can reap a fortune, but society as a whole is no better off.’54 Although it may boost profits for a few companies, from society’s point of view, this kind of work is a waste of talent, effort and training that could have been used in far more valuable ways.
Expending resources on taking a larger share of existing wealth, rather than creating new wealth, is called ‘rent seeking’: it is an exercise of power. In the 2008 bank bail-out it was the power of the financial sector to shape laws and avoid regulation – not an increased contribution to society – that allowed it to engage in practices that made billions at the expense of ordinary people. Through a range of rent-seeking practices, banks managed to siphon off increasingly large