sell securities that had been designed to fail; taking reckless risks in the knowledge that a government bail-out would be waiting should the gamble fail to pay off; targeting the desperate and uninformed with predatory loans and exploitative credit card practices; and borrowing money from central banks at extremely low interest rates. The financial sector was amply rewarded for its rent-seeking behaviour before the crash and, because of its political influence, continues to be handsomely rewarded in spite of it. As union organiser Eugene V. Debs put it, those with ‘the power to rob upon a large scale . . . [have] the power to control the government and legalize their robbery’.55
How did we end up moving away from Smith’s description of wages, which acknowledged the central role of power, to the assertion that wages are determined by contribution instead? Nineteenth-century economist John Bates Clark pioneered today’s theory of wages. In doing so, he simply ignored what economists before him had recognised: that it’s often impossible to separate one person’s contribution from the team in which they work.56 Clark recognised that Smith’s theory of wages had radical political implications, seemingly offering support to the mass of workers demanding higher pay. He believed that a new theory to justify poverty wages was essential to avert revolution. Of the impoverished mass of workers in the nineteenth century, he wrote:
[T]heir attitude toward other classes – and, therefore, the stability of the social state – depends chiefly on the question, whether the amount that they get, be it large or small, is what they produce . . . The indictment that hangs over society is that of “exploiting labor.” “Workmen” it is said, “are regularly robbed of what they produce. This is done within the forms of law, and by the natural working of competition.” If this charge were proved, every right-minded man should become a socialist; and his zeal in transforming the industrial system would then measure and express his sense of justice.57
Clark’s theory of wages reframed the debate to suggest that it wasn’t about power but contribution: that workers did in fact receive what they were worth, so they had no cause to demand higher wages. As we have seen, Clark’s theory isn’t up to the task. It is founded on spurious assumptions and bears little relation to the real world. Power – economic and political – very clearly plays a crucial role in determining wages and the overall distribution of wealth. There is no economic law forcing Walmart to pay its workers starvation wages or demanding that CEOs be paid hundreds of times more than their workers. These are political outcomes. But Clark was right about one thing: power is more vulnerable when it is perceived as illegitimate. Moral justifications, if widely accepted, can appear to rationalise extreme poverty and gross inequality.
Carrots and sticks
Every political and economic system has at its core a conception of human nature. The one underpinning the leading economic models of today assumes you are rational and self-interested with unlimited wants and tastes that do not change. There is, as Amartya Sen observes, ‘something quite extraordinary in the fact that economics has . . . evolved in this way, characterizing human motivation in such spectacularly narrow terms’.58 Extraordinary as it may be, the extreme and growing levels of inequality in our world are often justified with reference to this ‘spectacularly narrow’ conception of human nature. The argument goes that inequality is necessary to provide the right incentives to increase the overall productivity of the economy. Prevalent assumptions about human nature have led many to conclude that, in order to increase productivity, we should reward what we like and punish what we don’t. However, decades of research have turned these intuitions on their head. External ‘carrot and stick’ incentives often produce the opposite of what their advocates expect.
Behavioural scientists categorise tasks as algorithmic or heuristic. Algorithmic tasks are formulaic in character and can be completed by following a set of instructions; whereas heuristic tasks are creative, requiring flexibility and imagination. Delivering mail is an algorithmic task: it can be broken down into a series of simple steps, a routine to be repeated day after day. Writing a speech is a heuristic task: there is no manual for doing it correctly; each speech requires novel solutions. Research with both children and adults shows that punishments and rewards are effective motivators when it comes to simple algorithmic tasks, but for creative heuristic tasks, they result in poorer performance. Extrinsic motivations ‘crowd out’ our intrinsic motivations. They turn play into work and reduce the satisfaction of that work.
The counter-productive nature of rewards has been observed even with toddlers. A series of experiments at the Max Planck Institute in Germany placed a group of twenty-month-old infants in a room where an adult pretended to need help.59 In the first phase of the experiment, some of the toddlers that tried to help (a majority) were rewarded, while others were not. In the second phase, the helpful infants were given further opportunities to be of assistance to an adult in need. The results showed that the vast majority of the unrewarded group continued to lend a helping hand to the adults (above 80 per cent) but in the rewarded group, a significantly lower proportion continued to help (only about 50 per cent). In other words, material rewards diminished the motivation of the toddlers to carry on helping the adults.
Over the course of numerous experiments, Professor of Psychology Edward L. Deci has found that ‘When money is used as an external reward for some activity, the subjects lose intrinsic interest for the activity.’60 When we are told ‘If you do this, I’ll give you that’ it undermines our autonomy, diminishing the appeal of what had previously been an intrinsically rewarding activity. Although rewards can deliver a short-term boost, the effect soon wears off and often reduces our long-term motivation. According to Deci, we all have an ‘inherent tendency to seek out novelty and challenges, to extend and exercise . . . [our] capacities, and to explore, and to learn’.61 An environment conducive to the full flourishing of these capacities ‘should not concentrate on external-control systems such as monetary rewards’. The results of Deci’s studies suggest that, to truly motivate people, it’s best to empty their minds of financial rewards altogether. This frees them up to engage creatively with the task at hand. Thinking about what we are getting, or what we ought to be getting (perhaps because we are anxious about our financial situation), hampers our creativity.
It has generally been assumed that people are driven predominantly by basic biological needs – hunger, thirst, libido – and the rewards and punishments of their environment. But research on human motivation points to a third crucial drive: ‘the innate need to direct our own lives, to learn and create new things, and to do better by ourselves and our world’.62 Numerous experiments have shown that not only do rewards reduce motivation, they actually hamper our performance. In one famous study, people were asked to solve a problem that required a creative approach. The people who were offered a financial incentive took, on average, ‘nearly three and a half minutes longer’ than those who were offered no financial incentive.63 A study undertaken for the US Federal Reserve System tested the effect of relatively large rewards on a series of challenging tasks. It found that ‘In eight of the nine tasks we examined across the three experiments, higher incentives led to worse performance.’64 Other studies show that this principle also applies to pay-for-performance plans.65 Speaking of his own professional performance, former chief executive of Shell, Jeroen van der Veer, once declared, ‘if I had been paid 50 per cent more, I would not have done it better. If I had been paid 50 per cent less, then I would not have done it worse.’66
In light of such research, we need to reassess our assumptions about human nature, work and motivation. For instance, fairness turns out to be an important motivator. Workers who believe they are being paid fairly are more productive. One experiment showed that increasing the wages of workers who felt they were being treated unfairly boosted productivity, while raising the wages of workers who felt they were already being treated fairly had no effect.67 The implication is that a more equal society would boost overall productivity. It may well be more innovative too. The evidence suggests that the US economy was far more innovative from 1950 to 1970 (when inequality was at a historic low) than it was from 1990 to 2010 (when inequality was growing rapidly).68
To change the conditions of work is to change the experience