wage could buy in several nations. Although the theory predicts that the wage of all entry-level workers should be able to buy the same number of Big Macs, the actual figures varied significantly. In India an hourly wage bought 0.23 Big Macs compared to 3.04 in Japan, a thirteen-fold increase for producing the same thing. Other studies have found similar disparities. Economist Ha-Joon Chang, for instance, points out that a bus driver in Sweden gets paid about fifty times more than a bus driver in India – and no one believes Swedish bus drivers are fifty times more productive.34
Clearly, it is not individual productivity setting the wages. Other factors are at play, one of which is immigration control. If borders were open, large numbers of Indian workers could travel to Sweden and accept a fraction of the wage earned by Swedish drivers, which would still be a significant improvement on their earnings in India. Conceivably, they could replace all Swedish bus drivers since they would be willing to work for so much less. It is the politically determined immigration policies of Sweden – enforced by armed border guards – not a difference in productivity, that allow Swedish bus drivers to earn so much more than their Indian counterparts.
Another factor that influences income is gender. For all the gains feminism has made, men still earn more than women in almost all nations. This disparity exists for a variety of reasons that are not easy to untangle – unequal caring responsibilities, undervaluing work traditionally done by women – but discrimination remains a factor. In the UK, for instance, not only does it take longer in certain sectors for women to be promoted to senior positions, but they are still less likely to receive a bonus in their job, and when they do receive one, it is likely to be significantly lower than one given to a male counterpart.35
The popular myth that wages reflect the value of what we contribute is a powerful one, but the briefest examination of who enjoys most of the world’s wealth reveals it to be a fiction. Nobel prize-winning economist Joseph Stiglitz makes the point well:
Few are inventors who have reshaped technology, or scientists who have reshaped our understandings of the laws of nature. Think of Alan Turing, whose genius provided the mathematics underlying the modern computer. Or of Einstein. Or of the discoverers of the laser . . . or John Bardeen, Walter Brattain, and William Shockley, the inventors of transistors. Or of Watson and Crick, who unravelled the mysteries of DNA, upon which rests so much modern medicine. None of them, who made such large contributions to our well-being, are among those most rewarded by our economic system.36
If our system genuinely rewarded people according to their contribution, then these individuals, with their rare and historic contributions, would have been among the wealthiest in the world. And what are we to make of the fact that Van Gogh, William Blake, Vermeer and Schubert all died in poverty?
One study focused on expert commentators whose analysis and predictions on economic and political events were in great demand.37 These people earn good money for offering insights into their field of expertise. Psychologist Philip Tetlock wanted to know how accurate their predictions were, so he asked each participant in his study to rate the probabilities of three outcomes on a given topic covered by their expertise: the continuation of the status quo, more of something (such as economic growth) or less of something. Tetlock gathered data on 80,000 predictions. The results were not flattering. If the experts had simply assigned a probability of one third to each of the three outcomes they would have had more success. In fact, the more in demand (and presumably highly rewarded) a forecaster was, the poorer their predictions turned out to be.
Another study conducted at Duke University looked at the extremely well paid chief financial officers (CFOs) of large corporations.38 After tracking over 11,000 economic forecasts from CFOs, it found that the correlation between their predictions and what took place was less than zero. In other words, when they said the market would go up, it was slightly more likely to go down. The point is not that these forecasters are stupid (certain things are just too complex to predict reliably) but that the market is rewarding people extremely well for contributions that have no value.
Individuals with strong bargaining power are able to maintain incredibly high wages in the face of significant falls in productivity, corporate CEOs being the obvious example. According to mainstream theory, a CEO’s income should be equal to the value they add to their company. Consider the case of Henry (Hank) McKinnell, former CEO of Pfizer, the world’s largest research-based pharmaceutical company.39 From 2001 to 2006, the share price of his company dropped by 46 per cent, yet McKinnell still pocketed $65 million. No one can prove that he did not contribute $65 million worth of value to the company, but neither common sense nor the economics profession provide any reason to suppose that he did. Instead, it is overwhelmingly likely that CEOs like McKinnell exploit their powerful position to extract ever more money from the corporations they manage, even when those businesses perform poorly.
Falls in profit accompanied by executive salary increases are a regular occurrence. It was reported in 2014 that the board of directors at Barclays Bank awarded a 10 per cent rise in bonuses despite a 32 per cent fall in profits.40 High-level 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
