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 amounts of wealth from the productive economy. These included exploiting buyers’ ignorance in order to 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
