Wealth is created collectively, not by god-like ‘wealth creators’

Even supposedly ‘self-made’ millionaires rely on taxpayers to support the transport infrastructure, educated workforce and customer base on which their wealth depends.

 Luke Hildyard is a researcher at the High Pay Centre

Last year directors of FTSE 100 Companies increased their pay by 14 per cent to an average of about £3 million. This is about 20 times the rate of increase experienced by the average worker.

The research from Income Data Services merely highlights much longer-term trends. Pay for a FTSE 100 CEO has almost doubled over the past decade while wages for the average worker have stagnated over the same period.

Executive pay sets a benchmark for other top professions, such as bankers, lawyers, consultants and public sector managers, who have also seen their pay explode in recent years. The net effect has been to increase the share of total UK incomes going to the richest 1 per cent from about 6 per cent in 1979 to around 14 per cent today.

Various policy changes and socio-economic trends explain how this has happened (eg falling levels of trade union membership). A number of policy proposals (such as workers representation on company boards) have been put forward to bring the gap between top earners and everyone else back to more reasonable levels.

But it’s probably more important (and less boring) to identify the economic and moral case underpinning the rise of the super-rich before moving on to detailed policy analysis.

The argument is based on the notion of a finite pool of god-like ‘wealth creators’ who bestow prosperity on the rest of us. It is implied whenever corporate lobbyists talk of the need to attract and retain talent or when Boris Johnson quivers at the ‘energy, confidence and risk-taking instinct’ of London’s millionaires.

This is a misunderstanding of how wealth is really created. For a start, nearly all FTSE 100 Directors are not risk-taking entrepreneurs who have started their own company, but bureaucrats who have taken over long-established organisations. It is questionable how much value they really add.

While no-one would argue that anyone could run a major supermarket or energy company, for example, it is legitimate to ask if it really takes a one-in-a-million talent to ensure that people don’t stop buying food or heating their homes.

Similarly, a South African mining boss noted recently that foreign exchange rates are far more important determinates of profitability in the commodities extraction sector than executive leadership. Yet if exchange rates are favourable and company profits increase, the CEO cashes in on millions of pounds worth of bonuses and incentive plans.

The same argument could be made for other contextual factors – rising demand from China and the Bank of England’s Quantitative Easing programme effectively pumping money into the stock market have both enabled company executives to hit bonus and incentive targets in recent years without having to demonstrate especially outstanding or innovative leadership.

This wouldn’t seem quite so appalling if rewards were distributed across the entire employee base. Most FTSE 100 companies now have thousands of employees worldwide and operations on multiple continents. But performance-related pay packages several times the size of basic salary are the sole preserve of a handful of top managers, based on the crazed assumption that these people alone are responsible for the company’s success.

Even supposedly ‘self-made’ millionaires rely on taxpayers to support the transport infrastructure, educated workforce and customer base, rule of law and scientific research on which their wealth depends. As the economist Mariana Mazzucato has noted, the technological sector, the pharmaceuticals industry and big defence companies all rely on government research and spending. In the US, Google and Apple have essentially packaged and marketed technologies developed in publicly-funded Universities.

That such a small number of people have been able to capture such a disproportionate share of the rewards that arise as a result of this public investment represents a market failure somewhere along the line (sustained by the flawed narrative of ‘wealth creators’ and ‘irreplaceable talent’).

This is how policymakers should understand the ritual announcements of executive pay increases. Their response should aim to create a pay structure that recognises the collective nature of wealth creation.

13 Responses to “Wealth is created collectively, not by god-like ‘wealth creators’”

  1. TM

    We need more fairness and more balance. Wealth does not trickle down at all, it is actually concentrating in fewer and fewer hands, to the detriment of all of us not affluent, wealthy or super wealthy. Why would a worker on minimum wage in a massive international corporation care if he or she is not benefitting in any real way and see’s the people at the top reaping all the benefits and those in middle management too? If you pay the people at the bottom a decent living wage, won’t they work harder? If you offer those at the bottom a chance to progress and get promoted won’t they work harder? If you pay someone a living wage, won’t they want to see that company prosper so they can continue to get a decent pay packet? Not rocket science is it?!
    Capitalism in most continental countries works best when there is a left of centre emphasis; in short, regulated capitalism. Rich people pay their taxes, there is a fair and living wage and companies are seen to be about community and working together and not like in Britain where everyone is against each other’s interests. But sadly, the class system in Britain just reflects the divisive practises of business. If we worked together we might be great again. If we work against each other, the adage ‘a house divided against itself will fall’ may already seem to be coming true for the UK. Greed will affect us all in the end.

  2. Sparky

    Oh, if we only we could have socialism! Like we did in the 1970s. When the power used to shut off in the evenings, when rubbish piled up in streets, mortuaries filled up with unburied bodies. Because those were the days when British workers came together for the good of the country, and put the common good of their community ahead of their self-interest. Oh, what has gone wrong?

  3. pete

    By which I take it you weren’t there. There was never a huge amount of socialism in this country but more than there is now. The gap between rich and poor was smaller, there were controls and constraints on the uncontrolled greed which is responsible for our current message and we had ownership of assets which were managed got the common good. Yes there were some strikes, for one short period only affecting burials. No one died as a result (they were already dead) unlike under the current government’s “health” policies.

  4. frank100

    The tories were in power for by far the majority of the last century and for the most part operated tory polices and it was only for brief periods that the ills you speak of occured. The strife that occured in British industry was caused by very poor management as much as by the Unions.

  5. TM

    ‘Oh, what has gone wrong?’ Someone voted in a load of rich, Right wing, unaccountable, not particularly talented, uber privileged, posh, privately educated gentleman with oodles of self entitlement and not much more; for brevity most of us just call them Tories.

  6. Pitchfork Peter.

    The super rich don’t create wealth, they own the wealth created by others. Laws are written to enable this to happen and unless those laws are changed it continues ad nauseum. The wealth creating workforce may one day decide enough is enough and there will be disruption when they strike but slavery has been abolished we are free to withdraw our labour we are free to change the laws we live under and we are free to disbelieve propaganda that tells us we cannot do without those who own the product of our daily work.

  7. Rory

    I don’t disagree with your sentiment on greater equality. Having lived in more equitable countries, I have experienced the clear benefits to society.

    However, explain to me why this arguement always has to start with senior company executives and entrepreneurs?

    If the battle has to start anywhere, how about premiere league footballers, film stars, successful musicians, song writers, even some utterly talentless celebreties, and not to mention the agents and managers for all of the above. Their ratio of earnings, compared to the average, is sickening. And yet people always pick on executives.

    Personally, I think it is right that senior executives and entrepreneurs should get paid more than a footballer.

    But perhaps that is because I have two left feet to put forward!

  8. Sparky

    When you say ‘someone’ voted the Tories in, it was actually 37% of those who voted. The actual number who voted conservative was 10,703,654. So it’s hardly a tiny elite of uber-rich privileged people is it? Clearly, huge numbers of ‘ordinary’ working people chose Conservative over Labour.

  9. Sparky

    On an intuitive level that doesn’t make sense. Companies cannot be about ‘community and working together’ in one geographical market and about profit in another geographical area. Capital goes wherever the return is greatest. Investment would dry up in one country and pour into the other since return on capital would be greater in the other country. So what you’re saying cannot be true.

  10. Sparky

    Socialists never mention rich people in the arts because they perceive a value in the creative process. However, since socialists do not come from the business community, they have very little understanding of how business works, what business leaders do, how they create value. How many socialists are accountants, lawyers, sales directors, investors?

    To a socialist, a CEO is just a boring guy in a suit who works in an office. Consequently he must be overpaid. But J K Rowling writes those wonderful books about wizards that my children like. Sting has recorded some great albums with the Police that I listen to in my car. David Beckham -well he’s an amazing goal scorer and a great ambassador for British football.

    No-one on here is going to agree with me. They’ll say this is patronising. It may well be patronising but that doesn’t mean it’s incorrect. You look at the background of left wingers, they have degrees in history, politics, english, media. They work in the public sector, or they are writers, artists, musicians, teachers, lecturers, charity workers, researchers, bloggers. But they don’t work in commerce.

  11. TM

    Nuff said.

  12. Dave

    Slavery has been abolished? not heard of workshare yet then?

  13. TM

    A good and balanced comment. I am not in agreement with all you write but that is a decent view that I agree with. What’s the answer for some more fairness all around?

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