One of the most important campaigns being run by the equality industry involves measuring the multiple by which CEOs earn more than the average worker. This seems to be based on the assumption that it is very important, for purposes of equality, fairness, justice, etc, for you to know exactly how much your boss earns and how that compares mathematically to your own wage. But it is difficult to ascertain the truth when faced with conflicting sums: does the boss earn 350 times your wage, or only 100 times your wage? Even after you’ve decided which mathematical calculations are the most robust you still have to figure out what to do with that information. Should you quit your job because of all the inequality and unfairness, or should you start campaigning for equalisation, or should you go out and riot if the weather is nice, or what? What is the truth about the various multiples of executive pay, and why should we care?
According to leading think tanks in the equality industry, the average CEO earns 386 times more than minimum wage workers.
It is not clear what a minimum wage worker needs to do with this information once it has been 'exposed', but we’ll come that in a minute. First you should note that it is not only minimum wage earners who need to measure pay ratios, but also average earners.
Now we know that the average CEO earns 386 times the minimum wage, and 100 times the average wage. What should be done? So far the proposals about what the government should do relate to disclosure rules, on the assumption that once the truth is exposed and people can link the headlines about 'fat cats' to individual miscreants those individuals can be shamed into agreeing to a pay cut that will bring them in line with the lower-waged so that it’s fair.
While the equality industry lobbies the government to fix this problem, economics think tanks are questioning the maths. According to FEE, the Foundation for Economic Education, the gripping ‘386 times more’ and ‘100 times more’ soundbites are ‘based on pure numerical chicanery’ and ‘flawed statistical assumptions that result in meaningless apples-to-oranges comparison’.
We need say no more. It is immediately obvious that in the war between the equality industry and the economists, the equality guys must win the popular vote. Which side do you think has the more compelling arguments: those who say that your boss is overpaid when he doesn't really do any work but just creams off the profits produced by other people like a shameless capitalist parasite; or those who expect you to look closely at the mathematics (yawn) to see whether the calculations stack up? I can imagine rioting over ‘fat cat CEOs’ who are causing the rest of us to suffer poverty conditions redolent of the 14th century, but I really can’t imagine anybody mounting the barricades over ‘numerical chicanery’, ‘statistical legerdemain’ and ‘serious mathematical flaws’. The truth about executive pay is that we don't care how the figures are calculated or whether they are accurate. We are cross that some people are wealthier than others, and that's about the sum of it.
The numerical chicanery highlighted by FEE includes making apples-to-oranges comparisons, like this.
First compute the average CEO pay:
Here CEO means CEO in a FTSE 100 (top 100 companies traded on the London stock exchange), not CEO of the butcher shop down the market square who incorporated himself into a one-man-firm and designated himself as its CEO with his wife as the CFO and the two of them are working hard to make ends meet. Not them.
When we worry about executive pay we are obviously focusing on the largest and most profitable publicly-traded firms because if we include the corner shop it will just bring the average CEO income down; also the CEO of the corner store doesn’t have any bonuses or stock options or fancy long-term incentive plans; he barely expects to escape with a pension after his life of hard graft.
So to begin our comparison we must first target the richest men [editor: it would be unfair to include women, women have historically suffered enough already] in the largest corporations with the heftiest income packets. We only choose those CEOs in the prime of their careers who are at their highest earning potential; it’s no good including young CEOs who are just starting out on their corporate career and working long hours earning peanuts because when we say 'executive pay' we are only interested in those at the helm of a large and successful company.
From that starting point, we compare CEO pay to:
In other words, we compare CEO pay to minimum wage and zero-hours workers. You won’t find enough low-wage earners just by focusing on large publicly-traded successful firms – in order to bring in all the poor and exploited you have to look at the corner store and the struggling café in the market square. So you are now basically comparing the part-time 16 year old waitress at the Market Square Café in your town who sometimes waits tables after school, to the CEO of a global corporation like Amazon. Yeah, I guess he probably does earn 386 times her wage. Could even be closer to 1000 times her wage.
The next question is, what should you do with this information? For purposes of deciding what to do, it doesn’t really matter if the mathematics is correct. If you try to correct your variables and compare like for like, then according to FEE you end up with a ratio of 177-to-1 or even 104-to-1 based on median pay instead of average pay. That may be slightly less worrying than 386-to-1, but it doesn’t really make any difference to the underlying battle for equality. If you’re going to riot for a CEO who earns 386 times your wage I’m sure you could be persuaded to riot for a CEO who earns 104 times your wage or even 50 or 10 or 5 or 2 times your wage. Who cares? It’s still inequality, and if you’re an Equality Warrior then surely you should never rest until all wages are equal?
There are two kinds of equality – formal equality and substantive equality. Formal equality means that everyone has the right to take part in the race. Nobody can be denied the right to participate based on arbitrary factors like the colour of their eyes. Everyone has the right to present themselves at the starting line, and when the gun goes off it’s each man for himself and may the fastest runner win the race. Substantive equality means that everyone has an equal chance of winning the race, meaning that those who are slow runners should be given a head start – they will obviously need more time than the faster runners, so it’s only fair that they should be allowed to start running before the gun goes off. Alternatively, they could run a shorter race, by being allowed to start at some point halfway down the track rather than join everyone else at the starting line.
Basic human liberties such as freedom of speech, freedom of conscience and freedom to acquire and hold private property are more important than economic prosperity in an abstract sense. Given a choice between living in a rich country where basic human liberties are denied (so you would live an affluent life swimming in money but you could go to prison merely for voicing your opinion) or living in a poor country where you are free to say what you like without fear of persecution, most people would choose to hold onto their basic liberties and take their chances with the poverty situation. After all, once you have secured your basic liberties you are free to work on attaining prosperity to the best of your ability and nobody will stand in your way. But if you start with a situation where your basic liberties are denied then attaining prosperity is pointless; if you get arbitrarily and unfairly locked up and all your stuff seized with no right of appeal, that would be the end of your personal economic prosperity. Fundamental civil liberties should therefore be understood as a prerequisite for sustainable economic prosperity.
Early last year one of my academic colleagues emailed me with an update about conditions in the UK today being worse than the Black Death which killed up to 60% of Europe’s population. Because inequality. This was in the aftermath of news headlines announcing the advent of tough times ahead: ‘UK workers set for worst pay growth decade since the Napoleonic Wars.’ From the Napoleonic Wars it is only a short step to arrive at the plague. Obviously being wiped out by a plague spread by nasty flea-infested rats would be preferable to being forced to tolerate modern economic conditions where the CEO earns 350 terms your salary.
One of the most interesting features of the inequality debates is that one side puts forward rational arguments while the other side puts forward emotional arguments. Saying that you already have a lot of stuff but you feel bad that someone else has much more stuff than you is an emotional argument, and it cannot be met with rational replies. Appeals to ‘fairness’ in this context are just a way of expressing feelings (feeling very angry about all the unfairness) – if people feel that something is unfair there is no rational argument on earth that will make them stop feeling that it’s unfair.
Capitalism, as defined by Milton Friedman, refers to 'the organization of the bulk of economic activity through private enterprise operating in a free market...a system of economic freedom and a necessary condition for political freedom.' Friedman thus defends capitalism not for its own sake, nor even for its capacity to create wealth, but because of its association with individual, economic, and political freedom. The first thing to note about freedom is that it does not produce equality. So people wonder whether all this freedom is fair, and to the extent that it is unfair, whether it is immoral. Is it immoral to promote freedom if it ends up in a situation where some people have more stuff than others?
Many people today assume that life is ideally supposed to be fair, so they take it as self-evident that others must be forced by law to provide various things from within their own resources, in order to make everything fair. In other words, everyone has to share nicely even if they don't want to. Just like we learned in kindergarten, except this time there is the force of law behind it. The assumption is that the pursuit of fairness justifies legal interventions that redistribute wealth, even when that entails an encroachment upon liberty. 'Because fairness!' is the modern rallying cry behind every legal intervention. This is particularly so in the world of work. We expect employers to be fair to workers and we expect all workers to be treated equally, because that way it's fair. Ultimately everyone should end up with more or less equal amounts of wealth, so that it's fair. The desire to achieve a moral ideal in society is certainly compelling. Most people would like to expend their efforts making the world a better place. The only problem is: Other People. When other people don't agree with your vision of the good life, coercion by force of law becomes necessary.
There is some contestation regarding whether law is mostly about justice and fairness (and equality) or whether it's mostly about efficiency. The idea of efficiency doesn't seem to be extremely honourable, being connected as it is with capitalist markets and correlated associations such as greed, selfishness, and, worst of all, great wealth. This explains why lawyers value morality and human kindness above everything else. In Canada, where everybody is good and upholds the correct moral values, they're actually forcing lawyers to sign a blood oath promising to be good and kind and show equal love to everyone. Soon other countries will be following that illustrious example.
Private property is often criticised for failing to promote equality: with private property rights, some people inevitably end up with more than others. Is this unjust, on grounds that economic “equality” is an essential component of justice? We know that justice is a good thing (nobody would argue that injustice is an admirable goal to aspire to) but does it follow logically that the full force of the law should be harnessed to equalize everything? Equal amounts of stuff, equal pay for all working people especially if they're women, equal benefits for all unworking people and equal opportunities for all to have an equally good life. Everything should be equally distributed. Because otherwise it’s not fair.
There are many reasons why foreign aid and handouts do not succeed in lifting anybody out of poverty, but one of the main reasons is that progress requires effort. Sadly, there is no effort involved in being the recipient of a handout.