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.
Capitalist free markets do not generally create a situation where everyone has the same amount of stuff. Sadly, progress tends to yield unequal outcomes. Enter the welfare state, a creature of most modern capitalist economies. The idea is that taxes will be collected to create a repository of public funds to provide a safety-net for the poorest and most vulnerable in society. Thus the welfare state would be expected to meet the costs of unemployment insurance and pensions for those who found themselves cast on the heap when the company they worked for goes bust.
When people support notions of economic equality it's not always clear exactly what they have in mind. In Capitalism and Freedom Friedman challenges us to think about the meaning of 'equality' in the context of a market economy. If we are to translate the ideals of equality into reality we'll need a conceptual framework that's a bit more sophisticated than 'everyone having the same amount of stuff' or 'paying everyone the same wage'.
It's official. The Economist reports that America is the country where people care the least about inequality. Many Americans care about inequality, sure, just not as high a proportion as, say, the number of people in Sweden or just about any other rich country where people care very much about inequality and have the high taxes to prove it.
The real meaning of poverty is not having enough money to allow you to participate in the social life of your community. These days poverty does not mean having no food to eat; it's more about having no money to keep up with the Joneses. The idea of social inclusion as a fundamental human right introduces a whole new meaning of Deprivation and Want.
The terms 'poverty' and 'inequality' are often used interchangeably. This is wrong. There are three important differences between them. The first difference is that you can fix poverty but you can never fix inequality. There will always be someone out there with a bigger house, a fancier car and a higher income than other people. The second difference is that you can lift yourself out of poverty by your own efforts, whereas you can't fix inequality by yourself - you need the government to help you out through measures designed to make people more equal. And the third difference is that everyone agrees that poverty is a social problem, but not everyone agrees that inequality is a social problem.