Is your income based on you, or your power?

Look through the literature of social sciences and you see two broad theories on how people's income are determined. The first, borrowed from classical economics, says that in a functioning, market economy people are generally paid according to their “marginal product”. In simple terms, this means you are paid according to how good you are at your job, and in particular how much extra profit you make for your company.

The second, encompassing a broad school from marxist and industrial relations theorists, politics and sociology, say that ultimately it is power and power relations that determine your income. Historically, this would have manifested itself in many ways. Early tribes would conquer other tribe, individuals would rise to prominence within tribes and they would get others to work for them. In these societies power and subsequently income would be obtained by force. This power would be maintained over time by building kingdoms and armies. Power would be conferred by ancestory as long as you had the wits to maintain it. Over time power held by the few has been diminished and challenged. Aristocracy has been challenged by democratic government, imperialism and slavery have faced revolt, landowners have faced challenge from industrialists, industrialists in turn from labour movements, and labour movement in turn from markets.

All in all we have moved to a society (at least in western, industrialised democracies) where the goods an individual receives roughly correlates with the value of the goods and services he is able to provide - with relative values determined by the preferences of society. This is inherently a good thing and a principle we can all adhere to. Any individual, regardless of their background can learn a skill, trade it and receive something in return. What he gets in return (post-taxes) is dependent on whether his skill is useful and how much he has honed his skill.

On the downside, if many others are better than him at this skill he must face a choice as whether to improve his skill, accept lower returns or provide a different skill to which he may be better suited. If his skill is no longer required he may be redundant in the short term. These are tough features of a market economy, however, much better than a world where you must fight (risk death) to gain rights to income or are born into an unequal world where you produce many more goods that others give back to you.

However, despite improvements we are not in the happiest world we can be. We have not moved to a world where "wage = marginal product" (if indeed this is where we should go – but I won’t go over that here).  

Power in a modern, post-industrial society still rears its ugly head and determines all our incomes. This is not the power of kings or early scrupulous industrialists, but more subtle and complex. Today it largely manifests itself in many ways, and I would highlight the following (i) inheritance of wealth (ii) gender (but not class, race or sexuality) (iii) networks and (iv) monopolies of information, knowledge and uncertainty. It should be also noted that these tools of power may themselves change over time. 

Much of these have discussed at length by others, so I won’t go into great detail. In short they work in the following ways:

(i)         Inheritance of wealth – everyone wants the best for their kids, but no-one person should start their life at a disadvantage. This article by nef outlines how privileges conferred across generations still have profound impacts on life outcomes in the UK. What’s more with inherited wealth there is an increased likelihood that the original wealth was captured by force and abuse of power (think of the aristocracy).

(ii)        Gender – the history of man has been exactly that and today there is still a pay gap between men and women - which is not explained by women taking mid-career breaks to have children. What’s more historic division of roles, means that a lot of women’s work is unpaid (e.g. domestic economy, care for the young and elderly) and gets worse in times of austerity

(iii)      Networks – internships for mates' children and the old boys networks are well trodden media areas. Even more worrying recently are claims the remuneration committees for our highest paid are closed shops with therich deciding on what the rich should be paid

(iv)       Information, knowledge and uncertainty  - this is one of the toughest to spot, indeed some great minds missed it during the growth of the banking sector in recent decades. Post-crisis the issues apparent in banking are now better understood. These sectors were meant to take people’s savings, pensions, insurance proceeds and invest them in long-term productive uses, whilst earning a return. However, the sector tended to self-serve using unequal distribution of information and knowledge to speculate and benefit the minority in the know (fee creaming by traders and asset managers, excessive securitisation, PFI profiteers, mis-selling of PPI, Goldman Sachs’ conflicts of interest, Madoff, excessive bonus culture). Such issues could exists in other sectors e.g healthcare, where our doctors know a lot more than us – but luckily a nationalised service combats such an effect.

These are factors everyone should be empowered to examine in their homes, communities and political structures. Ideally, you will go away, look at your surroundings and ask the questiondoes society roughly give back what I put in. If not, ask (i) whether someone is unfairly abusing their power, (ii) whether that someone is you and (iii) whether in some instances this submission or application of power may itself be useful (we give power to our parents, but ulitimately for our own protection).

Above all look around your own workplace. Be critical, ask for transparency and dispel the taboo that income should not be discussed.

On my part I have asked my company to consider seriously the 12 recommendations of the High Pay Commission. I will keep you updated on how I get on.