CAPITALISM has delivered an extraordinary amount for human civilisation, yet it is profoundly disliked. One reason for this is that most people don’t like or understand some of its outcomes – especially why some professions pay such vast amounts of money, while others must make do on much lower wages. Why are footballers paid so much – and why are philosophers paid so little? How can investment bankers be paid so much more than coal miners? “That can’t be right”, people argue – “it can’t be fair.”
While understandable, this reaction misses the point. If wages were set centrally and arbitrarily by an omniscient dictator, it might make sense to describe his decisions as “unfair” or “fair”. The trouble with this kind of system is that whenever it was tried during the twentieth century it ended in poverty or genocide.
Fortunately, modern economies are not controlled by dictators. Instead, they largely rely on markets – impersonal mechanisms which collate information and allow scarce resources to be allocated to reflect the tastes and desires of society’s members. A market outcome cannot therefore legitimately be described as “fair” or “unfair” – it is merely a neutral price discovered by aggregating individuals’ valuation of a good, service or asset, accounting for supply as well as demand. The fact that people are prepared to pay more for gold than for pebbles is neither “fair” nor “unfair” – it’s just a fact.
The same is true of the salaries of sportsmen, entertainers, chief executives or investment bankers. All earn lots of money because they convince people to pay a lot for their services. The value of top footballers’ services is extremely high to their employers – clubs fighting globally to make money via ticket sales, TV, merchandising and sponsorships. Competition pushes up wages to incredible levels. Prices and wages are a signalling device: they tell people the extent of the demand for a particular product or service.
We may regret the fact that philosophers aren’t more valued and able to make millions selling their services – but that this is not the case is not “unfair”, it just reflects the public’s unfortunate lack of interest in what they have to sell.
This is not to say that markets never go wrong or make mistakes. They do so all the time. Football clubs may pay players so much that they end up going bust; eventually, a realistic equilibrium will have to emerge. Artificial barriers to entry may be erected by governments, limiting the supply of people to a particular profession and artificially bidding up wages. Shareholders may be incompetent or lazy and allow bosses to pay themselves more than their true market value. Central banks can print too much money, which fools market participants into thinking that they are richer than they really are, bidding up prices and triggering inflation and asset bubbles.
Yet such issues can be rectified through a combination of a more sensible economic policy which doesn’t introduce distortions into markets – and by more competition. Cartels and closed shops always enrich elites – in the City or anywhere else.
The real problem is not that markets are enriching some people too much – it is that decades of poor educational policies mean that too few people have the right skills to compete in the global economy. Rather than fuelling class war, politicians would be better off focusing on that.
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