Tuesday 18 October 2016 6:45 pm

Inequality doesn’t matter if we’re all paid according to the value we create

and Yaron Brook

Log on to Netflix and you can catch old episodes of Dirty Jobs, where you can watch host Mike Rowe visit plumbers, pig farmers, and steel mill workers and try his hand at some of the less sexy but utterly fascinating jobs that help make the world around us possible.

All of these people work incredibly hard, and it might raise a question in your mind – a question that is central to today’s debate over inequality: why is it that they earn far less than chief executives, investment bankers, or A-list actors?

The answer is that, in a free market, people don’t get paid for the effort they exert but for the value that they create.

Think about author JK Rowling, who became a billionaire from her wildly popular Harry Potter series. Rowling certainly worked hard – but so do thousands of other authors who struggle to find an audience. The difference is that millions of people value Rowling’s work. They were willing to turn over £10 or £15 for each Harry Potter novel, because the pleasure they got from those books exceeded the price tag.

It was irrelevant to them whether Rowling suffered writer’s block and spent sleepless nights agonising at her desk, or whether she effortlessly poured out a hundred pages a day of perfect prose. It was the value that mattered.

Ian McEwan
It's irrelevant to the reader how much work went into the finished product – just how much they value it (Source: Getty)

The notion that people should get paid for hard work, rather than valuable work, may sound nice to some in the abstract, but in practice it would mean that a hair stylist who struggles to line up your sideburns should get paid more than the master who can give you the best hair cut of your life without breaking a sweat. It would mean that a sleep-deprived waiter deserves a bigger tip than one who is equally competent, but who turned down the opportunity to party the night before.

To be sure, creating value does require hard work, and many of the people who earn headline-making incomes exert enormous mental effort: from the Silicon Valley entrepreneur to the superstar athlete to the award-winning heart surgeon. They may make success seem easy, but if it were easy, everyone would do it. Even so, effort alone, although deserving of our praise and admiration, doesn’t imply anything about how big a person’s paycheck should be.

Read more: Almost everything the Left tells you about inequality is wrong

Don’s wife, for instance, is a teacher – a really good one, if he may say so himself – and she probably works as hard as many FTSE 100 chief executives. But she’s providing a service to only a handful of students each year. The chief executives are creating value for millions and even billions of people. It would be absurd for her to earn anything close to what they make.

A paycheck is the result of a trade, and what we trade are the values we create. The more you have to offer, the more you can get in return.

That’s why it’s ridiculous to complain about the income inequality that emerges from free, voluntary transactions. Rowling increased inequality when she became a billionaire, but she did so by making millions of people better off – and anyone who didn’t like her books didn’t have to pay her a penny.

That’s the pattern we see all over the economy. Jeff Bezos, Warren Buffett, and Mark Zuckerberg may have billions in the bank, but their fortunes didn’t come at the expense of their customers or employees or society at large. They prospered by doing something enormously valuable – by running companies that enriched the lives of everyone who chose to deal with them. It was win/win all around.

Warren Buffett To Give Most Of His Fortune To Gates Charity
Warren Buffett's fortune didn't come at the expense of other people (Source: Getty)

Unfortunately, today, not everyone is getting paid for the value they create. Too many are getting paid for the government favours they can extract. Widespread cronyism in the form of bailouts, subsidies, and other special privileges can increase inequality. But the problem isn’t the inequality – it’s the win/lose nature of cronyism. When people get rich through government favours, it comes at the expense of taxpayers, buyers, and competitors. The solution isn’t to fight income inequality, but to stop cronyism. We shouldn’t punish value creators for the sins of cronies.

Fighting high pay at the top has, for some, become “the defining challenge of our time,” to quote US President Barack Obama. But following that path would be a double disgrace. A just society shouldn’t punish people for prospering – and if it does, it shouldn’t be surprised if it finds that there is less prosperity.

Today America is seeing a decline in its rate of economic progress, and the same could be said of Great Britain too. It is the top value creators who drive human progress, and the real defining challenge of our time is how to liberate the pursuit of productive achievement while eliminating political influence-peddling. That’s going to require some genuinely hard work.

Don Watkins and Yaron Brook are the authors of Equal Is Unfair: America’s Misguided Fight Against Income Inequality.

Brook will be speaking at this year’s Battle of Ideas festival, which takes place this weekend at the Barbican. To see the full programme and to order tickets, visit www.battleofideas.org.uk/

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.