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November 23, 2005

Class Envy.

Jonathan Freedland gets out the old class envy stuff today.

Nothing new in all this, you might say. The rich, like the poor, are always with us. But that would be wrong. Robert Peston, City editor of the Sunday Telegraph, estimates that this year no more than 200 to 300 hedge-fund managers will carve up $4.2bn of pure profit between them. These sorts of payouts are on a scale unimaginable in the past, at least outside the handful of individuals who either invented a new product or owned a tangible resource: Bransons or Rockefellers. That they should come, as regular as a salary, to those who, by their own admission, create nothing is a new development. (And buying up once-public companies in their entirety is essentially a new field.)


"Create nothing?" In what way, precisely, do people earn large sums of money for creating nothing? Is there some special hole in the market system whereby people get issued with a card to get oodles of dosh for not adding value? According to Mr. Freedland, apparently so. If those who work in them get money for "nothing" then financial markets do not add value. Mmm. Interesting idea but one that rather fails I think. Money has a time value, capital has a value, those who deploy it better than others are creating value just as much as those who deploy labour better are, or land or the other factors of production (or factor, if you prefer). It is, after all, multi-factor productivity that determines the general wealth of the economy isn’t it? There’s also the point that The City is one of the most ruthlessly competetive places on the planet. Not where you would expect people to be handing out the cheques for "nothing".


When Margaret Thatcher came to power in 1979, just under 6% of national income went to the top 1%. That figure stood at 9% a decade later, but under Tony Blair it has risen to at least 13%: a tiny group taking nearly an eighth of our collective wealth.

Tsk tsk. Confusing wealth and income? Stocks and flows old boy, stocks and flows. Something of an economic howler (and yes, I’m guilty of them myself at times).

I know it's frightfully old-fashioned, but I beg to differ. For the story about the £333 cocktails emerged in the same week as Shelter reported that children were being forced to sleep in kitchens, dining rooms and hallways because of cramped housing affecting 500,000 families in England alone. Of these, three in four said that the lack of space was damaging their children's education or development; many spoke of depression and anxiety. And the scale of the problem has remained unchanged since 1997.

To my mind, there is something deeply wrong here. If one man can spend £15,000 plying his pals with a syrupy cocktail, while another lays out blankets for his child to sleep in the kitchen then we know the system is broken. This is not some narrow criticism of the Labour government, but rather a challenge to our assumption that we are a civilised society at all.

That 15 k then goes where? Into the pockets of the bartender, the pot washer, the waitress, the brandy maker and his workers and......or perhaps we should prefer it to go to the taxman to be spent by John Prescott’s department so that he can solve this housing crisis? You know, that one where he knocks down hundreds of thousands of decent and well built houses in the North? ’Tis an old point but a good one, just because a market system doesn’t provide the solution you would like, there is not much evidence that a Governmental one will in its place.

It's not just lefty whingers, consumed with class envy, who are noticing all this. Leo Hindery, the multimillionaire chairman of HL Capital, told the BBC last year: "You're setting up a class system the likes of which we've never seen in the world. The most obvious precedent is the French revolution, where the gap between the extremely wealthy and the middle class grew to be so acute that social unrest ensued."

The existence of a precendent rather implies that we have seen it in the world before.

He may be on to something. Experts have long known that relative inequality, not just poverty, adversely affects the health of those at the bottom: by seeing those so much better-off than themselves, people feel excluded, even blaming themselves for failure. Others wonder about the prospects for social mobility when those at the bottom cannot even see the top. The evidence also shows that the spending habits of the super-rich trickle down, so that those with little money feel pressured to spend cash they don't have (a phenomenon reinforced by the Posh'n'Becks celebrity culture of constant, conspicuous consumption).

Aha! He’s been reading Polly Pot! Inequality kills!

Another would be to raise the basic rate of tax on the very rich: not to the 80% or 90% that scared the Rolling Stones and their ilk abroad in the 1970s, but perhaps to 50%. If Labour can't stomach that, it could simply crack down on tax evasion: some of the very richest of the super-rich don't pay a bean in tax.

Here’s a solution for you. Let’s put the tax rates up to 90%. All those high earners will then leave. That will even out the income distribution quite a lot, poor babbies will no longer die of the envy of the riches of others and we’ll all be better off. Well, except for we’ll have less tax money to spend on them. We’ll lose the financial markets which are our largest exporter. Lose the squillions that these high earners splash around London. That’ll all happen in Zug or Monaco where the markets and the jobs have gone.

But that’s OK. We’ll all be poor together and equal here in the UK, they’ll all be rich together there and equal and the health of all three places will get better because of the greater equality. Lovely eh?

The problem with 50% tax rates is that it only takes us a small step to that desirable solution. Why the hesitancy, eh Jonathan?

November 23, 2005 in Economics | Permalink

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Comments

...forced to sleep in kitchens, dining rooms and hallways because of cramped housing...

Sounds like the Soviet Union. And he thinks more socialism will improve things?!

Posted by: Tim Newman | Nov 23, 2005 10:01:37 AM

As usual a complete lack of understanding of the role of incentives. The problem is that those at the bottom don't get a sniff of the £520bn they already take off us.That is not a reason to take more.

Posted by: Mark T | Nov 23, 2005 10:41:39 AM

The big thing wrong is that the "poor" are having children they can't afford and screaming so loudly for money from productive workers that we don't notice that rational people who budget are putting off having children forever because the states extortion makes everything so f**king expensive.

If you're under 35 you are being screwed by the state, and you will get nothing in return. The baby boomer generation are by far the most impulsive, selfish and stupid generation. This is the reason the country is going downhill so quickly.

Posted by: Rob Read | Nov 23, 2005 11:26:02 AM

Sounds like communism could be making a resurgence!

I would note, though, that socialism is a catch all for a whole range of philosophy, policy, values etc etc. The Soviet Union actually operated communism - a particularly nasty authoritarian form of socialism. I am no whingeing socialist, but calling all socialists communists is like calling all free market advocates fascists.

And I choose to read the Guardian most days myself! which gives me a dilemma - I like the news coverage and breadth of the paper, but get f*cked off with all the whingeing gits such as Freedland, Polly Toynbee et al - what a bunch of hand wringing worrier anti global, anti market, big government, idiot - hacks! Their solutions for the ills of the world seem to be - the government, more tax, redistribute wealth etc. If government services got to the people who needed them we'd be in less of a pickle, don't you think?

To chime with Tim's PJ O'Rourke quote - from Eat the Rich - to redistribute wealth, you need to create it in the first place (or some such like).

Posted by: the-man-in-black | Nov 23, 2005 12:56:45 PM

When you redistribute (i.e extort) wealth, you are making it far less likely to be produced in future.

There should be NO punishments for financial success.

The whole point of production is consumption, so all the extra financial success will lead to more opportunities to earn.

Socialism is a form of slavery.

Posted by: Rob Read | Nov 23, 2005 1:25:08 PM

There's a rather obvious solution to Mr Freedland's problem, so obvious I wonder why he doesn't implement it forthwith. Since those who run hedge funds give extraordinary sums of money out to people who create nothing, he could simply call them up and point out that he and his fellow Guardianistas are all very good at doing that: in fact their wages are currently paid by the profits of the Manchester Evening News. Once the hedge funds start handing over huge wads of cash to the G-men, they can all start wandering around the housing estates of Peckham and Tower Hamlets, handing out £100 notes to the residents, who will no doubt greet them with incredulous joy and laughter as they stand patiently in line, waiting for the notes to be dispensed. I can't imagine why he is waiting, to be honest: it's such a lovely image I would pay to see it realised.

Posted by: Stephen | Nov 23, 2005 2:33:54 PM

Just so we can be clear, and as extrapolative lunacy appears popular, are you all saying you would like zero redistribution?

Tim adds: Redistribution for the sake of redistribution? In order to create some post redistribution state of greater equality of income?

Yes. Zero.

There are other reasons for both taxation and spending which I support and which may have the effect of redistribution, but for and of its own sake, no, I don’t support it.

Posted by: Matthew | Nov 23, 2005 4:29:54 PM

How did you know(?) I was just waiting for the chance to sing....

not me - I'm the man in black..

I wear the black for the poor and the beaten down,
Livin' in the hopeless, hungry side of town,
I wear it for the prisoner who has long paid for his crime, But is there because he's a victim of the times...

I wear it for the sick and lonely old,
For the reckless ones whose bad trip left them cold, I wear the black in mournin' for the lives that could have been, Each week we lose a hundred fine young men....

But 'til we start to make a move to make a few things right, You'll never see me wear a suit of white.

Fairly ambitious for an economist I'll admit...

Posted by: the-man-in-black | Nov 23, 2005 4:35:34 PM

On the issue of adding value - the paradox is that many trades in financial markets are zero sum - so they shift wealth from one pocket to another - it's distributional competition. It's quite hard to see the added value at the level of individual trades. Not like they are producing widgets. Though the net effect at the system level of having more bond dealers and the like may be to add liquidity, which usually is considered a social good. The irony then - as Chris Dillow pointed out in a recent post - is that the social good of many of these jobs may outweigh the private. Lose one bond trader and nobody is worse off. Lose the whole market and maybe we are all worse off.

On relative inequality - I wonder though why you are so down on the idea that relative inequality is potentially damaging. I think one could find a lot of evidence to back that claim up. When commentators label that "class envy" they are sometimes just avoiding a genuine discussion as to whether or not we should be at all bothered about relative inequality and under what circumstances. On which point I'll disagree with your view that redistribution should be zero. My view is that it is contingent. I could tolerate quite a lot of income inequality provided that income is not the sole arbiter of access to things like health care, education and decent housing. After all - I don't really care too much if someone is much richer than me if it just means they buy better cars or nicer cornflakes. But I think big income inequalities are much more an issue if access to the best schools, best universities and best health, for example, are fully market driven. Then big inequalities can really become self perpetuating.

Posted by: rjw | Nov 23, 2005 5:22:39 PM

hmm sometimes people who are extremely poor or deprived in some way can contribute to rather unpleasant or problematic externatilities like crime, shanty towns, public health risks and so on. And sometimes we may take a value judgement that relative poverty is a bad thing. And so we may seek to address this.

I agree that big inequalities can be bad, and I am against many of them. But redistribution of income is just one way of addressing these inequalities amongst many others. As Tim alludes to, redistribution per se may not be the best answer in all cases.

Its just that journalists paint pictures with very big brushes in the brightest colours they can find sometimes.

Posted by: Angry_Economist | Nov 23, 2005 9:52:45 PM

".. calling all socialists communists is like calling all free market advocates fascists". No, the former is much less stupid than the latter. Fascists had nothing in common with free-market liberals, fascists were just another heterodox variety of socialist. Il Duce came from a socialist home and started adult life as a socialist journalist. Mosley moved from being a rather corporatist Conservative MP to Labour cabinet minister to fascist, a move along a smooth continuum. Hitler didn't even disguise it: National Socialist German Workers Party = Nazi.

Posted by: dearieme | Nov 23, 2005 10:31:07 PM

Hmm thanks for clearing that one up! I just get annoyed with the 'all socialists are commies' brigade. I thought that went out with McCarthyism.

Posted by: the-man-in-black | Nov 24, 2005 9:18:17 AM

Financial market trades are not all, always zero-sum. I once played a currency trading simulation game: the interesting thing was that, when we analysed the trades afterwards we saw that sometimes, depending on exactly how your book had been built up, a trade could be profitable for both buyer and seller. And liquidity is important. If a fund manager needs to sell to pay for redemptions, she needs a counterparty to buy that hot share. Her need for the moment is cash, while another fund manager has cash, but needs growth. Each gets what they need: value is created.

But I think big income inequalities are much more an issue if access to the best schools, best universities and best health, for example, are fully market driven. Then big inequalities can really become self perpetuating.

On the contrary: these things are far too important not to be left to the markets. You might not be able to afford the best schools and the best healthcare, just as you probably can't now afford the best cars. But the cars you can afford are for all practical purposes, identical to the best. The "people's cars" produced by the communist countries were not. Markets ensure the best allocation of resources and therefore the highest value at the lowest cost.

Posted by: Stephen | Nov 24, 2005 2:10:40 PM

But how does having no redistribution square with your view that those on minimum wage should pay no income tax whereas thouse on £30k a year should?

Posted by: Matthew | Nov 27, 2005 6:37:02 PM

The basic reality is that it is a jungle out there. There is no such thing as culling of the weak in our human society. That is what I see happening in the big divide between the super rich and the super poor.

But what the author of the original article is trying to get at is: if supposedly we are more intelligent than animals, why aren't we taking care of the weak amongst ourselves? Is there no sense of social responsibility? What is the real need for a £333 drink used to feed at best a very few people very well. Why cannot we try and educate the people who need it the most, to get them to see the folly of their ways? For eg. their misconception of producing more children to help in their old age. That is a remnant from days gone by when there was no concept of a sustainable population. Likewise, preference of sons vs daughters...These habits are ingrained deep, very deep, and it is only through thinking have we been able to rise above to another level to understand.

Try to see it from the poor man's point of view here, what he is probably thinking. And try not to blame them. Some people are not capable of thinking some thoughts, just because it is a completely new train of thought. The reasons I feel are partly genetic, partly out of the realm of expertise of anyone they know, and partly inertia. Maybe some will never learn due to stubbornness or it is plain incomprehensible to them. Just like in every 100 apples in a barrel not all are rotten, likewise not all are smart or average. But I refuse to believe that 100% of the poor are incapable of improvement.

Won't it lead to strife, like the author says? Instead as supposedly superior than animals we are letting the poor take care of themselves, which they will eventually take care of us (the haves) to try and restore parity.

Posted by: Amit Kulkarni | Nov 28, 2005 8:02:28 AM