Oh dear me Willy

If you start off misunderstanding the very basics of capitalism then of course your prescriptions for making it better are going to be complete nonsense, aren\’t they?

But so should reward be proportional to our extra effort. It is a fundamental part of human beings\’ hard-wiring. The scales symbolically declare that justice is getting our due and proportional deserts.The irony is that capitalism if it is run properly is a means for people to get just that. If they are brilliant entrepreneurs or innovators then it is fair that they should get their proper due desert and make considerable if proportional profits. In fact, inventions are never the result of one individual light bulb moment but the consequence of a lot of social and public investment. Thus a proportion of the profit should go to the state as taxation, as its due desert for having collectively invested in the infrastructure and cumulative stock of knowledge from which invention draws – not least so it can repeat the exercise for the next generation. But the big point is that big rewards are justifiable if they are in proportion to big efforts – because big effort grows the economic pie for everyone. Profit is ethical to the extent it is proportionate to effort and not due to good luck or use of brute power.

No, capitalism is not set up to reward effort. Indeed, if it were, it would be a much less efficient system at generating wealth than it is. Capitalism is set up to reward value generated, regardless of effort. This is why it generates so much value that we all share.

Great effort can be expended in making a scale model of Westminster Abbey out of matchsticks. This is not effort that capitalism rewards. Very little effort might be expended in producing a new piece of software or cats\’ eyes for the roads.

However, cats\’ eyes produce great value and this is rewarded. That scale model might produce a few sniggers and little value: thus no reward.

Two pieces of software might have had the same effort put into them. One produces value for users, the other not. It is the former that will bring rewards.

It isn\’t effort put in which either does or should determine reward: it is value created, however it is done so, which should and does produce rewards. For it is this method that maximises the production of value which is what we all want.

\”It is only fair, they argue, that half a bank\’s revenues should get paid out in bonuses after each year\’s trading.\”

I\’m not aware of any bank that does that actually. I\’m aware of many that have total staff compensation as 50% or so of (net) revenues. But that is total staff compensation, not bonuses.

Oh, and just for a chuckle, can we find an organisation which has a higher staff compensation ratio? Yes, I think we can.

Income of £4.8 million, staff costs of £3.7 million. That\’s a 77% of revenue being paid in staff compensation in 2008.

That\’s also the Work Foundation, prop. one William Hutton.

So what\’s your excuse?

3 comments on “Oh dear me Willy

  1. “so should reward be proportional to our extra effort.”

    Good reason to oppose progressive income taxes. Extra earning from, say, overtime, should be taxed at the same rate rather than punished with a higher rate tax.

  2. “inventions are never the result of one individual light bulb moment but the consequence of a lot of social and public investment. Thus a proportion of the profit should go to the state as taxation”

    I think this is saying that if I order pizza while I am inventing, then strike it rich, I owe the pizza delivery boy a share of the profits, as I couldn’t have done it without him.

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