Unequal incomes are regularly justified by claiming that high incomes reflect a larger contribution to society. This has never been true as a general proposition.
Some high incomes, like those of skilled surgeons, reflect a contribution well above the norm. Others, like those of entertainers and sports stars, reflect services that are highly valued by our society whether or not they make it a better place.
Others on high incomes make only marginal contributions to society or cause active harm. The massive growth in the number and incomes of lawyers and finance professionals over the past forty years has not been matched by any obvious improvement in justice, financial security or the rational investment of capital.
The majority of people in these professions are, at least, attempting to earn an honest living in the system as it currently stands. But a substantial minority, exemplified by Donald Trump and Jeffrey Epstein, make their money by exploiting the loopholes in the system, and by campaigning to keep those loopholes open and widen them as far as possible. These are people for whom paying debts and obeying the law are options to be adopted when it is necessary for business purposes, and evaded whenever it is profitable to do so. And they have a legion of well-rewardd assistants – the Roy Cohns, Michael Cohens and Allan Dershowitzes all play their part.
By contrast with the highly visible upper end of the income distribution, many workers who make a vital contribution receive far less payment or recognition. The pandemic has reminded us how much we depend on workers we may never see and who work in difficult and sometimes dangerous conditions. Cleaners, meatworkers, grocery store packers and many others ensure that the goods and services we expect are delivered, even under the crisis conditions of the pandemic. Low-paid hospital workers are just as essential to the functioning of our health system as the most skilled surgeons.
The continuing appeal of the idea that high incomes are generally deserved stems largely from wishful or even magical thinking, of the kind that is reflected in the ‘Prosperity Gospel’ and the writings of Norman Vincent Peale. We want to believe tht the universe, or at least the country we live in, is inherently just and that only in exceptional cases do bad things happen to good people.
But the universe doesn’t care about us; the rain falls on the just and the unjust alike and, if there is a divine plan for justice, it doesn’t manifest itself in this life. Certainly, there is nothing in the pandemic that suggests its depredations have anything to do with justice.
As for justice in human affairs, it doesn’t simply happen. Justice comes only from a long struggle and can only be kept up with more struggle. The pandemic has done the greatest damage to the poor and low-paid whose efforts keep society running while leaving Wall Street and the professional classes largely unscathed.
Most defenders of inequality are unwilling to abandon the belief that high incomes go to those who deserve them. An important exception is Hayek, who argues that what should be rewarded is the value people create for each other, regardless of whether that value is the result of merit or luck.
This argument works only on the assumption that the return someone can secure from our existing market arrangements is a measure of the value we create for others. But it’s obvious that all of this is contingent on those existing arrangements: a different society would value contributions differently. Even within the limits of market capitalism, changes in things like intellectual property and bankruptcy laws can make valuable claims worthless and vice versa.
Stripped of the rhetoric of ‘value’, Hayek’s claim can be more simply stated as follows: a free market economy rewards luck as well as merit, so, if we want to maintain the free market economy, we must accept that income will not, in general, reflect merit. But looking at the outcomes of last few decades, they do not seem positive enough to make Hayek’s argument work. The market economy as it now exists is not such a boon that we should tolerate the inequities it generates.
John Quiggin 
The demolition job is fine. But what would be a just system of rewards? The neurosurgeon, the dustman, the cleaner and the economics professor are all essential. Does that mean they should be paid the same?
One uninspiring way out is to admit there is no such criterion for fair reward. The policy objective is just to reduce the damage done by Lady Fortune.
PS: if you want to listen to the crazy old man muttering into his 11-year-old soup about communist allocation, try here, then here, and here (in sequence).
It’s not about value, it’s about position (sociology 101). Cooperative production requires hierarchical organisation (past some quite early point – around 10 people); if the hierarchy is to be maintained, then rewards have to be commensurate with position. If the society is highly monetised, then money will be the currency of reward (in other times it could also be prestige, mates, opportunity…). Changes in monetary reward reflect changes in relative position (as an example, as occupations become more female or lower-class, pay sinks; if being female becomes of a marker, this changes – but one way to change it is to pay more, because that signals higher position – so it’s a dialectic).
“like those of skilled surgeons, reflect a contribution well above the norm”
and is actively enhanced by the “closed shop” nature of who gets to be part of that club (see also “silks” in the lawyering caper).
Two points:
1. Developers of high rise unit towers and big international accounting firms could be added to the list of minorities that exploit loopholes.
2. I find the paragraphs on v. Hayek interesting because it restores some of the subtleties of his writings that has been lost in the writings of some members of the Austrian school and even more so in the so-called thank-tanks and other associations that have been mentioned on this blog-site in the past.
Hayek was a lawyer in the first instance and as such a master of the usage of language. I read some of his earlier essays and, when considered in the context of the time of his writings, I would say he was quite subtle in contrast to the dogmatic stuff which emanated from the said contemporary organisations.
Some people, including many economists, dislike the mathematical treatment of economic theories. IMO, these people overlook its advantage, namely it almost completely eliminates subsequent distortions of the intended meaning and it is ‘honest’ in the sense that limitations are explicit (the assumptions) and comparing assumptions as well as results with observables is not eliminated in line one.
I appreciate this blog post. Thank you. I agree it’s unclear if higher income really reflects value creation vs rent seeking.
When my older brother first went to Australia for tertiary studies (during the Hawke government), he wrote back telling us that he overheard the gardener chatting about his vacation in France. I was astonished, and thought how wonderful to live in a society where one’s choice of vocation is not overly swayed by income considerations.
Funny that Australia has since moved away from what I saw as an ideal society to being more like the unequal societies in Asia. And even more astonishing, that seemed to be the desired policy outcome.
To some extent, merit is its own reward. I mean this not moralistically but occupationally. I will repeat in slightly altered form a little of my comment from part 1 of this topic.
To those who are exceptionally good at something and want large extra financial and material rewards, I would say this. Being highly capable in your métier is reward in itself. A person, performing well at work, or even sport, in a way that is constructive and useful to him/her and others, needs only the experience of the competence or mastery itself plus adequate means to live day to day and to repeat the métier experience itself and improve on it. By “métier” I mean a personally or socially useful occupation, trade, profession or activity for which a person is particularly suited and which often is the person’s specialty.
The above insight solves the riddle of meritocracy. The correct economic rewards for merit are those rewards sufficient to permit a living with reasonable amenity by community standards plus enabling the time investment and dedication for performance of and improvement in the métier.
On a somewhat different tangent, the covid-19 pandemic has revealed to us the problems of becoming a self-indulgent leisure society rather than a productive and self-improvement society. To explain that, we can say that health care and aged services, for example, are productive in that they produce good health, well-being and amenity for people, often lifting them out of the pain and misery which would be their lot otherwise. Just look at the pain and misery in under-funded aged care even before the pandemic. More resources should be devoted to such sectors and away from promotion and consumption in what are more selfish and self-indulgent sectors of the economy. Opportunity cost calculations would suggest that, as a society, if we built half the number of pubs, clubs, bars and taverns that we build and staff now, we could build and staff more and better aged care homes and maybe even have them permanently epidemic-ready.
There is also a difference between self-improving, constrcctive leisure and self-indulgent and even self-destructive leisure. The under-regulated advertising-consumer nexus for indulgent goods, from soft drinks to super yachts, promotes in the main self-indulgent, self-destructive and ecologically destructive leisure. It does so by, among other things, manipulating the dopamine reward system of the human brain with electronic media and using targeting algorithms. Under the current system, which I call capitalism but you may call an under-regulated mixed economy, the social engineering and control performed by advertising and media influencing is under-regulated. The resulting economy is one in which hedonistic goods are over-produced along with exclusion and alienation for those who cannot afford the requisite quantity of hedonistic goods. The evidence abounds that this system is deleterious to humans and to the literally collapsing environment.
We need to effect a radical change to what is a profoundly sick political economy system, sick in all senses, physical, moral, social, economic and ecological. This is what the novel zoonosis covid-19 pandemic shows us in clear colors. This is what the death of the barrier reef, insectageddon, the sixth mass extinction and climate change are showing us. But oh no, a beer at the footy is more important isn’t it?
I admit I do flip between hoping we turn this around and hoping that mother nature punishes people for what they have done. The latter could be seen as vindictive and sadistic schadenfreude, not to mention a death-wish, or it could be seen as a realist hope that a few more salutary demonstrations from nature, as shots across the bow of consumerist capitalism, will induce people to see that they need to radically change the political economy and production-consumption system. We need a a complete revolution. Peaceful revolutions are better and turn out better so let’s work towards effecting one.
People would compete for prestigious ,interesting ,and satisfying jobs regardless of whether they were well paid .Making them well paid just ensures that those who value money most highly will be attracted to the competition as well .A lot of the kids who enroll in medicine or law do so simply because they got the best high school result and their family values money and prestige. I think people who would do those jobs regardless of remuneration are of a higher caliber and more suited to the task. Does a 10 million dollar salary really attract a better CEO than a $200,000 one ? I would argue it attracts a worse one, I think thats pretty obvious when the quality of their think tanks and media is looked at . People down the ladder pay with their actual physical bodies too ,not just in dollar terms. Many go to early graves due to work related stressors ,mental and physical. There is a woman in my street whose husband died from a typical (she seems sure it was) asbestos related illness after working with it for years when he was young. Nobody over 50 who does manual work is unaffected by wear and tear.
Careful there. Only relying on getting good people by giving them social status would also be dangerous. That way you get mainly people with a rich family background and/or narcissists that value admiration above all. Would be (and already is in some countries) horrible in politics. A place where one can see that absurd Oxbridge graduates compete out better candidates for only so so paid jobs with their social capital game are for example international aid organizations.
JQ said “… stems largely from wishful or even magical thinking, of the kind that is reflected in the ‘Prosperity Gospel’ ”
“Sandel says, …” such diverse phenomena as mega-churches preaching the “prosperity gospel,” … “and more broadly to argue that a just political future must recognize that even a perfect meritocracy would be fundamentally unfair.”
… in ….
“The Insufferable Hubris of the Well-Credentialed
…
“The Harvard political philosopher Michael Sandel’s 10th book, The Tyranny of Merit, … covers a lot of ground for a short text — especially in its sweeping second chapter, “A Brief Moral History of Merit,” which, following Max Weber, describes the surprising emergence of the “fiercely meritocratic work ethic” out of the Protestant Reformation’s “war against merit.” From these origins, Sandel says, would eventually appear such diverse phenomena as mega-churches preaching the “prosperity gospel,” the weakening of the welfare state, and the increasing importance of the university system as a source of not just earning power but personal prestige. President Trump, for instance, likes to say that he went to Wharton, which he insists is “the hardest school to get into, the best school in the world … super genius stuff.”
“The Tyranny of Merit hopes to explain the cultural background behind this bit of Trumpian braggadocio, and more broadly to argue that a just political future must recognize that even a perfect meritocracy would be fundamentally unfair. I talked with Sandel about resentment and hubris, the trauma of the elite-university admissions process, the problem with economists, and pull-ups.
“Critiques of meritocracy are on everyone’s lips right now. Why?”
https://www.chronicle.com/article/the-insufferable-hubris-of-the-well-credentialed