Wednesday, 11 January 2017

Fat Cat Pay

Jeremy Corbyn's proposal to put a cap on high pay has provoked a big reaction. I set out, back in 2009 the objections to a state imposed cap. But, other elements of what Corbyn and others, such as Clive Lewis, have suggested are more interesting. That involves scrapping the rigged way in which executives pay is set by remuneration committees, stuffed with other executives, and instead to put a majority of workers on those remuneration committees. Yet, not surprisingly such suggestions have provoked as much, if not more, opposition.

The socialist objection to state imposed controls is that they are bureaucratic and inefficient, creating a series of distortions that impose additional costs, but also that such controls are always used as a means of attacking workers not limiting the power of capital. As I said back in 2009, at a time when inflation is about to rise sharply, the introduction of pay controls, nominally to limit high pay, will quickly be turned into pay controls on ordinary wages.

Moreover, if the wages of say top class footballers are reduced, who will benefit from that? It will not be other workers, but will simply result in even bigger profits for the large football clubs, and for bigger dividends for the money-lending capitalists who own shares in those football clubs. No one has so far demonstrated how any similar controls would be placed on those dividends, and yet it is the unearned income going to the money-lending capitalists, which is the real basis of income inequality, just as the main basis of inequality in society derives not from inequality of income, but inequality of wealth.

The opposition to the proposals from Tories and other representatives of the money-lenders is, however, thoroughly hypocritical and apologist. That includes the opposition to the proposals by former Corbyn advisors David “Danny” Blanchflower, and Richard Murphy. Those objections come down to the argument that the high pay of executives is simply the consequence of competition, and, in a global market place, if Britain were to limit these salaries, the entrepreneurs that receive them would not set up businesses in Britain. There are so many fallacies in this line of argument that its difficult to know where to start.

Firstly, the executives that receive these high salaries are not “entrepreneurs”. They are not responsible for taking risks with their own capital, and establishing new businesses. The small private capitalists that do fall into that category generally do not get paid these huge salaries. But, the executives of banks like RBS, HSBC or of giant multinational oil companies like BP, who are the ones that get these huge pay packets, are not people who have mortgaged their house to start these businesses. They are businesses that were started decades, often centuries ago. The executives today are simply employees.

In economic terms, their pay is part of the profits of the company, because these higher executives true function is not to look after the interests of the company itself, but rather to look after the interests of the money-lending capitalists, who own shares in the company. That is why these executives, over recent years, have used company profits not to expand the business, but to continually increase the proportion going to dividend payouts, and to use profits to buy back shares, so as to push share prices, and therefore, the paper wealth of shareholders ever higher. As Andy Haldane pointed out a while ago, in the 1970's, dividends accounted for around 10% of company profits, whereas today they account for around 70%.

The high pay of executives is not the result of competition, but of monopoly. That monopoly is the monopoly of those same executives that have created a closed shop which limits and determines who is allowed to sit on company boards, and to determine pay levels through tightly controlled remuneration committees. The proposal to open up and democratise those company boards and remuneration committees is then a useful proposal. If workers dominated those committees, after all, and they found that their interests are best served by having highly paid executives being employed, then workers on those boards will appoint them and pay those high wages, so as to further their own interests. The real objection to that proposal is that if such a situation were to arise, the emperor would be seen to be wearing no clothes. The reality would be exposed that there are plenty of capable executives available to carry out necessary functions at a fraction of the pay currently handed to executives, and, moreover, it would be exposed that, in reality, the vast majority of these higher executives have no useful role to play, over and above the actual job of managing companies that is carried out, day after day, by the real functioning capitalists, the day to day professional managers whose pay is little different to that of other workers.

The reality is that the wages of these higher executives is usually in inverse proportion to the actual labour they perform, and the value they add to the business. Anyone who has simply watched the farce in the banking industry, in BHS and a string of other large companies must be aware of that reality. And that illustrates the hypocrisy of those that continue to defend the exorbitant pay of these executives, when it is compared to the attitude to those who actually do create value in businesses, the workers.

In recent weeks we have seen the furore whipped up in the Tory media over the strikes by workers on Southern Rail, and on the London Underground. Millions of workers in London, we were told depended upon these rail and tube workers to get to work etc. Without the tube and rail workers London would grind to a halt. Clear evidence, one would think, of just how valuable, therefore, the labour of those tube and rail workers is! Indeed, it might well be argued that if the astronomical profits of all those other businesses in London, are so dependent on the tube and rail workers getting their own employees safely into work each day, then those businesses themselves should be paying a much higher cost for that benefit.

It only needs workers on the tube or the railways to not provide their labour for one day, before the real value of that labour is seen, as London grinds to a halt. By contrast, were any or all of the top executives of London Transport, or of Southern Rail to take a day, or even a week off work, would anyone in the travelling public be any the wiser? Would it make any difference to their daily activity?

You might think then, given the argument for the need to pay astronomical wages to executives, that this would mean supporting much higher pay for the workers that actually produce the goods and services upon which society actually depends. But, no. When it comes to considering the wages and position of workers, the argument suddenly changes. Rather than the indispensable function of tube and rail workers leading to demands that they be handsomely rewarded in their pay and working conditions, instead we are told that restrictions on their right to strike must be imposed so that they cannot impede the profit making of all those other businesses!

The idea that workers could have a majority on remuneration committees was dismissed by Blanchflower, speaking on TV, by saying that shareholders would never agree to such proposals. But, shareholders have to operate within the laws of corporate governance, and those laws can be set by Parliament. However, what that objection does highlight is the ridiculous position whereby shareholders, who are only people who lend money-capital to the business, no different to the way bond holders lend money-capital to the business, in return for a bond, or a bank lends money-capital to a business in the shape of a loan, are able, unlike these other lenders, to control the company's activity, and to appoint these top executives.

What the objection highlights is the need to change the laws of corporate governance to remove that unjustified, privileged position of shareholders, and to place control over businesses where it belongs, in the hands of elected committees of the workers and managers of the company. That exists to some extent in Germany, where workers via their trades unions appoint 50% of the members of supervising boards; it was proposed in the EU's Draft 5th Directive on CompanyLaw, and it was proposed in the 1975 Bullock Report, on industrial democracy, in Britain.

But, Blanchflower is correct in saying that if Britain under Corbyn were to try to implement such changes in company law, it would face the obvious hostility of all those money lending capitalists, who would move the focus of their operations to other European countries. Yet, this objection is quite easily dealt with. It amounts to simple defeatism, and support for a race to the bottom, no different to objections in relation to asking businesses to pay higher taxes, or to stop sending children up chimneys. If someone were to say, we cannot have legislation that prevents the employment of child labour, or establishes a maximum ten hour day, because otherwise firms would set up business elsewhere, we would immediately see the despicable nature of such arguments. The same despicable arguments, in fact, that were raised, in the 19th century, against legislation to prevent child labour, to establish a ten hour day, and to introduce factory legislation.

Of course, in some countries, the level of social productivity is so low that many of their businesses could not function without child labour, long hours and poor conditions, as was the case in Britain at the start of the industrial revolution. Yet, by and large, businesses do not leave Britain and set up in these other poorer countries. The reason is that the higher level of social productivity in Britain far outweighs any advantages that may accrue to the poorer country from using cheaper labour-power and imposing harsher working conditions. And, firms do not leave Britain, due to such legislation, to set up in France or Germany, because those countries also have similar legislation.

What the objections from the Tories, and from people like Blanchflower, highlight in this regard, therefore, is not only is socialism only conceivable on an international scale, but even social-democratic solutions to the problems created by capitalism are only possible on an international, at minimum EU, scale. That is why its clear that no solution to those problems can be accomplished via Brexit, which will only throw up further obstacles to the development of international regulation and control of capital, and exacerbate the tendency for a race to the bottom. But, for the same reason the proposals of Cameron ahead of the referendum, and of assorted Blair-rights, that sought to diminish that EU wide regulation, in favour of a return to greater national control – the same is actually true of some of the Corbyn proposals for greater regional autonomy and decision making – also point in the wrong direction, because they inhibit the required development of control and regulation on that larger scale.

The answer to the objections of the Tories, and of people like Blanchflower, is for Corbyn to spearhead a movement, alongside other social-democratic forces in the EU, such as Syriza and Podemos, and the Left Bloc, for a return to the social-democratic ideas of the 1970's, for greater industrial democracy, and a restriction on the power of money-lending capital. The answer is for an EU wide campaign for a change to the laws of corporate governance to establish democratic control via the election of Boards comprising the workers and managers of companies, and not shareholders.

It is the workers and managers in companies that are the long-term stakeholders in their future, not the shareholders, who increasingly are only interested in short-term, speculative capital gain, and in the case of high-frequency trading, speculative buying and selling of shares that lasts only a fraction of a second! It is, therefore, workers and managers, and not shareholders, that have a vested interested in the long-term future of businesses, and it is workers and managers who should thereby have democratic control over the decisions that determine that future.

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