Fraser Nelson attempts to defend the 1%. I have problems with this. He writes:
If a banker could be found to make RBS so successful that it could be sold at a £20 billion profit for the taxpayer, would they be begrudged, say, a £20 million pay-packet?
This begs the question, in the proper sense of the phrase. In practice, it is impossible to find such a banker. The belief to the contrary reflects several cognitive biases and ideological positions, such as:
- An underweighting of Hayek's scepticism about the possibility of managing complex organizations in which knowledge is inherently dispersed:
- An ignorance of the role of organizational capital. Boris Groysberg has shown (pdf) that managerial "talent" is not portable. What determines the success of a hire is not the individual's skill, but rather the match between his skill and experience and the organization's needs.
- An underweighting of environmental factors, one of which is luck. For example, the best hope of RBS's share price rising is that not so much that good management turns the company around but rather that investors become more risk-tolerant and the risk of a financial crisis recedes, so that its share price rises. This point widens. The market can occasionally sustain poorly-run companies, at leat for long enough for their CEOs to take out millions.
In this sense, demand for managers - and hence their pay - is inflated by the fundamental attribution error and pot hoc ergo propter hoc fallacy which combine to create a faith in "strong leaders" who can transform organizations. And as padeophile priests know, if people have faith in you, you can get away with anything. Bosses can therefore extort millions for mediocre or even disastrous performance.
Fraser's question-begging continues:
Had Fred Goodwin’s mania at RBS been spotted earlier and he had been paid £2 million to go quietly, it would have been money well spent.
But it wasn't spotted. And there's a reason why it wasn't. Management skill is not like sporting or musical skill; it cannot be observed directly by outsiders. We have therefore a problem of asymmetric information. This too gives bosses power, especially as it is combined with the aforementioned biases. And money flows to power.
The market for managers, therefore, is one that's rigged by ideology and information failure.
But does this matter? After all, the market sometimes rewards mediocre musicians or writers so why should we worry if it rewards bad bosses?
One reason is that bosses don't just get money but power, as politicians and the media defer to them. Another reason is that faith in leaders has an enervating effect. If we're looking to leaders (in business or politics), we are apt to lose the ability to take control of our own affairs; this is the converse of Tocqueville's point, that the virtue of democracy is that it "spreads throughout the body social a restless activity, superabundant force, and energy never found elsewhere."
Now, you might think I'm making leftist points here. I'm not sure. For one thing, New Labour was cringeingly deferential towards bosses. And for another, many rightists should, in principle, support what I say. Hayekians should be sceptical of central organization; no rightist should support market failures; and boss culture militates against good Thatcherite virtues of self-reliance. Why then, should the right be so supportive of bosses? It surely can't be because they simply want to defend inequality, can it?
Another thing: I wish Fraser wouldn't repeat that silly trope about to the top 1% paying so much income tax. If inequality is high enough, the rich can pay a disproportionate amount of tax even if the tax system is regressive.