One of my favourite economists, Ha-Joon Chang, came out with a new book this year: 23 Things They Don’t Tell You About Capitalism. I finally got around to browsing it in the LSE bookshop, but at £10 compared with the Amazon price of £6, I decided to buy it from Amazon, despite the 3-4 day delay.
[The cover of the US edition]
The chapter I read in the bookshop compared the situation of a Scandinavian bus driver and a Third World bus driver. The particular examples he picked had the Scandinavian earning 50x as much. Why? He pointed out in some amusing discussion that the Third World job was much more demanding and required much more skill than the Scandinavian one. A free market would surely dictate that Third World drivers would rapidly take over from locals in Scandinavia and drive prices down. The reason that does not happen is stringent immigration controls.
Put differently, the reason the poor in the Third World are so much poorer than the poor in the West is because the rich and privileged in the Third World are incompetent. Things are set up in Third World countries so that the poor earn only meagre rewards despite working hard, often with considerable talent.
But that is no credit to today’s OECD rich. They are only able to make so much money – and subsidise the poor in their countries by over-paying for bus rides – because things were set up in a favourable way by past generations. In other words, if you picked up Warren Buffett and dumped him with $1,000 in a Third World country he would be unlikely to accumulate billions.
There is a good deal of food for thought in that. One could certainly add some nuancing and argue about details. For example, many of the Poles who flooded into the UK after Poland joined the EU returned home after discovering that although they could earn more here, the cost of living was also far higher than in Poland.
I always get irritated by activists trying to persuade me how appalling it is that some peasant earns $1/month. Certainly, many people live in serious poverty, but it is not that serious. Most people in the UK for example are paying – directly or indirectly – thousands of pounds a year to occupy land. The absurdly high cost of housing in London is a land cost, it is not because the buildings are built of gold and ivory. The peasants are typically paying nil to occupy land. Similarly, many poor people outside cities get their food by growing it themselves, and again that requires nil income.
However, these are really quibbles. The basic point is correct. Many people in the UK are working much less hard, less skilfully and less effectively than their people in the Third World who are doing comparable jobs and earning dramatically less.
Simply saying that the rest of us are subsidising them is not quite the whole truth, however. Beyond a certain point, inequalities between people living cheek by jowl are not sustainable in anything remotely approaching a free society. They cause riots.
It is arguable that we have already reached that point in the UK and the US. More and more affluent Americans are moving into gated communities to protect them from the less affluent. Similarly, discussion has begun in a desultory kind of way in the UK about trying to achieve some kind of maximum ratio between the earnings of the richest and the poorest (eg 20x). Within the public sector there is beginning to be pressure to limit people’s salaries to that of the prime minister. Of course, all such schemes quickly come up against the incentives problem. Few people will work 80 hours a week, knowing that the extra hours are not benefitting them at all and that they could earn the same by working 40 hours a week.
Equally, the other main point is correct. A brilliant derivatives trader does not earn £10 million a year simply because of his brilliance. His earnings are mainly because he is put in a situation which facilitates such success. It would be handy if someone could think of a way to get that fairly simple point across to high-earning investment bankers.
Quite what the lessons are for immigration policy, I am not sure. I have listened to thirty years of arguments about immigration policy in the UK. The arguments are fairly basic. A group of people in relatively unskilled jobs complain that their jobs are being stolen by immigrants. The rejoinder is that they need to improve their skills and move to higher-paying, more rewarding jobs. That does not go down well with those who feel threatened. They are quite happy with their existing jobs, thank you. They have no wish to retrain and anyway there is no sign of better-paid jobs in their neighbourhood. Or if there is, they are not confident about their ability to retrain and get one of these fabled jobs, let alone confident that they would enjoy it remotely as much as their existing job.
It is easy to get impatient with such Luddite attitudes. But less easy for the rich and privileged to see that they too are being heavily subsidised – by their forebears, who slaved away for scant reward to create a society which would enable them to earn huge amounts.
I guess “food for thought” is a euphemism for “I have not understood the implications of that yet”. Maybe the rest of the book will help. Grrr! Why didn’t I shell out the extra £4?