Economic responsibility in our lifetime!

It is only through disciplined practice that an artist or musician can attain freedom of expression…what we might call mastery. Behaviour is much the same. Without responsibility, freedom is impossible. If we all behaved in a responsible manner, external laws and controls on us would not be necessary.

We hear so many calls for freedom these days. Some parties call for “economic freedom” for all people. Others call for free markets without government control. But where are the calls for responsibility? We would be wiser to first call for responsibility, because only responsible actions will allow us the space to have real freedom.

It is no co-incidence that we have become a nation plagued by poverty, unemployment, inequality, crime, violence etc. Apartheid and centuries of colonialism and racism left us with a legacy of inequality that we have failed to address.  It is becoming increasingly clear that freedom without responsibility is not possible:  Our poor are trapped in a cycle of poverty and squalor, and the rest live in walled prisons behind burglar bars, too afraid to walk the streets at night.  Poverty and ever increasing inequality have reached the point where revolution seems increasingly inevitable.

Fortunately, its not too late to change things for the better and to heal and build our great nation.  Our beautiful people are so truly powerful, there is no limit to what we will achieve once we get our values straight.

How we value something is reflected in how we reward each other for it.  It is wise to ensure that work is rewarded according to the quality of the work, the difficulty of the task, how much time and effort is expended, how dangerous it is, and the value that that work adds to a product or company and society in general. In rewarding adaquately, we demonstrate the true value of hard work, and we encourage quality people to do the kinds of work that would most benefit our country, our society, our companies and our people. However, because we have lost our values and use the market as an excuse, most employers reward people according to how desperate their workers are for work and money…the more desperate our workers are, the less we reward them, regardless of the quality of their work or value added.

In our market driven system, the salary of a worker is not determined by the quality of his work or the value that his labour adds to a product or company, but rather by the supply of labour. The more jobless people there are who can do that work, and the more desperate they are for work and money, the more bargaining power an employer has compared to the employee. Irresponsible employers have taken advantage of this bargaining power to drive down the wages of employees so that their own reward can be increased.

Why is that irresponsible you may ask? Well, there is ample evidence that high inequality levels are bad for communities and nations.

Statistics from the World Bank and the UN show, when comparing developed countries, that there is a direct and undeniable correlation between higher inequality within a country and higher levels of social problems.

These statistics show that countries with greater inequality, regardless of average wealth or GDP per capita, show lower life expectancy, lower math’s and language grades, lower levels of trust within communities and social mobility, and higher levels of infant mortality, rape, homicide, imprisonment, high school dropouts, teenage pregnancy, obesity, mental illness (including drug and alcohol addiction), and many other social ills than more equal countries!

Greater inequality also leads to less representative democracies and in turn even greater inequality, because governments are often persuaded through corruption and party election funding to pursue policies which benefit the rich elite and large corporations at the expense of the poor majority. The poorer the masses become compared to the elite, the less influence they have on their government.

The cost of our ever increasing inequality is clear: Hundreds of billions lost in recent strike action, increased borrowing costs because of our ratings downgrade (blamed on uncertainty caused by inequality and industrial unrest), crime, violence, drug problems, racial animosity, poor education, loss of investor confidence due to the unrest, the damage to South Africa’s image etc.

Our growing inequality is simply unsustainable, and simple mathematics shows that inequality can’t decrease while income inequalities increase. Income inequality in SA has been rising steadily over the last 20 years despite the end of apartheid and despite the implementation of race-based affirmative action policies. We have simply not addressed the underlying cause of income inequality, which is the irresponsible manner in which salaries are decided.

Often the salary gap is not even caused by market forces, but rather because bosses have the power to decide their own salaries and also those of their workers, while workers have limited bargaining power through collective bargaining processes. This explains the disparity between the salary of a teacher, nurse or policeman, and the salary of a member of parliament. There is a shortage of teachers etc, but always a surplus of politicians. Politicians may argue that their job is more important than a teacher’s, but I doubt anybody else would agree with them. Teachers add huge value to our human capital, and there is no doubt as to who makes more sacrifices and works harder generally, though admittedly there are some hard working and dedicated politicians. The private sector is similar. When bosses don’t decide their own salaries, it is common knowledge that most remuneration boards are made up of like-minded CEOs who sit on each others boards and scratch each-other’s backs.

We should also remember that market price is not just affected by the supply of a commodity (in this case labour). It is also affected by the demand for money. A poor and desperate person will sell a valuable product for less than a rich person would, because he/she needs the money more urgently than the rich person who can shop around for a better price or wait for a better offer. Employers take advantage of this bargaining power and consequently the wage gap is growing continuously.

Part of the reason why inequality is so persistent is that many people still imagine there is some sort of magical divide between the rich and the poor, between capitalists and labour. Fundamentalist capitalist and socialist ideologies entrench this imagined divide. This is a form of Apartheid. We need to understand that these devisions are imaginary. There is no divide. We are fellow citizens and we need to start acting responsibly towards each other for all our sakes.

At the moment we are not acting responsibly. In SA the ratio of total CEO pay to average company pay is around 73 times, and the total pay of the CEO compared to that of entry-level workers averages around 150 times for JSE listed companies, while the gap in larger JSE companies is around 300 times.  In a well-publicized example in 2011 one executive accepted 10 000 times more than his lowest paid employees earned. This is most disrespectful and highly irresponsible.

Our people are more important than “the market”. We are the market. If we allow market forces to decide the value of work, inequalities will continue to grow, leading to more social unrest, more crime, less investor confidence, more industrial action etc. Ever increasing inequality will inevitably lead to revolution. Evolution would be far more beneficial, and in order to evolve peacefully to prosperity and unity, we have to bring down inequality levels.

Fortunately, there is an easy, simple quick and effective method to bring down inequality: Salary-gap moderation.

Salary-gap moderation is simply limiting the ratio between the pay of executives and their lowest paid workers within each company. So instead of a fixed minimum wage, the minimum wage within companies becomes flexible, while the maximum wage comes into balance with the minimum wage, according to the profitability of the company.

The benefits of salary gap moderation:

Salary-gap moderation creates jobs! By spreading wealth into the communities that need it most, salary-gap moderation will benefit our economy tremendously, because our people will have the funds to support local businesses, and invest in child-care, education, healthcare, business and the employment of others. We will always lack jobs if there are too few employers. By distributing money into the communities we will create more employers.

With salary-gap moderation there would be no need for a minimum wage and striking would be a thing of the past. If the boss is not earning too much more than the workers, there is nothing ethically wrong with paying low wages. Workers would be more willing to make a sacrifice, if they knew that their bosses were making the same sacrifices alongside them, and that they would get a fair share once the company starts making profit. Workers would have more incentive to work harder at making their company a success, and local manufacturing would be much more competitive because start-up entrepreneurs would be less reliant on capital for wages to get their businesses to the point of profitability, at which time he/she would have to raise the workers wages in order to earn more him/herself.

Greater equality leads to social and political stability, encouraging investment and leading to an economic environment in which business can flourish.

The East Asian countries of South Korea, China, Taiwan and Japan took active steps to ensure that wage inequalities were kept within bounds during their development, and have grown far more quickly than countries like SA, which have not made an effort to limit inequality. Nothing scares investors away more than social and political instability and uncertainty!

Salary-gap moderation is non-racial

The best part about salary-gap moderation is that it is completely non-racial. It creates a culture of equality, respect, goodwill and prosperity, in which social ills such as crime and violence would decrease dramatically. It brings people together, whereas the race-based BEE schemes, though currently necessary, and despite their limited success, continue to divide us into race categories. With salary-gap moderation, race-based empowerment would be far less necessary.

Salary-gap moderation increases demand

Economists agree that the recession that is plaguing the world economy is caused by a lack of demand. The lack of demand is caused by the gradual lowering of the real value of workers salaries in most countries over the last few decades (even though the salaries of bosses and company profits have grown immensely over the last decades). This reduction in worker salaries was masked by the availability of easy credit from the 1980’s, which ensured continued demand until the credit crunch in 2007. When easy credit dried up, so did demand, hence the global recession.

Governments have been using fiscal lubrication (pumping money into the economies) or quantitative easing to very little effect, because that money does not reach the general population. Even though companies are doing well, the profit does not reach many people. It does not create much demand if a company pays its CEO a few hundred million rand, as one person has very little purchasing power, and is far more prone to saving or investing that money (often overseas) than spending it immediately. If that same company paid that money to its lowest paid workers instead, you would see more demand immediately, and a multiplier effect, as those workers would quickly spend that money within their communities, allowing it to circulate there. This will also help to lower personal debt levels as the increased income would allow people to pay off their debt easier and perhaps even save a little. The rise in general incomes would also increase property values thereby increasing collateral.

Salary-gap moderation increases demand without increasing borrowing or increasing the net cost of labour, because salary moderation does not increase the amount of money spent on salaries, it simply distributes a company’s salary bill more evenly.

Salary-gap moderation would probably lead to price rises due to more consumer demand, but these price rises would not be caused by inflation (of the money supply). By stimulating the economy by increasing demand, salary moderation would actually facilitate less need for fiscal lubrication or quantitive easing, so it might actually lead to less inflation in the long term.

Salary-gap moderation is more effective than taxation at distributing wealth:

Salary-gap moderation is a far more efficient means of distributing wealth than our current model of taxation and welfare for the following reasons:

-Firstly, with taxation, the government is the “middle man” between the rich and the poor. Government is ineffective at distributing that money to where it is really needed. Salary-gap moderation takes out the “middle man”. As an example of how inefficient the tax to welfare system is, our government recently outsourced the distribution of welfare grants to a US company NET1 UEPS at a cost of R2 bn per year!

-Secondly, without salary-gap moderation, taxation actually increases inequality, because to compensate for the high taxes on their income, executives pay themselves more. In order to be able to be able to afford this, they pay their workers less.

-Thirdly, the tax-to-welfare model creates a culture of dependency whereas salary-gap moderation shows workers the true value of hard work by rewarding them appropriately for it.

-Whereas taxation syphons value from successful companies, salary-gap moderation would ensure that successful companies employees benefit from their hard work, retaining more value within the company, and leading to a happier and more stable work force.

In fact, because salary-gap moderation distributes wealth, there will be less need for welfare and therefore less need for taxation. Less taxation will boost the economy by making business cheaper and more competitive. Tax revenue that would have gone to welfare could now be spent on education, health etc.

How best to implement salary-gap moderation:

Once our business leaders, labour movements and government see the benefits of salary-gap moderation, implementing it would be very easy, smooth and painless.

In the interests of our nation, government and business leaders would agree to place a moratorium on increases to executive salaries within every company until the wage gap in each company reaches a certain ratio (agreed between business, labour and government).

Inflation linked salary increases of the lowest paid workers would gradually bring the wage gap down, which will ensure that income inequality will start to shrink.

Because the Reserve Bank controls the inflation rate, it could speed up inflation in order to bring about more rapid equalisation. Obviously there is the risk of hyper-inflation that needs to be taken into account, but if inflation is kept below 20%, the risk of hyper-inflation would be very low. With workers salaries tracking inflation, if inflation was kept at around 15%, the ratio of the gap between salaries would narrow by half every 5 years. For example a company with a salary gap ratio of 1 to 300 would reach a gap of 1 to 150 in 5 years, 1 to 75 within 10 years and 1 to 37,5 within 15 years. With inflation at 18%, a gap ratio of 1 to 300 would reach 1 to 150 within around 4 years, 1 to 75 within 8 years and 1 to 37,5 within 12 years.

But in order to decrease our poverty levels we need our lowest paid workers pay to increase faster than inflation, so tax incentives for companies with low wage ratios and penalties for those with high wage ratios could be used to speed up the process, as executives would be pressured to keep the ratios down to increase profit. Income tax incentives and penalties for executives could also be useful. Salary-gap moderation should be seen as an alternative to taxation as a means to distribute wealth. If companies and executives could choose between taxation or salary-gap moderation, I believe most will choose salary moderation because of all its benefits to their companies, the economy, their community and ultimately their own lifestyles.

The set ratio between the earnings of executives and workers need not be set in stone, and can be tweaked to balance the need for more equality with the need for more incentives for entrepreneurs and business leaders.

Once salary-gap moderation is implemented, set ratios between gross dividends to shareholders and gross wages (including management) within larger listed companies might be necessary to prevent shareholders of companies from using salary-gap moderation as an excuse to drive down wages across the board. These set ratios would ensure that shareholders get adequate returns on their investments, while workers also get their fair share of the profits from their labour. Though it might be a little complicated, I am sure our economists can work out viable optimum ratios if they put their heads to it.

At the same time, employee share schemes could be used to ensure employees have a stake in the growth of businesses.

As an added incentive for job creation, any money spent on the employment of others within ones private capacity (outside of companies) and within a specific wage-gap ratio could be made tax deductible. If it were tax deductible, many more households would hire nurses, tutors, domestic workers, gardeners, babysitters, builders etc. For example if you earned R1000 an hour, and it was tax deductible to hire someone’s services as long as you paid them at least (for example) 1/5th of your earning rate, you could hire a builder, tutor, domestic worker etc at R200 an hour rather than pay that money to the tax man. Think of how many quality jobs this would create!

Money spent on education should also be tax deductible. This would mean a lot more people would be able to pay for their children’s education and thus relieve the state of much of the burden. It would also stimulate the educational and tutor industries, and bolster the populations’ investment in education. No-one should be forced to pay tax instead of educating their kids properly.

Frequently asked questions:

Wouldn’t salary-gap moderation lead to capital flight or cause executives to emigrate to where they could earn more?

No it wouldn’t.

The main cause of investor hesitancy in SA is the uncertainty caused by the growing inequality in SA, and the strikes, mass action etc stemming from that. Other reasons often sited are minimum wage legislation and other red tape. By addressing these issues, salary-gap moderation would increase investor confidence.

The capital flight and the brain drain from SA are usually blamed on the increasing threats of crime, violence, instability, perceived racial marginalization due to race based empowerment policies, and fear of the rise of populist nationalism. Salary moderation would tackle the cause of all these threats. And because salary-gap moderation leads to a stable political, social and business environment, with a stronger market and a more educated and empowered work force, we would retain more skilled individuals and enjoy increased investment.

Salary-gap moderation is painless. A moratorium on salary increases for executives will mean that the rich will not lose any of their current properties or investments. I am a true believer in the power of reason. Sensible and patriotic business leaders will see the value of the moratorium when they consider the fact that nobody will loose any assets or investments. Instead we will all be gaining a safer, more functional and ultimately freer environment, a stronger and more united country in which to live and do business, and a stronger market for our services and goods. A stronger economy and country will result in stronger businesses and greater profits.

Wouldn’t better education sort out our inequality?

Education is very important, and the benefits of education are obvious. But because the market price of labour is constantly being undermined by our continents enormous supply of poor and desperate people, education alone will not necessarily lead to higher wages. A desperate educated person with no capital would still take a poor paying job, and compete for it (making labour cheaper). And “unskilled” jobs will still be very necessary and plentiful, even if we were all university graduates. So unless we decouple our labour price from the market, education will not affect income inequality to the extent that most people believe it will.

Isn’t minimum wage legislation enough?

The idea of minimum wage probably came about from good intention, and seems to make sense on the surface, but if we really examine the concept closely, its effects on business, societal hierarchy, and the lives of most workers compared to their bosses, then it becomes clear that minimum wage legislation is not working.

Minimum wage legislation is not good for business and it is not good for workers. In fact it has contributed to the growth in poverty, unemployment and inequality.

It keeps many workers in successful companies in poverty and prevents many entrepreneurs with no capital but with good ideas from starting up companies, and if they do, they are more reliant on capital (investors and venture capitalists) in order become viable.

Minimum wage regulations make our manufacturing companies uncompetitive on the international market place. What’s more, companies that are struggling are expected to pay the same minimum wage that highly profitable companies pay their workers! This makes no sense at all, and leads to more unemployment as companies go out of business on the one hand while increasing inequality within companies that are making big profits on the other as executives take the lions share of wages.

Yes there is some benefit to having a minimum wage: It has allowed workers to live in poverty instead of in dire poverty. But it also has legitimised the imaginary divide between employer and employee, and between capital and labor, where in fact no divide exists. Employers and capitalists are not another species to their employees. We are all human beings. We are all South Africans. But minimum wage apparently has allowed many executives to imagine that they are somehow a separate species from their workers and society at large….that workers are a species who’s natural and proper place is to exist on hundreds or even thousands of times less pay than the executives themselves earn.

Our business leaders and entrepreneurs should be treasured. Their skills, vision and hard work drive the economy. Obviously, to encourage and reward entrepreneurialism and risk-taking, executives should earn more than their workers, but they should never be allowed to loose sight of the fact that they are human, part of our society, and responsible.

Isn’t it true that “You can’t increase the size of the pie by dividing it”?

No, that is not true.

Imagine that our country had one extremely rich trillionaire and the rest of us were dirt poor. How many iPods, computers, cars etc. would be sold? What would the annual GDP be? How many entrepreneurs would you see? What would the standard of education be? If we distribute the wealth better the economy will grow!

The economy is not like a pie. It is stupid to compare an economy with something else, but if I must, I would say it’s more like a tree with fruit and seeds than a pie. When you share the fruit, and the people who eat the fruit plant the seeds and water them, they grow, and each seed can grow as big or bigger than the tree it was cut from.

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This entry was posted in capitalism, economics, education, employment, entrepreneurs, equality, financial, freedom, human rights, leadership, politics, prosperity, socialism, South Africa, Uncategorized, wealth creation. Bookmark the permalink.

4 Responses to Economic responsibility in our lifetime!

  1. cedric nunn says:

    Buddy, thank you for your well considered, researched and presented article and proposition. However, I fail to see how CEO’s, managers and the like will ever see the benefits of wage moderation, no matter how wise and sensible. They are on an inevitable roller-coaster of the logic of capitalism, and there is no return to responsibility. This system is bankrupt and crumbling before our eyes around the world. We are going to need to be responsible in other ways, and maybe your system will be implementable after the demise of this system, but no amount of tweaking can safe it. Our planet needs this unsustainable model to disappear. We cannot continue producing and consuming at the present rate, let alone at any higher or faster rate. There are other models being hatched, debated and discussed, and we need to embrace all of these in thoughy and possibly in action. But a system in which some are rewarded more than others is doomed to fail. We are moving into a new age (there, I’ve revealed my true colours!) And we need to embrace this radical challenge and change.

  2. Sabelo says:

    Amandla economic freedom in our lifetime…

  3. Ross Suter says:

    Thanks for your well considered thoughts on this matter Buddy. I, however, do agree with Cedric. The current system is fraught with problems, is unsustainable, and can not be perpetuated. It must be allowed to crash and implode and we need to work hard to collectively replace it with a sustainable, equitable, environmentally friendly system that allows the natural balance on Earth to be restored and maintained, and all people to share it’s resources equally. We have to move away from consumerism and materialism, cornerstones of the global ‘free’-market economy. We need to cease from being puppets to being creators and ‘masters’ of our own destinies, breaking out of the molds of debt and dependency that hold us captive and continue to enrich a tiny minority of the people on this planet. If we can use the internet to share information, mobilise the vast majority of the world’s population and co-ordinate a vast, mass movement that rejects the status quo and chooses a better, radically different (range of) model/s on which to base our lives and endeavours, then we and life on Earth have a chance of thriving once more.

  4. Great article. I endorse much of what you say and would add that one of the greatest crimes against our nation is our short-term paradigms. Shareholders expect to see year-on-year improvements on profits and dividends and our CEO’s have long ago forgotten that the customer is king. Their mantra has become the shareholder is king and this can be seen in the way operational budgets are eroded and maintenance and training become luxury items. I like your tree analogy… it works for me.

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