Who gets what?

cristiano_4

Worth every penny

“If, therefore, the choice were to be made between Communism with all its chances, and the present state of society with all its sufferings and injustices; if the institution of private property necessarily carried with it as a consequence, that the produce of labour should be apportioned as we now see it, almost in an inverse ratio to the labour—the largest portions to those who have never worked at all, the next largest to those whose work is almost nominal, and so in a descending scale, the remuneration dwindling as the work grows harder and more disagreeable, until the most fatiguing and exhausting bodily labour cannot count with certainty on being able to earn even the necessaries of life; if this or Communism were the alternative, all the difficulties, great or small, of Communism would be but as dust in the balance.”John Stuart Mill, 1848

It is one of the oldest fallacies in economics that reward is or ought to be linked to effort. Indeed, as well as appearing in works by august economists like John Stuart Mill it has been solemnised as ‘the Protestant work ethic’ – a fair days ways work for a fair days pay. The attitude persists. Many people think it outrageous that Christiano Ronaldo earns €18,200,000 a year for kicking a football around a couple of times a week while people are fishing cigarette butts out of nightclub urinals for minimum wage.

But, as the generation of economists after Mill realised, reward is linked to productivity. If buckets of water sell for £1 each then someone who can run 100 buckets a day from a tap and drive them to the market in a van will make 10 times more with a fraction of the effort than someone who has to walk to a well and carry by hand 10 buckets day to the market.

This is one of the reasons wages are higher in developed countries than developing ones. There is plenty of effort going on in poor countries but very little capital (like the tap or the car) to augment its productivity and productivity is what counts.

More accurately in modern economies reward is linked to an employers estimation of the workers (likely) productivity. Real Madrid pay Christiano Ronaldo his €18,200,000 a year because they think he will add at least that amount to their profits. People want to watch a team with Ronaldo in, they want to wear shirts with his name on them and they are willing to pay for that. They are willing to pay something or more than they would otherwise to do so.

For a concrete example, consider Real Madrid shirts with ‘RONALDO’ on the back.

1 – Adidas have a bunch of white cloth and thread which they could sell for, say, £1 a sq yard.

2 – They build a factory in Pakistan, buy a bunch of sewing machines and hire a local worker to sew these into plain white T shirts which they can sell for £2 each. The workers sewing and Adidas’ factory and machine have, between them, added £1 of value.

3 – Next they ask the worker to sew an Adidas badge on the shirt. Now it can be sold for £10. Adidas, via their brand, have added £8 of value. You might say that it was the worker who added the value as they did the sewing. But, in fact, only a fraction was added by the worker. To see how true that is consider how much value would have been added if, for the same effort, the worker had sewn ‘JIMMY SAVILE’, ‘MICHAEL VICK’, or ‘GHI PUINNJNULJ’ on the back of a shirt. It wasn’t the worker’s sewing but what they sewed that added the value.

4 – Now they ask the worker to sew ‘RONALDO’ on the back of the shirts. Now they can be sold for £50. Christiano Ronaldo has added £40 of value.

Christiano Ronaldo gets a lot of money because he adds a lot of value.

We can also see why ‘wicked’ capitalists get money for little apparent effort. Think back to our water makers. If a capitalist builds a tap and a car which now enables the second person to bring 100 buckets of water a day to market without all that walking and carrying, that capitalist has added £90 of value.

Is this ‘fair’? I’m an economist, not a philosopher. But plenty of people must think it was fair or it wouldn’t happen. You often hear football fans complain that the prices of tickets or replica shirts is a disgraceful rip off – then they hand their money over for a ticket or shirt. At the moment they hand over £80 for a match ticket or £50 for a shirt they are signalling that they would rather have the ticket/shirt than the £80/£50. Quite simply, it is worth more to them. Which action reveals their true preference; The complaining, which is free to do, or the buying, which costs money?

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s