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CEO compensation and Jamaican demands for reparations: two sides of the same coin

CEO compensation and Jamaican demands for reparations: two sides of the same coin

David Cameron’s visit to Jamaica last week led to vociferous demands for the UK to pay the Caribbean island billions of pounds in reparations for slavery.  Most people here reacted with predictable eye-rolls and sighs.  Slavery was abolished throughout the British Empire in 1833, nearly two centuries ago.  Jamaica has been independent since 1962, over fifty years ago.  Surely they have had time to sort themselves out and get a decent economy?

There is much to be said for these arguments.  In the early 1960s, for example, South Korea was essentially a poor, agricultural society, only one step up the ladder from subsistence level incomes.  Now, it has a dynamic, modern economy with living standards similar to those of the West.  Countries such as Singapore have followed similar trajectories.

The demands for payment are a classic example of what economists call “rent seeking” activity.  The word “rent” here does not mean what you pay on your apartment to live in it.  The concept goes all the way back to Adam Smith himself, though the phrase was only coined in the late 20th century.  Rent seeking means trying to increase your share of existing wealth without creating any new wealth.

But we should not feel too much moral superiority over the Jamaicans.  Rent seeking has proliferated in Western society in the last couple of decades.  The US economy has performed well over this period.  Its success is reflected in the amounts paid to CEOs, with the average compensation in the top 350 firms being around $15 million a year.  This enormous sum is some 300 times higher than the amount the companies pay to the typical worker.  In the mid-1970s, the ratio was not 300:1 but only 30:1.  Even in the mid 1990s it was around 100:1.  This later figure would still hand the average CEO some $5 million today, not a bad sum to have.  It is hard to justify these payments in terms of the contribution the individuals are making to creating new wealth.  Some of it, yes, but essentially these pillars of our society have been rent seeking on a grand scale.

Rent seeking by the public sector characterised Gordon Brown’s long period as Chancellor.  Public spending rose dramatically.  But much of the increase did not go to provide better public services.  Instead, it paid for the private consumption of those employed in the public sector.  Some graduates in Hollande’s France flee abroad.  Most of the rest aspire to become a fonctionnaire.  Good pay, virtually unsackable, and with a gold plated pension at the end, it is a much sought after position.  Little wonder that France has essentially registered no economic growth since 2011.  Jeremy Corbyn eulogised the Italians for subsidising a steel plant rather than letting it go under like Redcar.  But rent seeking proliferates in Italy, and their living standards are now back to those of the late 1990s.

Economists disagree about many things, but they are united in their opposition to rent seeking, an unequivocally Bad Thing.

Paul Ormerod

As published in City AM on Wednesday 7th October 2015

Image: “Street in Montigo Bay Jamaica Photo D Ramey Logan” by WPPilot – Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons.

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