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Bookmark and ShareAndrew Simms is nef‘s Policy Director and head of nef’s Climate Change programme.

Levelling out: The maximum wage isn't just for equality: it helps firms – and big earners – to function happily

Levelling out: the maximum wage isn't just for equality: it helps firms – and big earners – to function happily

Whether it is bankers, doctors or dentists pulling in excessive pay, people are left wanting to spit at their greed. But John Varley, Barclays chief executive, reacted in horror this week to the suggestion of a Radio 4 interviewer that some parameters should be put around pay and bonuses awarded to bank staff. It would “interfere with the market”. This, it should now be clear, was a deeply strange thing to say.

Extraordinary powers of compartmentalisation may be a key skill for any banking chief. Yet this breathtaking adherence to doctrine in the face of real-world evidence is worthy of the officers of 1916 who ordered soldiers to slow walk against machine guns.

Had the banking market not been interfered with, to the tune of hundreds of billions in public largesse, it would not have survived in its current form. Something for which Varley, if not the rest of us, should be deeply grateful, and for which there must be a serious quid pro quo. And why should the market not be interfered with when it doesn’t think twice about interfering with life, the universe and everything else?

Six years ago, I proposed a maximum wage in an article for the Guardian. At the time it seemed a logical complement to the minimum wage, one of the key achievements of New Labour’s first term. The signs of the crash to come, in terms of ludicrous executive pay expectations, were already there. As Richard Wilkinson’s work in The Spirit Level has shown, inequality really is at the root of most social, and by implication, environmental problems. A maximum as well as a minimum wage would tackle income inequality from both ends of the scale.

The defence of high pay is that it is needed to attract and motivate senior executives, and give mid-level executives something to aspire to. Yet, as with so many facets of the failed neoliberal economic model, it is a triumph of self-serving assertion over reality.

The unintended consequences of that argument lie all around us in the landscape of the recession. But, more than that, the existence of an inverse relationship between pay and performance has been demonstrated for FTSE 100 companies. One of the fathers of modern banking, JP Morgan, believed that to motivate people you didn’t need a ratio of more than 10 between the highest and lowest paid. This is common knowledge in management school, but seemingly ignored in the workplace.

We know now all too well how destructive are the forces of seeking profit and pay maximisation for their own sake. Another benefit emerges of capping high pay or setting a maximum ratio between highest and lowest paid: beyond that level, an executive’s performance has to be judged against achievements other than personal accumulation. So, instead of status derived from higher incomes, the desire to excel can instead be directed toward the social contribution and environmental performance of the bank or company involved.

In an efficiently functioning market, there should be no exorbitant pay or profits. Competition is supposed to deal with that. There should always be someone or some business prepared to offer the same goods, skills or services and do the job for less. The pressure at the top should be down, not up on salaries.

Varley is fond of using the example of footballers pay to defend bank bonuses. But football managers get sacked. Varley himself earned more than £1m as the banking system crashed around him in 2008. Time to blow for a foul and show a maximum-wage card to those bringing the economic game into disrepute.

Bookmark and ShareAndrew Simms is nef‘s Policy Director and head of nef’s Climate Change programme.

Vanuatu

The experience of small islands can teach us a lot about living good lives at low environmental cost

“A man who falls from a 100-storey building will survive the first 99 storeys unscathed,” wrote the economist EJ Mishan in response to critics of his attack on the costs of economic growth. It was the 1960s and then, as now, it was heresy to question growth. The cry went up: “But natural resources haven’t actually run out yet, and what about the costs of not growing?” Mishan returned to his falling man: “Were he as sanguine as our technocrats, his confidence would grow with the number of storeys he passed on his downward flight and would be at a maximum just before his free-fall abruptly halted.”

The environmental movement was labelled alarmist and wrong in reaction to the subsequent Limits to Growth report, written by scientists at MIT, which projected the natural resource constraints of trying to grow indefinitely in a finite space. When, last year, a detailed study compared the original report with 30 years of data and trends, it found a solid correlation between projections and reality. Among environmentalists there was less a sense of final triumph than sadness at a critical opportunity lost.

Now, with the UK’s ecological debt still rising, and perhaps about 90 months to go before the world enters a more perilous phase of warming, we cannot afford another lost month. We must look for new models of economy that can operate in dynamic equilibrium with the biosphere on which we depend. In getting out of this mess, our creativity needs more help than anything. How can we begin to imagine what it looks like to live within our environmental means?

Britain is an island nation, and we could start by looking at the experience of other islands, especially small ones. Try to grow indefinitely on a small island, and you’ll come a cropper. It’s not so different on a small island planet. When societies get it wrong on small islands the consequences are clear, think of the Pacific island of Nauru, mined to virtual destruction for its rich phosphate. But when islands get it right, they show how it is possible to lead good lives at much lower environmental cost.

vanuatu2

Vanuatu is a happy nation with a tiny ecological footprint. And yet it is seriously threatened by climate change thanks to the high ecological footprints of industrialised nations.

The Happy Planet Index is a measure that assesses the relative efficiency with which natural resources are converted into meaningful human outcomes. It compares peoples’ ecological footprints with life expectancy and life satisfaction. On average, island nations score better than other states on all three indicators. Within different global regions, islands come top. Malta was ranked highest in the western world, the top five nations in Africa are all islands, and two of the top four are in Asia. Sitting on top of the index was the island of Vanuatu.

Several reasons might explain why. Isolation and relative vulnerability have probably encouraged more adaptive and supportive ways of organising island societies and economies. Traditional Pacific agriculture is, for example, highly resilient to extreme climatic conditions. Island economies like that of Tuvalu developed around sharing and gift giving, helping to create highly co-operative and mutually supportive communities.

In Karl Polanyi‘s classic work The Great Transformation, he presents various types of social and economic organisation on islands as evidence against some of Adam Smith’s more sweeping assumptions on the central role of markets. Complex forms of “gift exchange”, in which people partly meet their needs not through markets mediated with cash, but through the giving and receiving of gifts, operated over vast areas, revealing a system that met people’s needs in a challenging environment, and bonded society together.

In their book The Spirit Level – on the comprehensive importance of equality – Richard Wilkinson and Kate Pickett point out that economies more based on sharing and reciprocity equalise access to resources and create more equal, resilient communities. Conversely, unlimited growth, fed by individualistic, beggar-thy-neighbour competition, is no recipe for survival on an ecologically stressed and finite planet.

The next lesson is deceptively simple: on islands you have to respect environmental limits. Close contact with nature may also help develop deeper cultural respect for ecosystems and ingrain notions of environmental stewardship. But we are challenged at the global level to learn – in a few short years – lessons that such small communities often took millennia to arrive at. We can bail out the banks, but if we bankrupt the biosphere there is nowhere else to go.

This article was first published in The Guardian, Monday 13th April 2009.

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nef employees blog in their personal capacity. The opinions expressed here do not necessarily reflect those of the new economics foundation.