9

You Deserve What You Get

In most richer countries inequality is rising and has been rising for some time. Many people believe this is a problem, although there is disagreement about its importance. But in any case it seems there is not much we can do about it – and besides, the cure may be worse than the disease. Globalization and new technology have created an economy in which those with highly valued skills or talents can earn huge rewards. Inequality inevitably rises. Attempting to reduce inequality via redistributive taxation is likely to fail because the global elite can easily move to another tax jurisdiction or a tax haven. Insofar as increased taxation does hit the rich, it will deter wealth creation, so we all end up poorer.

One strange thing about these arguments, whatever their merits, is how they stand in stark contrast to the economic orthodoxy that existed from roughly 1945 to 1980, which held that rising inequality was not inevitable and that various government policies could reduce it. What’s more, these policies appear to have been successful. Inequality fell in most countries from the 1940s to the 1970s. The inequality we see today is largely due to changes since 1980. In both the US and the UK, from 1980 to 2016 the share of total income going to the top 1 per cent has more than doubled.1 The material living standards of this top 1 per cent have rapidly pulled away from the rest of the population: after allowing for inflation, the earnings of the bottom 90 per cent in the US and UK have barely risen at all over the past twenty-five years. We can see the same trend at an individual level. In 1950 the world’s highest paid CEO was Charlie Wilson, the boss of General Motors. He was paid $586,000 – equivalent to more than $5 million today. But in 2007 GM paid their CEO $15.7 million, roughly three times as much (and GM made a $39 billion loss that year). More generally, fifty years ago a US CEO earned on average about twenty times as much as the typical worker. Today the CEO earns 354 times as much.2 In short, while the period from 1945 to 1980 is not so long ago, within living memory, as far as inequality is concerned it is about as remote as Mars. So what has changed?

The arrival of an immense package of ideas – in the form of a fundamental shift in mainstream economic and political thinking in favour of free markets – undoubtedly played a large part. As Margaret Thatcher put it, ‘It is our job to glory in inequality and see that talents and abilities are given vent and expression for the benefit of all.’3 However, the Reagan/Thatcher turn in economic ideas, already dissected at length by some brilliant historians, is far from complete as an explanation of rising inequality.4 To see why, we must look elsewhere, beginning with an economist whose impact on thinking about inequality remains enormous.

REASONS NOT TO TALK ABOUT INEQUALITY

Vilfredo Pareto is one of the most influential economists most people have never heard of. He is an enigmatic figure in the history of economics, an abrasive, volatile, argumentative, aristocratic cynic whose life and ideas are hard to categorize. His working life began quietly: after a degree in engineering, he worked as a railway engineer in Florence. But by his death in 1923, ten months after the fascist leader Benito Mussolini became Italian Prime Minister, his ideas were hailed by the fascists as their main intellectual inspiration. In those ten months they showered him with honours – although Pareto refused most of them. Along his journey from railway engineer to hero of the fascists, Pareto had been a staunch defender of free markets and small government before flirting with socialism and Marxism. He was a radical democrat, involved in street protests and polemical journalism. But then he publicly declared himself an anti-democrat. As an economist, he focused on abstract mathematical economic theory, before becoming bored of it once he decided its relevance to reality was limited.

A cynical explanation for some of these ideological flip-flops might be found in Pareto’s personal circumstances. Pareto campaigned for radical social change. But then he inherited a fortune. Shortly afterwards Pareto’s wife left him, running off with their young cook. Whether in response to his wife’s actions or his inheritance, Pareto moved to a luxurious house overlooking Lake Geneva. Naming it Villa Angora, he lived alone there, except for his housekeeper and an entourage of twelve pedigree angora cats, whom he thought of as examples to humanity.5 It was in this otherworldly setting that Pareto refined the two ideas that have come to dominate how most economists think about inequality today. It is the ghost of Pareto – not the much better-known Marx, Keynes, Friedman or Hayek – that has done most to shape the mainstream political consensus on inequality in the richer nations of the early twenty-first century, a consensus around the inevitability of substantial inequality and the difficulty of devising policies to reduce it.

In mainstream economics a fundamental idea – perhaps the fundamental idea – is efficiency. Mostly, when economists speak of efficiency it is a shorthand for Pareto efficiency. In engineering, there is an unambiguous increase in the efficiency of a system or process if output is maintained while reducing inputs, or output is increased using unchanged inputs. Either way, there is a costless improvement. Pareto the ex-engineer applied the idea to economic systems: a costless improvement occurs when at least one person gains and no one loses (economists now call this kind of improvement a Pareto improvement). And Pareto efficiency is achieved when no further Pareto improvements are possible: all costless gains have been taken, so any further gains for some will be unavoidably accompanied by losses for others.

For economists from the 1930s onwards the idea of Pareto efficiency was transformative. It transformed awkward, politically charged debates about the distribution of the fruits of capitalism, about winners and losers, into scientific-sounding arguments about efficiency. A Pareto improvement, when at least one person gains and no one loses, could be seen as an unambiguous improvement, as objective and unarguable as engineering efficiency improvements in some manufacturing process. And beyond Pareto improvements, nothing objective (and hence ‘scientific’) can be said. All other changes involve both winners and losers, so deciding whether the change is on balance a good thing involves ‘unscientific’ value judgements – appeals to morality to weigh up the gains and losses. In the self-image of economics-as-science which came to dominate after the Second World War, value judgements were seen as having no place in economics. Paretian ideas had given economists a convenient excuse to pay little attention to the winners and losers arising from changes in government policy or the wider economy. In other words, the effects on inequality were largely ignored. Economists simply identified the Pareto improvements and left it at that – ‘economics has nothing more to say’. This view has been passed down to the present via generations of economics textbooks. In contemporary debate the ghost of Pareto lies behind the idea that the goodness or badness of increased inequality is merely ‘a matter of opinion’ and that serious, politically impartial policy analysis done by advisers in government and business must focus on efficiency considerations, not equity, fairness or inequality.

The bizarre, Pareto-inspired reluctance of orthodox economists to talk about inequality doesn’t just sideline other perspectives on inequality from Smith to Keynes. It ignores Pareto’s own work too. Textbooks refer to Pareto efficiency on every other page – but they make no mention of Pareto’s other big idea about inequality.

And this idea was big. After a careful study of as much income and wealth data as he could find (going as far afield as Peru and as far back as tax records from Basel, Switzerland, in 1454), Pareto concluded that in all countries, at all times, the distribution of income and wealth follows the same pattern of high inequality. Pareto had begun by noting that 80 per cent of the land in Italy was owned by 20 per cent of the people: his research is the origin of the ‘80/20 rule’ familiar today. Pareto discovered a deep and general pattern: if we put all members of society in order of income (or wealth), moving from the poorest to the richest, income (or wealth) does not rise smoothly or follow a line. Instead it barely rises at all initially, then by a relatively small amount over the majority of the population, then it shoots up hugely once we reach the top 1 per cent. As we have seen, people default to bell-curve thinking – in this context, the idea that the pattern of inequality is all about the disparity between the very rich (or very poor) and the great mass of people in the middle. But this misses a key fact about inequality: it does not stop at the top. In the mathematical language of the previous chapter (which was not known in Pareto’s day), Pareto had discovered that income and wealth follow a scale-invariant distribution: the pattern of inequality stays the same, regardless of scale. In the late 2010s, the richest 1 per cent in the US received around 20 per cent of all the income. Pareto’s scale-invariance idea implies that, within this top 1 per cent group, the same pattern of inequality holds. And Pareto was right: today in the US, the top 1 per cent within the top 1 per cent (the top 0.01 per cent) also earn around 20 per cent of the total earned by the top 1 per cent overall. In other words, millionaires differ. There is a high degree of inequality among millionaires – and the same degree of inequality amongst billionaires. It is like opening up successive nested Russian dolls.6 The CEOs of the top 500 companies in the US may earn a fortune, but in some recent years the top 25 US hedge-fund managers have earned more than these 500 CEOs combined.7

While Pareto was right about the facts of inequality, his explanation for them is controversial, at best. Pareto argued that the stable pattern of inequality across time and place reflected innate differences in ability and talent across people. Significant inequalities in income and wealth are the inevitable and natural result of significant inequalities in ability and talent. Pareto insisted that democratic societies risked stagnation and decay if they attempted to ameliorate these inequalities, or to limit the natural tendency of superior people to rise to the top. He believed that we should ‘compare the social body to the human body, which will promptly perish if prevented from eliminating toxins’.8 This was just the kind of language which Mussolini, with his master-race fantasies, found so appealing. While it may seem to have nothing to do with mainstream opinion in the twenty-first century, elements of this Paretian worldview persist today in the idea that there are some exceptionally talented people in the world who deserve to keep the overwhelming majority of the wealth they create. Trying to resist this tendency towards the concentration of wealth in the hands of a few supreme wealth creators, so the argument goes, is likely to be futile, and attempts to do so will usually be harmful to wider society. Another reason why inequality becomes barely worth talking about.

In the modern version, the conclusion is essentially the same: rising inequality is natural and inevitable. But it is justified by an economic argument around globalization and new technology. Globalization means that most goods and services have a potentially global market. Supplying such a large market is much more profitable, so if your own skills are indispensable to that supply chain the rewards are potentially much greater. And new technology has boosted the earnings premium available to workers with the skills to make the most of it. One implication is that the earnings of university graduates will rise faster than average earnings.

However, familiar as it may be, this explanation does not fit the facts. Instead we see the pattern Pareto identified – rising inequality within the group. A small number of graduates have enjoyed enormous earnings growth, but most graduate earnings have not risen faster than average earnings, even though these graduates include most of the highly skilled workers in the economy.9 The story of rising inequality is not one of increasing rewards to highly skilled workers because of globalization and new technology but a stunning rise in rewards to a very small group among them.

Any argument that rising inequality is largely inevitable in our globalized economy faces a further crucial objection. Since 1980 some countries have experienced a big increase in inequality (the US and the UK); some have seen a much smaller increase (Canada, Japan, Italy), while inequality has been stable or falling in France, Belgium and Hungary.10 So rising inequality cannot be inevitable. And the extent of inequality within a country cannot be solely determined by long-run global economic forces, because, although most richer countries have been subject to broadly similar forces, their experiences of inequality have differed. Given their common economic experiences, the explanation of any differences is likely to be non-economic. This returns us to the familiar political explanation for rising inequality – the huge shift in mainstream economic and political thinking triggered by the election of Reagan and Thatcher. Its fit with the facts is undeniable. Across developed economies, the biggest rise in inequality since 1945 occurred in the US and UK from 1980 onwards.

The power of a grand political transformation seems persuasive. But it cannot be the whole explanation. It is too top-down: it is all about what politicians and other elites do to us. The idea that rising inequality is inevitable begins to look like a convenient myth, one that allows us to avoid thinking about another possibility: that through our electoral choices and decisions in daily life we have supported rising inequality, or at least acquiesced in it. Admittedly, that assumes we know about it. Surveys in the UK and US consistently suggest that we underestimate both the level of current inequality and how much it has recently increased.11 But ignorance cannot be a complete excuse, because surveys also reveal a change in attitudes: rising inequality has become more acceptable – or at least, less unacceptable – especially if you are not on the wrong end of it.12

Inequality is unlikely to fall much in the future unless our attitudes turn unequivocally against it again. Among other things, we will need to accept that how much people earn in the market is often not what they deserve, and that the tax they pay is not taking from what is rightfully theirs. All of which is easy to accept when applied to hedge-fund managers, harder to accept when applied to entrepreneurs – and much, much harder to accept when applied to you and me.

We will come to you and me, but let’s start with Bill Gates.

IT’S TOUGH AT THE TOP

As The Economist put it, ‘Societies have always had elites … The big change over the past century is that elites are increasingly meritocratic and global. The richest people in advanced countries are not aristocrats but entrepreneurs such as Bill Gates.’13 As well as often being dubbed ‘world’s richest person’, Bill Gates seems to be a nice guy. A leading philanthropist, he seems the model of someone who used their substantial talent and worked extremely hard to achieve great success. Yet a closer look at his rise tells a less heroic story.14 Thanks to family wealth, he went to Lakeside, a private school in Seattle that had something few schools in the world had in the late 1960s – a computer. Gates was hooked early on. After more lucky breaks, Gates dropped out of Harvard and set up Microsoft (with another former Lakeside computer enthusiast). By the late 1970s the leading operating system in the nascent field of desktop computers was called CP/M (Control Program for Microcomputers). Microsoft’s main business involved selling software to run on CP/M.

Around this time IBM, whose giant presence in the industry was matched by the giant size of its mainframe computers, wanted to launch a desktop and needed an operating system. Not only was CP/M the market leader, its creator Gary Kildall was ahead of his rivals, having already developed multitasking. (If this sounds like another era, it was. Kildall’s company was originally called Intergalactic Digital Research.) However, for reasons which remain obscure, IBM approached Gates rather than Kildall to buy the licence for CP/M. Gates told them it wasn’t his and referred them to Kildall. Yet somehow Gates still ended up doing the crucial deal with IBM, selling them a hurriedly bought and adapted version of CP/M. The exact reasons for Gates’s success remain unclear. However, Kildall’s boy-racer image did not fit in well with IBM’s corporate culture; whereas the IBM CEO made it clear that he was pleased to hear of a deal with Microsoft, because he knew Bill Gates’s mother well. It still took years for IBM and Microsoft to introduce an operating system that could handle multitasking.

We like hero stories, and the accumulation of wealth is no different. We like to see important advances in knowledge as the product of dogged determination and geniuses struggling against adversity. Yet history is awash with ‘geniuses’ who were very lucky. While Alexander Graham Bell is credited with inventing the telephone, it seems that Antonio Meucci had successfully developed it years earlier. Meucci filed a statement of intent to patent in 1871, five years before Bell. Bell is in the history books only because, in 1874, Meucci let the statement lapse because he could not afford the $10 renewal fee.15

It’s not just that Bill Gates was lucky. His success depended greatly on the work of others, starting with Charles Babbage. Similarly, while Apple were lauded and rewarded for introducing a computer mouse to accompany their Mac desktop in 1984, it was Douglas Engelbart and Bill English who, with funding from the US Air Force, had invented the computer mouse back in the early 1960s.fn1 When, in popular mythology, a single individual is strongly associated with a new product, invention or breakthrough, it is exactly that – a myth. Trying to tease out one person’s contributions is a hopeless task. Professions of intellectual modesty tend to be more accurate than hero myths, a point well understood by one genius who changed the world. As Isaac Newton wrote to his rival Robert Hooke: ‘You have added much several ways … If I have seen further it is by standing on the shoulders of Giants.’

Moving from the individual perspective to the whole economy, the point stands. Attempts to trace the source of economic growth find that most of it is due neither to increases in labour productivity nor to investment. Coming from different theoretical perspectives, Nobel laureate economists Robert Solow and Herbert Simon reached the same conclusion: most growth ultimately stems from the economic consequences of advances in knowledge. George Akerlof, another Nobel economist, emphasizes that ‘our marginal products are not ours alone … [they] are due almost entirely to the cumulative process of learning that has taken us from stone-age poverty to twenty-first century affluence’.16

Were it not for ingrained hero myths, this might seem too obvious to state. And yet the traditional economic theory of the determination of wages and salaries assumes that a person’s ‘marginal product’ – their extra contribution to economic output – can be neatly isolated and identified. The theory then asserts that every individual’s earnings are a direct consequence of their marginal product: your pay reflects your contribution. Or, you get what you deserve, and you deserve what you get. The political context that originally inspired this marginal productivity theory was the emergence of a huge impoverished underclass after the Industrial Revolution and the charge from Marx and Engels that workers were being exploited.17 Marginal-productivity theory satisfied the urgent need to justify the poverty pay of workers, in contrast to the much higher income of their bosses. The surprise is that, some 150-odd years later, economics textbooks still defend the theory.

One reason is that the theory is so difficult to disprove. Even assuming that your contribution could be somehow independent of our common inheritance of knowledge from the past, few people today work in splendid isolation, so it is hard to identify the added value due to your work alone. The CEO of a big corporation may take the credit for a large rise in profits, but how much of that rise is due just to their efforts? The converse is true too: it is hard to prove that the credit for a particular output is best attributed to others. The theory becomes impossible to disprove when it descends into tautology. This is easiest to see in the rare cases when someone’s individual contribution can be identified (think sports stars and other solo performers). Often the only way to measure the value of this individual contribution is in terms of how much consumers or clients are willing to pay for it. Then the marginal productivity argument boils down to: your pay is justified because it reflects how much others are willing to pay you. In other words: your pay is justified because it reflects how much you are paid.

If this seems like a harmless semantic game, it is not. If the only measure of the value created by someone’s work is consumers’ willingness to pay for it, then we should ignore the intrinsic, non-market, value of goods and services. And we can justify top bankers being paid more than top neurosurgeons, and dog-walkers for the top 0.1 per cent being paid more than primary-school teachers.

Clearly, there must be more than marginal-productivity theory behind the widespread popularity of ‘you get what you deserve, and you deserve what you get’. And hero myths – even if we believe them – can only justify the pay of a few exceptional people, not the rest of us. So we must dig deeper.

BECAUSE YOU’RE WORTH IT

At its heart, every argument in favour of inequality appeals direct to your ego: you are special and unique. Ergo you are different, ergo we are all different, ergo inequality is a fact of nature. Or at least, your uniqueness is manifested in your talent and hard work, which justify you getting the job you did or being paid more than other apparently similarly qualified colleagues. Or at least, you deserve what you earn because you worked hard to get where you are. At last, we can glimpse one crucial reason why we have done so little to reduce inequality in recent years: we downplay the role of luck in achieving success. Success usually requires a high degree of sustained effort over a long period, which is especially hard to summon up if we focus on the possibility of bad luck intervening to stymie our best efforts. So we favour narratives that marginalize the role played by luck. Parents teach their children that almost all goals are attainable if you try hard enough. This is a lie, but there is a good excuse for it: unless you try your best, many goals will definitely remain unreachable. Entrepreneurs who have successfully built up a business from scratch often recall with bemusement the naïve optimism they had when they started. If they had begun with a more realistic awareness of the huge risks and obstacles, they would probably never have started their business. In general, in many competitive situations, success may require a degree of self-delusion, overstating the difference our own individual efforts can make and understating the role of luck.18

Ignoring the good luck behind my success helps me feel good about myself and makes it much easier to feel I deserve the rewards associated with success. These forces are at work even in the most unpromising circumstances. Lottery winners frequently describe the elaborate techniques they used to pick their winning numbers. Research among stock-market investors has shown that they often attribute most of their successful investments to good judgement and most of their failures to bad luck. And, of course, people with high earnings see them as the deserved result of talent and hard work.

Yet the stubborn persistence of you-deserve-what-you-get and related beliefs suggest that these beliefs may go beyond self-conscious exercises in providing a moral justification for your own high income or wealth. High earners may truly believe that they deserve their income because they are vividly aware of how hard they have worked and the obstacles they have had to overcome to be successful.

Unfortunately, our memories play tricks, systematically biasing the narrative of the path to success that we construct. The biggest culprit is probably the availability heuristic (another one of Kahneman and Tversky’s major insights). When English speakers are asked whether English words beginning with the letter K are more frequent than words with K as the third letter, most choose the former. In fact, there are more words with K as the third letter, but words beginning with K are much more available to our minds because it is easier to think of examples. Availability is a mental shortcut which biases our judgements by leading us to give too much weight to readily available examples. Every high earner can easily remember several examples of their exceptional hard work (working all night, all weekend, and so on. Vivid examples of equally hard work by people we rarely know well (low earners) are more difficult to bring to mind. Similarly, it is easier to recall past obstacles and challenges I had to overcome than prevailing circumstances which worked in my favour. The latter are hard to capture with a single word (tailwind?) or image. Headwinds are easy to visualize, impossible to ignore, and hence easy to remember (imagine riding a bike into one). Tailwinds are easy to forget, even when on a bike.19

But there is a puzzle here. If the explanation for you-deserve-what-you-get and related beliefs is psychological and hence universal, why does support for these beliefs differ so much in different countries? More than that: why is support for these beliefs stronger in countries where there seems to be stronger evidence that contradicts them?

Support for you-deserve-what-you-get seems strongest in the country where there is perhaps the most conflicting evidence: the United States.20 Attitude surveys have consistently shown that, compared to US residents, Europeans are roughly twice as likely to believe that luck is the main determinant of income and that the poor are trapped in poverty. Similarly, people in the US are about twice as likely as Europeans to believe that the poor are lazy and lack willpower and that hard work leads to higher quality of life in the long run. Yet in fact the poor (the bottom 20 per cent) work roughly the same total annual hours in the US and Europe. And crucially, economic opportunity and intergenerational mobility is more limited in the US than in Europe. A person’s income is more likely to reflect their economic background (their parents’ income) in the US: the correlation between parents’ income and children’s income is higher in the US than the European average. In the US the correlation is around 0.5, about the same as between the heights of parents and their children.21 US children born to poor parents are as likely to be poor as those born to tall parents are likely to be tall. And research has repeatedly shown that many people in the US don’t know this: perceptions of social mobility are consistently over-optimistic.

European countries have, on average, more redistributive tax systems and more welfare benefits for the poor than the US, and therefore less inequality, after taxes and benefits. Many people see this outcome as reflecting the differing attitudes in US and Europe described above. But cause-and-effect may run the other way: you-deserve-what-you-get beliefs are strengthened by inequality. Psychologists have shown that people have motivated beliefs: beliefs that they have chosen to hold because the beliefs serve some function or meet a psychological need. Now, being poor in the US is no fun, given the meagre welfare benefits and high levels of post-tax inequality. So Americans have a greater need than Europeans to believe that you-deserve-what-you-get and you-get-what-you-deserve. These beliefs play a powerful role in motivating yourself and your children to work as hard as possible to avoid poverty. And these beliefs can help alleviate the guilt involved in ignoring a homeless person begging on your street.

This is not just a US issue. Britain is an outlier within Europe, with relatively high inequality and low economic and social mobility. Its recent history fits the cause-and-effect relationship here. Following the election of Margaret Thatcher in 1979, inequality rose significantly. After inequality rose, British attitudes changed. More people became convinced that generous welfare benefits make poor people lazy and that high salaries are essential to motivate talented people. However, intergenerational mobility fell: your income in Britain today is closely correlated with your parents’ income. The pattern recurs worldwide: countries with higher inequality are those with lower intergenerational mobility, and vice versa. Economists have dubbed the graph showing this relationship the ‘Great Gatsby Curve’.22

If the American Dream and other narratives about everyone having a chance to be rich were true, we would expect the opposite relationship: high inequality (is fair because of) high intergenerational mobility. Instead we see a very different narrative, more of a coping strategy: people cope with high inequality by convincing themselves it is fair after all. We adopt narratives to justify inequality because society is highly unequal, not the other way round. So inequality may be self-perpetuating in a surprising way. Rather than resist and revolt, we just cope with it. Less Communist Manifesto, more self-help manual. And inequality is self-perpetuating in other ways too.

YOU GET WHAT YOU CAN GET AWAY WITH

We have seen that much of the rise in inequality is driven by changes at the very top. The rewards going to the top 1 per cent have risen greatly, both in comparison with the bottom 99 per cent and as a proportion of GDP. Why? We have already ruled out some answers: it is not due to global economic forces or new technology, while explanations from marginal productivity theory are either false or tautological. The answer is both simple and astonishing. Simple because, in essence, the top 1 one cent just decided to pay themselves much more. And astonishing because, at least initially, we invited them to do so.

This kind of absurd invitation violates common sense so, unsurprisingly, its genesis lies in economic theory. In textbook economics, a prerequisite for successful capitalism is that firms seek to maximize profits. But profit-maximizing firms are unlikely in reality, because profits traditionally go to shareholders, whereas the CEO and senior managers who make the decisions are more likely to be interested in enlarging their own salary or status. Economists proposed ‘optimal contracting’ as the way to make firms more like the profit-maximizing textbook ‘ideal’: give senior managers a relatively modest basic salary, along with the opportunity to earn a substantial bonus contingent on good profits (or some other outcome serving the interests of investors, such as a rising share price). While CEOs and other managers with these new ‘pay-for-performance’ contracts could earn much more, the entire economy would benefit, economists argued, because firms would be run more efficiently. In 1990 two of the most prominent cheerleaders for pay-for-performance, Michael Jensen and Kevin Murphy, wrote in an article in the Harvard Business Review: ‘Are current levels of CEO compensation high enough to attract the best and brightest individuals to careers in corporate management? The answer is, probably not.’23

Jensen and Murphy’s piece proved massively influential: together with other leading economists, they provided a fig leaf for corporate greed. In the fifteen years following 1990 the average total ‘compensation package’ of CEOs in the top 500 US companies more than tripled (after allowing for inflation). By 2004 Jensen and Murphy had recanted, commenting on their earlier view that CEO pay should be higher: ‘Jensen and Murphy would not give that answer today.’24

We have the benefit of hindsight, of course, but still, the flaws in the argument for massive pay rises for CEOs seem glaringly obvious. First, the argument assumes that any increase in profits must be due entirely to the actions of CEOs and other senior managers; second, the argument assumes that if profits rise, somehow in the long run everyone in the economy will be better off. Actually, we can ignore these heroic assumptions because something cruder went wrong with pay-for-performance contracts: they were – and still are – rigged in favour of CEOs and other top managers.

The key reason is not hard to find. Pay-for-performance contracts are determined by boards of directors. And, as Jensen and Murphy belatedly noticed: ‘The CEO does most of the recruiting for the board … board members serve at the pleasure of the CEO. The CEO generally sets the agenda for the board. Virtually all information board members receive from the company originates from or passes through the CEO.’25 The result, from the perspective of perhaps the world’s most successful investor, billionaire Warren Buffett, is that ‘The deck is stacked against investors when it comes to the CEO’s pay.’ The practical realities of pay-for-performance have finally filtered back to its originators, the economic theorists who invented ‘optimal contracting’. Bengt Holmström recently won a Nobel Prize for his work on optimal contracting – but used his acceptance speech to perform a pirouette similar to Jensen and Murphy’s. Holmström concluded that ‘bringing the market inside the firm is such a misguided idea, something I failed to understand [earlier] and advocates of market-like incentives in firms seem to miss today’.26

Better late than never, although the more inventive self-enrichment efforts of the top 1 per cent have now moved elsewhere. Most of these efforts involve changing the rules underpinning economic activity in their favour. Economists call it rent-seeking: any action undertaken with the principal purpose of redistributing income, wealth or resources in your favour – in contrast to most economic activity, which in some sense creates wealth or adds value to economy or society. The only objective of rent-seekers is grabbing a bigger slice of the pie; they do nothing to enlarge the pie for everyone. The telltale sign of rent-seekers at work is the appearance of some obscure or little-discussed rule or regulation which has no conceivable justification but turns out to be worth a fortune to the rent-seekers. In many countries, for example, government-controlled and -funded healthcare systems have curiously forbidden themselves to negotiate lower prices with manufacturers. In the US, this little-noticed legal rule has effectively gifted the drug companies more than $50 billion a year.27 But probably the favourite playground of rent-seekers is the financial sector. The former head of the Securities and Exchange Commission (Wall Street’s chief regulator) described how Wall Street lobbyists ‘would quickly set about to defeat even minor threats. Individual investors, with no organized [group] to represent their views in Washington, never knew what hit them.’28 The general lesson is clear, and now supported by extensive research: as the very rich become even richer, they exert more influence throughout the political process, from election-campaign funding to lobbying over particular rules and regulations. The result is politicians and policies which help them but are inefficient and wasteful.29 Left-wing critics have called it ‘socialism for the rich’. Even Warren Buffett seems to agree: ‘There’s been class warfare going on for the last 20 years and my class has won.’

We saw earlier that once inequality increases, it can be self-perpetuating, as attitudes evolve to accommodate and justify it. And now we see a parallel dynamic at work: an initial impetus coming from economists (such as advocating pay-for-performance contracts) followed by a vicious circle in which inequality begets further inequality. As the top 1 per cent grow richer they have both more incentive and more ability to enrich themselves further. Their success in doing so begins the cycle all over again.

But the biggest increase in inequality has come from this process playing out in another arena: tax. High earners have most to gain from income tax cuts and more spare cash to lobby politicians for these cuts. Once tax cuts are secured, high earners have an even stronger incentive to seek pay rises because they keep a greater proportion of after-tax pay. And so on.

Here is the evidence. Over the last fifty years developed economies with the smallest increase in the share of pre-tax income going to the top 1 per cent are also those with smallest cuts in the top rate of income tax (the rate applicable to the highest earners). Conversely, countries where the top 1 per cent have gained the most before tax are also those countries in which they have enjoyed the biggest tax cuts.30 No surprises about the countries in this last group: although there have been cuts in the top rate of income tax across almost all developed economies since 1979, it was the UK and the US that were first and that went furthest.31 In 1979 Thatcher cut the UK’s top rate from 83 per cent to 60 per cent, with a further reduction to 40 per cent in 1988. In 1981 Reagan cut the top US rate from 70 per cent to 28 per cent. Although top rates today are slightly higher (35 per cent in the US and 45 per cent in the UK), the numbers are worth mentioning because they are strikingly lower than in the postwar period, when top tax rates averaged 75 per cent in the US and even higher in the UK. That people saw things differently then is illustrated by President Eisenhower, war hero and Supreme Commander of the Allied Forces in the Second World War (so hardly a commie). Under Eisenhower, the top US income tax rate rose to 91 per cent. Eisenhower really seemed to believe in high tax on the rich: in a private letter to his brother he wrote about his acceptance of the New Deal, involving generous social-security and unemployment payments funded partly through income tax. Eisenhower described those opposed as a few ‘Texas millionaires, and an occasional politician or businessman from other areas. Their number is negligible and they are stupid.’32

Some elements of the Reagan/Thatcher revolution in economic policy, such as Milton Friedman’s monetarist macroeconomics, have subsequently been abandoned. But the key policy idea to come out of microeconomics has become so widely accepted today that it has acquired the status of common sense: that tax discourages economic activity and, in particular, income tax discourages work. This doctrine did not emerge from a new idea in economic theory. Instead it boiled down to a brilliant new presentation of old ideas, in the right place at the right time. The new doctrine seemingly transformed public debate about taxation from the dismal science of the turbulent 1970s, an endless argument over who gets what, to the promise of a bright and prosperous future for all. The for all bit was crucial: no more winners and losers. Just winners. And the basic ideas were simple enough to fit on the back of a napkin.

TAX IS THE NEW THEFT

One evening in December 1974 a group of ambitious young conservatives met for dinner at the Two Continents Restaurant in Washington DC. With Jude Wanniski, an editor at the Wall Street Journal, were the Chicago University economist Arthur Laffer, Donald Rumsfeld (then Chief of Staff to President Ford) and Dick Cheney, then Rumsfeld’s deputy and a former Yale classmate of Laffer’s.33 While discussing President Ford’s recent tax increases, Laffer pointed out that, like a 0 per cent income tax rate, a 100 per cent rate would raise no revenue because no one would bother working. Logically, there must be some tax rate between these two extremes which would maximize tax revenue. Although Laffer does not remember doing so, he apparently grabbed a napkin and drew a curve on it, representing the relationship between tax rates and revenues.fn2 The ‘Laffer curve’ was born and, with it, the idea of ‘trickle down economics’. The key implication which impressed Rumsfeld and Cheney was that, just in the way that tax rates lower than 100 per cent must raise more revenue, cuts in income tax rates more generally could raise revenue. In other words, there could be winners, and no losers, from tax cuts.

But could does not mean will. No empirical evidence was produced in support of the mere logical possibility that tax cuts could raise revenue, and even the economists employed by the incoming Reagan administration some six years later struggled to find any evidence in support of the idea. Yet it proved irresistible to Reagan the perennial optimist, who essentially overruled his expert advisers, convinced that the ‘entrepreneurial spirit unleashed by the new tax cuts would surely bring in more revenue than his experts imagined’.34 (If this potent brew of populist optimism and impatience with economic experts seems familiar forty years later, Laffer was also a campaign adviser to Donald Trump.)35

For income tax cuts to raise tax revenue, the prospect of higher after-tax pay must motivate people to work more. The resulting increase in GDP and income may be enough to generate higher tax revenues, even though the tax rate itself has fallen. Although the effects of the big Reagan tax cuts are still disputed (mainly because of disagreement over how the US economy would have performed without the cuts), even those sympathetic to trickle-down economics conceded that the cuts had negligible impact on GDP – and certainly not enough to outweigh the negative effect of the cuts on tax revenues. But the Laffer curve did remind economists that a ‘revenue-maximizing top tax rate’ somewhere between 0 per cent and 100 per cent must exist. Finding the magic number is another matter: the search continues today. It is worth a brief dig into this research, not least because it is regularly used to veto attempts to reduce inequality by raising tax on the rich. In 2013, for example, UK Chancellor of the Exchequer George Osborne reduced the top rate of income tax from 50 per cent to 45 per cent, arguing Laffer-style that the tax cut would lead to little if any loss of revenue. Osborne’s argument relied on economic analysis suggesting that the revenue-maximizing top tax rate for the UK is around 40 per cent.

Yet the assumptions behind this number are shaky, as most economists involved in producing such figures acknowledge.36 Let’s begin with the underlying idea: if lower tax rates raise your after-tax pay, you are motivated to work more. It seems plausible enough, but in practice the effects are likely to be minimal. If income tax falls, many of us cannot work more, even if we wanted to do so. There is little opportunity to get paid overtime, or otherwise increase our paid working hours, and working harder during current working hours does not lead to higher pay. Even for those who have these opportunities, it is far from clear that they will work more or harder. Instead they may decide to work less: since after-tax pay has risen, they can choose to work fewer hours and still maintain their previous income level, leaving their material standard of living unaffected. So the popular presumption that income tax cuts must lead to more work and productive economic activity turns out to have little basis in either common sense or economic theory.

There are deeper difficulties with Osborne’s argument, difficulties not widely known even among economists. It is often assumed that if the top 1 per cent are incentivized by income tax cuts to earn more, those higher earnings reflect an increase in productive economic activity. In other words, the pie gets bigger. But some economists (including the influential Thomas Piketty) have shown this is not true for CEOs and other top corporate managers following the tax cuts in the 1980s. Instead, they essentially funded their own pay rises by paying shareholders less – which led in turn to lower dividend tax revenue for the government. Allowing for this and related effects – the rich redistributing the pie rather than making it bigger – Piketty and colleagues have argued that the revenue-maximizing top income tax rate may be as high as 83 per cent.37

The income tax cuts for the rich over the past forty years were originally justified by economic arguments: Laffer’s rhetoric was seized upon by politicians. But to economists his ideas were both familiar and trivial. Modern economics provides neither theory nor evidence proving the merit of these tax cuts. Both are ambiguous. Although politicians can ignore this truth for a while, it suggests that widespread opposition to higher taxes on the rich is ultimately based on reasons beyond economics.

When the top UK income tax rate was raised to 50 per cent in 2009 (until Osborne cut it to 45 per cent four years later) the musicals composer Andrew Lloyd Webber, one of Britain’s wealthiest people, responded bluntly: ‘the last thing we need is a Somali pirate-style raid on the few wealth creators who still dare to navigate Britain’s gale-force waters’.38 In the US Stephen Schwarzman, CEO of private equity firm Blackstone, likened proposals to remove a specialized tax exemption (from which he greatly benefited) to the German invasion of Poland.39

While we may scoff at these whines from the super-rich, most people unthinkingly accept the fundamental idea behind them: that income tax is a kind of theft, taking income which is rightfully owned by the person who earned it. It follows that tax is at best a necessary evil, and so should be minimized as far as possible. On these grounds, the 83 per cent top tax rate discussed by Piketty is unacceptable. There is an entire cultural ecosystem which has evolved around tax-as-theft, recognizable today in politicians’ talk about ‘spending taxpayers’ money’, or campaigners celebrating ‘tax freedom day’. It is not just populism. Tax economists, accountants and lawyers refer to the ‘tax burden’ – and if you think ‘tax burden’ is a neutral label, then for the sake of consistency you should be happy for the term ‘public spending’ to be replaced with ‘public benefits’.

But the idea that you somehow own your pre-tax income, while obvious, is false. To begin with, you could never have ownership rights prior to, or independent from, taxation. Ownership is a legal right. Laws require various institutions, including police and a legal system, to function. These institutions are financed through taxation. The tax and the ownership rights are effectively created simultaneously. We cannot have one without the other. Perhaps we overlook this inherent interdependency between tax and property rights because as individuals we can fantasize about escaping from it: clearly, an individual could receive all their pre-tax income and have enforceable ownership rights over it – providing everyone else pays the tax to maintain the system to enforce these rights.

However, if the only function of the state is to support private ownership rights (maintaining a legal system, police, and so on), it seems that taxation could be very low – and any further taxation on top could still be seen as a form of theft.

Implicit in this view is the idea of incomes earned, and so ownership rights created, in an entirely private market economy, with the minimal state entering only later, to ensure these rights are maintained. Many economics textbooks picture the state in this way, as an add-on to the market. Yet this, too, is a fantasy. In the modern world all economic activity reflects the influence of government. Markets are inevitably defined and shaped by government. There is no such thing as income earned before government comes along. My earnings partly reflect my education. Earlier still, the circumstances of my birth and my subsequent health reflects the healthcare available. Even if that healthcare is entirely ‘private’, it depends on the education of doctors and nurses, and the drugs and other technologies available. Like all other goods and services, these in turn depend on the economic and social infrastructure, including transport networks, communications systems, energy supplies and extensive legal arrangements covering complex matters such as intellectual property, formal markets such as stock exchanges, and jurisdiction across national borders. Andrew Lloyd Webber’s wealth depends on government decisions about the length of copyright on the music he wrote. In sum, it is impossible to isolate what is ‘yours’ from what is made possible, or influenced, by the role of government.40

Talk of taxation as theft turns out to be another variation on the egotistical tendency discussed earlier – to see my success in splendid isolation, ignoring the contribution of past generations, current colleagues and government. Undervaluing the role of government leads to the belief that if you are smart and hard-working, the high taxes you endure, paying for often wasteful government, are not a good deal. You would be better off in a minimal-state, low-tax society. One reply to this challenge points to the evidence on the rich leaving their home country to move to a lower tax jurisdiction: in fact, very few of them do.41 Here is a more ambitious reply from Warren Buffett:

Imagine there are two identical twins in the womb … And the genie says to them, ‘One of you is going to be born in the United States, and one of you is going to be born in Bangladesh. And if you wind up in Bangladesh, you will pay no taxes. What percentage of your income would you bid to be born in the United States?’ … The people who say, ‘I did it all myself’ … believe me, they’d bid more to be in the United States than in Bangladesh.42

REVENGE OF THE LUMPENPROLETARIAT

The Lumpenproletariat was Karl Marx’s term for the underclass, the poorest, marginalized members of society, usually with little if any secure work or income, and vulnerable to being conned into supporting political leaders who claim to want to help them, but don’t. (In the US after the election of Donald Trump, the word Trumpenproletariat went viral online.) Yet the Lumpen/Trumpenproletariat have more power than it seems. Around the world, employers large and small assume that an easy way to boost profits is to pay unskilled workers as little as possible – just enough to prevent them walking away. This strategy has the blessing of traditional economic theory, which treats labour as just another input to the production process, as if workers were just another kind of machine. And we saw how this mechanistic view of humanity spread beyond economics via Frederick Taylor and the early behavioural psychologists. But humans can take revenge.

If they know they are being paid as little as possible, people will work as little as possible in return. As one apocryphal worker described life in a Soviet factory, ‘They pretend to pay us and we pretend to work.’ To be clear, this is not a Marxist or Communist argument about the hidden power of downtrodden workers: Soviet production was hopelessly inefficient largely because it failed to recognize this power. Among modern economists the argument has been pioneered not by Marxists but by two Nobel laureate economists and a subsequent Chair of the US Federal Reserve: George Akerlof, Joseph Stiglitz and Janet Yellen have shown how profits can rise if a firm pays more than the bare minimum to prevent workers from seeking employment elsewhere. If instead the firm pays a substantially higher ‘efficiency wage’, this motivates workers to give their best, maximizing efficiency and productivity. They do so because they feel valued and respected by their employer – and also want to keep their job because they know they would probably earn less elsewhere.

Efficiency wages have profound implications for thinking about inequality. When increased inequality in pre-tax incomes arises from paying workers the bare minimum, the negative effect on productivity and profits is damaging for the wider economy. The pie shrinks. Inequality here doesn’t just make the poor and the unskilled worse off; the rest of us lose too.

Reduced productivity caused by paying workers below their efficiency wage is not the only way that rising inequality can be costly, even to those on middle and higher incomes. Setting aside the wider social costs of inequality, there remain important – but little discussed – reasons why high inequality is costly even in narrow economic terms.

We have seen how the soaring rewards of the top 1 per cent are the result of their political and economic power and changing attitudes, rather than a reflection of their greater economic contribution. The growing mismatch between the rewards and contribution of the 1 per cent is very costly to the wider economy, much more so than the direct cost of lavish remuneration packages alone. The costs are clearest in the financial sector, since it employs such a large proportion of the 1 per cent (and an even larger proportion of the 0.1 per cent). These costs are recognized by insiders sympathetic to the sector, not just its critics. Leading central bankers have emphasized that rigged pay-for-performance contracts have increased the likelihood of bank bail-outs and other harms to the broader economy, by encouraging excessive speculation and risk-taking in financial markets.43 The rigged contracts are less pay-for-performance, more heads-I-win-tales-you-lose: they let bankers keep a big part of the returns from successful bets without having to shoulder equivalent losses from failures.

Another problem with excessive remuneration packages in finance is that they lure too many talented people into the sector – people who would make a greater economic contribution elsewhere. On top of this waste of human resources, there are the resources wasted solely on getting excessive remuneration – merely redistributing the pie, rather than enlarging it. More rent-seeking, in other words. A rough estimate of the scale of the waste comes from the classic rent-seeking activity, lobbying. In the US in 2011 alone over $3 billion was spent on lobbying.44

Turning to the other end of the income distribution, poverty is not just a tragedy for the poor. It is an appalling waste of productive capacity in the rest of the economy. The poor have little access to affordable long-term credit, so they cannot afford the education and training available to the better off, and they struggle to borrow enough to develop a business idea. Starting a business, always a risky process, is especially dangerous for those with a minimal state-welfare safety net and no cushion of family wealth to protect them should the business fail. As well as the economic wastefulness of poverty, there is growing macroeconomic evidence that rising poverty and inequality are partly responsible for the lower levels of economic growth seen in many countries in recent years.45 The explanation is straightforward: since real incomes at the bottom have stagnated, demand from the poor for goods and services has inevitably stagnated, too, adversely affecting economic growth. (Reduced consumption by the poor has not been offset by increased consumption by the rich, because the poor spend a much higher proportion of their income than the rich. So as money moves from poor to rich, overall consumption falls.)

This is not the place to go into the details of specific policies to reduce inequality. We looked briefly at one key aspect of one key policy: increasing top rates of income tax may well raise more revenue, as well as acting directly to reduce inequality in after-tax pay. To go deeper, you can turn to the many leading economists who have argued that more unequal societies are, if anything, associated with lower rather than higher economic growth; that tax rises for the rich do not harm economic growth or lead to a flight of talent abroad; and that redistributive measures involving greater welfare spending can be both affordable and feasible in an economy facing global competition.46

Yet perhaps these sophisticated economic arguments all miss the point. The crucial economic objection to any serious attempt to reduce inequality may be more basic and self-interested. There is a large and politically influential group – let’s call them the affluent middle classes – who are much richer than average but poorer than the top 1 per cent. They have a vague sense of losing out from recent rises in inequality (and, as we’ve seen, they are right), and a much clearer, sharper sense that tax rises and other redistributive policies would definitely make them worse off. But here they are wrong.

Most of us with above-average incomes spend a large part of them on goods and services which are, to an economist, atypical. They have an unusual characteristic: their supply is effectively fixed or, if it can increase, it does so only rarely. The clearest examples of goods with a fixed supply (original art works and furniture, vintage cars and wine) are not our concern here because, even among the affluent middle classes, few people spend much of their income on them. But we do spend a large proportion of our incomes on housing – and usually the kind of housing that is in inherently short supply, either because the style or features are not possible to reproduce in new buildings, or because the location has inherently scarce features. There are inevitably only so many people who can live in comfort near the city centre, or with a view of the park, or with access to the best school for their children. This latter kind of scarcity is social rather than physical, and brings us to a range of other goods which are scarce because they need to be: their value or desirability is due to their scarcity. High-end labels – Gucci handbags, Ferrari sports cars – appeal in this way, enabling owners to signal their uncommon wealth or taste. The affluent middle classes spend a little on these. They spend much more on educational services (elite schools, elite postgraduate degrees) which confer advantage over others in the job market – because they are scarce. Economists call all these things positional goods, because buying them depends on outbidding other people for the limited supply: it depends not on your absolute income, but on your relative position in the income distribution.

The upshot is that middle-class dissatisfaction about those with higher incomes need not be due to envy, as some commentators suggest, but to legitimate positional concerns, such as falling behind in the competition to get your child into a better school. Yes, there is a kind of irrationality here, but it is collective rather than individual (it’s the Prisoner’s Dilemma of Chapter 2). When you are at a sports match, standing up to get a better view – to improve your relative position – is individually rational, but soon everyone else stands up, too, and we are all worse off. Similarly, most of us are trapped in the rat race, competing to buy the nice houses with access to the better schools. If everyone’s income rises, the question of who gets which house remains unchanged. House prices rise, though: we all have to spend more to get the same house. We all stand up. If everyone then pays more tax, the opposite happens. Post-tax incomes fall, who gets which house remains unchanged, we all sit down.47 Paying more tax, then, need not imply that your material living standards decline. If others face the same tax rise too, then your relative position will be unchanged, and so, too, your access to sought-after positional goods.48

Of course, there are caveats and exceptions to this argument. Clearly, it does not apply to tax rises on poorer members of society, who will be spending a large proportion of their income on necessities rather than positional goods. On the other hand, tax rises on the wealthy can do more than merely leave living standards unchanged, because my argument so far has ignored the benefits of increased government spending. Notably, many familiar economic arguments ignore these benefits too: when income taxes rise, textbook tax economics holds that the benefit from working falls, because post-tax income does. But what about the benefits you may now receive from increased government spending? Ignoring these benefits leads to absurdities. When someone chooses to save some of their earnings into a private pension, we don’t say that their benefit from working has fallen. But if instead the same proportion of someone’s earnings is paid into a state-organized pension, funded through higher income tax, economists often say the benefit from working has fallen, because tax has risen.

There are complex issues here. One thing, however, is clear: that in assessing how people think about and respond to tax increases, economists often take an unduly one-sided view, which dovetails with a presumption of wasteful government spending encouraged by the public choice economists in Chapter 4. And political debate often echoes the tax economics: enthusiasts for tax cuts are usually blind to the state-funded services which must necessarily be cut too – in turn necessitating higher spending by citizens to buy replacement services privately. One irony of this selective blindness is that it leads to a society in which we cannot enjoy the private luxuries made possible by low taxes because of crumbling public infrastructure. Or, as one US economist advocating higher taxes puts it, with an example designed to appeal to the rich: ‘No matter how wealthy you were, you’d probably prefer driving a $150,000 Porsche 911 Turbo on a well-maintained highway to driving a $333,000 Ferrari Berlinetta on a pothole-ridden road.’49 The point is clear: even if the rich are only interested in their own living standards, they should not welcome tax cuts. The resulting deterioration in public services is making them worse off too. And yet …

IT’S NOT THE ECONOMY, STUPID

Much of the inequality we see today in richer countries is more down to decisions made by governments than to irreversible market forces. These decisions can be changed. We have entered an era of automation and artificial intelligence, which, some argue, makes increased inequality unavoidable: in essence, the geeks who design the robots and the 0.01 per cent who own them will be fabulously wealthy, while the rest of us will be jobless. Yet, as we’ve seen, there is nothing preordained about such an unequal outcome. We can control the direction of technological change, specifically by encouraging innovation which supports human workers and recognizes their irreplaceable role in growing areas of employment including care, leisure and entertainment.

However, we have to want to control inequality: we must make inequality reduction a central aim of government policy and wider society. In economic policy, inequality reduction should not be an afterthought but an overarching goal on a par with efficiency and economic growth – and so a factor to be explicitly considered in decision-making across all branches of government. This would not be a step into the unknown: detailed, well-researched policy proposals to reduce inequality have already been developed.50 Finally, inequality reduction is not just something to wait for governments to do: an awareness of the impact on inequality should help shape our own choices as consumers, employers and employees.

The most entrenched, self-deluding and self-perpetuating justifications for inequality explored in this chapter are about morality, not economy. The great economist John Kenneth Galbraith nicely summarized the problem: ‘One of man’s oldest exercises in moral philosophy … is the search for a superior moral justification for selfishness. It is an exercise which always involves a certain number of internal contradictions and even a few absurdities. The conspicuously wealthy turn up urging the character-building value of privation for the poor.’51

There is a final reason to fear that such attitudes may yet become more entrenched. High economic inequality works as social fission, fracturing diverse communities and driving people into ghettoes of wealth or poverty. Many new apartment blocks in London have two entrances: a front entrance for the rich accessing luxury apartments and a side or back entrance for those in more modest accommodation. Increasingly, we rarely mix with people with very different economic circumstances and living conditions. So inequality becomes less noticeable and more easily forgotten. And when rich and poor rarely mix, myths about intrinsic differences between them are more likely to survive and spread.

Against this, there is a glimmer of hope now that inequality has risen enough to have a big effect on future generations. Even those with the purest faith in you-get-what-you-deserve and related beliefs acknowledge that being born poor is not the fault of the child. And there is growing awareness of the overwhelming evidence (such as the Great Gatsby Curve mentioned above) that being born poor means you are much more likely to stay poor. Once the role of luck and our broad inheritance – including knowledge from previous generations and being born in a richer country rather than a poor one – is widely accepted, we can confront the implications for taxation. A historical perspective helps us see that taxation can be proudly defended across the political spectrum. In their different ways, thinkers from John Stuart Mill to Tom Paine emphasized that when an individual becomes richer, their increase in wealth is partly of social origin and tax should be used to return this wealth to society. Tax is not about taking your money, but about paying back society for the social wealth it has bestowed on you, from education to roads to the knowledge inherited from past generations.52

Still, the self-obsessed super-rich will always be with us. And as Galbraith suggests, they will always invoke some worn-out morality. Not that it helps them. At a party on a super-yacht owned by a billionaire, two authors reflected on their surroundings. Kurt Vonnegut turned to his friend Joseph Heller and told him that their hedge-fund-manager host made more money in one day than Heller made in total from Catch-22 (despite that book selling more than 10 million copies). ‘Yes, but I have something he will never have,’ Heller replied. ‘Enough.’