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HOW FAT CATS ROCK THE BOAT
Independent, The (London), Nov 3, 1996 by CHARLES LEADBEATER
After three minutes the walkers would be 2ft tall. After a quarter of a hour they would still be dwarfs, of about 3ft; they would reach 4ft after 24 minutes. You would have to wait until 37 minutes before a person of average height, about 5ft 8in, walked by. In the final quarter of an hour, abnormally large people, more than 7ft in height, would start appearing.
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With three minutes left, people of twice average height would be passing by. In the final minute, the figures would be giants 30 yards high. Yet even they would not be the biggest. In the hour's closing seconds, a small number of super-earners would walk past: each would be earning pounds 1m a year or more - and thus each would be at least 235 yards tall. These freakish beings - top barristers, leading City analysts, a few chief executives as well as stars in the entertainment industries - are the products of a society that is increasingly organised in a new, freakish way. There have always been a few people who have taken a disproportionately high share of society's material rewards. But modern Britain is more unequal than it has ever been. In fact, it is rapidly becoming what economists call a winner-take-all society - that is, a society in which there is spectacular inequality within social groups as well as between them. In other words, it is not just that a top barrister is paid much more than the temporary contract worker who comes in at night to clean his chambers: he is also paid hugely more than a barrister of the same age, who qualified at the same time as him, having gone to the same university, but is now mired in the profession's overcrowded middle ranks. There are some fields of endeavour in which this principle has always applied: sport, for example, in which multi-millionaire crowd-pullers like Andre Agassi or Michael Johnson can earn hundreds of times as much as even their close competitors. Doug Flach, who beat Agassi at Wimbledon this year, and Frankie Fredericks, who won silver behind Johnson in the Olympic 200 metres in one of the fastest times in the history of the event, earn far less. And then there is showbusiness, in which - even though no one seriously imagines that Angus Deayton or Chris Evans is necessarily 100 times (let alone tens of thousands of times) more talented than an unknown struggling on the stand-up circuit, the market dictates that celebrity is what counts. The disturbing development of the past decade and a half has been that "star system" economics have spread. At first it was the more creative professions that were affected - writing, for example, in which celebrity authors like Jeffrey Archer, Judith Krantz and Ken Follett get multi-million dollar advances for their books, while lesser-known authors whose writing is no worse can be paid only a few thousand. But the cult of celebrity has been spreading to every corner of the economy. Virtually every profession is succumbing to a winner-take-all logic, so that an elite is pulling away from the middle, where living standards are stagnating, and leaving the bottom trailing a very long way behind. This idea was set out in a best-selling book, The Winner Take All Society, published in the United States last year. The authors, Robert Frank and Philip Cook, argue that several forces have combined to accentuate inequalities in societies which are already highly unequal. Deregulation and privatisation mean that more areas of life are governed by the market, which is delivering higher rewards to the more successful. Frank and Cook argue that intensifying competition is having paradoxical effects. In theory competition should make it more difficult for a small elite to charge excessively high prices and make monopoly profits. Yet in fact more competition helps such elites. In highly competitive markets there is a premium on perceived value - on standing out from the competition by looking distinctive; after price, the biggest influence on consumer choice is brand. So those people and companies that are particularly good at marketing, advertising and self- promotion will tend to do better, everything else being equal. Success will breed success, celebrity will beget celebrity. Thus, in television a handful of comedians have cornered the market in light entertainment, becoming a self-perpetuating elite. And, of course, celebrities like to deal with other celebrities; that is a symbol of their status. If you are a film celebrity, you want your divorce handled by a celebrity divorce barrister, your hair done by a celebrity cutter, your home decorated by a celebrity designer and so on. As well as being more competitive, however, markets for many goods, whether they are computer games, books, films or legal services, are becoming more international. And larger markets mean larger rewards for the people who win. Being a winner in a purely local market - a school sports day - might bring you a small cup; winning in a global market - the Olympics - brings you vast rewards. The processes identified by Frank and Cook in the US now seem to be at work in Britain, which has become markedly more unequal, at a faster rate than almost any other country, in the last 17 years. In 1979, the poorest 10 per cent of the population claimed 4.3 per cent of the nation's income. By l991 that was down to 2.9 per cent. Over the same period the share taken by the richest 10 per cent rose from 20.6 per cent to 26.1 per cent. At first sight the explanations for this seem obvious. Politics have played a role: tax cuts for top earners and changes in employment law that have penalised the low-paid. So too has culture: almost as much as in the US, we now celebrate success - and greed. But the main force has been global and economic: the growth of the market. It has always been the case, in Britain as elsewhere, that in fields of endeavour subject to market forces, the rewards - and the risks - are greater. Thus people working in the public sector have traditionally had more security and less pay than those in the private. As the market, and its bounty, grows, so the gap widens. The most obvious and controversial example of this growing inequality has been the pay rises awarded to so-called fat-cat directors. The highest-paid directors of Britain's largest companies enjoyed an average pay increase of 12.6 per cent in the past year, while average earnings rose by just 3.75 per cent. In 1995 top directors' pay rose by 9.9 per cent and the year before by 22 per cent, according to Income Data Services, the pay research body. The most striking rises have been among directors of privatised utilities. A Labour Party study published two weeks ago found that boardroom salaries at privatised utilities had risen six-fold since 1986, to an average of pounds 150,000 a year, while average pay has not even doubled, rising from pounds 184.70 to pounds 352 per week. As in the past, the starkest indicator of inequality is the gap between households that are work-rich and those that are work-poor. Between 1979 and 1990/91 the proportion of families with no full-time worker rose from 29 per cent to 37 per cent. Over the period, benefit levels have remained roughly fixed in terms of inflation and fell compared with average earnings. In 1979, it took an average of a year and a half for a member of a household without work to find a job. By 1993, it was taking four and a half years. That year more than 40 per cent of single-adult households had no earnings from work, compared with 24 per cent in 1975. Meanwhile work has become increasingly concentrated in households that already have at least one full-time worker. The proportion of two-adult households where both work rose from 51 per cent to 60 per cent between 1975 and 1993. These are powerful and troubling trends, but they provide only part of the explanation for why Britain has become so unequal. The growth in unemployment was the main force behind the rise in inequality between 1975 and 1985, according to a study by Professor Tony Atkinson, Britain's leading authority on inequality. But since 1985 unemployment has been far less of a factor. Only about a quarter to a third of the rise in inequality is due to growing poverty among the unemployed; most is due to a widening gap between levels of pay in different professions and occupations and, more significantly, between people within the same occupations and professions. One factor at work is the collapsing worldwide demand for unskilled manual workers and the escalating demand for highly skilled people (see chart, right). In the last 10 years, demand - and rewards - for the top 10 per cent has skyrocketed. But that is only part of the picture. Paul Gregg, an economist at the London School of Economics specialising in inequality, puts it this way: "We know that more educated people are being paid more, because demand for skilled workers has risen. The income gap between someone with a degree and someone without a degree has widened. But that can only explain perhaps 35 per cent of the growth in inequality." His colleague Stephen Machin expands on the conundrum: "The troubling thing is that people who are alike in every other respect - sex, age, qualifications, background - can get paid vastly different sums. A large chunk, perhaps the largest chunk, of the rise in overall inequality is due to the widening gap between the top and the bottom within professions, rather than a widening gap between professions. The top in every profession is pulling away from the rest. It is still a puzzle as to why." The winner-take-all theory offers an answer. What we are seeing is the market at work. Middle-class professions, where old codes of conduct once kept pay rates reasonably compressed, are being taken over by commercialism and competition. Commercial solicitors in the City, for example, are enjoying a boom. Profits at Slaughter & May, a top law firm, last year averaged pounds 460,000 per partner. And that was on top of partner salaries already often in six figures. In these top-flight multi-partner companies, serving rich international clients in the Square Mile, salaries are escalating. A recent advertisement in the Financial Times, for instance, invited applications for the job of head of legal services at a "major financial institution" offering a "very substantial six-figure package". In contrast a small high-street solicitor in, for example, north London, just a few miles away, is finding it increasingly hard to compete, particularly since the deregulation of house-purchase conveyancing, formerly its main source of income. The pay of principals in such a firm is stagnant and is likely to remain so for years to come. Twenty-five years ago the partners at Slaughter & May and the partners of such a high-street practice would have been part of the same world. Now one is in the stratosphere. It is possible to argue that the growing differential between solicitors' earnings reflects Slaughter & May's involvement with the City. But that difference has always existed; and the increasing gap is part of a new, wider trend. The same process is at work in other professions. Dentistry is almost certain to polarise as the profession becomes more commercial, increasingly operating outside the constraints of the NHS, with an elite offering expensive cosmetic treatments to the wealthy. In television, too, where the market is slowly replacing bureaucracy, something similar has happened. Independent producers such as Charles Parsons, founder of Planet 24, which makes The Big Breakfast, and Denise O'Donaghue of Hat Trick Productions, makers of Have I Got News For You, have amassed small fortunes because their companies have filled lucrative niches in the light entertainment market. Twenty years ago their jobs would have been done by moderately paid senior bureaucrats at the BBC or in an ITV company. Similar forces are at work in academia. Universities are increasingly competing for scarce funds, public and private. The best way to attract them is by doing world-class research, and the way to do that is to hire world-class researchers, by offering them much higher salaries. It is now commonplace for top-flight researchers, who attract grants and donations, to stop teaching undergraduates and be made professors much earlier than would once have been considered normal. A transfer market in a new breed of academic-research entrepreneurs will soon emerge, rather as teams of financial analysts, lured by lucrative packages, switch between banks. In one recent case, for instance, the two top researchers at the highly successful Personal Social Services Research Unit at Kent University decided to take a chunk of their unit to work in London, lured by substantially more attractive terms and conditions; now they split their time between the London School of Economics and the Maudsley Hospital. Their unit probably attracts 70 research grants a year. Academics who can pull in that kind of funding will be worth a lot to universities. In the US, six-figure salaries have become commonplace as faculties lure scholars who can bring instant, possibly worldwide, brand-name recognition to a department. Florida State University, backed by a $66m grant from the state government, recently lured a magnet laboratory away from the Massachusetts Institute of Technology. These developments in academia point to another trend behind the growth of a winner-takes-all culture: the rising rewards of those with a lot of marketable knowledge. It is not just that the demand for highly skilled people has risen dramatically. Something more fundamental is going on. Across a range of industries, entirely new generations of products are about to be born through scientific advances in genetics, biotechnology, software, communications and computing. We are entering the age of the knowledge economy, when the most valuable forms of capital will be creativity and ideas rather than land and labour, or machinery and materials. This makes possible a modern form of alchemy. Wealth can appear out of thin air as fortunes are made from nothing more than a few ideas and a good computer programme - see, for example, the rise of Microsoft and Oracle, and the riches of their founders, Bill Gates and Larry Ellison. In this country, the most striking example of this development is in entrepreneurial biotechnology companies developing new treatments for intractable diseases, often using gene therapy. The risk of failure is high, but the rewards are potentially huge if a scientific discovery creates a drug that could be marketed by a global pharmaceuticals company. And now the scientists are demanding their share of the rewards from the global markets their work could open up. British Biotech, the sector's leading firm, which is working on a genetic treatment for cancer, wants to rewrite the rules for issuing share options so that it can lure researchers and marketing staff with packages which, by giving them equity stakes in the company, could make them millionaires. Last year Peter Lewis, the company's research and development director, made a paper profit of pounds 1.5m on his options. Not just in biotechnology, but in fields as diverse as journalism and car manufacturing, companies will be prepared to pay very large sums for individuals who they judge will be able to make a critical difference to corporate performance. For example, Michael Chance, the managing director of Rupert Murdoch's satellite TV station BSkyB, was recently given a pounds 1m golden handcuffs payment to keep him at the company, so vital are his services judged to be. In 1993, Volkswagen paid vast sums ($15m over five years) to hire from General Motors a Spanish specialist in out-sourcing and sub-contracting, with a well-deserved reputation for cutting costs. In many markets, however, special knowledge and skills - which can be hard to measure - will not be enough. Marketing and self-promotion will be just as important. The winners in extremely competitive markets will have to stand out. If you are already on top, that means spending more and more promoting your uniqueness. Take the rock band REM, which recently signed a six-album, $80m deal with the Warner record label. The only hope Warner has of recouping its investment is to spend millions out-marketing the competition to maintain REM's popularity and stop competitors emerging. Success breeds the revenues to promote continued success, to sell the brand, to make it seem more special, glamorous, unmissable, and so create more of a barrier to competitors. They too, however, will be clamouring for attention. In more and more markets, consumers are besieged with information and alternative offers. Brands compete to be different, more innovative, more noticeable, and in cultural markets this often means being more extreme and shocking - witness the rise of Irvine Welsh and Quentin Tarantino. What kind of society will Britain become as a handful of winners take more and more and the giants start ruling the land? Will no political currents start moving against the tide of rising inequality? The United States, where winners have been winning for longer, tells us something about what the future might hold. The compensation package for the average US chief executive is 225 times greater than the pay of the average employee working under him. The top 1 per cent of the US population owns 48 per cent of the nation's financial wealth while the bottom 80 per cent owns 6 per cent. Yet, as the commentator Gary Wills remarked recently in the New York Review of Books, this has only made the political establishment more conservative: "We must choose between a party that neglects the poor and one that savages them, between a party that defers to the rich and one that deifies them, between a party that abjectly apologises for government and one that demonises it." Yet it is not inevitable that growing inequality should breed a sense of powerlessness amongst the losers. Many of the relative losers now are in the anxious, squeezed, disenchanted middle classes. Growing numbers of these people - middle-ranking solicitors, academics, accountants, dentists - are finding their living standards stagnating, despite their degrees, professional qualifications, hard work and self-interest. This is perhaps the first middle-class generation for a century that cannot confidently look forward to its living standards being better than those of its parents. The truth is that in economies like the US and Britain the global labour market probably directly benefits at most the 2 per cent of the population who have truly internationally marketable skills. For the rest, the global market brings lower prices for goods and services they buy as consumers, but also more competition for the jobs they do. This anxious middle class is not poor, but a gale of downsizing, delayering, restructuring and deregulation has deprived its members of some of their self-confidence and sense of security. They often feel uneasy and at times even betrayed. The real rub for many among the metropolitan middle classes - as they calculate when they will get rid of their negative equity and how they will pay for the school fees, plan their private pension and save to provide care for their elderly parents - is a nagging feeling of jealousy that they have been left behind. They know people they were at university with, or once worked with, people with similar backgrounds, qualifications and talents, who quite inexplicably have made a pile and are only just 40 years old. This inchoate sense of middle-class disquiet will be a rich political vein in the new winner-take-all Britain. In the US it has fed the anti- global market, anti-downsizing, anti-fat cat, anti-foreigner, rejectionist populism pioneered by Pat Buchanan and Ross Perot. It will probably do something similar, if milder, here. Envy used to be put down as a working- class motive for supporting socialist plans to dispossess the ruling class. Yet envy will be a powerful force in our politics in the next few years, feeding a moderately protectionist, mildly populist, middle-class rearguard action against the creation of separate super-leagues at the very top of their occupations. In many professions - law, accountancy, academia, the media - this super-league will encounter increasing hostility from those toiling in the middle. A new age of envy is dawning. ! Inequality been growing faster in Britain than in any other OECD country except New Zealand. This graph shows how, indicating the proportion of the nation's income taken home by each tenth (by income) of the UK population, in 1979 (blue) and in 1991 (red) Demand for labour has always depended on skill levels; but the pattern of demand has changed dramatically. The blue line shows how demand used to vary; the red line how it varies now. Financial, computer and communications skills are particularly in demand TO HAVE AND HAVE NOT Do your earnings measure up as well as you'd like? Paul Rodgers on how not to be left behind ROUTES TO RICHES n Become a consultant. Consultancy now outstrips law and accountancy at the top of the league of well-paying professions. Acquire specialist knowledge while working for a company, then go freelance. A top-flight consultant charges pounds 1,000 per day. n Become a celebrity. Ideally, this will mean lucrative deals with Hello!, product endorsements, etc. But the main thing is to be celebrated within your field. Most workers are now more dispensable than ever before; being known is the best form of security. n Get a copyright. The explosion in new media has created a huge demand for content, from writers and illustrators who will continue to receive royalties for years after they do the work. Estimates of the value of royalties in the UK range from pounds 1bn to pounds 2bn a year. n Start a business. It's risky, but the pay-off can be huge. Last year 350 companies floated on the London Stock Exchange and the AIM, with a combined market capitalisation of pounds 16.7bn. n Become a director of a large company. It doesn't matter how sound the business is, or how able you are; with a bit of luck you'll have arranged a nice nest-egg for yourself before it all goes wrong. n Inherit a fortune. A big windfall is infinitely more rewarding than a large salary, which is all too easily squandered. Unless you're lucky enough to be libelled, a legacy is your best chance of acquiring such a lump-sum. In the 1990s, pounds 120bn is expected to be passed down through the generations. n Save, and invest in the markets. It sounds obvious, but this is the most straightforward way to ending up wealthy. n Buy property, and let it. It's a landlord's market. n Manage your marriage. The Fraser Institute, a Canadian think tank, has found that married men and childless women are more likely to hit the top end of the pay scale. ROUTES TO POVERTY n Be profligate. If saving makes you wealthy, spending makes you poor. Obvious, but probably the best financial advice you'll ever get. n Be unskilled. Workers without specialised skills are 10 a penny, and treated accordingly. (See chart, opposite page.) n Work in middle-management. Unless you can make it from there to director level (see above), you'll probably succumb to delayering. n Go into a `caring' profession. n Divorce. The technical cost of leaving your spouse is only pounds 500 to pounds 600. But added to that are lawyers' fees at up to pounds 300 an hour in London, the loss from a forced sale of joint assets, and the birthday and Christmas bribes paid to children. The trauma of a bitter parting can also affect performance in other spheres, such as work. n Get Rich Quick. If it sounds too good to be true, it probably is. n Close a business. Even basically sound firms can collapse if a key creditor fails to pay on time or a market disappears. Some 11,400 companies went out of business in the first three months of this year. n Become an inventor. Of the 26,465 ideas submitted to the Patent Office in 1984, 22,948 were not approved. n Get caught taking a short-cut. Nothing damages one's earning potential as much as a criminal record.
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