Corruption and fat-cats are the enemies of prosperity

ProperityVcorruptionWith the election looming and most people looking for better times, it is instructive to consider what prevents greater prosperity. Comparing different countries, what stands out strongly is that the greater the level of corruption the lower the prosperity, however you define it. That corruption is the enemy of prosperity is hardly a surprise, just ask: in Europe which countries are in financial difficulties?  and which have significantly higher levels of corruption?

We can easily see the mechanism by which corruption reduces prosperity, corrupt practices simply siphon off money from enterprise.  But legal practices can do the same. For example, ticket touts are not illegal but are entirely detrimental to the prosperity of individuals wanting the tickets. Is there really any difference in financial effect between an executive in any business paying themselves an excessive salary and embezzling the same excess?

In common language these are the people we define as “fat-cats”. The effect of a single fat-cat, like the effect of a single corrupt individual, may not be significant, but the widespread existence and tolerance of both fat-cattery and corruption drains away prosperity.

What is the evidence? It seems very likely that the cumulative effect of many fat-cats will tend to increase inequality. Again, comparing different countries, greater levels of inequality correlate with lower prosperity. The degree of correlation is not as strong as with corruption but it is there. We can say that fat-cat induced inequality probably reduces overall prosperity but certainly does not increase it, While it may increase the prosperity of the fat-cats themselves, the prosperity of the majority, the 99%, is significantly reduced.

Corruption and fat-cats are the enemies of prosperity.

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2 Responses to Corruption and fat-cats are the enemies of prosperity

  1. John Catt says:

    Hmm – so where do footballers fit in here? The Premier League Clubs get an enormous income from television deals and not inconsiderable income from ticket sales and yet most seem to manage to run on wafer thin profit margins or at a loss due to the staggeringly high wages they pay to star players.

    In the same way most executives don’t set their own salaries, they are set by the remuneration committee of a board of directors. This may have the shortcoming of all having a vested interest in high salaries, but if any company could break ranks it would benefit its profits. They don’t for the same reason that football clubs continue to pay high wages to star players.

    As far as I am aware no commercial company pays very high salaries just for their own sake. As with professional footballers, an expensive employee does not always deliver. However the reason for signing them is that their anticipated performance will more than cover their cost. A Chief Executive of a large company with billion of pounds of turnover can make a big difference to the bottom line. Hence the incentive to pay such enormous salaries. The individual worker at the bottom of a large organisation can have almost no effect on its overall performance.

    Indeed, if we want to pursue this line of thinking, what about professional associations and trade unions. These have traditionally used “closed shop” tactics to increase levels of remuneration to their members at the expense of customers and/or employers.

    I suggest we leave “corruption” to cover practices where people break the law or their employer’s rules by taking bribes in order to increase their income. We should not IMHO conflate this with a debate on the problems of equality, since any payment for work can be regarded as a bribe.

    • The question is, “what is excessive?”. Consider the effect of increasing those rewards; will the players play any better? Will the executives perform any better? If the answer is no then they are excessive. However the fans will be worse off because the cost of watching matches will be increased, either by increased ticket prices or increased burden of advertisements, and for the companies, there will be less money for shareholders and, by contributing to increased inequality, we, the 99%, are worse off.

      We can hardly blame the fat-cats as individuals, the problem lies with the mechanism that creates them, each remuneration is made in the context of the going rate. This tends to creep up with no effective limit.

      The underlying problem is that regulation of this mechanism (and most other economic mechanisms) is in the control of fatter-cats and they don’t want limits. The result is and endless spiral to ever greater excess.

      The case of professional associations and trade unions or indeed any payment for work, should be judged as above. Is it excessive? I think the answer is in general not.

      I am not trying to conflate corruption with inequality, they are different things and need different means of countering, but they act together as enemies of prosperity.

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