Why do bosses or capitalists earn more than employees even when employees work more? Why must the boss who does less work make more money than the employee?
The fundamental reality of capitalism, i.e., the capital-owning 'boss' generally earning more than the laboring employee, is a frustrating one for the younger generations. The question this work attempts to answer is a very common one these days, often raised in debates and presented in discussions of inequality. The rising income gap of recent years has also contributed to intellectual explorations of this subject at the school, college, and university levels.
This issue, ever since Karl Marx's critique of this condition, has been a fundamental cry of those that view capitalism as inherently flawed and desire the rise of a more equitable society, one with drastically reduced income inequality. But why is there a difference in incomes?
For example, if an individual (boss) opens a small coffee shop and sits at the cash register only to manage the cash while the employees are running hither and thither to serve the customers and working 8 hours grueling shifts, why must then the boss, who is only collecting the money, earn more? This condition seems morally unjustifiable.
Or, for example, assume a new pencil-producing factory is opened, and the boss only sits in his lavish office directing employees, yet the employees spend 8-hour shifts producing pencils; why must the capitalist boss earn more when the employees put in the hard work? On its face, it seems unjustifiable and wrong. . .
Such questions arise in the minds of the younger generation, and in an era when many previously normalized socially unjustifiable practices are being abolished through what can be described as a "peoples' uprising," particularly in the US and the West, many assume that wage inequality as described in the premise, will and should be the next target of the social uprising.
This work, however, describes the reasons why such a condition exists and why, in a capitalist system, the achievement of an equal compensation of bosses and workers might not be possible. Why such a condition may be a necessity is also explained.
Why does this condition exist?
Imagine a group of hunter-gatherers in a parallel universe. People that must find the means of sustenance for their existence; put simply, they must find the food they can consume and other essentials such as shelter, water, and herbs for healing, etc.
The group, let's imagine, hasn't found anything to eat in the last day and a half and is starving. There is a difference in the personality of group members; some are more willing to pursue perilous hunts while others have a tendency of avoiding such quests, to keep themselves very safe; they usually assist others when the hunt is complete, for cutting the meat and preparing it, etc.
The group sees a sleuth of bears (a group); they are aware that they might not find any other animals nearby. They have to make a decision; they can try to hunt a bear for its meat which, if successful, may provide them the meat required and then some, or risk their lives, as they might not find another prey for miles, and seeing that they haven't had anything to eat for almost two days now, they have to make a decision.
Out of the 30 people in the group, 28 feel very reluctant, bears are dangerous animals, and a hunt can cost the hunter their life. However, two members have a bold disposition; they are more willing to accept such, let's say, challenges. While the other 28 members stay back, they make loud noises from two directions and attack with sharpened bamboo culms and stones.
Due to the noises they make, some bears from the sleuth move away, but the hunters charge. . . they corner a few bears, but a large bear charges at one of the hunters; he tries to duck under the bear's claw but still comes in contact with it partly. He loses an ear and an eye, and the quality of his life, even if he survives, would be severely impaired.
The other hunter throws large stones at the charging bear and spears an animal with the culm. When the chaos settles, he realizes they have managed to hunt a cub, nothing more.
The unhurt hunter drags the cub's carcass and the injured companion back to other members of the group. The other members now work diligently, as directed by the hunter, to butcher the cub, while the severely injured hunter lays down as some members try to numb his pain through what's available. The unhurt hunter also collapses with weakness and exhaustion.
The cub they hunted does not have enough meat on the bones to feed all members. Worse yet, if the two hunters aren't satiated, i.e., provided more calories than they burnt in the hunt, and to compensate for their weakness, they won't survive.
What would be an equitable division of meat in this situation?
Would it not be just and equitable to first let the two hunters, that put their lives and well-being on the line for the hunt, be satiated? If they aren't satiated, what incentive would others have for such, let's say, audacity? Would it not be 'natural' to reward those that had the most to lose, first?
We can simplify and encapsulate this story as follows:
In a system where achieving objectives exposes individual(s) to risks, risks which may vary in proportion, but might impact the well-being of the individual(s), if the risk-taking individual(s) is not rewarded proportionate to the risk borne, then no other individual would be willing to take risks in the future. Without risk-taking, progress, in a natural system, cannot be achieved.
Therefore, the higher income, of the 'bosses' or capital owners, is compensation for the risk they take in starting a business, putting their economic well-being on the line. Employees, however, are not exposed to any such risks. For example, if a new venture fails, the entrepreneurs may lose their capital or default on the loans made, and they would have to carry that financial burden. This, however, isn't the case for the employees. If a company goes down, they can find a job elsewhere without any risk exposure.
Employees aren't the residual risk-takers in ventures, and as such, are only paid for the tasks they perform in a transactional exchange. However, if employees are also risk-takers, as in an insider corporate governance system or as in a firm that issues equity for bonus or performance compensation, they should then earn a higher income—proportionate to their ownership—compared to other employees that do not own equity.
Let's go back to the parable of the two hunters. A neo-moralist may argue that as the group consists of 30 people, even if two hunters pursued the sleuth, the food should be equally divided as that would be the morally correct thing to do. Some more dogmatic neo-moralists may argue that food should be equally distributed even if the two risk-takers, who hunted the cub, die.
While we all desire angelic, utopian, ideal solutions, the realities that govern our existence (nature) impose laws on us far less beatific.
If the meat is equally distributed, the two hunters, physically deteriorated & weakened, with one severely injured, would die. Such a condition would disincentivize the act of taking risks. If next time such a condition arises, most members would be unreasonably cautious, i.e., they would stay back thinking that another member would rise to the occasion, take the risk of the hunt, yet they would receive equal meat as the one taking the risks.
What would be the result of such "equal distribution?" The group, more likely than not, would die of starvation long-term.
Adam Smith's famous quote from the wealth of nations that "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest," in a sense, is applicable here as well.
In our parable, a few members may have a higher risk appetite, not because of a thinking that it would benefit everyone, and thus, it is what they should do honorably, but to satisfy their own self-interest; their motivation for bearing such risks would only prevail if they know that such audacious behavior would reward them personally. If we take personal enrichment out of the equation, such motivations wouldn't exist.
People would expect anyone but themselves to face the dangers of the hunt, but expect an equal amount of satiation, through food, while expecting the hunters to put themselves in harm's way, suffer exhaustion, injury, and in some cases, death.
Wouldn't such an expectation be more immoral? I.e., letting others face the danger while you expect an equivalent reward? Even if other members partake in the butchery of the animal, they at that stage aren't exposing themselves to dangers; thus, even though they work in the scenario for the meat, their work does not expose them to hazards. Therefore, the hunters, those facing the risks first, must have the first & superior right on the food, justly.
One does not need Einsteinian intellect to understand that such a condition would not work for the group.
We can apply the lens of this parable to the modern world: Those who face the perils of entrepreneurship and starting new ventures must be rewarded higher than those who only perform the tasks required for the operational functioning of the system after the founders bear the risks. It is a requirement to encourage & incentivizes others to take risks; if we alter this condition in a way that everyone earns the same, the capacity of ingenuity, idea generation and creativity in the modern economies would be impaired. The result would be economic stagnation that leads to economic devastation.
We know that many nations, in history, have tried to implement a more 'financially equitable' system; we must also understand that none succeeded. If we really try to understand the flaws of such experiments or try to understand them through the lens of the parable provided in this work, we should understand the causes of their failure much more easily.
Unbalancing the natural risk-reward system for an unnatural one, based on unrealistic & unachievable ideals, would fail. Just as if the hunters aren't incentivized for their courage, the whole group would perish, as explained earlier. If the risk bearers in the modern world aren't rewarded, in proportion to the risk they take, economic devastation would occur.
There exists a Darwinian rationality in the capitalist system that all models of socialism or ideals based on neo-moralist economics lack. All economic models that are closer to a natural system should perform better than those that aren't. While we all yearn for a utopian system, for now, due to scarcity, the mother of all economics, we still have some distance to cover before such systems can become a reality.
While it is true that the Marxist critique of workers being cruelly used to extract all profits, for the capitalist boss, has merit, as workers should be reasonably paid for their work, a decent wage given the economic circumstances, so they can achieve comfort in life. Nonetheless, we must not forget that standards of living and development under the capitalist system have continuously gone up.
The appalling conditions of 18th & 19th century Europe, such as in the factories of Liverpool, Manchester, Bradford, or Birmingham that drove people like Karl Marx and Friedrich Engels to dismiss the capitalist system, aren't present anywhere in the developed world presently.
It is true that a new system would eventually emerge, but we still need to explore and study alternatives at a deeper level to devise superior alternatives; still, we mustn't forget that socialism or communism aren't the solution and cannot be the future. They are unnatural systems, impractical and flawed.
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Interested in understanding what economic system may emerge after capitalism? See our article: What Economic System May Emerge After Capitalism?