6 September 2021

Never knowingly underpaid? What the John Lewis wage row really tells us about capitalism

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There’s nothing, it seems, that can’t be blamed on capitalism. Climate change is a result of the demand for permanent growth. We don’t have enough growth because the rich just sit, Scrooge McDuck-like, on their fortunes and don’t invest. Now the John Lewis Partnership is facing a contradictory row over paying ‘poverty wages’, with some staff earning less that the ‘real living wage’ of £9.50 per hour, or £10.85 in London.

The living wage here is defined as that which we, in aggregate, think affords a lifestyle that isn’t one of relative poverty. Adam Smith used the example of a linen shirt to illustrate a similar point – you can live just fine without one, yet if you’re in a society where not being able to afford a linen shirt marks you out as poor, then in that society, if you cannot afford one, you are poor. Likewise, the argument runs, capitalism has made Britain today a rich country and people should be able to live to a certain standard. But is the fact that some people do not meet this supposed income threshold capitalism’s fault?

As far as John Lewis goes, the clue is in that word ‘partnership’. The company is a worker-owned cooperative. After the necessary amount retained to cover depreciation and investment expenses, the profits are distributed to the staff who own it, rather than to shareholders. Whatever is responsible for the company’s low pay, it’s not those Scrooge McDuck capitalists, because there aren’t any taking a slice.

The real problem is that there aren’t many profits to be had right now as the retail sector is undergoing a profound change. Covid is only a trigger, an accelerant, of a bigger structural transformation. For a couple of decades the percentage of empty shop space has closely tracked the percentage of online sales – both rising strongly. We now have more physical retail space than we need and too many people working in it.

The deeper point here is that we have a problem – relatively low pay – that persists even in a company not run on the usual capitalist lines. This is clearly not a problem caused by capitalism, therefore the reform or even abolition of capitalism won’t be the solution.

Of course, we can reject out of hand any claim that full-on socialism will raise those wages. Abortive experiments of the 20th century show that socialism doesn’t raise the wages of the workers, or the living standards of consumers, for that matter. And for all John Lewis has been feted by politicians and commentators as a new kind of ‘caring capitalism’, much of our experience of co-operatives in this country is of ignoble failure (a point Oliver Kamm addressed in a recent piece here).

To return to our main them, the low wages for some of John Lewis’ Partners are clearly coming from somewhere other than the expropriation of workers’ sweat by dastardly shareholders.

One useful answer is that the minimum amount we’d like everyone to be making, that definition of the living wage, is higher than many business operations – even non-capitalist ones – are able to pay. The problem therefore is with our evaluation of what wages should be, not with wages themselves.

If we really do think some people should be getting more than the market determines, then the only solution is welfare to top up people’s standard of living. One advantage of this is that, if people had to pay out of their own pockets through taxation, they might well reconsider the level at which that standard should be. You think incomes should be higher? Then you pay for it.

We still have that basic observation though. If it’s not capitalism causing the problem then modifications to capitalism won’t be the solution – a useful filter through which to view any number of political suggestions these days. All too many of which turn out to be an excuse to abolish the thing that isn’t causing the problem.

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Tim Worstall works at the Adam Smith Institute and Continental Telegraph.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.