Contract at breaking point

Inequalities will tear our society apart if we do not remedy them, writes David Nicholson-Lord

THE NEXT time you pass near the City of London, glance towards the sleek black outline of the NatWest Tower - the City's tallest building and thus endowed with a certain symbolic quality - and consider the position of Douglas Hurd, our not-very-ex-Foreign Secretary. He has a lean and attenuated look and fits uneasily into the stereotype of a fat cat. Nevertheless, should you want a clue to the state of contemporary Britain, you might do worse.

Last week Mr Hurd began his new job at NatWest Bank, providing "services of a promotional or ambassadorial nature" as well as advice on global political and economic issues. For this - and for those who remember the days when Britain was a manufacturing nation the job description has a slippery feel - he will be paid pounds 250,000 a year, plus an office, a secretary and a large expense account. The odds are, however, that when you glance at the tower Mr Hurd will not be there because his contract commits him to work the equivalent of a two-day week.

Details of this pay package were made available last Monday. For students of Britain's new moral economy, the week afforded other rich pickings. We learnt of the high-earning QCs, for instance, paid more than pounds 300,000 out of the legal aid fund for defending businessmen in fraud trials. There was Archie Norman, earning nearly pounds 500,000 a year (and another pounds 1.2m recently in share options) as chief executive of Asda, the supermarket chain - among the business coups that many observers feel entitle Mr Norman to his salary are Asda's discounting of books and medicines, both of which seem destined to drive more small shops out of business. And don't feel too sorry for Derek Lewis, the sacked director-general of the Prison Service, who looks set to receive a small fortune in compensation. All this and the National Lottery, too - no wonder get-rich-quickery has become the staple of pub and dinner-party chat.

As the Rowntree Foundation reported earlier this year, income inequalities in Britain, of which such figures are a sign, are now greater than at any time in the last half-century. The growth in inequality, after 30 years in which it was static or falling, has occurred almost entirely since the Conservatives were elected in 1979 and is largely attributable to policies with which they are identified - financial deregulation, abolition of the wages councils, erosion of the welfare state, changes in taxation. In so far as such policies, pursued more deliberately and for much longer in the US, have a moral justification, it is that prospects of high rewards will spur on the wealth creators and that the new riches generated will "trickle down" to the poor: all will become richer. "A rising tide," as President Kennedy once declared, "lifts all boats."

The Rowntree report concluded that there was no evidence of "trickle- down" working - the poor became poorer in absolute as well as relative terms in the 1980s - and that widening income inequalities did not produce greater economic growth. Countries with more equal distribution of wealth have done far better economically than Britain - Japan is an obvious example - and Britain itself has not grown faster in periods of high inequality. But the Rowntree inquiry was primarily a piece of analysis: it was no part of its brief to examine the institutional and spiritual rot at the heart of Britain's widening wealth gap.

Mr Hurd's appointment is a useful parable. What on earth is the former holder of one of the most exalted offices of state doing as a PR man for a bank? Is this how knowledge acquired at the public expense and through public service should be used? Is any advice worth that much - the price, as the banking union BIFU pointed out, of 20 (full-time) counter staff?

At this point in the argument economic liberals usually arrive bearing a totem on which are inscribed the words "market forces". Invoking the free market as a form of supra-rational entity, to which the only response is speechless assent, often has the desired miraculous effect: it cuts off debate. If one can advance beyond it, however, one can begin to savour the tautological nature of the market-forces argument, which is that Mr Hurd deserves his money because someone is prepared to pay it. Such sums are, in effect, self-validating.

What the market-forces argument lacks is any sensible framework for determining the financial rewards of top people.

This is not for lack of ideas - management textbooks are full of them, from simple work-study analysis to concepts such as the "time-span of discretion", measuring how long a decision takes to work itself out and therefore how great a person's responsibility is. But in the upper strata of wealth generators, anything that savours of objectivity is junked: the mysterious workings of the market are more convenient.

The reality is that there is little link between top salaries and company performance and that vast sums of money are in effect shared out behind closed doors by small groups of (mainly) men who form an informal, extended network - business, politics, the City - operating on the principle of mutual back-scratching. There is nothing resembling a genuinely free market, there is little accountability or democracy and there is no representation of all those wider groups - employees, shareholders, pensioners and investors, even voters - whose lives and finances are affected. And for all the fuss made about the Greenbury committee on executive pay and the Nolan report on parliamentary sleaze, the responses so far indicate that the people who benefit will not give up their privileges without a fight.

The rot goes deeper. The typical response to the latest revelation of six- or seven-figure earnings is somewhere between a flurry of indignation and a shrug of despair. "It is not fair," we say, impotently. "Something should be done." But nothing is done and the perception of inequity undergoes a subtle transformation: it takes root inside us, souring our behaviour to each other and corroding our attitude towards the state.

Most modern politicians and business leaders have a poor sense of history: they have forgotten the fragile foundations of statehood. Those who witnessed the growth of the modern state, in the 17th and 18th centuries, suffered no such illusions. Political philosophers such as Hobbes, Locke and Rousseau argued that the authority of the state derives from an unwritten bargain between ruler and ruled: the former provides order, the latter, in return, agrees to obey. Thus was born the doctrine of the social contract.

Nowadays we expect more than order from the state, but the same tacit agreement still underpins our relationship with it, and also, by extension, our attitudes to civil society. The corollary is that if the state breaks the rules, its subjects are no longer bound by the terms of the contract: if people in high places misbehave, so may we. In consequence, both state and civil society suffer. Hence such disparate phenomena as the growth of protest movements, of the black economy, even - as measured by claims to the insurance industry - of dishonesty.

Inequities in income provide one of the truest indicators, and predictors, of such large-scale social dysfunction. One review of 50 separate studies on the relationship between crime, deprivation and inequality found that "income inequality is strongly related to criminal activity" (with the exception of homicide). Another concluded: "It is not absolute poverty but poverty experienced as unfair ... that creates discontent."

Income distribution also has a direct bearing on health - it explains, for instance, why people in more egalitarian countries have a higher life expectancy.

The saddest aspect of "trickle-down", however, is that it has failed in what was perhaps its chief aim. It does not make us contented. Research has consistently demonstrated that the key to a nation's well- being is not absolute income - GNP per person, for example - but the relativities such averages conceal. Opinion polls have shown that despite a doubling of GNP, Americans are no happier now than they were 40 years ago. Absolute income does play a part, but only above a certain quite modest level. Above that, one recent study concluded, "satisfaction in life is the highest in the most socially equal nations". A study in 1974 which ranked countries on a "happiness scale" put impoverished but egalitarian Cuba as one of the world's most contented nations. When the United Nations creates its human development index each year, income distribution is a key measure.

The failure of "trickle-down" carries implications beyond the economic. Once the ties that bind individuals to each other and to the state have broken, how easy will it be to repair them? Can the social contract, once it has been torn up, be rewritten - and what form will that reconstitution take? For all "New" Labour's talk of community and renewal, the lasting inheritance of the age of inequality may well be a permanent degradation of civil society and an irresistible drift towards social instability. The United States is already well set on such a course; Britain, on present evidence, is not far behind.