The doctor and the banker

No posts recently owing to a long trip and then too much work.

This morning I listened to Jim Naughtie interviewing Stephen Hester on the Today programme. Naughtie asked one simple question which, I think, nevertheless gets to the heart of the issue of bonus culture. The question was along the lines of ' why does a banker need a bonus to do a good job while a doctor does not ?' It has been asked before, I know, and once again there was no answer from Hester. In fact he admitted he did not know the answer. This immediately shocked me as, if he is such a big shot in the business world, he should know the answer. I do and millions of others do. Perhaps he was just being blatantly disingenuous because the real answer does not suit him ?

There are at least two answers to the question. One is that doctors on the whole (though this may change if reform of the NHS has unfortunate consequences) are not in a full scale market situation. There is a market for doctors, of course, and UK doctors benefit because they are some of the best paid in the world, but they do not get bonuses because doctors round the world do not get bonuses. Additionally, they are employed mostly by the state and cannot on the whole practice anywhere in the world unless for humanitarian reasons. In short, we don't pay bonuses to doctors because we don't need to because no one else does. God forbid.

The second reason - and this is conceptually more interesting and less surprising that Hester does not know it - is because what doctors do is intrinsically of value to people and society. Put another way, improving people's quality of life and even saving their life is a reward in itself. It is sufficient incentive to persuade them to do a 'good job'.

As an illustration, perhaps not too far-fetched - of this latter point, we may turn our minds back to the days of the 'Captain Mainwaring' style bank manager whose bank branch served the community, its people and its businesses. They may well have felt that what they did had intrinsic value because their activities would benefit the community and they lived and worked in the same community. Like the doctor, this kind of bank manager did not need a bonus, because doing a good job was its own reward. But perhaps I am being romantic.

If we turn this second answer on its head we are led to the conclusion that being a top banker does NOT have intrinsic value to society so a monetary incentive is needed to make people do it well. This in turn leads to the logic that bankers do a job which has less intrinsic value to society than doctors, but mostly get paid much more. Mmmmmm.

Top bankers (and CEOs in general) earn a great deal of what economists call economic rent. That is earnings they receive, not because of their intrinsic worth or because they are creating goods or wealth, but because they are scarce (very like top footballers). The nineteenth century free market economist David Ricardo understood economic rent and recommended taxing it as it is not earned and will not interfere with the free working of markets.

The final logic is, therefore, ineluctible - a bonus tax. Sadly it will have to be inetrnational to meet Ricardo's criterion.

Speaking of tax another blog will follow.



http://www.hoddereducation.co.uk/Colleges/Government---Politics.aspx?mRef=CNM01.