Why Bonuses Have Survived

Why did bank bonuses survive the crisis? The attack was weak. Bank bonuses should not be criticized using arguments against the greed and underlying inequality that is produced (although these are powerful reasons which in fact should be heeded by anyone interested in making the world a better place for all—not exactly the main trait of bankers). Rather they should be argued against attacking the underling logical foundation on which they stand. This logical foundation is that bankers take on very high risks, and when those risks reap a high return, they should in fact be rewarded—they deserve it.  The same logic is used to justify the exorbitantly high returns that powerful shareholders have earned in the last decades (one of the prime sources of increasing inequality). The logic here is that shareholders are the biggest risk takers since they only earn the returns that are left over once all the other economic actors are paid (the ‘residual’ if it exists, e.g. once workers and managers are paid their salaries, loans paid off, etc). Hence when there is a large residual they are the proper claimant—they could in fact have earned nothing since there is no guarantee that there will be a residual (see Lazonick 2007, and Lazonick, and Mazzucato 2011 for a critique).  To combat bank bonuses and extremely high share holder returns which increase inequality, requires rethinking the collective nature of risk taking across society, and hence the more collective distribution of rewards which should exist.  In fact, there are many different types of agents that take on massive risks, with no guarantee of any return at all. What about government which notoriously, in the USA and the UK, both funded and provided the ‘vision’ for some of the most radical innovations (from the internet, to 75% of recent New Molecular Entities with ‘Priority’ rating).  In fact risk taking is a much more collective enterprise than both bonus earning bankers and shareholders would like us to think. And so the rewards should be better distributed. The debate around bank bonuses will only move forwards when such assumptions around risk taking and the rewards from it are fundamentally questioned. Until then the rest of us will look simply look miserably jealous, or unrealistic progressives thinking that the idea of a ‘less unequal world’ is a shared concern. Which unfortunately it is not.

References:

Lazonick, W. (2007) The US stock market and the governance of  innovative enterprise, Industrial and Corporate Change, Vol. 16 (6): 983-1035

Mazzucato, M (2011), The Entrepreneurial State, Ch. 6 Risk Taking in Innovation: who gets the return?, DEMOS, July 2011, www.demos.co.uk/publications/theentrepreneurialstate

Lazonick, W. and Mazzucato, M. (2011, forthcoming), ''Fair' capitalism and the Risk-Reward Nexxus',FINNOV Discussion Paper 2.11