The New Statesman Essay - How to cage the fat cats

Political intervention can curb our winner-takes-all society, argues Julian Le Grand

What has gone wrong with the idea of meritocracy, to which both main parties, but particularly new Labour, supposedly subscribe? As John Goldthorpe and his colleagues at Oxford have shown, there is little sign of increased social mobility in Britain in recent years: the enormous difference between a working-class child's chances of going on to professional/managerial employment and a middle-class child's chances shows no sign of diminishing. In some respects mobility may even have been reduced: the proportion of students at Oxford and Cambridge who come from private schools has risen from 38 per cent in the late 1960s to around 50 per cent now.

At the same time, inequalities in outcomes are widening dramatically. The work of John Hills and his colleagues at the London School of Economics indicates that since 1979 the richest 10 per cent have increased their share of national income from around a fifth to more than a quarter, while the bottom 10 per cent have seen their share halved (from 4 per cent to 2 per cent). The gap between the highest-paid and lowest-paid workers is greater than at any time since records began in 1886. Although the position of the very poor has improved a little in recent years (largely because of the fall in unemployment), the trend towards soaraway incomes at the top continues. Thus, a few days ago, the Guardian reported that the executive directors of Britain's biggest companies took pay rises of 22 per cent last year - giving 30 of them a basic pay and bonus of more than £1 million a year - while their employees made do with average rises of just over 5 per cent.

All this suggests that, as Anthony Giddens has argued, we are creating not so much a meritocracy, but something more like a "winner-takes-all" society: one where, in the name of merit, those who rise to the top grab an ever-growing share of the nation's wealth, while those at the bottom receive less and less, accompanied by the demoralising message that they deserve to be there. Worse still, as Andrew Adonis and Stephen Pollard have pointed out in A Class Act: the myth of Britain's classless society, the new meritocrats are kicking the ladder down behind them, entrenching their privileges for themselves and their children through private education and healthcare, and increasingly living in privatised enclaves serviced by an army of the new domestic class: nannies, cleaners and gardeners.

Much of this was predicted by Michael Young more than 40 years ago. In the extraordinarily prescient work that injected the term "meritocracy" into the language, The Rise of the Meritocracy, he envisaged a society of huge inequalities with a technocratic elite served by a sullen and resentful underclass. In the book, the underclass eventually riots in an attempt to destroy its oppressors. Anyone who has visited our decaying inner-city estates and experienced the anger of the people forced to live on them will recognise that this prediction, too, may not be far off the mark.

It is hard to argue against the meritocracy as an ideal. The idea that a combination of talent and effort can get you to the top is one that appeals to social efficiency - the right people in the right jobs - and to at least some conceptions of social justice. Further, anyone who opposes a meritocracy has to answer the question as to what they would put in its place. A drab, inefficient egalitarianism that offers little incentive for hard work? A feudalistic society where everyone knows their place? Or a return to aristocracy, where family determines social position? But winner-takes-all societies are much harder to defend. And the difficulty for those who favour meritocracy is that it tends to metamorphose into winner-takes-all, thus sowing the seeds of its own destruction.

So is it possible to have the benefits of a meritocracy without its costs? Or, more precisely, can we devise a society that gets the right people into the right jobs and rewards talent and effort without creating too many social divisions and without permitting the privileged to entrench their families' advantages?

I believe we can; but we need an activist government intervening at all levels of society. Such a government needs to promote equality of opportunity - in its very broadest sense, where there are no social or economic barriers to any individual achieving his or her full potential. Inevitably, since some people's potential (and efforts) will be greater than others, this will mean some inequality in outcomes. But we have to limit the domain of that inequality: to ensure that it is confined to the inessentials of life and that a family's ability to pass on excessive privilege to its children is restricted.

I would start with education. Excellence in education has to be made available to all, not just to the sons and daughters of the better off. We cannot, for a start, have the privileged buying extra advantages for their children through private schools. This is an issue that Labour governments (including this one, so far) have always ducked, but it cannot be avoided any longer.

This does not mean abolishing private schools. There is nothing wrong with Eton as such. What is wrong is the excellence of Eton - or Westminster or Winchester or any of the other great public schools - being confined to the children of the rich. The public schools should be exactly what their name implies - for the public.

One way of achieving this would be to follow George Walden's idea of offering private schools the opportunity to "opt in" to the state system. In other words, the state should pay for pupils to attend these schools - on condition that they do not accept fee-paying pupils as well.

If this sounds like the assisted places scheme which Labour abolished that is no accident: abolishing assisted places was a mistake. What the government should have done was to go in the opposite direction and make all places assisted. I believe that many public schools would accept such an offer. Many of their dedicated teachers (I write as the son of one of them) are unhappy about being bastions of privilege, reserved for the sons and daughters of the better off. If there was a way of preserving standards while widening opportunity, I think they would find it very attractive. But the pressure on them to accept the idea would increase if certain other proposals were adopted.

One of these would be to raise the standards of state schools to match private ones. Although most people seem to believe that private means better, there is nothing automatic about this. Few people seem to think that private medical treatment is superior in quality to NHS treatment; if they go private, it is because they want something quicker or more comfortable, not because they think the doctors are better. It is not clear why we cannot replicate that reputation for quality in education; after all, other countries do. If we did that, then all public schools would have seriously to consider "opting in" to the state system on the principle that if you can't beat them, join them.

You may object that the better off can always manipulate even state school systems to their advantage; and that the children of the poor might still be disadvantaged by my scheme. The answer is to adopt what I have called the "positive discrimination voucher". All schools, including our newly opted-in public schools, would receive a bonus for each child they accepted from a poor area. They would then have an incentive to accept and teach such children.

My second proposal for an activist government is to tackle the question of inheritance tax. This is another issue that has been sadly neglected by successive Labour governments. The present death duty is based on the size of the deceased's estate. I would replace it with a tax based on the size of each individual inheritance. If the tax is progressive, and if the donor wants to minimise tax liability, then he or she has an incentive to divide the estate across several individuals, instead of leaving it all to one. The incentive would be increased if there was a level below which an inheritance would not be liable to tax at all. In this way, the "natural" motivation for tax avoidance is harnessed to further the aim of encouraging equality of opportunity. And since the tax burden can in whole or in part be avoided, there can be no great objections about parental rights being infringed or incentives to wealth-creation reduced.

To make such a tax yet more acceptable, and further to promote equality of opportunity, the revenue could be used to finance a capital voucher that is given to everyone on attaining the age of majority. This could be used to finance higher education, to provide some of the starting capital for a small business or for other investment purposes. Thus the accumulated wealth of one generation could be used to fertilise the growth of the next: "manure spread around to help young things to grow", in the words of Dolly Levi in Thornton Wilder's The Matchmaker. (For a similar proposal, see Robert Reich, New Statesman, 14 June.)

However, especially if donors engaged in substantial tax avoidance by spreading their wealth, it is unlikely that there would be much revenue from the tax to pay for a capital voucher of a decent size. Moreover, the other proposals - "buying in" the public schools, better state education, positive discrimination vouchers - would require greater public expenditure. So these measures would have to be accompanied by tax rises - rises which, if they were concentrated on the wealthy, could have the additional benefit of reducing some of the grosser inequalities in outcome that our winner-takes-all society has generated. An obvious candidate would be a rise in the top marginal rate of income tax, although, unless this kicked in at quite moderate levels of income, it would not raise very much revenue; the really rich, although highly conspicuous and therefore socially damaging, are relatively few in number. Another possibility is a more drastic revision of the rate structure of income tax with a greater number of bands; appropriately designed, this could generate considerably more revenue. Other forms of wealth taxation could also be considered, such as a general wealth tax as in Sweden or Germany or - to cope with the problem that much wealth is mobile - perhaps a land tax.

But even if tax increases are feasible financially, are they realistic politically? In my view the politics and the finance are intermingled. Some of the expenditure measures that the taxes would be financing could be quite popular politically, especially if the public schools' excellence was preserved and state education improved. Also, the middle classes would save money by no longer having to lay out money on school fees. So, overall, taxpayer resistance to any increases in taxes that might be necessary would be lessened.

But even if we removed the avenues through which the privileged transmit their advantages down the generations, would we actually end up with a more equal society? Probably not; we need additional measures. These could include restrictions on the range of things that money can buy, so that the poor are not disadvantaged in important areas of well-being. The wealthy could still purchase fancy cars or expensive holidays; but they could not purchase privilege in some of the more essential components of life, such as housing and healthcare. Planning restrictions could be used to discourage "gated" communities and to encourage residential integration. The ability to purchase private healthcare could be restricted (not impossible - Canada does not allow it at all). And the standard of NHS care could be raised to match that of private care. This need not be that expensive. We don't need to spend money on improving the quality of medical treatment; we just need to bring down waiting lists and improve hotel facilities in hospitals.

We could also look at the world of work. One of the striking things about our winner-takes-all society is how hard-working it is. Working hours have steadily increased in Britain over the past ten years, so that we now work longer hours than anywhere else in Europe. In the United States things are even worse, with the average American now working the equivalent of a month longer each year than he or she did in 1973.

In fact, as Robert Frank, the originator of the term "winner-takes-all", has shown, increases in working hours are an inevitable consequence of such a society, especially where people are paid by salary instead of by the hour. Employees think that in order to get an advantage over their colleagues in the promotion race they should work longer hours; but everyone thinks the same, so everyone works the longer hours, leaving no one with the advantage - except the employer, who gains lots of extra labour at no cost.

We don't need to follow France and enforce a 35-hour week; indeed, given the problems the French are facing, we probably wouldn't want to. But we could introduce more official holidays. We could encourage firms to offer work-time reductions instead of higher pay offers, and we could encourage more job-sharing. Everyone would be paid a little less - but since this would reduce income inequality that would be no bad thing.

Then there are more ambitious ideas that involve trying to change the culture of reward, away from money and towards something else: for instance, a more developed system of public honours. Again, a different culture is not an impossible dream; other countries such as Germany and Japan do not have as gross inequalities in pay as the US and Britain, and we ourselves used to be much more restrained in what top people got. In the armed forces, for example, personnel used to be motivated by material reward (for instance, prize money in Nelson's day); now, I am reliably informed, the chief motivator is "medals". So perhaps we need more public service medals.

What about those at the bottom? There would have to be a decent minimum of some kind, not least because that would be necessary to help the children of the poor grasp the educational opportunities they are offered. However, it would be better if, where possible, welfare measures took the activist form of welfare-to-work measures (as indeed this government is doing), rather than simply handing out unconditional benefits. This would be better for the morale of recipients, better for equality of opportunity and ultimately better for social mobility.

Some of these ideas already form part of new Labour policy. But some of them do not (tackling private education and inheritance, changing the culture of reward). If they were all implemented, the world would still be far less than perfect; inequalities in outcome would remain and some inequalities of opportunity would as well. But society would be better: more equal than our present one in terms of opportunities and more meritocratic.

It would even be more equal in terms of outcomes, with the winners' excessive rewards curbed and the penalty of losing made less damaging and more marginal. However, none of this can happen without an active, watchful government: laissez-faire will let the culture of winner-takes-all become even more dominant. The price of a genuine meritocracy is eternal vigilance.

Julian Le Grand, Richard Titmuss professor of social policy at the London School of Economics, presents "Winners-take-all?", the third of BBC2's Big Ideas series, on 25 July at 7.30pm