In March this year, Red Nose Day raised £35m. That's less than one quarter of Philip Green's annual earnings

Nick Cohen on how meritocracy became a reality in new Labour's Britain

The worst fate for a satirist is to be taken at face value. In 1958, Michael Young, one of the authors of the 1945 Labour manifesto, looked at the country he had helped to create and decided he wasn't sure he liked the way it was going. Young invented the word "meritocracy", to describe what he saw as a coming dystopia, and, in The Rise of the Meritocracy, imagined what it would be like. It would be insufferable. Whereas aristocrats, who know they are the beneficiaries of an accident of birth, may on occasion show humility, meritocrats feel no reason to restrain their appetites. Young wanted to use mockery to show how, "if the rich and powerful were encouraged by the general culture to believe that they fully deserved all they had, how arrogant they could become, and, if they were convinced it was all for the common good, how ruthless in pursuing their own advantage".

In his imagined future, those excluded by the meritocrats revolt in 2034 and demand to know who set the criteria that held them down. The rebel manifesto states: "Were we to evaluate people, not only according to their intelligence and their education, their occupation and their power, but according to their kindliness and their courage, their imagination and sensitivity, their sympathy and generosity, there would be no classes."

When The Rise of the Meritocracy was published, Young was warned by a classical scholar that he had made a terrible mistake: it wasn't done to create a word by mixing Latin and Greek. "I would, she said, be laughed to scorn." It didn't work out like that. Instead of attacking his linguistic inconsistency, the targets of the satire took the mockery as a compliment. To be a meritocrat was to hold power on the basis of merit, and who could propose a preferable system? Young watched with a weariness close to despair as "meritocrat" was turned from an insult to a compliment, and the meritocracy rose and rose until even the Labour Party decided that promoting meritocracy was its raison d'etre.

Admittedly, there were setbacks. In opposition, Tony Blair feared that the meritocratic utopia might never be reached. "We are light years from being a true meritocracy," he sighed in 1995. By 1997, he had perked up. "I want a society based on meritocracy," he proclaimed just before his election victory. After winning power, he made his intentions clear. "The Britain of the elite is over. The new Britain is a meritocracy." The new Britain was coming and nothing could stop it because "the old establishment is being replaced by a new, larger, more meritocratic middle class". The future would be democratic because "the meritocracy is built on the potential of the many, not the few". It would be profitable because "the meritocratic society is the only one that can exploit its economic potential to the full for all its people".

For all Blair's enthusiasm, the question raised by Young's rebels remained as valid as ever: how do you evaluate? Educational achievement was the generally accepted measure. The 1990s produced a craze for exams, and, although there were complaints about the pressure on children and the quality of the marking, parents continued to judge schools on their performance in exam league tables, while new Labour aimed to get 50 per cent of the young to pass the exams needed for admission to university. The private schools were as keen on tests. They had abandoned their preference for good chaps over swots years before and become centres of academic excellence. These developments appeared benign, but they couldn't conceal the stresses of a meritocracy. Intellectually successful private schools enabled the coached children of the rich to secure the best grades. Self-made men or women who "deserved" their money could buy advantage for their children. Their families would move from a meritocracy to an aristocracy of wealth in a generation.

Once the examination process stopped, merit was to be judged by one criterion: money. The more a man had, the better he was. On this point, new Labour was explicit. In 1998, Peter Mandelson told one of the ideologues of the dotcom "revolution" in Silicon Valley that no millionaire or billionaire need fear his government, because new Labour was "intensely relaxed" about people getting filthy rich. A year later, Charles Leadbeater, an adviser to Mandelson and Blair, wrote in Living on Thin Air, a breathless manifesto for the "new economy", that innovators were "motivated by the prospect of making money". It was only by treating them "as heroes for creating wealth from knowledge that Britain will develop a fully fledged entrepreneurial culture".

Such gushings help to explain the great failure of Blair's government to protect pensioners and investors by curbing speculation in the dotcom bubble market - a calamitous refusal to regulate for which the government has received surprisingly little opprobrium. New Labour loved the greatest capitalist mania since the 1920s. The new economy promised to wipe away the old world of manufacturing and unions, which were old Labour millstones round the party's neck, while providing the growth to allow Gordon Brown to spend without significant rises in taxation. Not content with refusing to intervene, the government encouraged the frenzy. In autumn 1999, journalists asked Eddie George, then governor of the Bank of England, whether he thought dotcom and telecom stocks were running out of control. George, who had been given the ridiculously inapt nickname of "Steady Eddie" by the financial press, replied that high-tech stocks "provide a better underpinning of equity values than perhaps has been appreciated". Bubble shares were solid investments that were, if anything, undervalued. (Anyone who followed this advice and clung on to dotcom stocks would have lost about 90 per cent of their investment by 2002.) George, like the ministers he served, reserved his anger for the real enemies of economic stability. When working-class fire officers demanded a salary of £30,000 in 2002, he cried that economic disaster would follow.

In new Labour circles, the socialist belief that workers created wealth for the bosses was as anachronistic as the horse-drawn plough. On the contrary, the real wealth creators were at the top, and no incentives were too great to encourage them to help a grateful nation.

In 2001, Management Today found that the average salary of chief executives of British companies was £509,000 - up by one-third on 1999. British salaries were 33 per cent above those of French chief executives, who were the next highest-paid in Europe, on £382,128. Swedish executives had to get by on £311,400, while the Germans were close to beggary with £298,223. German chief executives received 11 times more than the average shop-floor worker in manufacturing. The average French boss was worth the same as 15 workers. British executives were "worth" 25 times as much, while British workers in manufacturing were the lowest-paid in the developed world, with average salaries of £20,000. They were also the cheapest in the developed world to fire.

Averages conceal as much as they reveal. In 2000, when Vodafone took over Mannesmann, a rival German mobile phone company, Chris Gent, Vodafone's chief executive, was awarded a £10m bonus to supplement his £6.9m salary and share options. And when the drug companies Glaxo Wellcome and SmithKline Beecham merged in a deal that promised huge cost savings and a flood of new drugs, the share options of Jan Leschly, the SmithKline chief executive, were valued at $100m (about £60m at the time). Jean-Pierre Garnier, the chief executive of the merged company, began on a salary of £7m. Vodafone went on to record the biggest loss in British corporate history, and the performance of Garnier's merged company was notable only for its mediocrity. But the paltry salaries of Gent and Garnier were dwarfed by that of Philip Green. According to the Sunday Times Pay List, in 2002, the tycoon behind the Bhs chain took £157.7m in dividends on the shares he owned in the store.

Numbers of this size boggle the mind. They were put into a kind of context on 14 March, when the BBC ran its annual fun-fest, Red Nose Day, Britain's greatest exercise in communal giving. The relentless cheeriness ground down all but the meanest. Comedians and singers donated their services to raise money to relieve poverty at home and in Africa. There were messages of support from Bill Clinton and Julia Roberts. Tens of thousands pestered their friends to sponsor them to dress up as chickens or sit in baths filled with cold baked beans. Twelve thousand telecom workers gave up their spare time to man phone lines. About one million schoolchildren wore red noses, and 20,000 schools ran fundraising events. The organisers estimated that five million people bought noses and contributed to a total of charitable donations from the public and business of £35,174,798 - or a shade under one-quarter of what Green had pocketed the previous year. Comic Relief wouldn't have made the top ten of the Sunday Times Pay List. It would have languished in the charts at number 16, just behind Madonna, who made £36m.

A look at executives doesn't begin to cover the redistribution of wealth from the bottom and middle of British society to the top. In December 1999, the bubble peaked when the FTSE 100 hit 6,930. By January 2003, it had fallen to 3,460. But while the markets climbed in the 1990s, lawyers, accountants and investment bankers had reached out their hands and snatched the money that would comfort them in the hard times.

No other country in Europe had as many accountants as Britain - at 250,000, they outnumbered all their rivals in the European Union put together. Companies preferred accountants on their boards to engineers because short-term management of the share price was more important than producing goods - especially when share options made the level of the stock a matter of intense personal interest. Accountants had a state-guaranteed monopoly of auditing, which in no way inhibited them from prostituting their independence by trying to flatter the corporate clients they were meant to be policing into buying additional services from their firms. Selling tax advice and management consultancy was where the money was. They had every incentive to keep their paymasters sweet by turning a Nelsonian eye to dodgy figures.

The tax advice they produced was on how corporations and the super-rich could find ways not to pay tax. Nobody could be sure how much money they helped to divert from the Exchequer, but Prem Sikka, professor of accounting at Essex University, and the Labour MP Austin Mitchell estimated that £85bn a year escaped the Inland Revenue by being channelled to offshore havens, which were the successors to the pirate statelets of the Spanish Main. If the wealthy had paid their share, the tax burden on the working and middle classes might have been reduced or something more might have been done about the gridlocked roads, or the joke of the railway system, or the 20,000 old people who died each year from cold-related diseases, or the cumulative 25-year underinvestment of £275bn in the NHS, or the useless police force, or the unemployment benefits which were the lowest in western Europe, or the state pensions which were as miserable.

Finding ruses to avert this catastrophe was a skilled job that required the services of men and women who had expected to be well rewarded for their services. British accountants were the best-paid in the world by a mile. Their average salary, including bonuses, stood at £82,000 in 2001. Foreigners looked on with envious appreciation. The next best-paid were the Swiss, whose average was £46,000. Rewards were at their highest in the "big five" accountancy firms. Most kept their secrets, but Ernst & Young revealed in 2001 that 411 partners had each received a £449,000 bonus on top of their salaries.

The rest of the City fared as well. In 2000, 61 City lawyers who advised on corporate tax (the avoidance thereof), mergers and acquisitions made more than £1m a year. In the same year, mergers, acquisitions and the dotcom and telecom bubbles created an estimated 2,000 bonus millionaires in City banks. Did any of them doubt for a moment that he or she was worth every penny?

There might have been resistance. There might have been a questioning of the true merit of the meritocrats, along the lines Michael Young predicted. A normal response to a country where one man could make four times as much as the Comic Relief appeal would be to change it. But how were the proles meant to bring about change? By voting new Labour? The U-turn by the natural party of egalitarianism had made change impossible.

In 2001, near the end of his life, Young watched the ghastly masquerade pass by and reflected on how his prophecies in The Rise of the Meritocracy had been all too accurate. "So assured have the elite become that there is almost no block on the rewards they arrogate to themselves," he wrote. "The old restraints of the business world have been lifted and, as the book also predicted, all manner of new ways for people to feather their own nests have been invented and exploited. Salaries and fees have shot up. Generous share option schemes have proliferated. Top bonuses and golden handshakes have multiplied. As a result, general inequality has been becoming more grievous with every year that passes, and without a bleat from the leaders of the party who once spoke up so trenchantly and characteristically for greater equality."

This is an edited extract from Pretty Straight Guys by Nick Cohen, published by Faber & Faber (£14.99)