Posted on 01/22/2007 9:16:03 PM PST by jazusamo
In an era when our media and even our education system exalt emotions, while ignoring facts and logic, perhaps we should not be surprised that so many people explain economics by "greed."
Today there are adults -- including educated adults -- who explain multimillion-dollar corporate executives' salaries as being due to "greed."
Think about it: I could become so greedy that I wanted a fortune twice the size of Bill Gates' -- but this greed would not increase my income by one cent.
If you want to explain why some people have astronomical incomes, it cannot be simply because of their own desires -- whether "greedy" or not -- but because of what other people are willing to pay them.
The real question, then, is: Why do other people choose to pay corporate executives so much?
One popular explanation is that executive salaries are set by boards of directors who are spending the stockholders' money and do not care that they are overpaying a CEO, who may be the one responsible for putting them on the board of directors in the first place.
It makes a neat picture and may even be true in some cases. What deals a body blow to this theory, however, is that CEO compensation is even higher in corporations owned by a few giant investment firms, as distinguished from corporations owned by thousands of individual stockholders.
In other words, it is precisely where people are spending their own money and have financial expertise that they bid highest for CEOs. It is precisely where people most fully understand the difference that the right CEO can make in a corporation's profitability that they are willing to bid what it takes to get the executive they want.
If people who are capable of being outstanding executives were a dime a dozen, nobody would pay eleven cents a dozen for them.
Many observers who say that they cannot understand how anyone can be worth $100 million a year do not realize that it is not necessary that they understand it, since it is not their money.
All of us have thousands of things happening around us that we do not understand. We use computers all the time but most of us could not build a computer if our life depended on it -- and those few individuals who could probably couldn't grow orchids or train horses.
In short, we all have grossly inadequate knowledge in other people's specialties.
The idea that everything must "justify itself before the bar of reason" goes back at least as far as the 18th century. But that just makes it a candidate for the longest-running fallacy in the world.
Given the high degree of specialization in a modern economy, demanding that everything "justify itself before the bar of reason" means demanding that people who know what they are doing must be subject to the veto of people who don't have a clue about the decisions that they are second-guessing.
It means demanding that ignorance override knowledge.
The ignorant are not just some separate group of people. As Will Rogers said, everybody is ignorant, but just about different things.
Should computer experts tell brain surgeons how to do their job? Or horse trainers tell either of them what to do?
One of the reasons why central planning sounds so good, but has failed so badly that even socialist and communist governments finally abandoned the idea by the end of the 20th century, is that nobody knows enough to second guess everybody else.
Every time oil prices shoot up, there are cries of "greed" and demands by politicians for an investigation of collusion by Big Oil. There have been more than a dozen investigations of oil companies over the years, and none of them has turned up the collusion that is supposed to be responsible for high gas prices.
Now that oil prices have dropped big time, does that mean that oil companies have lost their "greed"? Or could it all be supply and demand -- a cause and effect explanation that seems to be harder for some people to understand than emotions like "greed"?
Thomas Sowell is a senior fellow at the Hoover Institute and author of Basic Economics: A Citizen's Guide to the Economy.
Great article.
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"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
- Friedrich A. Hayek
LOL. What a great and pithy statement.
Dr. Sowell's Basic Economics should be required reading of every US Senator.
While I still believe Home Depot's board was wrong to give hundreds of millions of dollars to a CEO they were firing, I nonetheless believe Gordon Gekko was right. Greed is good. It's what gets successful people out of bed and onto the job every morning.
Should computer experts tell brain surgeons how to do their job? Or horse trainers tell either of them what to do?
Of course not. Actors are the only people who know everything.
The senators wouldn't understand it; it doesn't have pretty pictures of bunnys and flowers.
LOL! You're both right on the money.
All too often, the highest paid CEO is the bringer of the "miracle turnaround", taking a company from losing money to making big bucks in a matter of months, then moving on to the next job and an even higher salary.
But it is easy to turn a company around in the short run: Fire a bunch of employees and sell of a bunch of assetts. Overnight you have positive income and lots of cash.
Eventually though, these guys start believing their own BS and stick around a little too long. The next morning when the party is over the hangover starts. They haven't solved the fundamental problem, they have just kicked it down the road. Their products still aren't selling, and now they have fired all the employees who were working on the next big thing and liquidated all the assetts they would have used to manufacture them. Then they get the golden parachute at precisely the time the company can least afford it.
Even worse, before they take the jump out of the plane they are flying into the ground they take all that cash they generated firing employees and selling assets and buy another failing business and repeat the process. What you have is not productivity but a cycle of destruction akin to a pyramid scheme.
These big companies are not sources of wealth, they are sinks. What keeps them afloat is the truly innovative products produced by the smaller businesses they sometimes purchase.
Would the stockholders of Home Depot be worse off with the CEO of Costco at the helm? Hardly. Not only would they have a competent CEO, they would have one whose salary doesn't resemble a pirate raid on the company's books.
ping
Bravo. You nailed it.
Did you, by any chance, see yourself in the article?
Well, he nailed something, but I'm not sure it was the target.
The fact remains that, basically, people haven't the standing or the knowledge to meaningfully criticize what other people choose to do with their money, and nothing in the post in question deal with this reality.
Instead he goes off on executive salaries exactly in the way Sowell complains of, but without dealing with the crux of Sowell's critique. It's OK (if risky) to disagree with Sowell, but anyone doing so ought to at least offer up some reasons and deal with Sowell's argumentation head on.
Liberal economic ignoramuses (I know, I'm being redundant) just can't understand how someone who has no direct interest in your wellbeing can help you. In lib world someone must intentionally say they want to help someone and not make a cent off it to count as help. So according to libs, that "greedy" boss who gives you a job because he's forced to is not helping you. And the nitwit good person who is nice to you but can't give you a job or does a poor job educating or training you is helping you. In lib world, that makes sense.
More than any other living American, Tom Sowell's books (of which I have a number) and articles should be required reading in all classrooms from high school on up.
This is also why you can find a web programmer in silicon valley for just over minimum wage, but finding a good plumber, HVAC tech, or finishing carpenter is going to really cost you. It has to do with the relative value of certain skills, and just how scarce those skills are.
There's an old joke where the punchline is,
Total service fee: $5000.
Hitting the pipe with the hammer: $5.
Knowing where to hit the pipe with the hammer: $4995.
Mark
Good point. Glad you made it. I didn't want to get in a flame war with the guy.
My guess is that Home Depot negotiated the compensation at the time of hiring the CEO, not at the time he left the company.
His Basic Economics is brilliant, and would be my textbook of choice if I had to teach the subject.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
Excllent job of proving the author's point.
"All of us have thousands of things happening around us that we do not understand. We use computers all the time but most of us could not build a computer if our life depended on it -- and those few individuals who could probably couldn't grow orchids or train horses.
In short, we all have grossly inadequate knowledge in other people's specialties."
Exactly. I've been self-employed for over 5 years now. Some days I can't believe what and how much people will pay me for my particular "brands" of expertise. I'm a firm believer that everyone has unique skills to exploit for their own personal gain. For some reason, we get it drummed into our heads that we couldn't possibly survive by our own skills, aptitudes and wits. Pish!
Our circle of friends is rather large and quite varied, but if I need something, I can get it done for me quickly and competently. Please don't think I'm trying to make my life seem like a Socialist Utopia, but when someone has what you need, and you need what someone else has, it's great to barter and/or be paid for those skills.
"One of the reasons why central planning sounds so good, but has failed so badly that even socialist and communist governments finally abandoned the idea by the end of the 20th century, is that nobody knows enough to second guess everybody else."
I'd never try to fix my furnace myself; that's where Doug comes in. If I need a new window, I call Dennis. If I need accounting advice, I call Jessica. If I need Veterinary care for one of my animals, I call Dr. Smith, etc.
If I needed a CEO commanding millions of dollars a year who can get me great returns on my investment in his/her company, I guess I'd want a competent one available too, LOL!
You are correct. 90% of what Nardelli received was negotiated prior to his taking the position. The Board had to honor his contract. That fact won't stop the anti-capitalists from ranting though.
Thomas Sowell is not just brilliant, he's also hilarious. For an economist, that's amazing.
If Sowell, and you, are correct, then the CEO doesn't fully understand the job of anyone else in their business. What then, exactly, is the CEO's function, and what makes their own skill so rare? If it is indeed rare, or is it just that so few persons ever get the opportunity to demonstrate their own ability to do the CEO's job?
Executive compensation, as well as labor's, and all other costs, plus profit, directly impact the cost of products, therefore consumers have a right to voice their opinions regarding same.
He says it like it is.
I love this guy! He's brilliant, and can explain things in terms the rest of us can understand.
There may be many potentially great CEO's, who haven't had a turn at bat, but how many Boards would take the risk of choosing one? Instead, they get into a bidding war for one that has been fortunate enough to get a swing at the ball, and connect.
People who don't have the personality to become accountants, instead, become economists.
And I'm not saying some rich guys didn't get their money by crooked means, either, but so what? A percentage of people with middle class level wealth got it by breaking into houses, but we don't look at the other 99% of middle class people like they're crooks because of that.
You are correct and the most effective way of doing that is through their wallet. And in our capitalistic society, that is exactly what we are doing.
Actually no. That one dollar from those 500,000 people wasn't taken from them, they chose to spend it for a product or service.
There are many expenditures we make for which there is no better, or more desireable, alternate choice, therefore we have little, or no, leverage to influence management decisions.
And like Dr. Sowell says, what makes you think you should make management decisions about a company or field of expertise you know nothing about?
You'll have to explain that one.
If someone has the power to mandate which books/authors must be read by all students, then I wold call that "centralized planning".
Such a power might require all students to read the New York Times. How would you like that?
"A little leaven, leavens the whole lump".
Given the high degree of specialization in a modern economyor in any field of foreign affairs, demanding that everything "justify itself before the bar of reason" means demanding that people who know what they are doing must be subject to the veto of people who don't have a clue about the decisions that they are second-guessing.
The above does not make a transaction "wealth redistribution," since everyone is subject to the same lack of choice.
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