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
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