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.
Nope...this article is like a Rorschach blot...you lose...
"There you go again..." Ronald Reagan.
I agree, but you don't go far enough. It should be required reading for every elected official at every level.
I wonder if Hunter needs a VEEP. Then again, Sowell would make a good President too... ;-)
"Throw a rock at a pack of dogs and the one the yelps is the one you hit."
Which is, of course, ridiculous. Of course greed can be a factor, and sometimes a lot of folks are willing to play along with it.
Did he simply not pay attention to what motivated the nice people at Enron?
Milton LIVES!!!!!
I love Thomas Sowell.
I'm with Sowell, I don't have any stock therefore I have little say in the matter of their compensation.
I & Mr. Sowell were just using the CEO as an example of someone that has skills that others will pay for. You're probably right that not many get to demonstrate their skills in that area; but who'd want the ulcers? LOL!
Take me, for instance. I sell new & used books. Now, how would I know which ones sell best? How do I know which older titles will consistently sell, no matter what condition they're in? Who can find a 1939 First Edition of a book at a garage sale for 25 cents and turn around and sell it for $50? Well, that would be me, because that's another area of expertise that I have. I'm not the only one, but I'm the only one that my customers know of, so I'm valuable to them. :)
I also raise laying hens. My egg customers swear they have NEVER tasted a cage-free, organic (though not certified) egg that tastes as good as the ones my hens produce and will pay up to $4 a dozen for them (when you can get grocery store eggs for 39 cents!) Now...do these people need to get inside of a hen's head (not much room in there) to know how the hen does that? Nope. Does my average customer care (versus those weird "Foodies" who grill me) what I feed them (all natural grains and veggie scraps)? Nope. They just like the product and are willing to pay me for producing it.
My husband gets upwards of $90/hour for his computer skills. Personally? I think he's a goofball most days, and certainly not worth $90/hour or any portion thereof to take out the trash for me each week, or till the garden for me in the Spring, LOL! Yet, people are willing to pay that kind of money to make their computer problems "go away." Which is the kind of "magician" he happens to be. :)
I'm not defending CEOs. I would if I were one, I guess, but they matter little to me in MY world, aside from a few Investment CEOs that I trust. :) As long as they provide the shareholders in THEIR world with good returns on their investment, how is their value as a CEO any different than my value as a lowly Chicken Farmer, depending upon the customer?
It's a sliding scale of course, LOL!
I wish your view, about CEO compensation, would get as much exposure here, as Dr. Sowell's. Thanks!
Smartest man in America ping!
(sigh...)
I have seen it and lived it (meaning I have worked for companies with exactly the type of CEO I described). Now, I have seen and worked for some truly good CEOs, too. The difference is night and day. In my experience it has always been readily apparent which type I was working for.
I was going to say that also. Thanks and agreed.
Hear, hear!
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