Anna, I appreciate this exchange on income inequality and executive pay. I agree with you that “the rise in executive pay is due to many factors, not merely to an increase in their productivity or abilities.” My point was that the increase in their abilities has been so dramatic that it was going to confront us with this question of long-term income inequalities regardless of the impact of other factors.
Based on what you write, I would identify two main points of disagreement. (I would also quibble with some of the factual assertions you quote from outside sources in your post, but that’s not really worth getting into.)
1) Your whole post is predicated on the assumption that to whatever extent you can show a failure of rationality on the part of the buyer (in this case, the company, which is purchasing the executive’s work), to that extent you have demonstrated that the price is not rationally related to the real value of the thing being purchased. This assumption comes through clearly in the hinge of your argument, which is your statement that “if that rise is not merely the result of executive talent or the natural move of the free market, then we could try to rein in CEOs’ compensation without suffering dire economic consequences.”
The assumption is false. It stems from a conflation of the subjective rationality of the buyer with the objective operation of the price system and (even more fundamentally) the fallacy of thinking that it is possible to evaluate prices quantitatively against some standard of value that is independent of the subjective valuations of buyers and sellers.
Let’s say I buy bananas at Safeway for $3 a bunch when I would have preferred to buy them for $2 a bunch at Target, for the sole reason that I was unaware Target was selling them for $2. Let’s further stipulate that my lack of awareness of the better price is attributable to a blameworthy defect in rationality on my part (rather than, say, a rational and legitimate judgment that I have more valuable things to do with my time than shop around for better banana prices). Even so, this contributes pricisely nothing to consideration of such questions as whether Safeway is acting unjustly in charging $3, or if the “real” value of a bunch of bananas (or the ”ideal” value or the “rational” value or any other term you choose) is $3 or $2 or some other number.
Thomas Aquinas devoted a good deal of attention to deconstructing these fallacies; see John Mueller’s Redeeming Economics for a thoughtful consideration of Thomistic price theory.
2) Your key statement (“If that rise is not merely the result of executive talent or the natural move of the free market, then we could try to rein in CEOs’ compensation without suffering dire economic consequences”) also assumes that if we grant some entity—unspecified in your post—an arbitrary power to engage in a large-scale price fixing scheme affecting the leadership of every major company in America, this scheme A) might succeed in actually reducing executive compensation, B) might do so without creating massive disruptions throughout the economy, and C) might do so without dehumanizing the persons affected.
A) will not happen because price controls never actually exercise much control over the price; what they mostly do is transfer a part of the price into non-monetary forms of payment; B) will not happen because, in sharp contrast to “safety net” programs that don’t directly interfere with the price system, price controls have a devastating effect on whatever sector of the economy is subjected to them—just try to rent an apartment in Manhattan; C) will not happen because price controls must always, by their very nature, grant the controlling class arbitrary (and therefore dehumanizing) power over the controlled class.
John Paul II’s critique of socialism in Centesimus Annus provides all the basic ideas at work here. His sharp distinction between protecting the dignity of the vulnerable on the one hand, and on the other hand arbitrarily limiting or tearing down the success of those who get ahead through what he calls ”know-how, technology and skill,” is in strong continuity with Aquinas’ contributions to price theory and remains an important touchstone of Christian ethical engagement with this whole set of issues.
February 26th, 2013 | 6:25 pm
“price controls must always, by their very nature, grant the controlling class arbitrary (and therefore dehumanizing) power over the controlled class.”
Very often the “controlling class” and “controlled class,” in this case financial regulators and executives, are often the same class or at least related. That is, executives mainly fear new regulations and restrictions only if they fear that the new policies will threaten their incumbency.
Higher executive-compensation technically means higher tax-revenue. In actuality, this is the case only if executives pay most, certainly a larger share than many executives currently pay, of their tax-rate. Thus, I think tax-code reform is a more pertinent and realist discussion than pay-restrictions and price controls.
Nonetheless, we ought to avoid placing too much trust in the market. The fact that the abortion, contraceptive and pornography industries exist is evidence that supplying-the-demand isn’t the comprehensive way toward true human development and progress.
The real question is “What are we building and creating” Are we building and creating? While many executives fund important services and products conducive to growth and opportunity, we are naive to assume that what benefits, or is most convenient, for the CEO benefits the single-mother cleaning public bathrooms all day to feed her child. That is another discussion, but it evokes the truth, pertinent to this discussion, that a true economic growth, a part of more holistic human development, means more than the unrestricted success of CEOs. Such a truth is prevalent in Centismus Annus, in which John Paul II also recognizes that our current mentalities–not policies necessarily–toward economics and human work dehumanizes the low-income single mother more often than the executive.
February 27th, 2013 | 5:57 am
Your whole post is predicated on the assumption that to whatever extent you can show a failure of rationality on the part of the buyer (in this case, the company, which is purchasing the executive’s work),
I think this is the hole in your argument’s foundation. I’m in a car lot, the salesman is giving me a lot of stupid reasons to pay too much for some lemon. Here you could argue that while the salesman is influencing me, he isn’t a formal part of my mind. I am allowing myself to be influenced by him and to the degree it causes me to be ‘irrational’, it can be said to be my own choice.
Companies are not people with minds but collections of people, of whom, surprise!, the CEO is quite influential. The CEO has the ability not only to influence ‘from the inside’ but also shape the case to those supposedly making the decision independently. It’s a bit like telling the salemen you have to talk it over with your wife but he informs you the state law is that you can’t call her, the salesman must call her on your behalf and he’ll tell you what she says about it!
So perhaps the solution is not price controls but better corporate governance. Let shareholders have to vote on CEO compensation as a multiple of average worker compensation. If your theory is correct, that evolution has blessed us with a new species of human who have many times the talent of regular humans (homo-executos?), shareholders will be happy to vote for a very high multiple. If on the other hand CEO compensation is partially a racket, then CEO’s will be inhibited a bit unless they help bring up everyone else’s pay with them.
February 27th, 2013 | 6:24 am
Those of us (myself most definitely included) who have not done advanced study in economics are not precluded from discussing the subject, from offering our observations or possible solutions to economic problems. But as in other complex areas in which advanced study, effort, and practice are necessary, it is important that we not overestimate our ability to participate in any effective way.
Scholars of high intellectual achievement have devoted their academic and professional lives to this subject. Many are also passionately interested in justice, mercy, and the proper ordering of society. No one system has yet been shown free of complexities and unintended negative consequences.
How are we to make men good? How can a society through law and regulation make life good and provide a decent standard of living for all without destroying individual initiative? What is the most important good! These are the questions that are on the minds of readers and writers of First Things.
Long experience has taught me humility in this area. Simple solutions to economic injustice present themselves every day in the persons of those with whom we have the privilege of sharing. Complex systemic solutions have been proven difficult at best, dangerous at worst.
February 27th, 2013 | 8:10 am
[...] Thomas Aquinas and John Paul II on Executive Pay Greg Forster, First Things [...]
February 27th, 2013 | 8:26 am
Boonton, there are certainly some difficult “agency problems” between shareholders and boards. I’m not denying that. Modest governance reforms addressing this may well be wise, although my confidence in such reforms surviving the legislative sausage grinder and still being wise on the other side is low. But compared to price controls even a bad governance reform is infinitely preferable.
February 27th, 2013 | 9:16 am
I’m with the author on this one. The very idea, apparently expressed by Anna, that we may limit exec pay without negative consequences is specious. We need only to look at the horrible ways this present administration is regulating things, shaking down companies and other organizations (eg “buying” the support of AARP for Obamacare, in direct contradiction to the interests of seniors) to see what mischief this would unleash.
BTW, if you haven’t yet perceived that Obamacare is bad regulation, stay tuned.
Look at it the other way around. Suppose I grant that the top exec team of the S&P 500 companies are all overcompensated by 20%. The “wasted” compensation might be a number like $2 billion per year. That’s a lot of money, but to put it in perspective, it’s about the amount the Federal government wastes in 3 or 4 business days!
Or–imagine a law which establishes a Bureau of Overcompensation (BO). Its annual budget will be about what might be “saved” in “overcompensation”. I’m gonna trust 10,000 top executives to waste their money in better ways than the Feds do!
February 27th, 2013 | 9:19 am
Anna Williams, you are the only person in the FT orbit to have the guts to question the full-blown marketolatry that prevails here, and I commend you for it. It is richly ironic that people who have never read the plain sense of what St. Thomas wrote invoke his name to defend what they imagine is a properly Christian Capitalism. If one is blind to simple injustice, how is one to attain charity?
By the way, I’ve worked on Wall St. (not by inclination) for 25 years, and the idea that very ordinary and uninspiring people like Dick Fuld and Jamie Dimon “deserve” their income is laughable. I think the number of people who could give the appearance of “running” a large firm competently, at least for long enough to get very rich, is actually infinitely larger than Mr. Forster surmises. I’d be happy to try it myself for those bucks.
February 27th, 2013 | 10:00 am
HT, before you consign me to the outer darkness, read this:
http://thegospelcoalition.org/blogs/tgc/2012/03/28/confronting-ethical-emptiness-on-wall-street/
What I’ve said here doesn’t imply any individual deserves his salary – in fact I’m explicitly saying there may be plenty of bad decisions being made and it doesn’t mean the aggregate price system is unjust.
What part of Aquinas are you interacting with?
February 27th, 2013 | 10:51 am
Greg,
Please could you flesh out your arguments a little more on why you think today’s executives are so much more capable than their predecessors.
I think part of the reason for the small number of people considered capable of doing these roles is a massive institutional reluctance to allow people without experience of executive management to enter the elite based in part on a protective attitude and a desire to justify exorbitant pay. This seems to be the only reason for persistent reward for failure amongst CEOs in the UK. They oversee failure at one organisation, blame it on market factors beyond their control and move on – accompanied by a sizeable golden goodbye – to another post, where you can guarantee if there is an upturn it will be attributed to their acumen.
Yet look at many of our most successful businesses in tech, their CEOs are often people who had no formal management experience and were not identified by educational institutions; rather they were people who had an idea that other people liked and had an idea about how to get it to them.
Just some thoughts.
February 27th, 2013 | 12:29 pm
Toby, the argument is fleshed out at great length in Charles Murray’s book from last year, but your own comment here points to one key factor. Consider the guys you’re identifying as highly capable CEOs – the tech entrepreneurs who didn’t work their way up in the system. Well, if you think it’s hard for those guys to become CEOs now, just rewind the tape and take a look at how hard it was in the 1950s. There could have been no Bill Gates, no Steve Jobs, etc. I’m not saying there isn’t an old boys club now – there is. I’m saying that succeeding in spite of not being in the old boy’s club is a lot easier now than it was in 1950.
It’s also much easier to get into the old boy’s club than it used to be. Time was, you basically had to be born in it. Today, if you’re born inside you do get a free ride to stay in – but if you’re not born inside, you can get in if you have the right natural gifts and determination, and (especially) if you start working on it early. If you come from a Harvard family you’ll have an easy time getting into Harvard, but you can also go to Harvard even if you don’t come from a Harvard family. That’s new.
February 27th, 2013 | 1:16 pm
Greg: Haven’t got time to look up the citations now, but a really wonderful summary of Thomas’s view of justice is given in the chapter of that name in Eleonore Stump’s “Aquinas” (which can be read in isolation from the rest of that big book). Stump is a Christian philosopher who is not a theological liberal and who has no obvious ideological axe to grind. She is also recognized in the profession as one of the foremost living Aquinas scholars. One of Thomas’s points, that anything one has in superfluity is owed, as a matter of justice (not charity), to one’s neighbor in need (irrespective of how that need arose), was also emphasized in a few places by G. E. M. Anscombe, whom I consider the greatest Catholic philosopher since the Middle Ages. Needless to say you don’t often hear such things from the pulpit.
One might remark in general, though I don’t think this is in Aquinas, that market prices *can’t* be just by definition, because markets abstract from all the “thick” circumstances of human life (indeed from all consumption-independent real values), and generate incentives based solely on that abstraction. If justice involves respecting real human beings and real human goods (like being able to support one’s family), then something that reduces all those things to a single fluctuating number will frequently (to say the least) violate the demands of justice.
February 27th, 2013 | 2:21 pm
HT, now you’re getting into deep waters. I would argue that the biblical concept of justice is much broader than only transactional, interpersonal relations. Those are primary, but aggregate social structures can also be just or unjust. Otherwise I fear we may drift in the direction of nominalism.
February 27th, 2013 | 4:24 pm
I’ve never been afraid of deep waters :-) I was referring to Aquinas’s notion of (in this case, distributive) justice, which I am sure HE believed was biblical and patristic. I agree with your second and third sentences, but don’t see how they in any way problematize what I said. I don’t follow you on nominalism.
February 27th, 2013 | 5:26 pm
Well, distributive justice is not the only kind of justice. You said “market prices can’t be just or unjust” because they “abstract from the thick circumstances of human life” and I inteded to challenge that assertion with my second and third sentences. (That is, I challenge the assertion that they can’t be just or unjust; the assertion that they abstract from the thick circumstances of human life I don’t deny.)
I was wondering if the idea that anything “abstract” can’t be just or unjust presupposes that ideas (abstractions) aren’t real.
February 27th, 2013 | 6:43 pm
Looks like a tendentious reading of what the “whole point” of Anna Williams’ post was. All of this only addresses the final line of her post (which did not really commit to salary limits as price control – she may have just meant reforming corporate governance). The rest of what she said was to challenge (pretty effectively, I think) the rather amazing claim that executives are simply that much better today than they were a few decades ago. I’d appreciate it if Mr. Forster could give us a brief run-down of why he thinks that is a plausible view.
“the consequences of those companies being poorly run would be catastrophic for millions of people – See more at: http://www.firstthings.com/blogs/firstthoughts/2013/02/21/re-re-stigmatizing-wealth/#sthash.vl6XpvOA.dpuf”
I’m trying to wrap my mind around this one. First, capitalism is creative destruction, so surely the failure of any single company ought to be a live possibility – otherwise we’re no longer talking about capitalism or free markets at all. And if the market is functioning, there should be a crowd of competitors waiting to step into the breach. Am I wrong to see this statement as suspiciously reminiscent of “too big to fail”? Second, executives with ludicrous pay screw up all the time, preside over incredible losses and failures, and then leave with big fat bonuses. I’m quite prepared to say that this is a necessary evil (pending questions about corporate governance). I’m not at all prepared to say that it just reflects the labor market’s increased efficiency at identifying and enabling prophets. This is another weird point: it’s a consequence of efficient markets that you cannot, in principle, predict market behavior. So whence these extraordinary visionaries into people’s future economic decisions?
Granted, some people are good at certain things that go into these (no doubt…
February 27th, 2013 | 8:58 pm
Agreed that distributive justice is not the only kind of justice, though it is a part of justice. I didn’t mean to say market prices were “beyond good and evil”. I meant to say that they are very often UNJUST. Of necessity. In terms of distributive justice. Because of the abstraction that you acknowledge.
Abstraction may or may not falsify reality in a morally culpable way — I maintain that it does in “market” abstractions. I don’t expect you to agree. But have a look at Stump’s book; it’s only about 30 pages that are relevant here. If it doesn’t change your mind, it will sharpen your apologetic sword for Christian Capitalism, which is something I presume you care about.
February 28th, 2013 | 1:13 pm
Thanks for the exchange, Greg, and thanks to all who have commented. I’m afraid I’ve been unclear in saying that some CEOs are over-paid while not specifying what I’d have us do about it. So to state my views more clearly:
I don’t favor price-fixing, whether for consumer goods or CEOs. I realize that letting supply and demand determine prices and salaries is most likely to spur innovation and increase prosperity for everyone. I don’t want to the government or another entity to set salaries, for the reasons Greg mentioned in his post. But that doesn’t mean we can’t do anything about CEO pay. Our exchange started with my post about stigmatizing the rich. While that approach has downsides (it can end in mob justice), I think social pressure could encourage companies to rein in CEO compensation and to raise the pay/benefits of their bottom-tier workers when possible.
A real analysis of income inequality (and what, if anything, to do about it) must go beyond the issue of CEO pay, and it’s beyond the scope of this comment. To explain briefly where I’m coming from: I do not believe income inequality is inherently unjust. A person who has invested much time and money in his/her education (an engineer, a doctor, a lawyer, a businessperson, etc.) should earn more money per hour than a teenage babysitter.
The fact that income inequality can be just, however, does not mean that it is always just. Without debating what level of income inequality is excessive, it’s worth noting that income inequality in the U.S. is at or near a historic high and that the Catholic Church, for one, considers a high degree of income inequality unjust.
As Greg points out, Pope John Paul II criticized socialism. He also wrote “One of the greatest injustices in the contemporary world consists precisely in this: that the ones who possess much are relatively few and those who possess almost nothing are many. It is the injustice of the poor distribution of the goods and services originally intended for all.” Catholic social teaching criticizes socialism, certainly, but it also criticizes unfettered capitalism.
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