Arnold Kling  

Paul Graham on the Distribution of Income

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From Mind the Gap.


Like chess or painting or writing novels, making money is a very specialized skill. But for some reason we treat this skill differently. No one complains when a few people surpass all the rest at playing chess or writing novels, but when a few people make more money than the rest, we get editorials saying this is wrong.

...Perhaps the CEO or the professional athlete has only ten times (whatever that means) the skill and determination of an ordinary person. But it makes all the difference that it's concentrated in one individual.

...prices are determined by what buyers want. People like baseball more than poetry, so baseball players make more than poets. To say that a certain kind of work is underpaid is thus identical with saying that people want the wrong things.

Well, of course people want the wrong things...It's lamentable that people prefer reality TV and corndogs to Shakespeare and steamed vegetables, but [is it] unjust?

...If there is enough demand for something, technology will make it cheap enough to sell in large volumes, and the mass-produced versions will be, if not better, at least more convenient. And there is nothing the rich like more than convenience. The rich people I know drive the same cars, wear the same clothes, have the same kind of furniture, and eat the same foods as my other friends.

...in a modern society, increasing variation in income is a sign of health. Technology seems to increase the variation in productivity at faster than linear rates.

...The only option, if you're going to have an increasingly prosperous society without increasing variation in income, seems to be...that people will create a lot of wealth without being paid for it. That Jobs and Wozniak, for example, will cheerfully work 20-hour days to produce the Apple computer for a society that allows them, after taxes, to keep just enough of their income to match what they would have made working 9 to 5 at a big company.


As an illustration of people wanting the wrong things, I would have used the fact that New York Times readers prefer Robert Frank's sophomoric column to the work of Paul Graham. However, my guess is that years from now, Paul Graham's words will still be worth something.


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CATEGORIES: Income Distribution



COMMENTS (7 to date)
Scoop writes:

Graham's argument doesn't really address the primary critique of executive pay. Other than for reflexive egalitarians, the problem isn't the raw dollar figures, it's the system that lets management do so much to choose and control the board members who are supposed to be choosing and controlling the executives. If reforms are made that let actual shareholders choose and control the board, which in turn chooses and controls execs in the best interest of shareholders, all the outrage melts away -- except perhaps in the pages of The Nation.

conchis writes:
"As an illustration of people wanting the wrong things, I would have used the fact that New York Times readers prefer Robert Frank's sophomoric column to the work of Paul Graham. "

Wow. Haven't read Frank's column yet, but if it's logic is worse than paras 1 and 3 of the Graham excerpt above, it must be pretty bad.

Barkley Rosser writes:

Arnold,

I will weigh in to support both of the previous commenters. Do you really want to defend the increase by an order of magnitude over the last 20 years or so of the gap between the average worker and the average CEO? Does this not in fact reflect a huge principal-agent problem with a lot of quid pro quo backscratching of CEOs of each other?

And, one can disagree with Bob Frank all one wants, but his arguments are pretty serious, not exactly sophomoric. Calling them that is itself a sophomoric thing to do.

Josh writes:

Barkley, et al,

If CEOs are really stealing money from shareholders (I'm assuming that's what you're implying when you say "quid pro quo backscratching of CEOs of each other"), then why do people continually invest in the stock market at such incredible rates? If every time I went into a store I got robbed by the owner, I think I'd eventually take my money somewhere else. Yet companies with high executive compensation don't seem to have trouble attracting investors. Why wouldn't these people - who you seem to think are getting robbed - take their money elsewhere?

Nacim writes:

I love how Robert Frank compares the government to a bank robber in the opening paragraph. I'm going to use that from now on.

Barkley Rosser writes:

Josh,

Well, let's see. The DJI has finally made it back up above where it was in early 2000, but the S&P 500 still remains below that level, and it will be years, maybe decades, if ever before the NASDAQ gets back there. In fact investors have been going elsewhere, stock markets overseas where the CEOs are not so overpaid, and which have mostly outperformed the US stock markes.

mike writes:

Interesting piece...sadly it was also very elitist and ignorant of the reality of economic life for the majority of people in this country...I have had the rare gift of experiencing both wealth and extreme poverty in my life..it changes your perspective a lot..You see people and current events quite differently after such an experience. Sadly, it does not appear to me that the author of this piece had the foresight to take his silver spoon out of his mouth before he inserted his shoe...
I have no problem paying somebody what they are worth...but come on!! How much is one person worth?? I cannot believe that the CEO is worth ten or twenty thousand times more than the cleaning woman is worth..Not for their personal contribution to the company or as a human being, but the cleaning woman is treated as FAR LESS than Human by her supervisors and the CEO who treat their pet cockerspanial better than her [and spend more money on the dog too]...why is she denied the ability to get something as simple and basic as health care or medicine?? Why can she NEVER ever buy a home on her salary (you try to live on $7/hour on one salary and then judge for yourselves)..is not a home and medical care a basic right that everyone should have access to?? What about her kids?? What did those children do to diserve to be denied medicine, good food, access to a physician or hospital, preventative medical care and dental care?? How about the chance for those kids to get an education or go to a University... Why is that cleaning woman worked to the point of total exhaustion while being paid the minimum possible wage...she really is NOTHING in the eyes of those she cleans up after...Why does she work all her life to simply survive..never having anything except food and a few rent reciepts and a worn out car and too many bills to pay...Why is this same CEO paid more in an afternoon than this cleaning woman will make in a LIFETIME...They both are doing an important job for the same company...How about we DO take back some of the wealth and distribute it differently...more humanely and fairly...I think it reasonable that the CEO should not be paid more than 20 times the salary of the lowest paid employee...I have no problem with a bonus for preformance, but most bonuses today are paid weather the CEO is great or runs a company into the ground...That is where shareholders should have the vote..annually they need to vote yes or no "did the CEO the directors the boardmembers or the upper management do enough to deserve one single cent more than their base pay?"...If shareholders were given that choice I think the answer would be quite clear...How about something being done for the employees of that company...they should have a no confidence vote...then their pensions will not be stolen from them and they will not be cheated out of what they were promised by these same CEOs and board members who can figure out new ways to pad their pay by destroying the lives of their own workers..How about these business leaders being offered the same pension plan...then perhaps they would do what was in the best interests of more than themselves for a change...
Yes I am disturbed by what I see today...It should be a requirement of all business school graduates to take a course on ethics and morality since they obviously have never been exposed to these quaint old fashoned concepts...I fear that it may be too late however...at least for this age of aquisitors...
As for the distribution of wealth...beware...as our elites continue to concentrate greater and greater wealth and power into the hands of the few, it gets far more difficult for the other 90+% of the population to survive..at some point the elites will get so disinterested so crude and myopic so currupt and greedy that they push just a little too far..at that point they could easily discover that their grip on the throat of the masses is slipping badly...revolutions still can and do occur..they have many times thru history...and the same basic dynamics are setting themsleves up again right here in America...the rich have gotten far richer in the last few years and the masses are getting nothing but debt slavery, taxation, inflation and official indifference and contempt from the power elite... Wake up and look at the vanishing middle class and desperate working class...the people ARE getting pushed into a corner and they are restless...next time there is a price hike at the store and your cleaning woman cannot afford to buy bread for her children...you had best offer her a raise...not cake...

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