Worshipping the power of the market

A couple nights ago, I had an argument with my father and brother at the dinner table. They were both very critical of me applying to work for unions and my father started getting into problems caused by raising the minimum wage. My father, like most conservatives, has what I believe is an unreasonable faith in the power of the free market.

Unfortunately, markets never function perfectly as they are supposed to in economic models, because pesky things like environmental variables and irrationality effect the decision-making process of the participants. Even when such factor are minimal, we are faced with a system in which is considered most functional when each person or entitity is acting with maximizing its own self-interest as the only goal. One of the problems that can result from this is described by ecologist Garrett Hardin in The Tragedy of the Commons (1968). However, I think the larger problem with this type of thinking is that it condones a system where millions of people in this country work full-time and are still unable to provide their families with a decent standard of living while others purchase fourth and fifth homes at The Palm Jumeirah. A world like this can only exist when one accepts the premise that it is morally permissible to have these desparities so long as people are compensated according to the value of their labor. While I reject this very premise, most conservative economics rest upon it. Yet, even if you can accept the concept in the abstract, I take issue with anybody who argues that people in this country are in fact compensated according to the value of their labor.

To illustrate my argument, let's take a look at professional sports leagues, where owners claim they need to institute salary caps because otherwise they will lose money and force the teams and league out of business. Nobody is forcing the owners to pay ever more ridiculous wages to their superstar players. If paying Shaq $20 million per season is going to cause you to be operating in the red (at least according to whatever twisted accounting practices the team is using), PAY HIM LESS! Fundamental rule of business, people: don't spend more to make your product than you can earn by selling it. Assuming pro sports teams use reasonable accounting practices (yeah, right), there are two explanations aside from competetive balance that can explain why the owners would need salary caps. One is that they don't understand the fundamental rule of business, but since all of them managed to make enough money in whatever other ventures they undertook which earned them the money to buy a professional sports team, I think we can rule that one out. The other explanation is that they are irrationally bidding superstar salaries beyond the true value those players add to their teams, much in the same way that we continue to see skyrocketing salaries for CEOs. Paul Solman did an excellent job of explaining why this happens during one of his appearances on News Hour with Jim Lehrer:

When Graef Crystal himself started as a compensation consultant in 1959, firms often paid CEO's by formula: A multiple of the average worker -- the old 40:1. But then they started relying on consultants to survey other firms yearly to set their own CEO's pay. Crystal once polled 100 firms: Where do you like to position your CEO, the average, below the average, above the average. Well, one-third of the companies said, "We want to position our CEO in the top 25 percent, that way we can get better talent." Two-thirds of the companies said, "We want to be at the average." Not one company said we want to be below the average. So you actually have the Lake Wobegon effect: If one-third of the companies are chasing the top 25 percent and two thirds are chasing the average, you can't even catch the average. Every year, what do you know? We're behind again.

Obviously, bringing executive pay under control is only part of the equation in ensuring that workers at the bottom of the economic pyramid earn a wage which can provide their families with a decent standard of living. Although I do not advocate outright socialism, I think there needs to be a fundamental shift in the way people see the economy. A healthy economy should not be judged by the total output produced, but rather by the marginal wellbeing of all its participants.

Whew. That didn't end up where I intended when I started writing this post. Maybe I'll try again later.