Friday, 6 January 2012

In Defence Of The Free Market

I made a comment on CEO pay being just fine.  I had a thoughtful individual make some points (bold), with my responses below:

It does not stand to reason that we should see justice in the distribution of wealth as it stands. (re: CEO pay @ 189 times higher than average worker pay).
I disagree with the idea that someone is entitled to earn wages of such magnitude based solely on their place in the hierarchy of a complex system such as a corporation.
I disagree with attributing a necessary connection between 'justice' and a 'gap' (in pay). For example, say Susan takes the position, "gravity lacks justice".  Lenny asks, "that's odd, why Susan?"  Susan explains, "sure, gravity allows some to juggle enabling balls to fall, crowds to cheer and people's hearts to be warmed, but I know a group of people who crashed in an airplane, and if gravity was not so cruel, they would have had a soft landing…therefore gravity lacks justice."  My point is simple. We cannot necessarily look at a gap (exorbitant pay vs. low pay or cheer's vs. cries), target the culprit (gravity, free market) and claim an injustice.  In some cases we could, but not necessarily.  Therefore, let's look at the 'culprit' behind these exorbitant gaps of pay…the free market.  Like gravity, there are certain 'laws' governing the free market, chiefly: private individuals/corporations trade goods and services at prices set though supply and demand.  The means of production and distribution are privately held.  I would argue the free market and gravity are both 'good'.  If Joe pushes Jennifer off the cliff because Jennifer cheers for the Montreal Canadians, we don't look to 'gravity' as the culprit.  We don't look to pass laws to prevent cliffs from existing.  Gravity was the mechanism behind poor Jennifer's fall, but we both know who is responsible: Joe.  The free market provides choice within the framework of legal protection of individual rights and freedoms, and private production of goods and services.  It is not the culprit.  People being idiots is the culprit.  And idiot people exist regardless of the 'system' they are under.  I understand people can choose to use the free market for evil…and they do.  However, using something for evil, does not make it evil..that is a simple logical fallacy.  Ted bashing his wife's face with roses make his actions evil, not the roses.  People's choice to operate without integrity under a free market makes them lack integrity, not 'the system' inherently lacking integrity. 

I would submit top CEO pay being so high is not any more unethical (pending they did not break any laws) then average pay. 
Here are the similarities between top CEO pay, and average worker pay
1. Both CEO pay and average worker pay was based on an agreement between employer and employee.
2. Both CEO and Worker has a job description outlining their responsibility for compensation.
3. Both CEO and Worker 'do well' at their job
4. Quality of performance determines pay within a free market for high, low income earners.  If this rule is violated, bankruptcy typically follows (endless examples).
5. Bad choices for positions exist with CEO's and employees.  The free market penalizes companies to the degree and influence of the bad performance of people hired.
6. Pay increase comes from re-negotiating wages of both top CEO's and lower income earners.
7. If the 'top CEO' does not like his (chiefly men on the list) re-negotiated pay, he can choose to leave.  If a lower income employee does not like their pay, they can choose to leave.  There is no legal law forcing either a top CEO, or a lower wage earner to stay and work at a place.  Supply and Demand works within the free market to 'pay people what they are worth'.

The common denominator is private companies agreeing to compensate an individual based on a mutual agreement. 
What gives a company the right to pay you $32.50 this year, instead of $29.75 from last year?  The free market allowing personal exchange of time for money based on supply and demand within the free market.  Cool.  What gives a person the right to earn $32 500 000 this year from $29 750 000 from last year?  The free market allowing personal exchange of time for money based on supply and demand within the free market.  Cool. 
It's the same 'justice' (if you want to use that word), mechanism that allows somebody to get a raise, pay decrease or worst case terminated.

So, nobody is 'entitled', contrary to your comment above.  It is based on an agreement between employer and employee.  People at all wage levels can be hired on 'entitlement'…and I have found hard and fast that customers have little 'mercy' for poor performance based on entitlement…so companies that hire on entitlement can and should be punished by a free market unwilling to pay for that 'entitlement' service.  It is not 'solely based' on their hierarchy within the company.  If a zombie were to have 'made his way up' to CEO (to the shocking surprise of every person watching), does the board keep him there after they learn he is a certified zombie? Do they say, "well, he is now our CEO and is therefore entitled to earn wages of huge proportions."?  NO!  They say, "he is a zombie, failing to do his job, he's fired.  The company is out for profit, so a zombie who fails also violates our need for profit." It is a contradicting statement to say that a corporation is out for profit (said below) and pays solely based on place in hierarchy. If the sole reason is 'place in company', the performance for profit is by definition not a reason.  If performance violates profits, do we still keep the CEO and violate our 'rule for profit'?  If yes, we are not just 'out for profit'.  If no, then the sole reason for hiring/paying CEO is not solely place in company…can't have it both ways.

Top CEO pay is structurally the same as average pay.  The free market chooses based on an agreement between owner and employee governed by supply and demand.  It is no more 'wrong or unjust' for Frank to make millions as it is for you to make thousands.  It is the same dynamic at work.  If we decry, 'unfair advantage', 'favoritism', 'sexism' or any host of injustices, share them and someone will likely be able to articulate how they fail to constitute a defeater to a free market being a basic good thing.

Therefore, as 'just' as it is for us to agree to $30k/year based on supply/demand so to is it as 'just' for Debbie to earn $30 million based on supply and demand. 

You would call this (incredible pay) an achievement or success, but what gives a man the right to control so many others?
What do we mean by 'control'?  Do we mean lead by directing others to perform to best serve customer? If so, people choose to accept direction when they take on a job description for agreed upon pay.  An individual using their free will to make a choice to allow an employer to direct them 'gives' that employer the right to direct them, and this is not bad.  It's based on a mutual agreement.  Mommy is grocery shopping and asks a stranger, "Sir, can you open the door for me?  I got my hands full." The stranger uses his free will to say, 'sure', then obeys the request.  Two parties exercising free will to mutually choose to offer/exchange time and talents is good, not bad.  Nobody is 'exploited' because there is mutual fee will coming into agreement.   

Power over countless people's lives and over countless resources (nationally or abroad), and all within the legal framework of our "free market". Is this power morally, ethically, socially justified?
Power is limited to job description and mutual agreement.  Resources is based on private ownership.  Legal framework of free market and protection of rights and freedoms is our law.  Morally, ethically justified? I would argue yes. And this would be based on a basic worldview (another post).

The bottom line is that the CEO's have no room for conscience when decisions need to be made. The love of fellow men is not included in the equation. Business management at that level is about profit, survival, stockholders' interests, the machine begins to look like what it is. It has no love.
They do have room for conscience.  Acting ethically and valuing people can easily be done while making profit. I argue, the best way to make a long term profit.  However, the company is about trading goods and services, not love. That is correct.  Gravity is about pulling us towards the earth…not about love either.  I think there is a God behind gravity who is love (i.e God who put gravity in place for our benefit).  Similarly, God gave us a platform to create, grow, develop and learn, within the context of free will and protection of private property/personal rights/freedoms.  The free market is a good expression of our ability to exercise the said mentioned freedoms (how socialism fails to do this, another post).  When the natural result is profit, you are right, stockholders get it (that is, what is not reinvested or bonused out…they also get the losses).  Now the question becomes, personally, what do they do with their wealth?  Are they going to pull a Bill Gates and give billions away, or horde and keep only for themselves? What a tragedy if the latter.  It's not the free markets job to love. That would be people's job. My objective as a CEO is to serve customers and get results.  I do this within the context of helping people and (trying my best) to value people.  I try to love people by valuing them and enabling them to release the gifts and abilities inside of them.  A benefit of releasing these gifts is often a satisfied customer and increased compensation to those advancing.  To me it is simple logic, do people grow, get smarter, take on more responsibility  and make the company more money when they are valued, or devalued?  I say valued. Let the free market be free. If anyone wants to work at a company where the focus is on valuing people and making a profit there are some 'free market' options:
1. be thankful you work at such a place
2. be the change at the place of work you want to see in others
3. leave and find a company that values people and makes a profit
4. start your own company that focuses on valuing others while making a profit


  1. Apologists for highly paid CEOs argue they are merely getting the pay they deserve for their talents. Their pay is determined freely by the laws of supply and demand in the marketplace. Right?

    CEO pay in the U.S. has grown to become 364 times the average worker's pay. It was just 40 times the average pay in 1980. It's hard to imagine that top leadership skills have grown so much scarcer in the past 27 years.

    Face it, we're getting scammed by the very corporations that used our tax dollars to stave off bankruptcy.

  2. Just a question Ryan - how does one start their own company? You started one - tell us how you did it. I don't know that someone making 35-40 a year would have that option.

  3. glad to see all these leftists are so angry at Al Gore's big money scam, right?, NO?, but they are angry at Micheal Moore and his excessive millions?, no again, what about fraulent hollywood millionaires who chirp about climate change and then fly around the world and live in giant mansions, no? What about over paid union hacks, probably not. The logic of the left is really non existant

  4. 11:43 I lothe tax dollars rescuing private companies...but 99% of companies do not get that...what do you mean? You point offers little by way of instrucing flaws with argument.
    CEO pay was not 364 times greater. Perhaps 'top CEO pay' was...

    12:47, will do a post on it sometime...also, I started company on $12/hour from old job. Made $0/hour first 2.5 years.

    14:03 Michael is part of the 99%, didn't you hear him tell us so??? ;)

  5. Your blog name almost discouraged me from reading on. Expecting Bush conservatism or Progressive Conservatism I was surprised by and very appreciative of your POV. To the article itself, I'm one business owner, CEO, mechanic and toilet cleaner who isn't paid more than I deserve, hardly anything in fact, because my motivations and practices are not directed toward financial rewards. I wouldn't trade places with George Soros et al at the risk of losing my soul - that is God's approval and my customers' respect.


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