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Walter Hudson

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November 7, 2013 - 11:00 am

eat_the_rich

PJTV’s Bill Whittle uses a great illustration that I’m about to shamelessly rip off. Imagine that you work in an office, occupying one of many cubicles. One afternoon, the boss calls you into his office and tells you that you’ve done such an incredible job that the company has decided to provide you with a $5,000 bonus. In that moment, how would you feel? Pretty darn good, right? Your day just got $5000 brighter! Your mind might go straight to what you could do with the money, the vacation you could take, the bills you could pay, the possible boost to your savings or investment accounts. You’d probably swell with pride at the recognition you’ve earned and head out to tell a friend and co-worker the great news. He would listen intently, then smile and tell you that he and everyone else earned a bonus too — only theirs is $10,000.

Now how do you feel? What only a moment prior was overflowing joy and celebration instantly metastasizes into something wholly different. You actually feel worse than you did before getting an extra $5000. Instead of thinking about what you can do with the money you got, you think of what you could have done with the money everyone else got. From a dark place, you acknowledge that you’d rather see no one receive a bonus — including yourself — than see others get more than you.

There’s something about the human heart which fosters such envy, an emotion so powerful that it can drive us to work against our own interests in pursuit of equity. It’s better that everyone get the same, even if the same is nothing, than for some people to get more than others. So that dark corner of our heart proclaims.

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Speaking to such envy within our souls, the above video concisely makes the Left’s case against wealth inequality. Even the term “wealth inequality” provokes the green-eyed monster. Inequality connotes a lack of fairness, an injustice, something wrong which properly ought to be set right. The video seizes upon that sense of unfairness to advocate for some unspoken solution — not “all the way to socialism,” but certainly in that direction.

The lynchpin of the piece is a subjective “ideal” established by an unnamed Harvard business professor and economist who asked 5,000 Americans how they felt wealth in the country ought to be distributed. Before considering any further analysis, that methodology ought to signal a fatal flaw. Rather than establishing objective criteria by which to judge how wealth ought to be distributed, we’re looking to whim to set a wholly arbitrary “ideal.”

From there, the video’s creator seeks to shock us by comparing real wealth distribution to the public’s imagination. The 80% of Americans who earn the least earn only 7% of the total income in the country, while the 1% of Occupy bane bring home 24% of the national income. That’s obscene, right?

Of course, missing from the video’s analysis is any consideration of how people come to earn their wealth. The narrator briefly acknowledges the role of productivity in the economy and how incentives must be maintained to foster it. Even so, he adopts a condescending tone which suggests all that free market stuff might be nonsense. Meanwhile, the fundamental concept of value goes largely ignored.

Do these guys produce anywhere near the value of Mooby's CEO?

Do these guys produce anywhere near the value of Mooby’s CEO?

To the extent the narrator does evoke value, he expresses the labor theory which perceives value as a measure of effort. According to the labor theory of value, people should be compensated for working hard, regardless of whether their work produces anything of use to anyone willing to pay for it. The narrator expresses this when addressing the difference in income between a CEO and an average corporate employee.

I’m sure all of these people have worked very hard for their money. But do you really believe that the CEO is working 380 times harder than his average employee – not his lowest paid employee, not the janitor, but the average earner in his company?

That question proceeds from the assumption that earning more can be justified only if someone works harder. Surely, any given CEO probably doesn’t work 380 times harder than his average employee. But it shouldn’t surprise anyone to learn a CEO produces 380 times more value than his average employee. What the CEO does, regardless of how much effort he expends to do it, commands a higher price in the market than what his average employee does. Let’s be clear what we mean by that. Someone — a board of directors — is willing to pay the CEO a certain amount for what he does, because they judge the transaction to be worthwhile. Virtually anyone can sweep a floor. A whole lot of people can pilot a cubicle. A slim few have what it takes to head a major corporation. We’re talking about simple supply and demand, the same forces which result in multi-million dollar contracts to professionally throw a ball.

The labor theory of value, a lynchpin of leftist ideology widely accepted throughout academia, much of the media, and our popular culture, fails the most cursory of tests. If a CEO were not worth 380 times more than his average employee, why would his board of directors pay him that much? No one is holding a gun to anyone’s head in this scenario. No one is forced to work or forced to pay. Market transactions rest upon consent and mutual benefit. So why would a board consent to pay a CEO one penny more than they are worth?

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What many folks seem to find obscene is the notion that one human being could be worth 380 times more than another. Yet, we’re talking about economic value here, not the value of one life compared to another. We who defend the market are not saying a CEO’s life has greater intrinsic value than his employees’, or that one should be granted legal privileges at the expense of the other. In fact, that’s the Left’s argument! They’re the one’s saying some people — the 99% — ought to be granted privileges at the expense of others. We’re saying every individual gets to keep what they earn, whether they earn $10,000 per year or $3,800,000.

In the final analysis, that’s the concept folks concerned with wealth inequality wish to avoid — earning. Let’s say three different prospectors set out to find gold, but only one actually finds it. Applying the labor theory of value, each prospector would be entitled to compensation on account of their effort, regardless of the fact that only one of them was successful. Would that truly be fair? Would the unproductive prospectors have actually earned pay?

True value isn’t defined by effort. True value is defined by the mind. Stephen King and I can put the same effort into writing a novel. That doesn’t mean we will each create something which holds the same value. One work will likely be better than the other. In the admittedly unlikely scenario where King authors a hit and my manuscript languishes in obscurity, has King taken something from me? Have I been somehow cheated? Applying the labor theory of value, the answer would tend toward yes.

Wealth inequality should not concern us unless it results from an inequality of rights. Does the top 1% pull in 24% of the nation’s income because they earn it, or because government violates individual rights in such a way that those with favored status operate from an unjust advantage? That’s a question worth investigating, and a point of potential alliance between grassroots activists across the political spectrum. Perhaps wealth distribution in this country would look more like the “ideal” imagined by Americans if individual rights were protected and individual judgment dominated the market.

Walter Hudson advocates for individual rights, serving on the boards of the Republican Liberty Caucus of Minnesota, Minnesota Majority and the Minority Liberty Alliance. He maintains a blog and daily podcast entitled Fightin Words. He also contributes to True North, a hub of conservative Minnesotan commentary, and regularly appears on the Twin Cities News Talk Weekend Roundtable on KTCN AM 1130. Follow his work via Twitter and Facebook.

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43 weeks ago
43 weeks ago Link To Comment
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44 weeks ago
44 weeks ago Link To Comment
Of course, the Marxian definition of value is ridiculous. All the work one cares to add willl not turn a mud pie into an apple tart; it remains a mud pie, value zero. By corollary, unskillful work can easily subtract value; an untalented cook can turn wholesome dough and fresh green apples, valuable already, into an inedible mess, value zero. Conversely, a great chef can fashion of those same materials a confection of greater value than a commonplace apple tart, with no more effort than an ordinary cook uses to prepare an ordinary sweet. These kitchen illustrations demolish the Marxian theory of value - the fallacy from which the entire magnificent fraud of communism derives - and to illustrate the truth of the common-sense definition as measured in terms of use. - Heinlein
44 weeks ago
44 weeks ago Link To Comment
Part II of my reply to KMan1

"Giving stockholders immunity from responsibility for corporate debts and civil judgements, not to mention criminal acts, concerned him as well."

If stockholders authorize criminal acts, they have no immunity, and not from conspiracy charges either. If they have not undertaken such a conspiracy, they should have no liability.

"In our time we claim to want to encourage small businesses and family farms, but in practice we do everything we can to throw roadblocks in their way--often at the bidding of the big dogs to thwart competition."

And the answer is undoing the New Deal approach to having the government manage or regulate the economy.

"I strongly suspect Smith would have had some things to say about today's incredible CEO pay levels. And many posting here would not want to hear those things."

I strongly suspect I wouldn't give a damn what he might say, if he was prepared to empower government to interfere politically in what should be a free market.

"In summary, to defend CEO pay rates compared to pay of rank-and-file employees is to defend an element of a system that one of the big advocates of free markets found abhorrent in his most famous work."

To the extent he thought people shouldn't be paid what the people paying them thought they were worth, he was no advocate of a free-market, was he?

"It isn't coincidence...better-paying jobs."

What's not coincidence, is that those CEOs were evaluated by the corporate boards to be returning more increase on shareholder's investment. Want a broad tariff on imports? See if you can sell that idea. Smoot-Hawley in particular thought it was a wonderful idea.

"Also note that often CEOs still get paid even when the company pulls losses or fails. It's all rigged."

To return the greatest value to shareholders, yes. And most of us are shareholders. If a CEO's efforts result in smaller losses than the board thinks would otherwise have been incurred, why shouldn't they be well paid?

"Given what Adam Smith had to say then, I think criticism of CEO pay levels is eminently fair."

Oh it is. It's that no laws about it are warranted.

If the laws creating corporate charters were re-written to require greater shareholder participation, this would not be a bad thing...

...Except that no such things as corporate charters should be required to end the idiocy of the jointness and severability of debt. The benefits of doing away with it are clear enough, it should be possible to do it merely by the contract implicit in doing business with persons operating with an openly stated condition of your doing so.
44 weeks ago
44 weeks ago Link To Comment
My Edit to my reply to KMan1's comment below having failed to post, I will post it here.


Nothing Smith wrote justifies any regulation occurring in law, beginning with the Sherman Act and from that to this day. Laws criminalizing theft by force or fraud are all that is required to restrain unscrupulous business practices.

"The irony in this discussion: do you know who first discussed the labor theory of value as the only way of comparing values of goods across cultures and different eras? Karl Marx? No. Vladimir Lenin? No. It was Adam Smith in Wealth of Nations, a book many claim to lionize but few have read."

The idiocy of the labor theory of value is observed by noting one of Keynes' original stupid ideas, that it would be worthwhile to pay people in a recession to dig and fill holes. Labor has been done, you are out the additional calories the laborers spent, and you have nothing of value to show for it--labor by itself is a dead loss. Money has moved, but to very little point whatsoever. What to labor at, and how and when to do it are everything which produce the value resulting from labor being done. The judgement of management--including the judgement that now is the time to bide--is what is worthwhile. That judgement to the greatest extent possible should be undertaken on solely economic and not political criteria. The stupidity of socialism destroys all, and communism does faster only by it's more pure application of the same essentially wrong principles.

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices…."

And no such conspiracy can long succeed, unless government is captured by business and empowered to enforce the conspiracy. The solution is less government power. You might take note from history, the successful adverse cartels are all sponsored by sovereign power; and the Sherman Act was shilled for by the daughter of an oil-man outmaneuvered and impoverished by Standard Oil--and that oil prices actually fell continually as a result of Standard Oil's policies.

"He foresaw, as had already happened with some royally chartered trading companies, that they could become effectively immortal "persons"."

Why should anyone care if they do? They are legal fictions, and in fact have no rights at all, nor any special legal privileges--except that their shareholders are privileged from the common law application of the jointness and severability of debt--a thing which by principles of laissez-faire, should be conditions of doing business which can be enjoyed by contract without the necessity of begging government for the privilege in a charter.

End Part I
44 weeks ago
44 weeks ago Link To Comment
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44 weeks ago
44 weeks ago Link To Comment

A better example for your essay would be professional athletes or movie stars. They earn what they earn based on a true arm's length transactions. They get it because they are worth it.

CEOs are another matter. Their earnings are basically arbitrary, because they control or heavily influence the process. The answer to your question, why would the BOD pay more than they are worth is, because it isn't the BOD's money.

An interesting contrast exists between the pay of executives in companies with no owner of a significant fraction of the company's corporate stock sitting on the board, versus those with the founder still around and active in the company. I can tell you from personal experience that the latter such will enjoy far more modest pay and perks than the former.
44 weeks ago
44 weeks ago Link To Comment
The irony in this discussion: do you know who first discussed the labor theory of value as the only way of comparing values of goods across cultures and different eras? Karl Marx? No. Vladimir Lenin? No. It was Adam Smith in Wealth of Nations, a book many claim to lionize but few have read.

Elsewhere in Wealth of Nations he says, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices…."

Smith also had deep suspicion of the forerunners of today's corporations, which were termed "joint-stock companies" in his day. He foresaw, as had already happened with some royally chartered trading companies, that they could become effectively immortal "persons". Giving stockholders immunity from responsibility for corporate debts and civil judgements, not to mention criminal acts, concerned him as well. Smith really preferred the small businesses and farms common in his time to large artificial structures. In our time we claim to want to encourage small businesses and family farms, but in practice we do everything we can to throw roadblocks in their way--often at the bidding of the big dogs to thwart competition.

I strongly suspect Smith would have had some things to say about today's incredible CEO pay levels. And many posting here would not want to hear those things. In summary, to defend CEO pay rates compared to pay of rank-and-file employees is to defend an element of a system that one of the big advocates of free markets found abhorrent in his most famous work.

It isn't coincidence that CEOs' pay has kept rising even as manufacturing and even intellectual jobs move overseas at their bidding, to enable ever fatter bonuses while Americans lose better-paying jobs. These executives live for the moment, even though eventually no one will be left in the US making enough money to buy what that business produces. Why don't shareholders stop this? Often the rules are rigged to keep stockholders from having any real say in pay levels, and for many large corporations investors such as mutual funds own much of the stock and play no role in any of the corporations whose stock is held. Also note that often CEOs still get paid even when the company pulls losses or fails. It's all rigged.

Given what Adam Smith had to say then, I think criticism of CEO pay levels is eminently fair. And you should be aware that even many people on the right have been raising the alarm about this disparity, some for over 30 years, beginning when that disparity was a lot less.
44 weeks ago
44 weeks ago Link To Comment
OK, I don't accept the labor theory of value, and God knows I've been lectured about it enough by union negotiators. And they were only objecting to directors, commissioners and governors making four or five times what the lowest paid people in their bargaining unit made.

That said, the "willing buyer, willing seller" theory only applies to the "little people." Very, very few of those multi-million dollar a year CEOs live in a free market. They exist almost entirely in monopolies or oligopolies where they have used government to limit or eliminate competion and to regulate their industry and product so as to guarantee their position almost without regard to improvements or innovations that if allowed to compete would force them to change or even fail. These "movers and shakers" have wholeheartedly endorsed the Democrats' fascism because they know that if they pay, the Democrats will let them play, and make sure nobody can interfere with their playing.

In a sane world much of the leadership cohort of the financial/banking sectors in 2008 would have been rounded up and shot and their wives and children sold into slavery. Instead, they placed their bets right and took an equity share in the US Government which has allowed them to be the only people in the Country not employed by the government who have propered since the Soros Junta took over.

The Republicans have become the party of small business, independent tradesmen, and non-union employees because they are the only people who have to compete for their livelihood. Whether it is the CEO whose family name and money, or having checked the right block on the EEO form, got him/her admission to a front rank prep school and an Ivy League school despite rather wits and no real accomplishments or the trust fund babies who sit on Boards of Directors, these people don't compete. Then the networks of "people like us" pretty much guarantees access to the best opportunities and keeps them there even if they are dismal failures. Frankly the inventer who came up with a good product, ran an efficient business and entered the market with a good model is no match for the CEO who has a frat brother at the EPA or the USDOL, whose wife has a sorority sister at USDOJ, whose family has close ties with a powerhouse law firm on K Street, and who has the President's COS on his speed dial.
44 weeks ago
44 weeks ago Link To Comment
"Very, very few of those multi-million dollar a year CEOs live in a free market."

Maybe there is a fraternity of CEOs who are insulated from job market competition but their companies are not necessarily insulated from market competition. The issue is more one of shareholder rights and activism.

Having said that, it is really hard to understand how the financial industries can pay so much money to so many executives and employees and still be profitable. Where is the free hand of the marketplace and the competition rushing in to undercut them by saying "we can do it just as well for half the fees". Major financial companies smell and acts just like monopolies or oligopolies. It may just be the nature of the beast or it may be government regulation and cronyism.
44 weeks ago
44 weeks ago Link To Comment
I'm not just talking about the CEOs themselves being insulated from competition, though they are, I'm talking about the companies as well. What industries have more than a handful of players in the US?

Since the end of WWII, and especially since the '70s, virtually every American sector and industry has consolidated down to a mere handful of significant players. That mere handful of players is happy to have economic and regulatory barriers to entry so that they don't have to innovate and compete and can work short workdays for large bonuses. If they work it right, they can have the government send over a SWAT team to shut down a troublesome competitor. Concurrently, the government has become such a factor in the economy that businesses, even whole industries, succeed or fail based on doing business with the government and how well they manage the regulatory environment. There is an entire "Third Sector" of businesses that exist totally as creatures of government regulation, e.g., utilities, most banking and other financial enterprises, exist solely or almost solely to do business with government, e.g., defense and aerospace, private prisons, most training and consultancy companies, or which rely on government regulation and permitting and/or funding for most or all of their existence, e.g., heavy construction, ship-building, health care. In the Third Sector, the efficacy of your PAC is far more important than the efficacy of the goods or services you produce.
44 weeks ago
44 weeks ago Link To Comment
You have a point about the industries that you listed. I spent my career in the technology and manufacturing spaces where competition can be fierce. Bigness and entrenchment does confer advantages but also creates inefficiencies and reduces agility. This is where the current regime's attack on small and medium businesses is really harmful to us all. It squashes the great engine of creative destruction that provides opportunity for the energetic and talented and improves the standard of living for all.
44 weeks ago
44 weeks ago Link To Comment
"... not “all the way to socialism,” but certainly in that direction."

This is the problem with Progressivism isn't it. The line between a free market based society and socialism is sloped - and slippery. No collectivist program or policy ever exhibits any stability - but rather they all move inexorably toward greater socialism, more central control, less claim on personal property and reduced personal freedoms. And to boot, they never deliver the supposed claimed benefits. In almost every argument I hear from the left my reaction is; why not go right to socialism and spare us all the self delusion?

BTW, This is a very fine article Walter. I would love to hear a logic-based rebuttal from someone on the left. Anyone? Anyone? Bueller?
44 weeks ago
44 weeks ago Link To Comment
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