There is this thing in economics called Marginal Productivity Theory. It claims to show that in a world of perfect competition, everyone makes exactly what they are worth. So if a CEO makes $30 million per year, that must be because he adds $30 million per year to the economy. It doesn’t really matter whether the theory is true, of course. There is no such thing as perfect competition in the world. This is something that constantly amazes me. Physicists deal with idealized systems because it is often the case that real world systems can be approximated that way, or controlled to be that way. But economics, which is a social—and therefore, practical—science has many practitioners who make the most ridiculous assumptions about the state of the world.
I came upon Marginal Productivity Theory because I’m trying to get my head around what I think is a fundamental flaw with a pure capitalist system. What I have seen all the way through my working life is that even on its own terms, people do not get paid what they are worth. The big example of this is the CEO who costs his corporation millions but ends up with a large bonus. But let’s not think that large. In general, the way the economy works is as a lens to magnify the differences between people. I have seen this kind of thing often:
What I’m showing here is just an example, but a 1% advantage in productivity can easily produce a ten-fold increase in compensation. That’s not the point that I’m making, however. Rather, I just want to show the economic system does do this to one extent or another. And the effect gets particularly ridiculous on the upper income margin. But in America, we just assume that the there is some kind of linear correlation between someone’s value and their reward. But this is most clearly not the case.
Consider a winner-take-all market like screen acting. If George Clooney had never been born, then there would be someone else in his position. His value to the economy might be slightly less, but it would be close. Instead, it is quite possible that the Slightly Less Wonderful George Clooney Replacement doesn’t even make a living as an actor. But one thing is for sure, because of the lensing effect of the economy, this guy isn’t making anything close to what Clooney makes. But any fair economic system should only reward Clooney for the marginal improvement that he provides over the Slightly Less Wonderful George Clooney Replacement. (Note: I’m a big fan of George Clooney; he’s the Cary Grant of my generation.)
All of this is to counter the conservative mythology that people are worth exactly what they are paid. I mean this in strictly economic terms. I’m not even considering all the hobbies and so forth that people have that add value to the society but are never compensated. Unfortunately, the neoclassical economists are convinced that their simplistic and unrealistic assumptions are valid. So they claim that of course the economy is perfectly efficient. Never has a tautology been so widely believed! Meanwhile, in the real economy, we have all kinds of inefficiencies and distortions. But given that this theory tells the rich that they absolutely deserve everything they have and more, it is accepted as fact.
If we are ever to make the economy relatively fair, we must get past this idea that the markets are perfect and someone’s pay is representative of their economic value. This is one of the most damaging ideas in our society.