Jared Bernstein recently wrote about one of my favorite issue, People on Third Base Claiming They Hit a Triple, or Marginal Product Theory at Work… Not! The idea of marginal product theory is that everyone is paid what they are worth. It goes something like this: if I start working at a factory and as a result, it’s productivity goes up $50,000 per year, then that is more or less what I am worth and more or less what I will get paid.

There’s just one problem with the theory: it isn’t true. Bernstein offered up the case study of Jeb Bush. After leaving the governor’s mansion, Bush and his family made a whole lot of money. Now, in our cynical society, we don’t tend to blink an eye at this kind of thing. In fact, to a lot of people, it just makes sense that ex-politicians ought to be able to cash out. But here we aren’t really talking about Eric Cantor getting a lobbying job, where he most certainly is worth all the money that he is paid. (Such lobbying is ultimately bad for the economy, but that’s a different matter.)

Bernstein put it exactly right:

But I think there is an easier way to think about it. Consider the fact that in the 1950s, CEOs tended to make 30-40 times as much as the average employee at their firms. Now, they make 300-400 times as much as the average employee at their firms. If anything, the films were more profitable then. Yet they are making ten times as much now. Either the “free market” then was greatly underestimating how much they were worth or it is greatly overestimating how much they are worth now. Regardless, the “free market” is nothing like infallible.

I understand that a single example doesn’t disprove the theory. The marginal product theory is something that is used in models. Clearly, in individual cases, people will get more or less than their marginal product. But very clearly, when we are talking about a class of workers (CEOs), there is something besides their value to the company that is controlling their pay. And that thing is power. CEOs have the power now to demand more money. Similarly, when unions had any degree of power, they could demand a greater share of profits for workers.

This reminds me of a great difference of opinion that I had with the vast majority of libertarians when I was still a fellow traveler. Most libertarians are aggressively anti-union. But it was clear to me, even as a libertarian (because I wasn’t a total idiot), that the ability of workers to organize was necessary for the “libertarian utopia” to function. You couldn’t have a situation where management was able to organize itself but workers were left with “every man for himself.”

What’s ridiculous about the marginal product theory is that it constructs a world apart from everything but economics. What’s more, it assumes a “free market.” But there is no such thing. The “free market” is defined as a system that gives excessive power to the owners of capital. But even that doesn’t exist in the real world. People get extra economic benefits for things like their fathers being president. And it goes right down the line from there. People who are good looking make more money, even though there is no marginal product for looking great on the assembly line.

In general, economics is not a real science. There are certainly scientific aspects to it. And there are economists who do good work that provides insight into how the economy works. But by and large, economics is just a specialized form of apologetics for the power elite. And that’s not just sad; it is incredibly harmful to our society.

I was listening to a little bit of Majority Report on Monday, when Sam Sader was interviewing Georgios Giannakopoulos about Sunday’s vote in Greece. It was all quite interesting. But there were two things that Seder brought up that I thought were worth discussing a little bit.

The first thing was a common analogy that anti-Greece people in Europe say, “How would you like it if the people of New York had to bail out Texas?!” As Seder noted, we already do. That’s what a real union does. It isn’t every state for itself. California pays a lot more in taxes per capita to the federal government than it gets back in benefits. Part of that is just that we have a relatively young population, but that’s just part of our general system that money goes to where it is needed. The argument that people are making in Europe is a big part of the problem. They want a united Europe, but not if it has to cost their particular country any money.

Associated with this kind of thinking is something that has been bugging me for years about rhetoric against Greece. That is this idea that the European countries are bailing out Greece. To begin with, that isn’t even true. All that the loans from the EU have done is to cause Greece to sink slower than it normally would have. It’s kind of a slow motion torture. But regardless, almost none of the money has gone to Greece. Instead, it has gone to the reckless banks that loaned Greece money in the past. It drives me crazy that everyone focuses on borrowers, when borrowers are not expected to be conservative. The bankers are supposed to be the “adults” in a lending situation. But it is always the bankers who are portrayed as the wounded party, as if we don’t all pay more in interest to make up for precisely these kind of bad bets that the banks know they sometimes make.

That leads us to Seder’s other comment. He noted that rather than “New York bailing out Texas,” the better analogy is the bailout of the banks in 2008. In that case, the government could have bailed out homeowners. After all, if it had stopped all the foreclosures, that would have indirectly saved the banks. But instead, the banks were saved. Now I understand: from a practical standpoint, there might not have been the time to do that. But the truth is that after the banks were saved, almost nothing was done for homeowners.

The government’s position seemed to be that it could give hundreds of billions of dollars to the banks without much thought. The banks were, in other words, the “right” kind of people. But when it came to helping out homeowners, the government saw them as the “wrong” kind of people. Troubled homeowners had to go through all kinds of contortions to get relief, which meant that most of them never got any. But it wasn’t just the government. To a large extent, the people agreed. I’m constantly amazed how the people in mass identify with institutions that on an individual basis are their tormentors.

The best example of this, of course, is the Tea Party. It started, for the umpteenth time, as a reaction to the idea of bailing out troubled homeowners. The actual bailout of the banks was not what got the Tea Party started. Sure: they complained a lot about the bank bailouts. But that was long after the hundreds of billions had been given out. Where were they when that was happening? I don’t know. Partly, it was just that Fox News and the Koch brothers weren’t around to fund their outrage. But it was more that they just didn’t care when bankers were getting bailed out.

It’s the same thing in the EU now. Greek would have been best to just default on its debt. I’ve been saying that since 2010. Everyone knows that at the very least, the bankers will have to write off some of Greek’s debt. And it may end up a full default. So what have the last five years been all about other than giving hundreds of billions of euros to the bankers? The people of the EU should be angry at the Troika for wasting their money on rich German banks; Greece has only been harmed because of these bailouts.

Update (Before Publication)

Paul Krugman addressed that “New York bailing out Texas” analogy: