The Myth of Being Paid What You’re Worth

Jared BernsteinJared 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:

No question, skills and your ability to contribute to firm output often plays some role in pay setting. But here’s what else matters, and increasingly so as you go up the pay scale, and even more increasingly so in our era of heightened inequality: power, connections, your race, your gender, and vast amounts of money in politics and policy.

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.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

11 thoughts on “The Myth of Being Paid What You’re Worth

  1. Your ‘single example’ of CEO pay deserves more respect than you yourself give it. I don’t know if someone has done the detailed homework on this stuff, but it sure seems like contemporary CEO pay has no relationship to the value of the CEO’s services to the company.

    If the hypothesis you are discussing is true, then CEO pay ought to exemplify it to a greater extent than everything else. But it looks like the correlation between measureable excess profit and CEO pay is far from one, and maybe even negative!

    I may be entirely mistaken, but I doubt it – if high correlations between these quantities were easily found, they would have place of pride on every right-libertarian site, day after day.

    So not a single example, but a conclusive counterexample. Anyone who disagrees is officially Refusing to Deliberate.

    • That’s a good point, and I don’t doubt that you are correct. But I didn’t want to say more than I could justify. Another thing that really gets in the way of thinking that CEOs are worth their pay is that they aren’t paid as much in Europe and Japan. Dean Baker seems to think that the main thing is that CEOs set their own pay by being able to determine the company board of directors. It might help if labor were accepted as a stakeholder in companies. Regardless, the rich and powerful are always able to game the system in their favor. Why then, do conservatives think it is so important to protect the rich and powerful? I really don’t get that.

  2. Other things:

    1. As you formulate it, marginal product theory is falsifiable, as is the assumption that consumers are rational.

    2. Your author could have added the ability and inclination to self-promote to his list. Every year, it seems that this is becoming the main determinant of success – at every pay scale large and small. “Networking”. “Getting ahead of the other candidates”. “People skills”. These things don’t track exactly, but strongly co-vary, with initial economic circumstance.

    Consider a reasonably intelligent but not brilliant college student. What is easier and more economically advantageous – working hard and learning a lot, or gaining the ability to convince others that you have these traits?

    We’re incentivizing sociopathy and monetization of friendships. And the centrist neo-liberals, more than the conservatives, seem to be on the leading edge of this negative trend.

    • You’re so right, and that’s been going on for a long time. It really disturbed me when I was a college kid in the ’90s. Now, sadly, I take it for granted . . .

      • And regardless of the levels, I think it is worse now. Because now this sort of thing goes along with the widely held believe (Especially among the poor!) the the rich deserve what they get. In the past, at least the poor were allowed to believe (Rightly!) that they are poor because they were born into the wrong family.

        • It IS widely believed among the poor. I made a joke during a staff meeting the other day about Trump being a repeat-screwup, and you could hear a pin drop. (My jokes usually go over pretty well!) You don’t insult the rich.

          Now on the other hand most poor people believe they should have better pay, better benefits, better protections from predatory service providers (phone company, health insurer, landlord, etc.) If I talk to co-workers about these things there’s little disagreement.

          It almost seems as if people believe that the Trumps, that any rich, are celebrities, and celebrities deserve to be free riders. That being a free rider is everyone’s dream, and hence anyone who’s achieved it is better than the rest of us.

          It represents such a paucity of imagination — it is a truth universally acknowledged that the slings and arrows of outrageous inequality fall heaviest on the poor. (Shakes and Jane in one overheated sentence!) But the poor shouldn’t demand respect for their work. Instead, they should aspire to be sociopaths. Which is the soul of almost every “reality” show — how to be an utter selfish jerk and get away with it.

          • This whole thing reminds me Nickel and Dimed. There was one quote from one of the housekeepers in it. The first half of what she said has been widely quoted by conservatives. It had to do with how she didn’t resent the rich people whose houses she cleaned. But then she went on to talk about how she really thought that she ought to have the economic freedom to take a day off when she was sick and so on. It’s interesting that conservatives could read that whole quote and just block out the important part, “The poor don’t care that the rich are rich! That’s all we needed to know. Now about that tax cut…”

            Yes, don’t do that with British authors of different centuries. There’s a law I think.

            • Seriously? That MAKES ME SO . . . grr, grr, go to the calm place, remember that 100 years from now, right-wing hacks from today will be utterly forgotten if not cited as examples of pure delusion. But, still, grr, grr, that MAKES ME SO

              • And there will be conservatives then saying, “Well, obviously George Will was a vile idiot. I would never think such things. But…” Actually, that will happen in 20 years. It doesn’t take long for even conservatives to see that they vile and idiotic.

    • I’ll have to think about that. I think that marginal product theory is indeed falsifiable. The reason it hasn’t been disproved is because those who use it use it so facilely. But there has got to be a way to get very serious about it. And the only people who take it seriously are the neoclassical economists whose models are built on the idea that it is true. Thus it isn’t surprising that the models would prove this. It’s a tautology.

      Yeah, I think you are right about self-promotion. Just look at Donald Trump. Or more broadly, look at how big finance has become in our economy. Moving money around is really important to the economy. But we’ve seen ridiculous levels of finance. And that’s all about the “right kind of people” greasing each other’s hands.

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