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.