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Saturday, November 29, 2008

Capping executive pays

Does it piss you off that some individuals - the very individuals who're now being held responsible for the financial mess - are getting paid an awful lot of money? One of the few things I've learned during my studies is that in an ideal market economy the bosses, just as their subordinates, are paid according to their marginal productivity. According to theory, this is an inevitable result of competition. But we often do not live in an ideal market economy; there just is not enough competition and this argument is often used to refute the idea that markets should be allowed to allocate wages/pays. This, of course, is stupid. Even if markets are not always fully efficient (or "perfect") two things still count:
1) Even if markets are not "perfect" in market economies, they're still quite perfect enough.
2) Attempts by the government to increase competition by means other than laissez-faire often fail and not only because bureaucrats lack relevant information but also because of rent seeking. Some producers seek ways to influence politicians in a way that'd result in a better market position but less free market capitalism. As has often been said, the so called capitalists are often the worst enemies of capitalism. Excessive government interference is not an uncommon result which is not exactly a wonder considering the fact that the public is driven by populist misconceptions ("ending agricultural subsidies will leave you starving", "speculators are responsible for price increases" etc.) about economics.

So how would limiting executive pay help anyone? If governments feel uncomfortable using taxpayer money on bailing out rich people then maybe they should not be doing so in the first place. Is there any logic behind the idea that less money attracts better people?

And then there's the moral side of the story: envy. Spiteful, petty individuals are for capping executive pay simply because they can't stand having a neighbour who's got a bigger house.

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