In an era when our media and even our education system exalt emotions, while ignoring facts
and logic, perhaps we should not be surprised that so many people explain economics by “greed.”
Today there are adults—including educated adults—who explain multimillion-dollar corporate
executives’ salaries as being due to “greed.”
Think about it: I could become so greedy that I wanted a fortune twice the size of Bill
Gates’—but this greed would not increase my income by one cent.
If you want to explain why some people have astronomical incomes, it cannot be simply
because of their own desires—whether “greedy” or not—but because of what other people
are willing to pay them.
The real question, then, is: Why do other people choose to pay corporate executives
so much?
One popular explanation is that executive salaries are set by boards of directors who
are spending the stockholders’ money and do not care that they are overpaying a CEO,
who may be the one responsible for putting them on the board of directors in the first
place.
It makes a neat picture and may even be true in some cases.
What deals a body blow to this theory, however, is that CEO compensation is even higher in
corporations owned by a few giant investment firms, as distinguished from corporations
owned by thousands of individual stockholders.
In other words, it is precisely where people are spending their own money and have financial
expertise that they bid highest for CEOs.
It is precisely where people most fully understand the difference that the right CEO can make
in a corporation’s profitability that they are willing to bid what it takes to get the
executive they want.
If people who are capable of being outstanding executives were a dime a dozen, nobody would
pay eleven cents a dozen for them.
Many observers who say that they cannot understand how anyone can be worth $100 million a year
do not realize that it is not necessary that they understand it, since it is not their
money.
All of us have thousands of things happening around us that we do not understand.
We use computers all the time but most of us could not build a computer if our life
depended on it—and those few individuals who could probably couldn’t grow orchids
or train horses.
In short, we all have grossly inadequate knowledge in other people’s specialties.
The idea that everything must “justify itself before the bar of reason” goes back at least
as far as the 18th century.
But that just makes it a candidate for the longest-running fallacy in the world.
Given the high degree of specialization in a modern economy, demanding that everything
“justify itself before the bar of reason” means demanding that people who know what
they are doing must be subject to the veto of people who don’t have a clue about the
decisions that they are second-guessing.
It means demanding that ignorance override knowledge.
The ignorant are not just some separate group of people.
As Will Rogers said, everybody is ignorant, but just about different things.
Should computer experts tell brain surgeons how to do their job?
Or horse trainers tell either of them what to do?
One of the reasons why central planning sounds so good, but has failed so badly that even
socialist and communist governments finally abandoned the idea by the end of the 20th
century, is that nobody knows enough to second guess everybody else.
Every time oil prices shoot up, there are cries of “greed” and demands by politicians
for an investigation of collusion by Big Oil.
There have been more than a dozen investigations of oil companies over the years, and none
of them has turned up the collusion that is supposed to be responsible for high gas prices.
Now that oil prices have dropped big time, does that mean that oil companies have lost
their “greed”?
Or could it all be supply and demand—a cause and effect explanation that seems to be harder
for some people to understand than emotions like “greed”?