12 September 2007

Serving Mankind: The Rich Do More

The Objectivist
Dunkirk-Fredonia Observer
September 11, 2007

In the world of politics, there are a lot of politicians and intellectuals who are convinced that they can pick out fair wages better than the market. Politicians and commentators constantly bemoan the high salaries of CEOs (S&P 500 CEOs averaged $14.78 million in 2006), baseball players (averaging $2.94 million in 2007), physicians (several types of cardiologists and orthopedic surgeons averaged over $400,000 even after expenses), and high-end attorneys (some law firms now charge clients more than $1,000 per hour for their best attorneys). At the low end of salaries, the AFL-CIO and other leftist organizations often criticize third-world sweatshops because they pay wages that are too low.

Even if these politicians and intellectuals could identify a fair wages, it doesn’t follow that employers should be made to pay them. In general, high prices for scarce things (whether labor or goods) usually bring about the best results by increasing supply and better distributing them. Economist John Lott in Freedomnomics uses the example of the rise in gas prices related to the Hurricane Katrina to illustrate this. Katrina disrupted oil production in the Gulf of Mexico. The restricted supply caused gas prices to rise. This rise gave companies the incentive to store gas in anticipation of the storm and then rush it to the area once the storm hit. It also reduced demand thereby making more gas available to those who really needed it. In contrast, government price control causes demand to outstrip supply, which inevitably produces shortages and waiting lines. An example of this was the obnoxious gas lines in the 1970’s that followed President Carter’s price controls.

As a general rule, free market wages are the height of fairness. A free-market wage is the wage that a person gets in a competitive sector of the economy. Generally, this reflects the degree to a worker contributes to lives of other people. This is because a worker’s salary reflects the degree to which others value his goods or services and the degree to which others value his goods and services reflects the degree to which these things make their lives go better. As Walter Williams has pointed out, such a system in effect rewards persons on the basis of what they’ve done for their fellow man.

For example, consider a day-care worker (median wage $7.90 per hour in 2003). There are lots of people willing to do this job and, at least according to consumers’ needs, the performance of one worker is not substantially better than her likely replacement. At least this is what consumers seem to think. Hence, any one day-care worker probably does not provide a service that is substantially better than her likely replacement. In contrast, other workers (e.g., Hollywood stars, CEOs, and sports stars) contribute far more to others’ lives than their likely replacement, which is why they get paid a lot more.

None of this applies to government employees because political considerations, rather than the market, set their wages. Thus in deciding whether veteran professors at state colleges contribute to their fellow man, their salaries are not a reliable guide (in 2003-2005, full professors at public colleges and universities averaged $88,500).

One objection to this claim about fairness is simple outrage. A critic might say that she hopes she didn’t just hear me say that some relatively low paid workers (e.g., day-care workers) really do less for humanity than highly paid but superfluous individuals like NFL running backs and well-known porn stars. But it’s hard to see why she thinks this. The reason the latter make so much more money is that while consumers value the latter’s services only a little bit, they serve millions of people. Oftentimes doing a little for millions of persons does more for the world than doing a lot for a few.

A second objection is that some low-paid workers (e.g., nurses) do far more for persons than others (e.g., Hollywood stars) because the former provide more important goods (health care versus entertainment). This, however, is to confuse what an industry provides versus what a particular worker provides. It is the latter that determines what an individual contributes to the world since she only can provide or withhold her own labor.

A third objection is that the low-paid workers often work from altruistic motives and care for their clients, whereas the highly paid CEOs and all-pro quarterbacks are in it for themselves. Even if true, this is irrelevant. Remember the issue here is the degree to which an individual makes others better off, not why he does it. Caring about others may be a good thing, but this doesn’t make others better off. Rather others are made better off when their wants and needs are satisfied and is what wages measure.

Other theories of fair wages are invariably confused or wrong. For example, various intellectuals think that wages should track the degree to which persons sacrifice themselves for a job or work hard at it. However, plenty of people work very hard at jobs that don’t contribute much to anyone’s benefit. For example, consider restaurant owners who work like dogs and put in incredibly long hours only to have no one show up. It doesn’t seem that fairness would dictate that they be well paid despite their efforts and sacrifices. Physicians often yell that they deserve high wages because they invested so much in their education, but again restaurant owners might have invested their whole life savings and it doesn’t follow from this that they deserve anything.

Other fair-wage intellectuals cite things like a living wage suggesting that persons who work full-time jobs should be able to escape poverty, afford medical care and decent housing, buy a house, etc. The problem is that such goals have nothing to do with whether the worker has served his fellow man. We might want to give all American workers such goods, perhaps in the form of various welfare benefits, but labeling these benefits fair wages hides what is being done.
In a reasonably competitive sector of the economy, wages are a pretty good indication of what workers contribute to others’ lives. Poor people do less for others; rich people do more. It’s a distasteful conclusion, but true nonetheless.

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