Cameron Diaz made $10 million for her voice work on Shrek 2. Tony Romo just signed a 6-year deal with the Dallas Cowboys worth $64 million. David Beckham scored $250 million over 5 years with Major League Soccer. The cumulative pay of the top 10 highest paid CEOs in the past 15 years totaled $11.7 billion. An average public high school teacher in the state of Texas earns $40K per year.
Isn’t it disgusting that we pay celebrities, athletes, and CEOs so much and we pay our teachers so little? How many times have you heard someone express this sentiment? Maybe you’ve even made similar remarks from time to time. It’s a common refrain, and one that reflects a prevalent attitude in modern American society. However, like so many issues involving economics, this sentiment expresses little more than a deeply conflicted and confused understanding of basic principles. On closer inspection we will see that what we’re really talking about here is envy, pure and simple. Unfortunately, there are plenty of politicians who are more than willing to tap into that emotion and use it for their own personal gain. In fact, John “Opie the Commie Redneck” Edwards fuels his entire presidential campaign on voters’ envy, threatening to “crack down on outrageous CEO pay” with his so-called Worker and Shareholder Bill of Rights – and he’s leading in Iowa. Let’s take a moment to step back from the emotion and dissect some of the core concepts that underlie this attitude, and see if we can’t shed more light than heat.
First, take note of the collectivist attitude implied in the complaint that “we” pay celebrities and CEOs too much. In the private sector, it is the employer that pays the employee’s salary, not you or I. Granted, the consumer is the ultimate source of anyone’s pay. But in the private sector, consumers voluntary part with their money because they believe ex ante that they will be better off by purchasing the particular good or service. This stands in sharp contrast to the public sector, in which employees are paid by your tax money and mine, without regard to how we feel about the transaction ex ante (or ex post, for that matter).
Second, there’s clearly some residual Marxist theory corrupting our modern discourse. Marx held that the value of a good depended on the amount of labor that went into its production. Although this idea has been completely demolished by more intelligent economists like Ludwig von Mises and others, there is still some primitive belief rattling around our reptilian brains somewhere which holds that a person’s pay should in some way be tied to the blood, sweat, and tears that went into the work. The harder we labor, the more we should make. The easier the job, the less it should be worth. However, this is simply not the case. Wage rates have nothing to do with the difficulty of the task, but are instead driven by marginal productivity. Simply put, the wage for a given task is derived from the value of the output of that task. If a worker can generate $20 of output per hour, then his wage will trend toward that marginal productivity rate of $20 per hour. The worker’s productivity is affected by any number of factors which are both intrinsic and extrinsic to the worker himself. Intrinsic factors such as intelligence, education, drive, and desire can affect productivity. But so can external factors like infrastructure and technology. I realize that this focus on marginal productivity stands in stark contrast to many people’s belief that wages are determined by other factors like the generosity of the employer or the dictates of Congress, but it is true nonetheless.
The third misconception is the idea that somehow “society’s” priorities are really mixed up if “we’re” willing to pay Tony Romo $64 million to throw a football while “our” teachers only make $40K a year for the priceless job of educating our children. Let’s be clear – society has no priorities. Only individuals within society have priorities. Lying at the bottom of the complaint that celebrities and CEOs make “too much” is the fundamental idea that consumers shouldn’t want what they want. However, this ignores the fact that all valuations are subjective, and no amount of wishing will change that simple fact. You may not like the fact that there is a significant demand for something you view as trivial or even wrong, but your disapproval is not sufficient to change economic reality.
This can be a hard thing to admit, no matter where you happen to fall within the ideological spectrum. For example, it’s not easy for me to admit that Michael Moore produces more of what people what than I do, but it’s a fact. I might think people are stupid to want the kind of totalitarian drivel he spits out, but that’s beside the point. They do, and any attempt to curb Michael Moore’s income and redistribute it to other, more worthy individuals (such as myself) would be nothing but a shallow and illegitimate attempt to elevate one’s own preferences over those of others.
When I hear people lament how much others make for providing a good or service that consumers want, or listen to yet another populist cry for government to curb alleged excesses relating to compensation in the private sector, I am reminded of Iago’s warning to Othello: “O, beware, my lord, of jealousy; It is the green-eyed monster which doth mock the meat it feeds on…” There are many green-eyed monsters like John Edwards in our midst, mocking us as they stoke the fires of envy to advance their own careers at our expense. If we take a critical look at their policies, however, we will discover that they are nothing more than thinly veiled attempts at making a virtue out of vice.
