Featured Quote

In 1913, Henry Ford wrote the following as the directors had been reaping the rewards of profits - "The wages we pay are too small in comparison with our profits. I think we should raise our minimum pay rate".

Tuesday, June 19, 2012

The Tradeoff - Response

My friend Justin Fisher wrote a piece on compensation entitled "The Tradeoff."  It is worth a read because he is one smart guy.  This is my response to the article.

I've been blogging about this for quite a while.  On this blog, from October 5th, 2010.  I also do a lot of research and usually provide links throughout my posts to allow readers to follow the research. So, when I read :
"the major reason incomes are unequal is that this system rewards its citizens based on their abilities."
I was shocked.  Assuming that "ability" is meant to imply aptitude and efficiency in one's chosen occupation, that statement is demonstrably untrue.  Maybe capitalism is meant to do so, but 'this system' simply does not.  Pay and promotions are largely based on opportunity, who you know, personality, length of employment, "education," and coming up last, ability.

"Our society rewards its citizens based on the satisfaction that buyers receive (economist call this “utility”) when they pay to enjoy our abilities."
That is true and opposite of the first quote, unless by "ability" you mean only the ability to create a feeling of satisfaction in 'the public' at large - or "ability to entertain."

"Peyton’s ability to make $23 million a year, doesn’t decrease Kelly’s opportunity to make that much. Wealth is not like a great big pie that, when divided, means that if you get a bigger slice, I, by definition, get a smaller one."
 Actually, yes, it does and yes, it is.  There is always at any point in time only 100 percent of money available. Perhaps in Theoretical Economics, that 'wealth creates wealth' works perfectly, but in the real world, wealth comes from somewhere.  Sam Walton created his wealth by selling cheap goods to poor people, making them less wealthy and himself more wealthy - but they got a lot of cheap plastic stuff! Did they become more wealthy? No. They just got more stuff.  Usually stuff that once they used it lost most of it's already low value.

Lets look at the pies!


See the last Pie chart? When the top 1% got almost 10% more, the bottom 4/5ths got 9% less.  Each % the top 1% gains is a % lost to the rest.  Can there be 110% of money? No. Of wealth? No.  In order for someone to gain, someone must lose (in pure money terms, though they may gain a material possession or a degree of satisfaction or entertainment).
(Found This to be interesting, though not necessarily on topic exactly.)

What has happened each and every time such income inequality has occurred? Depression or Recession. Why? Wealth flows Up, it does not trickle down.
"There is a negative unintended side affect to these practices is that it gives both groups less incentive to be productive. In fact, it gives both groups more incentive to be less productive; less efficient. As a rich person, why would you work hard to make more, if the reward would be that more would be taken? As a poor person, why would you work hard to make more, if the reward would be that less would be given?"
That is also demonstrably untrue.  While I am sure that you can find examples of people who have no desire to do anything more and want to continue taking handouts, I can find many more people who are not happy making less.  I would also challenge you to find a rich person that works as hard as a carpenter or plumber or factory floor worker.  Another challenge would be to find a rich person who doesn't want to make more - even venturing into a higher tax bracket to do so.  Sure, the "Theory" is sound, but in reality, it doesn't hold much water, if any at all.

As far as efficiency, workers have become lots more efficient - and their salaries have dropped.  So why become more efficient and more productive when, in reality, you get paid less?  The people who actually produce and create productivity are paid less than the people who stand around and observe them being productive.

To insinuate that Income is a variable based on Effort and Ability is absolute bollocks! Oh, it is a great theory and a desirable goal, but it rarely actually happens.

Justin's fishing buddy (seriously, read his post!) may be just a lazy guy scamming the system.  It happens.  Then again, he may be a carpenter who went to fight for our country and came back with such severe PTSD that the banging of hammers on his job sends him into convulsions of fear or violent outbursts of 'self defense.'  When you have a skill set and suddenly, for some reason, you can't perform your job, you are disabled - no longer able to do your job that you have skills for.  He may have to spend days at a time in bed due to severe pain.  Who knows?

Justin, on the other hand, is a highly motivated, smart guy whose intellectual ability more than makes up for his physical challenges.  People like Justin seem to have a hard time understanding that most people are just not intellectually able to do the things they can. Some people are just not that smart and if they loose their physical ability, then they are just unable to find another occupation in which they can be productive.  For most, being unproductive leads to severe depression and anxiety.  In our society, being unproductive is not rewarding at all. "Learning a new skill" usually take opportunity and money - something that people who find themselves unable to do their job often don't have any more.

Economic Theory is all fine and good, but it doesn't match up with economic reality very much.

(another post on that topic - see also "Farming the Economy" and "Cartoon Economics" and "Rich get Richer" and Finally - "Ethical Capitalism" and "More on Ethical Capitalism")

Another great source for reality-based economics is the Angry Bear blog.

We have seen a pattern increasing income inequality, loose regulations, wall street gambling and other factors leading to an economic collapse. How many more times do we have to see and live through the same patter before we realize that income inequality, loose regulations and allowing wall street to gamble on everything are bad things for our overall economy?

... I rambled again... dang! ... so.. I'll add this very statistical analysis of what is going on : This. :)