Last week, Mark Thoma at Economist’s View made an absolutely excellent post about profits and resource flows in the economy that meshed well with an idea I’ve been developing for a while now. I think most people have certain ingrained ideas about profits. They are seen as a necessary element of business that allows for a firm to “get ahead” by reinvesting their profits into growing the business, thus making it stronger and healthier. Randians and those on the far right view profit as sacrosanct, as the only important thing a business can produce. Indeed, in that worldview, profit is the only meaningful signal that a business is producing something of value to the public.
To me, however, profit is often indicative of an inefficiency in a market. This is not to say that profit is bad, per se, but only that there is something about a market’s structure that has increased a consumer’s cost for a good beyond the cost of the labor that produced it. The main thrust of Mark’s article is the tension between the idea of “profits as valid signal” and “profits as long-term inefficiency”. However, he includes another element, almost as an aside, discussing very high pay at the top levels of the executive structure at very large firms. Specifically, he discusses high pay in terms of marginal utility, making the argument that CEO pay could conceivably be reduced without much impact on the CEOs themselves.
I want to analyze these concepts in greater depth, so I am starting on a four-part series that will (I hope) ultimately make a strong case against bloated pay for top-level managers. However, I do not want to do it from the simplistic (though ultimately valid) arguments made by many that CEOs don’t deserve pay rates nearly 500 times what their workers make. Rather, I want to make the argument from a capitalist’s perspective, based on the assumption that markets, the profit motive, and the price system — when allowed to do their job properly — will provide the best results to everyone in an economy. I want the argument to be understandable by non-wonks, so I’m going to go over some background first:
- Part 1: Perfect Competition and the Nature of Profit
- Part 2: Profits and Market Signals
- Part 3: Marginal Utility and Wages
- Part 4: The Case Against Excessive Profit and Wages
I’ll be updating this post with links to the appropriate articles as I publish them.