Thanks to AllThingsFinancial, I came across this piece by Ben Stein, who I’ve mentioned fairly often on this blog. I like Ben Stein even though we don’t always agree on every issue.
In his new column in the New York Times, Ben talks about the huge disparity between worker and executive pay. He provides some examples of how the differential has grown over the last forty years and postulates some reasons on why we have allowed this to occur. His reasoning stems from the lack of governance by the board of directors. The members of the board, who are supposed to work for the shareholders, now exist to protect executives from the shareholders. Ben says this is not a result of a free market.
We should be up in arms! Why has there not been a worker revolution? We have not stormed on Washington or the Board Room demanding a fairer system. Why not?
I think it comes down to the “American Dream,” which was basically a myth perpetuated over the last couple of centuries. The American Dream says that anyone can get rich, anyone can move up in class, anyone can build wealth beyond their wildest dreams. Sure, some do. And those that do are fashioned into “proof” that the American Dream works. (See “anecdotal evidence.”)
Most people will struggle their entire lives to survive or just “get by,” even if the United States is the richest nation in the world. I’m not talking about people who spend as if there were no tomorrow, racking up mounds of debt they plan to leave to their children to deal with. Honest workers, honestly trying to move up through education and networking, will generally remain lower-middle-of-the-road.
We don’t want anything “bad” to happen to the richest in our country because we think we’re going to be there someday. All right, now it’s my turn to get off the soapbox.
Subscribe
3:32 pm (reply)
The dream isn’t a promise, not everyone who strives to become fantastically wealthy and successful will reach that goal.
8:44 pm (reply)
You make some good points. I think one of the problems today is that most shareholders are rather lazy when it comes to their interest in the stocks they own. It’s rare that anyone would care enough about how a company they own is run to actually voice their opinoin about it. Those that own a huge amount of a company, like Carl Ichan do voice their opinion and they see results. Until a “collection of the masses” of people who voice their opinion about a company do so, why should the board care?
10:43 pm (reply)
Well one might say the board has the responsibility of acting to benefit the shareholders even if they don’t gather together. But you’re right in that change usually won’t happen without some kind of uprising, and when it comes to things like outrageous pay and tax cuts for the rich… people won’t get upset because they imagine they’ll be rich someday and wouldn’t want someone to take away their fun when that happens.
7:36 am (reply)
I’m with Jim.
Flexo, have you turned anti-free market or something? Maybe we should all turn in our belongings and split them evenly? That system worked so well for Russia and others…
9:03 am (reply)
I’m for about 95% free-market, 5% “other.” I don’t think any economic system works well over an extended period of time.
2:50 pm (reply)
We’ve got 75% free market/25% “other” at the best (“other” being government intervention).
3:13 pm (reply)
Is there that much government intervention in the operation of corporations other than taxes? Some industries have more regulation than others, and there’s a pretty wide swing in regulation depending on the time in the political view cycle.
Anyway, whatever the mix is at the moment, I do think too much of a free market system is a problem and damaging to society.
3:41 pm (reply)
Government is into everything—what’s eaten, what’s seen, what’s taxed, what companies can and can’t do, etc. We have the freest free enterprise system, but it’s not 100% “free”.
I’m interested in what you think about the system is damaging to society—and what system would be better?
3:46 pm (reply)
That’s probably a good topic for another post… once I’ve had a chance to do some extra research! But my entry above does mention one way in which the current system (however you want to define it) is damaging to society.
4:26 pm (reply)
What’s that? That directors protect executives? That the American dream is a myth? Frankly, I’m not really understanding what you’re saying. (But I’m sure I don’t like it, whatever it is.) ;-)
11:58 pm (reply)
You don’t want things to be too “free-market.” Then business people think they can do whatever they want, as long as they’re making money.
5:30 pm (reply)
No, that’s where the market corrects them. If they do something people don’t want, don’t believe in, won’t pay for, etc., then people take their $$$ elsewhere and the business goes away.
12:08 pm (reply)
This is my first time visiting this site, and I was doing fine right up to this post. It feels very unconstrained. Let me explain.
Thomas Sowell wrote a book several years back called, “A Conflict of Visions.” The gist of it is that people seem to be divided into two camps when it comes to their worldview about humanity. Those with the constrained vision inherently understand that human behavior is fundamentally about selfishness, which means that all social, political, and economic systems have to successfully harness selfishness in order to produce general prosperity.
The others, the people with the unconstrained vision, hold that humans are perfectible (or at least they can get to a place where most are genuinely altruistic). In this view, it is the systems that govern humans that prevents them from realizing their perfection.
The idea that too much free market is a bad thing or that most Americans toil all their lives only to end up where they started reflects what I fear may be a hidden unconstrained vision.
The fact is that the most defining characteristic of our economy is its dynamic nature. If you look at income and poverty stats over time, you find that the vast majority of poor people, even those who spend some time on welfare, move up consistently. Or take some more indirect measurements – home ownership: all time high, second homes: all time high, international travel: all time high. and on and on.
The American dream is as alive as ever. If you don’t think so, go on down to your local Immigration office and ask some of the droves of people in line why they’re here.
As for too much free market, you might do well to extend your concern to say, “The free market without the effective rule of law is a bad thing.” As FMF so consisely pointed out – if businesses just do whatever they want, even if it is contrary to what consumers want, the market will exact the penalty. Your problems with the free market are really problems with the failure of corporations and our legal system to enforce business ethics. But again, the markets are exacting their punishment. Where are Enron, MCI, and Global Crossings now? Their demise has become a very real deterrant to similar behavior elsewhere.
It is only one with an unconstrained view of the world that would suggest that we can prevent new problems from occuring in a complex economic system. The constrained vision holder says we just let things happen and penalize bad behavior while the market rewards good behavior.
I have a post on ethics and capitalism at Enlightened Living. Check it out:
http://www.enlightenedliving.us/money_blog/2006/01/ethical_capital.html
12:29 pm (reply)
Ok, I’ll address a few items.
The American Dream is alive as ever. Yes, people are owning more and more homes and moving up in life. All of society is moving up, the top faster than the bottom, which results in no great movement at all. The very bottom is still at the very bottom. The next class has moved up a little, the next class a little more than that, etc. The result is larger disparity. Sure, more people get a basic education, but the value of that basic education is a whole lot less than it was in the nineteenth century. There are more homeowners, but when everyone is a homeowner, it doesn’t mean much. Thus, the American Dream of moving up relative to the rest of immediate society is still a myth. People move up, but the world and expectations move up around them.
As for free market, it’s more than just government regulations necessary for keeping it in check (or there need to be more/better enforced government regulations). Television news programs for instance only survive when they sell advertising. They are subject to ratings just like entertainment programs are. This is a feature of the free market that does not bode well for society overall. The weight falls on public television to be able to provide news free of corporate influence, but that doesn’t work because public television still needs to compete in the marketplace. The result is the need for corporate underwriters of public television program, which are really no better than advertising. The free market would see to it that public television would no longer exist… along with performance and visual art, research institutions, liberal arts colleges, etc… everything that doesn’t draw enough of an audience to survive on its own.
The free market cannot correct everything, and government cannot (or is not) enforcing regulation. Thus, over long periods of time (think centuries), free market favors those at the top of society and cannot provide the needs of the whole society.
1:15 pm (reply)
Flexo—You know you’re my friend, but I think you’ve fallen off the deep end on this one. I’m not going to get into TV programming and the like (though I could argue that they ARE controlled by the free market—which, by the way, means that people vote with their dollars what stays and what goes and if something isn’t “voted on” enough, then society doesn’t see it as valuable).
What I’m really interested in is your solution, which I think you mentioned before you’ll be posting on. (Or at least some thoughts). I hope it’s soon so you can clarify since some of these responses sound as if you’re a “big government” sort of guy (which maybe you are, but it’s better to know you point of view than to be quessing at it).
1:47 pm (reply)
The big assumption in free market systems is that the majority always does what is best for society. Yeah, I’ll write more about my beliefs in the future
- I don’t know how soon, but soon. It’s not a big government vs. small government thing.I’m off to New York City for the evening, so no responses from me until tomorrow, so… discuss amongst yourselves for a while. :)
4:20 pm (reply)
If the majority decides something, then it is “the best” at least for that society, isn’t it? Who is to say otherwise? And if it turns out to be a bad decision, the majority changes their votes, moves to another option, and the cycle continues.
10:47 pm (reply)
Free market systems are, in fact, about individuals much more than they are about groups, majorities or not. The idea is that every individual consumer decides what is valuable and worth trading for. While it is true that there is such a thing as a critical mass that, once achieved by a seller, makes it hard for the little guy to compete, the best thing about the free market is a minority of individuals can become influential enough to dismantle the status quo. Indeed, it often happens that once a few influential individuals make their demands (and what they’ll pay for them) known, the market responds and the majority gets on board. Fox News is a great example.
The point is that we only have two options when it comes to economics – individualism or collectivism. The free market is about individualism. Sure, it’s not perfect, but nothing is. Look around the world and it’s obvious that countries that embrace free markets fare better as a whole than countries under any other system. Nevertheless, there will always be losers. This is a reflection of the inherent inequality of the world. Those with an unconstrained vision simply will not accept this reality.
Like FMF, I’m anxious to read your solution.
4:41 pm (reply)
On the unreliability of majority:
Hypothetical situation. Let’s say a foreign interest owns 45% of all media outlets. Take away media outlets that are insignificant for some reason or another, than that entity controls 50% or more of the most powerful media. Those media can be used to disseminate the foreign interest’s viewpoints as fact. There is a chance that more than 50% of individuals will believe the viewpoints as fact. The majority falls in line with a possibly skewed viewpoint, and believe a particular side of an issue that may not be correct—just one entity’s viewpoint.
If the majority is always right, there would still be slavery, segregation, more raciscm in this country, etc. These issues have been limited because of the ability of the minority to have a powerful voice and convince the majority that a change is necessary. A pure free market limits the voice of the minority because the majority (that is, the money) gets to set all the rules.
I agree that the countries that have embraced the free market system are those that at the moment are doing the best economically if you look at averages. I’m not sure the system will always be the best solution. Are today’s humans at the absolute end of the evolutionary chain? I don’t think so. We’ve only been as we are for a relatively short period of time. Likewise, I also don’t think that the free market system is the absolute apex of economic thought. I’ll have more to say later, but if you’re expecting something along the lines of Adam Smith’s Wealth of Nations, you’re going to be disappointed.
11:04 am (reply)
“A pure free market limits the voice of the minority because the majority (that is, the money) gets to set all the rules.”
Wow, I’m almost speechless at the naivete of this statement. You want to see a limited voice of a minority, try any system other than a free marjet system. How about Spain and their price controls? Did you know shop owners (for clothing, for example) who try to have “sales” are shut down if they’re caught? The minority has absolutely NO voice in collectivist economies.
You seem to believe, as so many do, that our system is the problem. What you fail to recognize is that it is our species you have a problem with. No economic system will result in what you desire – equal opportunity for everyone. Our species is too proned to corruption. The free market gives the little guy the best chance of success. That’s simply an empirical fact.
Like you, I believe humans are still evolving – at least culturally speaking. Nevertheless, no matter what happens, you can be sure that there will always be cheaters – it’s simple game theory. That means nothing will ever be better than the free market – when it is operating properly.
6:05 am (reply)
“The oppressed love their oppressors and cannot wait to follow their example.”