What’s fair?

In the comments of this post, Wally posted a video about how actual wealth distribution differs from what a group of people feel like is the ‘ideal’ wealth distribution.

I think the video provides a good example of the dangers of convoluted reasoning disguised as something that sounds intelligent.

For instance, in one part of the video, the narrator says that CEOs make as much in one hour as their average employees make in a month and suggests that is unfair.

When framed this way, the unfairness seems plausible. However, this framing is like a distraction used in a parlor trick, or a red herring.

He implies that a CEO should make some multiple of the wages of an average worker, but he doesn’t tell you why. He figures you get it. But, do you?

Most of the average workers who have young children make several orders of magnitude more than those children.Is that fair? People with kids may now realize the distraction.

It’s not a question of fairness. They understand that there isn’t necessarily a relation between what they make and what their children make. They understand that what they make is based on the value they create for their employers or client and what others are willing to do that for, as well.

Now, don’t get me wrong. I think most CEOs are overpaid. But, I don’t base that opinion on nonlogic like what I think a fair multiple is between some unrelated job and their job, no more than I think what a nurse is paid should be some multiple of what a painter makes, or what a professional baseball makes should be some multiple of what the beer vendor in the stands makes. That’s nonsense.

I think most CEOs are overpaid in part because their decisions do not increase the value of their company enough to cover the risks they take and because Boards of Directors aren’t interested enough to get find truly good business leaders.

The whole video is a red herring. It basically compares ‘an ideal’ wealth distribution to the actual wealth distribution and implies that something is unfair. But, it takes more than a red herring to convince this guy.

Try to use some logic. Let’s talk about the value the people at the low, middle and high ends of the distribution create. Let’s talk about their financial behavior, their investments in human capital, decisions they’ve made.

Let’s talk about the absolute wealth at each end. Should I care than Bill Gates doesn’t fit on his chart, if I’m living a life unimaginable by my even fairly recent ancestors?

Update: ‘Dude Where’s My Freedom”s comment reminded me of the lyrics from Tenacious D’s song, City Hall. After starting riots to overthrow government and now ruling, Jack Black and KG are issuing their decrees. Their third decree is,

No more rich people and poor people. From now on, we’ll all be the same…ummm…I don’t…I gotta think about that.

Funny and true.

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9 thoughts on “What’s fair?

  1. I read somewhere that Ben and Jerrys (an incredibly progressive/liberal company) tried to implement a policy where executives could only earn some certain multiple of what the average worker made (forget what it was exactly) and then had to get rid of it after about a year because they couldn’t attract any quality executives.

    In any case, this is usually easy to combat by asking people a simple question “Should it be the government’s job to try and “fix” the “problem” that some people are very rich and others are very poor?” All but the most devoted communists will say NO.

  2. i remember going to a b & j shop in upstate new york before they went ‘national’. super fantastic ice cream. of course it was going to be a big seller. then i remember reading their ‘rbgh’ policy while working on a dairy farm and thinking…where did you go wrong ben and jerry…where did you go wrong…http://www.jerryben.com/activism/inside-the-pint/more-about-milk/rbgh/
    -‘The FDA has said no significant difference has been shown & no test can now distinguish between milk from rBGH treated & untreated cows’

  3. When one examines and compares societies throughout the ages, the striking thing about economic equality has always been that the citizens of those societies characterized by economic equality have been universally poor. When a society lacks or removes the incentives for man to propel himself to an above average economic level, it ensures that everyone will be equal, but they will be equally poor (except, of course, their leaders).

    There will always be rationing mechanisms which determine who gets what, i.e. who gets the most wealth.

    In a truly capitalist economy, it is the free market – the people “voting” with their pocketbooks according to each persons wants – that determines who gets rich and who stays poor. There may not be equality of outcome – this is determined by the individual actors according to their abilities and desires to produce and consume – but there is an equality of opportunity when the State protects private property rights and allows free trade. It has been demonstrated that in capitalist societies, there is significant mobility between economic classes, i.e. many of the poor move up and many of the rich move down. By virtue of the freedoms and opportunities of a capitalist society, people can choose to move up or down the economic ladder. The “problem” with capitalism is that you have to produce (work, think, etc.) to get ahead. However, everyone has that opportunity. It is not a zero sum game, i.e. the rich don’t get rich by making someone else poorer. They get rich by increasing their productivity, by making the pie bigger. In a capitalist society, everyone can simultaneously get richer. Indeed, that’s been the history of America – even the poorest Americans live better than Americans of the 18th century.

    Rationing exists in a socialistic society as well. However, rather than the market determining who gets what, it’s the political leader(s) who determines who gets rich and who stays poor. Because socialism is instituted by a horde that insisted on equality of outcome, the leader will oblige and ensure that everyone (except himself and his cronies) gets an equal slice of the pie. Because “getting ahead” can never be an incentive – indeed the only incentive is to get the same slice of pie while working less – productivity declines and everyone is left with a smaller slice of pie – economic equality, but universal poverty.

    When one proposes that some people’s income is too big and other’s too small, he or she must also tell us WHO gets to determine what income differential is fair. There are only two possibilities – the market or the government – and we have already discussed the natural outcomes of each.

    • Good thoughts. Reminds me of one of my favorite Reagan quotes: “All systems are capitalist. It’s just a matter of who owns and controls the capital – ancient king, dictator or private individual.”

      Also, I’m working on post with some similar threads, but a slightly different angle.

  4. To me the most interesting part of the video is people’s perception of wealth distribution in the states. Apparently people in this culture have a very weak grasp of just how rich the rich are and just how poor the poor are.

    This was in response to the quote in the earlier post:

    “I saw a paper presented yesterday on taxes. And it was very interesting that the population according to these surveys does think we should have more taxes on the rich. But then when you ask them, what are the rich actually paying, they underestimate, of course, what the rich are currently paying. And, what’s interesting is they think the rich should be paying less than they actually are. But you ask them, what is the fair tax to pay for various income brackets? They come in at figures that are actually below what the rich, what people in those brackets are actually paying. So here’s a case of people being uninformed and mal-informed at the same time.”

    So my purpose in posting the video was to show that people are uninformed and mal-informed about not just how much taxes people pay but how much money people make.

    Does it matter what kind of an economic system we have if most people don’t have a clue how it is working?

    • Hi Wally – I see it a little differently. I think the wealth distribution charts demonstrate that our brains have a weak grasp of logarithmic relations and tend to think more linearly. Many people know that Bill Gates and Warren Buffet are worth billions. But, they probably have never visualized what billions look like against thousands, hundreds of thousands or even millions.

      I’m not sure what is actionable from wealth distribution points. But, I would hope that when the people who believe ‘the rich should pay more taxes’ find out that they are already paying more, they reconsider their position.

      • That sounds like a plausible problem.

        Maybe nobody should make more than $100. That’s usually about how much money I can visualize at a time. 🙂

  5. I think we would be better off individually and collectively if people would concern themselves less with how much someone else is making and more with how they themselves can be more productive and earn more. Of course, this class envy is encouraged and fostered by some politicians who recognize that encouraging such wasteful activities is how they can enrich themselves.

    When people recognize just how many people in the US have gotten “rich” and how “rich” some of them have become, they can have one of two responses. Either they can demonstrate wasteful and destructive envy where they demonize the rich and look at their wealth as a zero sum game, i.e. the rich are rich not because they have added something to society, but because they have taken something and made someone else poor. These people will never improve themselves because they don’t want to see their own shortcomings. Other people will look at the rich (let’s use successful instead so that you can define success to encompass whatever your own goal is) and see that they have been rewarded for adding something that others had a desire to pay for, i.e the rich produced for them something they desired more than that which they already had and were thus willing to part with in exchange for whatever the rich were selling. Some of these folks will even be encouraged by the examples set by the successful and work to improve their own productivity and increase their own wealth.

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