CEO Pay: Normal or Unfair?

In my many years of trying to understand the free market economy, I have been hampered by the simple fact that no such thing exists. Like ideal marriages, genuine free markets are mostly something we can conceive of and understand in theory but rarely encounter in the actual world. Yet, just as with ideal marriages, we can ask whether free markets, if they did exist, would be better for us all than, say, some other conception of economic life, such as mercantilism, socialism, the welfare state or communism? And we can also think through how near-free market systems operate, by reference to the pure free market ideal and various thought experiments, as well as the history of approximations. When comparing the merits of economic systems, it is necessary to think through what would happen if they existed in pure form. That way, it is possible to propose various public policies based on the results of such comparative analysis.

One thing about free markets is that in such a system, to a considerable extent, the consumer drives the economy. Sure, producers come in with big ideas, but unless consumers decide to purchase their wares, producers will go under. Sure, advertising can help; yet even there no one has to respond to ads-'indeed, we encounter thousands of them we evidently ignore.

Critics of the free market ideal maintain, however, that the system is largely rigged in favor of big, greedy players, by which they tend to mean corporate managers and their clients, and shareholders (investors, stockholders, or family members who own closed firms). Especially outrageous to such critics is the sizable salaries made by some CEOs and a few other company managers. Among these critics, many hold that something must be wrong when such people can garner huge incomes, sometimes even when the company isn't doing very well, while ordinary employees make but a fraction of what these folks rake in. This surely cannot be the result of mere consumer choices. There must be something corrupt or grossly unfair afoot, so critics tend to approve of various state-'by which read: coercive'-efforts to set things straight, make the system more fair and just.

Of course, there can be malpractice in any profession, including business and, indeed, big or very big business. We have witnessed much malfeasance throughout the history of the profession. Yet, misdeeds abound within all professions-'medicine has its quacks or charlatans; education its indoctrinators and deadbeat scholars; politics its demagogues and petty tyrants. Virtue and vice tend to be pretty evenly distributed among the various different careers upon which folks can embark.

Yet, most disparities in pay are driven by the free choices of consumers, up and down the line of the business community. This is akin to many other fields of work.

Consider that orchestra conductors get much higher pay than, say, the violinists or viola players; the champion sluggers in baseball receive far greater compensation than those who have a meager showing on the field, let alone ball boys and others in the employ of those who own the team. There are only so many people in the professional sport, music, movie or book industries who are in wide demand, with the rest lagging far behind. The star system is nearly ubiquitous throughout society, and it is mostly due to how consumers of the various products and services choose to spend their resources.

I know this from personal experience. I have authored nearly 25 books, edited another 20, yet none has hit the big time, all the while around me I am fully aware of the best sellers listed every week in The New York Times Book Review section. My columns fetch me a pittance compared to what George Will or William Safire earn. And it is all pretty much due to nothing more insidious than the fact that zillions of people want to read those other folks, while only a few hundred, maybe a thousand at most, are interested in what I produce.

That's life. Is it unfair? No, because none of those folks who do not purchase what I write owe me anything. If you aren't owed the same consideration paid others, there is nothing unfair about the little you receive. (As a teacher, however, I do owe each of my students equal attention, since I made that promise when I signed up to teach them. Not, however, those to whom I made no such promise.)

The free market, like life itself, isn't about fairness. Yet, oddly, at the end of the day it comes closer to it than all the alternatives-'no near-socialist system has ever managed to distribute power and wealth without some folks at the top getting the bulk of it and few ever having the chance to take their place. On that score, at least, the free market is far more fair-'we all have a pretty good chance to get into the game, provided we keep at it.

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Tibor R. Machan's picture
Columns on STR: 70

Tibor Machan is a professor of business ethics and Western Civilization at Chapman University in Orange, Calif., and recent author of Neither Left Nor Right: Selected Columns (Hoover Institution Press, 2004).  He is a research fellow at the Hoover Institution, Stanford University.