Recently, there have been multiple stories about the increasing concentration of wealth at the top, especially after the global recession. By some accounts, 95% of the recovery since the recession went to the top 1%. Not surprisingly, most of this gain in wealth went to people who either had capital or used other people’s capital to obtain commodities at their recession low and are now reaping the benefits as the economy recovers. Money is going to people who make money—which is hard to argue as wrong.
Except, most of us do not make money.
We make goods or provide services—which money is supposed to represent. So, if a fund manager realizes a billion dollars of profit above market and keeps 20%, presumably this is because she generated 200 million dollars of goods and services.
Except, she didn’t.
At best she facilitated the creation of 200 million dollars of goods and services, maybe by providing capital in the right places while removing capital in others. (The financial industry likes to be seen as SmartGrid? operators throwing switches here and there to match power to demand.) So the fund manager is rewarded for the putative indirect value created. But, many people create indirect value without being compensated. I might teach a student something critical that enables her to create an iPod; a cook might create a meal that inspires hundreds of people to work harder; or, a fireman might save a critical factory for producing goods. Strangely, a fireman who saves a billion dollar facility doesn’t seem to expect being compensated with 200 million dollars.
So, the question is: what is fair compensation for work in a capitalistic society? If money represents goods and services such that the GDP of a nation represents the total goods and service, then fair compensation to me should be the percent of this GDP generated by my work. How do we measure this? Even if we know how to measure this, is it going to be a time invariant quantity? If not, what is the relevant period?
Being an empiricist I would argue that the proper measurement of my contribution should be a “knockout” experiment. That is, run the economy without me and compare the difference. This would have to be done for a suitable time horizon—enough time for a Bill Gates to arise from taking my classes.
Of course, the above is not a possible experiment. But, the thing is, there isn’t even a theoretical attempt to create such valuation of labor. If the right security instrument existed that were able to give the right valuation, maybe Isaac Newton would have been given half the wealth of the world. Instead we rely on badly imperfect labor markets—and most of the time, not even that. Unlike professional sports, there isn’t a global real-time market for every job. Instead, we have mostly a folk tradition of what somebody’s work is worth. This folk tradition often assigns zero value to a housewife’s labor while providing 20% of a $40 check ($8) to the waitress at Applebees and the same 20% of a $400 check ($80) to the waiter at Four Seasons who probably did not create 10-fold greater service. In the meanwhile, in the financial industry where such valuation is supposed to be accurate resulting in well deserved eight figure compensation for fund managers, they ignore the time factor and nobody loses their past compensation when the decisions they made actually tanks the GDP. One can’t help but come to the conclusion that this is all a shell game giving a veneer of rationality when the reality is we have the same situation as the folktales that declared a butcher the lowest form of labor in a Confucian society. Giving money to those who make money is not so obvious after all.
When I started seeing the articles about growing inequality, I remembered also reading an article about the 40% raise our university president received this year. At the time I read the news about her raise, I thought that was a good thing; among other things, she oversaw the largest growth of Penn’s endowment in its history. But, now I can’t help thinking that we’ve bought into the finance industry’s shell game valuation method and convinced ourselves that compensation should reflect immediate money made, not long-term value created. If I bring in more grants, I should get more money. If I create a new professional degree program, I should get more money. If I direct an athletic team that brings in income, I should get more money. The truth is all of those arguments are made, often successfully. But, I am not writing this to begrudge anybody’s compensation and I am sure I have made similar arguments favoring my own interests. Rather, I want to point out that while we pretend to valuate people’s work objectively (say at the 2.7% recommended annual raise), what we are doing is simply adopting folktale values--values that lead to metrics for valuation, both for compensation and for conduct. And, what is troubling is that we are increasingly normalizing and internalizing the dubious values of distorted extremes like the Wall Street.
The question we should be asking is: what values should an institution of higher learning and scholarship have that stands in contrast to that of the street?
(Percent compensation of some other value (e.g., a meal) is the most insidious of the devices that create inequalities. Given the same 3% increase in salary, I will gain 3~5 times the purchasing power of a postdoctoral fellow in my lab. One might argue that given the same amount of work, I have better skills and experience to create more value. But, surely there is a saturating curve to this proposition. In the world of finance there doesn’t seem to be any such saturation curve. In fact, the opposite seems to hold. A CEO who makes $10 million and given 5% raise can buy a new house with that raise while an employee who makes $50,000 can buy a new furniture set with a 5% raise. But, rather than recognizing this inequity of the multiplicative scale, the practice seems to be to give CEO even a much high percentage raise, say 40%.)