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Markets Don’t Work That Way

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Yesterday I heard a talk by someone – someone of some intellectual prominence – who lamented the rise of CEO pay. The speaker asserted that if CEO pay had not, over the past few decades, risen as much as it did, the pay of workers would have risen more than it did.

There is a great deal wrong with this fixed-size-of-the-economic pie worldview, not least that it reveals a complete failure to understand the operation of labor markets.

Rather than here detail all of the many errors that infect this worldview, I instead share with you Russ Roberts’s reaction when I related to him on the phone what this speaker said. Russ pointed out that, if this speaker is correct, then workers would get even higher pay raises if we enslave all CEOs, paying these corporate leaders only enough to physically survive.

…..

One cannot repeat the following truth too often: wealth must be created and recreated constantly. And there is nothing remotely automatic or even easy in arranging for the production of wealth. Wealth does not rain down on us; wealth is not a glob of stuff that we are free to “redistribute” as we see fit without affecting the amount of wealth in existence.

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