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January 27, 2004

Salary commensurate to exploitation

Dan's got some good observations about salaries in professional sports. He points out that a person's salary is not commensurate to the social value of his work. My reply to Dan follows.

It is true that most American's jobs have little social value, and that the low paid garbage collector is likely performing a more valuable service than highly paid Tim Bailen is. I think this is due to the fact that the true source of our wealth is from the environment and that right now the thing that comes from our environment that we deem most valuable is oil (and other sources of easy energy.) Some say that the Gold Standard was replaced with fiat money. We don't really have fiat money. We have the Oil Standard. The moment oil dries up our money will be worth a lot less. Until then, cheap energy and its attendent luxuries are what we value. Since we are a Taker culture our jobs somehow revolve around exploiting that resource. The sports professional can be highly paid because he can attract a large crowd. The crowd values the diversion that sports provides. Cheap energy enables the large crowd to show up. Do you think 80,000 people would drive to the stadium every home game if gas were $10 a gallon?

The produce grower in Mexico gets paid scraps. High social value job, right? He's feeding us. Doesn't get much more valuable than that. But it is the packager and the distributor who makes most of the profit, and enables odd professions such as supply chain managers, webmasters, and board of directors. Why? Could it be because they have figured out how to add the valued variable (oil) into the equation? It takes a lot of energy to move produce from Mexico to consumers in the US: transporation, cleaning, refridgeration, air conditioning of the grocery store, electricity for the checkouts and the IT systems that drive them, gas for the clerks to get to work. I'm missing a thousand things, but you get the idea.

Is that the right answer? Probably not. But I think I make it clear that a lot of professions exist today only because energy is cheap and so, for some reason, we gravitate away from jobs with high social value and buzz around with a lot of busywork instead.

This segues nicely to a book I just read, so I'll blog my review of that book next.

Posted by tbailen at January 27, 2004 10:55 PM

Okay Timmy, you know I respect you, but I gotta say you're smoking some serious conspiracy theory crack there.


Now, I agree that our economy is exceedingly dependent on cheap energy. But that is not what drives salaries. What drives them is simple supply and demand. MicroEcon 101.

Professional athletes get paid an assload because there are very, very few people in the world that can perform at that level. I mean face it, those people are physical freaks of nature. Have you ever tried running 40 yards in under 5 seconds while wearing football pads? There's probably less that 0.1% of the population that is capable of that level of performance. And of course, the demand is quite high. The demand might be lower if energy were cheap, but not *that* much lower because TV is the main profit driver these days. You'd have to make energy so damn expensive that people couldn't afford to watch TV anymore.

So let's take your other example, the dirt farmer in Mexico. Granted demand for food is high, but farming just is not that hard. Well, it is, but almost anybody can do it, so the supply of farmers is quite high. And farming can be done in a lot of places, many of them more fertile than Mexico. So it just ain't worth that much.

The Tim Bailen's, Brian Reischl's, and others of the world fall somewhere in between, so we get paid better than some and worse than others.

Now, I'm not saying this is right, but it is the way our economy is structured. It's just how free-market capitalism works. I'd love to do it a different way, but I just can't think of one.

The CEOs are sort of a special case, an anomaly. Basically, they most of them managed to get into a position where their raises are determined by a bunch of their friends (the board of directors). Likewise, most of them are on the boards for their friends' companies. So they all give each other massive salaries. This is the reason for recent NYSE rules limiting "interlocking" boards of directors, and other things of that nature.


Now, to go back to your oil comments, that touches on something that I've read in a book (might have been this one:

The basic concept was that things are not extremely underpriced these days because we treat anything from the environment as being "free". When you're buying oil, you're just paying for the effort of extracting, refining and transporting it. You're not paying the cost to replace that oil, or the damage that was done to the environment along the way. The oil itself is assumed to be free.

When a fisherman catches a fish, he sells it for what it cost to catch. Not what it cost to grow, or replace it. There are other obvious examples (logging, mining, chemical manufacturing, etc).

So ultimately this is the reason why capitalism demolishes the environment. Because the cost model is totally whacked, and ignores huge amounts of the true cost of produces goods. If you could some figure in those costs, there would be huge monetary incentives to reduce/reuse/recycle, in order to reduce those costs. Every company would instantly become an environmentalist's dream.

Regrettably, I didn't get far enough into the book to find out how to do that. :)

Posted by: Brian Reischl on January 28, 2004 10:18 PM

Brian, you were doing so well until the CEO comments. :)

However before I start on that one would someone please buy the book and finish reading it !?! We are talking about saving the world... :)

The CEO and high ranking corporate positions however need to be highly compensated for one simple reason. So they will leave.

Lets look at the recent BBC scandal in regard to "Sexing up Iraqi Intelligence" Why did the Director General and the Chairman resign? The simple answer is to save face for the BBC.

While these two individuals were not compensated as high as US counterparts (one less than 500,000 Pounds per year) it is likely that neither of these guys are going to hold similar levels of power in a huge media company until a cooling off period passes.

The top levels of companies become very political and stepping down or leaving is essential to saving political face. The news story does not read "BBC full of shit" Instead it reads "dude resigns in face of scandal" This fits much nicer into the publicís mind. Problem: BBC is full of shit. Solution: Dude quite. Ah now the public can sleep well, heads have rolled.

Yes the chairman may have been able to prevent the breakdown of journalistic integrity but probably not. Sometime stuff just slips through the cracks.

Not only that but as a result of these two resignations a large percentage of BBC employees in several cities took to the street to protest one of the resignations. Well lets look at that message. Management could have, and probably will, send out a memo to all employees that the "BBC will only have the highest ethics." Which frankly I bet they send that out once a year anyway. But by getting rid of these guys everyone knows shit has hit the fan and you better watch yourself.

The high compensation allowed the two individuals to be in a financial position that they can represent the company's best interests by leaving/ being asked to leave.

My point is simply: Being a CEO is risky.

Where this fits into the original comment is that risk is also highly compensated in the marketplace. This risk compensation is applicable to labor as well as products. Oil is costly because exploration costs a shit ton and is very risky.

Posted by: anon knoxville business guy on January 29, 2004 09:15 PM
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