Risk and value
Back when I was younger, I used to buy into the libertarian belief that the amount of money people have is exactly correlated with the amount of value they created. Because darn it, Free Markets are so powerful. So OK, the word “exact” is an exaggeration, but there was the belief that if someone made $100 million, they probably created somewhere between $80 million and $120 million of value. It was close enough that I didn’t want the damn gumm’nt thinking they can take away the righteously-earned profits of these value creators.
But now that I am older and wiser, I realize that the usual case (and perhaps the only case) is that people who earn great amounts of money don’t actually create any value at all, or if they do create value they aren’t necessarily creating any more value than a guy making a $100K/year. In fact, take the case of a scientist who makes a discovery that immensely improves our lives and thus creates huge value. Because the scientist may be an assistant professor at a university or an employee of a company that owns his discovery, the scientist gets nothing from his great discovery except his normal salary. Maybe the corporation he works for will give him an extra $15,000 bonus at the end of the year.
The libertarian types are actually aware of the scientist who makes nothing from his discovery. They have created the concept of “risk” to explain it. They say that the “risk takers” make money because there is supposedly great value in taking risks. If only more people would be risk takers, everyone would be richer. Having a low wage is your punishment for not taking enough risks.
Is a CEO who makes millions of dollars a year really more of a risk-taker than the scientist or engineer who makes $100K/year? ($100K/yr decent wage compared to the median wage which is around $30K/year, but it’s not rich.) I would say it’s just the opposite. If the CEO loses his job, he still has millions of dollars in the bank and may even have a golden parachute that gives him millions of dollars in severance pay. Meanwhile, the employee is barely scraping buy and subject to downsizing, or getting fired because he has a personality conflict with is boss, and then he may face huge difficulty in finding another corporation to hire him. No one wants to hire an old over-the-hill engineer. The lower you are on the corporate totem pole, the more risk you have.
Is a hedge fund manager or investment banker, who makes $10 million in a good year and only $1 million in a bad year, really taking more risk than an employee always makes a lot less than that no matter how good of a year he has and is subject to getting laid off or fired? I think not.
Maybe successful musicians are risk takers, because everyone knows that 99.9% of musical bands never make any money, but if Jaz-Z (net worth approximately half a billion) had never been born, it’s hard to see how the world would have been a worse place. Just because an industry is winner-take-all doesn’t mean that the winners have created outsize value.
Generally, it’s “entrepreneurs” who libertarians are usually thinking about when they talk about risk takers. But what percent of the richest of the rich are actually entrepreneurs and what percent became rich from banking and finance, real-estate investment, entertainment, etc?
An actual entrepreneur explains here that he’s not a risk-taker at all:
Being entrepreneur I don’t consider myself a risk taker. And I can’t really take risks. I have responsibility for my employees, my family and towards our customers. Out of opportunities I see, I only take ones I know I can transform into profitable and sustainable business.
Businesses don’t make money by taking risks, they make money by having monopoly power with respect some desired good or service. Jay-Z makes money by having a monopoly on being Jay-Z.
Also, given what I know about human behavioral biases, especially the well-known favorite-longshot bias and the optimism bias, the economy probably has too much risk-taking rather than too little. Thus it’s rather irresponsible of libertarian types to tell people they need to take more risk.
Lion of the Blogosphere 
Also, given what I know about human behavioral biases, especially the well-known favorite-longshot bias, the economy probably has too much risk-taking rather than too little.
The restaurant business surely does. Look at the amount of new eateries (at all price points) you’re still seeing pop up across America even in the middle of this economic slump.
Camlost
January 23, 2014 at 10:34 AM
Perhaps most importantly, even if a CEO gets canned for doing a terrible job, they still have a decent chance of landing another CEO job (definitely much better than the average person) since they have “executive experience.”
It’s almost tautological that more risk taking is not “good” since if it is a real risk, then it has a potential downside which will offset the gain over a large population as the central limit theorem kicks in.
I think a lot of times when people encourage taking risks (not necessarily the kind encouraged by libertarians), they mean risks with a small downside but a huge potential gain, such as applying to a prestigious school where your chances of getting in are low.
Jokah Macpherson
January 23, 2014 at 10:57 AM
That’s why it’s important to self actualize and not fall into the “money is king” mantra. The whole idea of having more money than needed, is getting a bit old in this day of age, when materialism is fading fast, as many people have been beaten down to avoid the rat race.
JS
January 23, 2014 at 11:20 AM
I suppose you could make an argument that the CEO’s high salary causes all managers to work harder than they would otherwise, to gain such a position, and so, altho the CEO doesn’t deserve the salary, it does serve a positive function.
CamelCaseRob
January 23, 2014 at 11:27 AM
People will work their ass off to go from $100K to $200K. They don’t need a multi-million-dollar carrot to be motivated.
Lion of the Blogosphere
January 23, 2014 at 11:43 AM
There are a couple of CEOs out there with 9 digit salaries. I cannot for the life of me fathom why they go to work the next year. What is the motivation? it must not be money, and if it’s not money, why pay them 9 figures?
The marbles in Lou Holtz mouth
January 23, 2014 at 1:13 PM
It never ceases to amaze me how people even make a big deal about 5K difference in salary.
JS
January 23, 2014 at 1:33 PM
you’re right marbles and you’ve laid bare the really big secret of success, namely, loving what one does and being lucky enough that what one loves to do is paid.
warren buffet said, “the ultimate luxury is to be paid to do what one would pay to do.” he has such a luxury.
the self-made have for the most part merely followed the path of least resistance like everyone else. they’ve just been lucky enough that their path lead to the top.
if steve jobs had never known steve wozniak he’d have been a cult leader at best. instead he was both a cult leader and a billionaire.
jorge videla
January 23, 2014 at 8:26 PM
namely, loving what one does and being lucky enough that what one loves to do is paid.
For most men, it’s more important for them to get laid.
http://alternative-right.blogspot.com/2014/01/everyone-harlot.html#more
JS
January 23, 2014 at 10:56 PM
i keep confusing ‘lead’ and ‘read’. should’ve been ‘led’.
BUT COME ON JS…isn’t it better to die like newton or kant than ‘get laid’ by a girl you have no interest in starting a family with.
all one hears is how ‘society’ expects too much of girls and gals and women, etc. BUT there’s a stereotype of what it means to be a man too.
i’d give back all my lays to be kant or newton.
jorge videla
January 24, 2014 at 10:13 PM
Jorge – I was just making a reference of the current situation of what guys have become. Bonobo monkeys whose ultimate goal is to shag a lot of females. There is anything wrong with that, if that’s what you want. But it’s a problem for many guys today who need validation from society, and especially from women.
Newtown was great. The virgin genius had no qualms about his predicament.
JS
January 25, 2014 at 11:08 AM
I’ve never heard any libertarian claim that people are paid according to their “created value.” This seems closer to the old commie “labor theory of value” nonsense than some libertarian belief. Libertarians would more likely claim that there is a market for labor, and people are paid the market price which is a function of the supply and demand for labor. This seems pretty reasonable to me, especially around the middle and low income salary ranges. Probably this breaks down out at the high-salary tail of the distribution, which Lion seems to be oddly obsessed about.
steve@steve.com
January 23, 2014 at 11:57 AM
Indeed. I’ve sometimes wondered why Lion doesn’t similarly excoriate, say, expensive food which arguably doesn’t provide much nutritional or taste benefit above less expensive fare (though lately he has been venturing in that direction too). If somebody ain’t you, they’re liable to have values, ideas and preferences wildly different than yours. For some reason Lion just can’t accept that.
Sam Hardwick
January 23, 2014 at 3:55 PM
You assume that it’s the scientist who does the most important work in producing a good or service for the public. But why would you think that’s true?
The discovery of a product means almost nothing to the economy. The scientists of the Soviet Union made numerous important discoveries that contributed little to the general welfare of the Soviet citizens because there was no economic system by which to productively deliver those discoveries to the public. This was true of even some discoveries in the West.
It’s the application of the product into the lives of people that creates economic value, and most scientists don’t have the first clue how to go about doing that.
Take the invention of the transistor. William Shockley, John Bardeen and Walter Houser Brattain invented the transistor. But several other scientists were on the verge of doing so. But only Shockley immediately saw the potential commercial applications of his work and tried to do something about it.
Unfortunately, Shockley didn’t have the first clue how to go about building a company and selling a product. Surprisingly, he even had trouble focusing on the most promising applications of the new technology – a point which some of his employees tried to point out to him. The only thing he did well was surround himself with talented engineers, all of whom promptly left him to go found the companies that would make up what would later be called the Silicon Valley.
Shockley took a job as a professor at Stanford and, deservedly, got no compensation for his efforts in what would become the greatest creation of wealth in human history – even though he was one of the key inventors behind it.
Pincher Martin
January 23, 2014 at 12:07 PM
This is just a rationalization based on the just-world fallacy.
Lion of the Blogosphere
January 23, 2014 at 1:36 PM
No, it’s not. It’s an empirical description of reality. A few cases contradict it (in finance, for example), but on the whole my description of the economy is more objective and accurate than is your description of the economy.
Most scientists don’t have the ability to commercialize their discoveries. They don’t have the first clue how to start. Nor do most of them show much interest in doing so. The really good scientists are wholly consumed with their work.
Yet the application of a new technology is the key to increasing productivity in an economy. In other words, it’s the key to wealth. Inventing the technology is just the first step.
The invention of the computer, for example, didn’t increase economic productivity. Only the mass production and utilization of computers did. And that could only be done when you could convince enough businesses and individuals that it was worth buying one.
Your idea of the scientist as creating the most important value assumes others don’t provide him with absolutely critical help. Without help, that scientist’s discovery goes nowhere. It helps no one.
Pincher Martin
January 23, 2014 at 2:20 PM
1. It seems to me that “scientists and engineers don’t care about money” is one of those lies that CEOs tell themselves to justify paying them such low salaries.
2. Just because there’s a division of labor doesn’t mean that scientists and engineers don’t create more value than higher-paid but less-value-creating managers.
3. “Scientists don’t care about money” becomes a self-fulfilling prophecy if people who care about money (most people) don’t become scientists because they see how poorly paid they are compared to investment bankers and strategy consultants. The result is fewer scientists and less value creation.
Lion of the Blogosphere
January 23, 2014 at 2:23 PM
“1. It seems to me that “scientists and engineers don’t care about money” is one of those lies that CEOs tell themselves to justify paying them such low salaries.”
I’m sure many of them do care about money. William Shockley certainly did. He still failed to make any.
But that’s the wrong issue to focus on. You should focus instead on who creates value. And the skill set needed to commoditize a new discovery and make it indispensable to modern living is quite different from the skill set an engineer or scientist bring to their jobs, and ultimately it is the latter and not the former which is more important to the economy.
“2. Just because there’s a division of labor doesn’t mean that scientists and engineers don’t create more value than higher-paid but less-value-creating managers.”
That doesn’t change the fact that it is not the discovery itself, but how the discovery is turned into a commodity that creates the most economic value.
It’s really not even close. Many kinds of discoveries are made which have no immediate economic value because no one knows what to do with them. They literally sit in someone’s desk as an interesting thought experiment until someone else (usually) discovers the value they have.
You glorify scientists and pooh-pooh the value of those who commoditize new discoveries and inventions. But if the latter’s job is so easy, why don’t the scientists and engineers just cut them out?
They don’t because they can’t. You think Apple today would be anywhere near the company it is – or even still in existence – if it had to rely on the marketing and management skills of the inventor and engineer Steve Wozniak?
Pincher Martin
January 23, 2014 at 5:40 PM
Erratum:
“…and ultimately it is the former and not the latter which is more important to the economy.
Pincher Martin
January 23, 2014 at 5:42 PM
do scientsists run big drug companies? no. typical is pfizer’s ceo, former lead counsel to mcdonald’s. this is NOT the way it is in germany or taiwan. technical people run technical companies in most of the rest of the world. american business is a joke. so is british business. it’s all about class and not about competence.
jorge videla
January 23, 2014 at 8:20 PM
blah, blah, blah…
anyone who uses the term “skill set” is an idiot.
jorge videla
January 23, 2014 at 8:23 PM
“do scientsists run big drug companies? no. typical is pfizer’s ceo, former lead counsel to mcdonald’s. this is NOT the way it is in germany or taiwan.”
That must be why America’s high-tech companies are trailing Germany and Taiwan’s.
Oh, wait.
“technical people run technical companies in most of the rest of the world. american business is a joke. so is british business. it’s all about class and not about competence.”
The only joke here, kemosabe, is in your head.
Pincher Martin
January 23, 2014 at 9:43 PM
How many scientists have access to the financial and social capital to commoditize their investments? It’s not so much the “skills” of financiers and business people as the fact that they have access to resources 99%+ of people don’t.
asdf
January 26, 2014 at 11:35 AM
Oh, a CEO takes huge risks. Not (usually) on his behalf but on behalf of shareholders. An incompetent/criminal/unlucky CEO can easily run a company into the ground. How much is that risk worth?
Suppose for some reason you can’t manage your money yourself and have to hire an outside manager. You know he is unlikely to earn you more than an average return, so in this sense his “value creation” is low. But if he is malfeasant or just plain stupid he can leave you destitute in your old age. Will you pay this guy well or will you economize?
Hamster of the Blogosphere
January 23, 2014 at 12:15 PM
This is the standard libertarian rationalization for why CEOs make so much money, but the correct explanation is that the corporate structure is such that the CEO is able to extract more money from it than any other stakeholder.
Lion of the Blogosphere
January 23, 2014 at 1:38 PM
Yep. Weak & compliant boards of directors design and approve the CEO’s overly high compensation. The CEO has more information about the company than the board to which he reports.
E. Rekshun
January 23, 2014 at 5:19 PM
Not (usually) on his behalf but on behalf of shareholders. An incompetent/criminal/unlucky CEO can easily run a company into the ground. How much is that risk worth?
Marissa Mayer of Yahoo seems to be the perfect example as we speak. Women spend like drunken sailors, when given money at their disposal. Her acquisition of all those small tech companies is akin to a female shopping at a department store.
JS
January 23, 2014 at 1:53 PM
http://money.cnn.com/2014/01/17/technology/yahoo-golden-parachute/
In Nov ’12 Mayer hired away from Google some Portuguese guy to be the COO at Yahoo. He was recently canned. Total compensation: over $100mm.
anon
January 23, 2014 at 5:24 PM
$20 million signing bonus, $20 million salary, $60 million golden parachute after he was fired a year later for doing a crappy job.
Where’s the risk exactly? And how can you argue that he was so good he was worth the money when in fact he was so bad he was fired?
Lion of the Blogosphere
January 23, 2014 at 5:36 PM
No risk, as some people get their debt cancelled and accounts closed, for racking up unfettered credit card charges, where companies decide to put at end to it.
If Yahoo descends into more failure, Mayer will get a free pass and be asked politely to step down as a CEO, because she’s physically attractive enough to bypass any strong criticisms from her shareholders. It would be different if she was Jerry Yang, an Asian guy.
JS
January 23, 2014 at 6:12 PM
“Where’s the risk exactly?”
A hundred million dollars sounds like a lot of money until you realize that all of your successful peers in that select group are either billionaires or on their way to being billionaires. So the risk to de Castro is the future income he lost by not succeeding. He won’t become a billionaire. He’ll have to live with just being a centi-millionaire.
By comparison, Eric Schmidt was worth $7 billion dollars by the end of his ten-year stint at Google. Sure he was wealthy before he got to Google, but nowhere near that rich.
That kind of crazy compensation is essentially what de Castro gave up by not succeeding at Yahoo. That’s the risk he took, and those are kind of stakes those people are playing for. Yahoo had to pay a lot of money just to lure Castro over from Google, where he reportedly did a splendid job. Otherwise he wouldn’t have come.
Pincher Martin
January 23, 2014 at 7:40 PM
“$20 million signing bonus, $20 million salary, $60 million golden parachute after he was fired a year later for doing a crappy job.
Where’s the risk exactly? And how can you argue that he was so good he was worth the money when in fact he was so bad he was fired?”
Strawman. Who is arguing that? Who thinks that lavish pay for corporate executives is always well-earned? Even Ayn Rand herself wrote about how lots of CEOs were moochers and cronies. In the case of Yahoo, Mayer has gotten widely pilloried for this $100mm mistake.
As for why she hired him, she probably bought into the cult of personality surrounding herself and applied it to him too. In reality, it’s hard to think of any one executive worth that much money. Yahoo shares have gone up since Mayer came on board, but that has little to do with her and a lot to do with interest in its Asian properties. A better use of $100mm might have been to poach the 100 of the best software programmers and designers from the industry with $1mm comp packages.
Dave Pinsen
January 23, 2014 at 8:03 PM
SO THERE YOU HAVE IT LADIES AND GENTLEMEN:
THOSE WHO ARE ALREADY VERY RICH MUST BE ENCOURAGED TO RISK NOT BEING SUPER RICH.
“america. f*** yeah. freedom is the only way yeah.”
jorge videla
January 23, 2014 at 8:38 PM
yahoo makes a murdoch tabloid look like the financial times.
jorge videla
January 23, 2014 at 8:41 PM
the us is exceptional…exceptionally sh****
jorge videla
January 23, 2014 at 8:43 PM
Mayer had to go to Portugal to find a COO? What, couldn’t find a qualified American? Was the guy here on an H1B visa?
E. Rekshun
January 24, 2014 at 11:04 AM
Woman CEO is an indicator of a company in decline. All this buying of small companies reminds me of the woman who headed eBay buying Skype.
Skype. Think about that.
map
January 24, 2014 at 10:03 PM
Woman CEO is an indicator of a company in decline.
The general public and legions of horndogs are attuned to Mayer’s physical attractiveness more than anything else. She’s considered the hottest CEO to ever sit in a boardroom, and was recently featured on the front cover of Vogue magazine so d!cks could lust after her.
From one of the Yahoo’s shareholders who made this comment during the meeting with her:
I’m a dirty old man, and you look attractive, Marissa.
http://www.huffingtonpost.com/2013/06/25/george-polis_n_3498594.html
JS
January 26, 2014 at 1:50 PM
* I meant to say that Mayer was featured in a photo spread in Vogue.
JS
January 26, 2014 at 4:17 PM
Yes, capitalism, free markets, monopoly (whatever you wanna call it) is fucked up. But it’s not more fucked up than communism, that’s for damn sure.
The best capitalism is Buchanan style protectionist capitalism which makes the dollar connected to actual things produced and manufactured.
And I agree that the likes of jayZ have created anti-value. He’s done nicely for himself, but has taken value away from society. It has to do with when Sam Francis talked about the egalitarian nature of capitalism which makes the dollar of an immoral consumer equal to the dollar of a moral one.
fakeemail
January 23, 2014 at 12:24 PM
I never said that Soviet-style communism was a better economic system.
Lion of the Blogosphere
January 23, 2014 at 1:40 PM
there is a very tired and tiresome “rhetorical device” in american politics. it’s the either you’re a laissez-faire randian or you’re a commi.
ONLY IN AMERICA. YEEE-HAAAW!
jorge videla
January 23, 2014 at 8:36 PM
” there is a very tired and tiresome “rhetorical device” in american politics. it’s the either you’re a laissez-faire randian or you’re a commi.”
No, we’re also strongly represented here by clichéd posters like yourself who think Europe’s soft socialists always do things better.
Pincher Martin
January 23, 2014 at 9:47 PM
Furthering your CEO/risk example, remember that in most decent-sized organizations, they actually hire flocks of consultants to hold their hand before making any major decision. The goal is to latch onto something that can be framed as innovative while not freaking out investors too much.
In fact, they won’t even take the minor risk of trying to master new tools. Whatever cutting-edge tools that the org’s engineers are using to help the company find new opportunities or save money, the mantra from the top is always the same: “Oh, we need to get that in an EXCEL SPREADSHEET, just like I learned to use back in the GOOD OL’ DAYS.”
Fiddlesticks
January 23, 2014 at 12:28 PM
Toos is all risk-avoidance. If a toos takes any risk it is usually a lesser member who does not stand to inherit too much of the power and wealth.
The truly chic never really ventures out of the accepted norm. They might do something strange sexually, but in business and politics they do not take any kind of risk.
That’s why toos never changes. As long as the current Western Establishment, the Cathedral, or whatever stands, toos will never lose power and wealth since they hold everything and they do not change.
Bill Gates (originally from upper middle class but no toos), after he was allowed to hang out with toos, has not done anything interesting. He has too much to lose so he does not take any risks.
If the toos want to rein Google, invite Sergey Brin to the top parties and soon Google will also cease doing anything interesting.
Colmainen
January 23, 2014 at 12:55 PM
Bill Gates’ father is a multimillionaire lawyer who specialized in anti-trust…ironically.
map
January 23, 2014 at 1:54 PM
i’m sure gates is very smart, but he doesn’t seem especially smart in interviews. he doesn’t seem dumb either. it’s like: “THAT’S what a 170 iq sounds like???”
jorge videla
January 23, 2014 at 8:33 PM
Paul Fussell said the same thing…. upper class do not have any interesting ideas, artistically or otherwise. Most interesting ideas come from the middle class. Possibly some working class have good ideas musically… what were the rolling stones were they working class?
shiva1008
January 23, 2014 at 10:15 PM
Another good post, though against my own interest.
Was pure scientist before until I realized what is going on in capitalist society. Join in a for-profit corp as pure nerd, slowly advanced to CEO position, I played the game well for myself. As typical nerds (like Gate) who are not into showing off, our janitors at headquarter office have no idea that I am the CEO.
You need to demonstrate your idea can bring more profit into organization as proof for future advance. The board will select the one who has trek records of good idea as next CEO. I would say 50/50 in term of value creation vs strategy of profit taking in our business. Yes, profit taking does not contribute much value for society at all. Either way, you can get rewarded for your ideas if you are in a good organization. If they do not promote you, they know the very danger of losing you. Smart people usually know that. In a market economy, game is supply and demand. As long you possess RARE quality of any talent, you always have potential for big profit if you find demand for it.
IC
January 23, 2014 at 1:08 PM
Ah, Street Libertarianism strikes again!!!
This is the same kind of problem liberals have. Liberals know that smart people will always take advantage of dumb people, so they want government regulatory schemes that protect the dumb. Trouble is, no such protection materializes because the smart take over the institutions. The end result is that government allows smart people to have a much broader palette on which to do their mischief.
Value transferring will always exist because value tranferrers will take over any institution. The $100 million CEO is Russia’s Commissar or the EU’s bureaucrat.
The only real solution is transparency and easy methods nby which to judge success and failure. This is why libertarians want smaller government and clearer laws.
map
January 23, 2014 at 1:14 PM
LOTB, I believe you’ve mentioned you are a lawyer, why aren’t you using your legal skills to transfer value to yourself? If you can’t beat ’em, join ’em.
Fiddlesticks
January 23, 2014 at 2:55 PM
Lawyers who are rich got rich by doing the right things, which are going to a top-14 law school and then getting a job at BIGLAW. (Doing the right things is the opposite of taking risks.).
I did the wrong thing, I went to a crappy state law school, so there’s no career path in law for me.
Lion of the Blogosphere
January 23, 2014 at 2:58 PM
I know of an ambulance chaser (personal injury attorney) who made 10s of millions, winning big traffic accident cases. He graduated from Brooklyn Law School, which is prole, but it’s a popular law school for White ethnics, the Italian-Jewish types, who are true to their New York roots.
BIGLAW is definitely BOBOLAW!
JS
January 23, 2014 at 3:35 PM
You can always be an ambulance chaser like that sleaze John Edwards and make bags of cash.
peterike
January 23, 2014 at 4:02 PM
In 1987, I dropped out of New England School of Law after one year in the part-time night program (while working full-time as a software developer), after I accepted the fact of how meager the job prospects were for crappy-law school grads. However, if I had stuck it out, I likely would have been able to parlay the JD into a patent attorney position with my then government defense contractor employer; and subsequently jump to a firm, and be earning two to three times what I make now w/ my top-50 MBA.
E. Rekshun
January 23, 2014 at 5:35 PM
@js
there will always be means of making millions for those who are smart (enough) AND have no morals.
when it comes to money people will rationalize the indefensible and smart people are better at this than the rest. but one can only be so smart and not see himself in the act of rationalizing.
jorge videla
January 23, 2014 at 8:31 PM
@ E. Rekshun: You and a whole lot of other people jockeying for that sliver of multi-million $$$ patent work. I knew a guy with impeccable credentials who followed that route. Then he got to a big NYC law firm and realized everybody had a gold-plated resume. And being older than his entering class and Big Law preferring young grinds who take adderall and work all night, he went in-house as soon as he could.
Law is a guild. Smart corporate consumers of legal services are devoting lots of brainpower to figuring out how to break it.
Most lawyers will be in cubicle farms by the time things run their course.
The Anti-Gnostic
January 24, 2014 at 12:21 PM
What’s the word on public sector law? Like in the federal government?
Georgetown Law School is in the T-14 but likely atop the FEDLAW track.
eradican
January 25, 2014 at 3:36 AM
“really taking more risk than an employee always makes a lot less than that no matter how good of a year he has and is subject to getting laid off or fired? I think not.”
Following that line of thinking, doesn’t the illegal migrant worker take the most risk? And/ or people in illegal arenas of trade (which can be highly lucrative)?
toomanyspiders
January 23, 2014 at 7:52 PM
Not really, because the illegal Mexican has 2 countries in which he can live and work – Mexico, which is actually a moderate-income country, NOT a Third World backwater like Paraguay, and the US.
Diversifying your portfolio always reduces risk.
Also, the illegal started out working class and will remain working class no matter what. If you read AlanB’s long comments recently in glpiggy, the worst fall that can happen is for a courteous, professional middle-class worker to end up in the underclass (a sheep amongst wolves).
ATC
January 24, 2014 at 10:15 AM
I don’t understand why it is a big deal if some small number of people at the apex of a pyramid make a lot of money. If you were to redistribute even billions of dollars in “overpayment” back to the masses, that would work out a few bucks apiece. For the amount of effort it would take by me, even in concert with others, to enact that kind of redistribution of income, I could improve my own income by a larger amount by adding another skill to my existing skill set. So, there’s a massive coordination problem where the only low-income people who would really benefit from redistribution are the people who are too low-skilled to actually pull it off. As far as I can tell, biggest beneficiaries of redistribution policies are the people in the various bureaucracies which administer the policies.
“the corporate structure is such that the CEO is able to extract more money from it than any other stakeholder.”
And also create more value for the corporation than any other stakeholder. I work as a strategy consultant and I can tell you that the difference in value between Strategy A and Strategy B can be many multiples of the size of a CEO’s compensation. Since the CEO is ultimately the only employee who can sign off on the selection of a strategy (with subsequent approval by the Board), the CEO gets to take home the largest chunk of the difference between Strategy A and Strategy B.
“Is a CEO who makes millions of dollars a year really more of a risk-taker than the scientist or engineer who makes $100K/year? ($100K/yr decent wage compared to the median wage which is around $30K/year, but it’s not rich.) I would say it’s just the opposite. If the CEO loses his job, he still has millions of dollars in the bank and may even have a golden parachute that gives him millions of dollars in severance pay. Meanwhile, the employee is barely scraping buy and subject to downsizing, or getting fired because he has a personality conflict with is boss, and then he may face huge difficulty in finding another corporation to hire him. No one wants to hire an old over-the-hill engineer. The lower you are on the corporate totem pole, the more risk you have.”
If the CEO and the over-the-hill engineer were hired at the same time when both were much younger, they had the same opportunity to become CEO. You are looking at the outcome and not looking at the process of becoming CEO. The only time someone low on the corporate totem pole has a lot of risk is when they are older. Someone low on the totem pole who is fired while young has lots of opportunity and time ahead of them. How many people who became successful later in life have a story about an early-career firing or downsizing or whatever and how that motivated them? And if someone is low on the totem pole when they are older, what does that say about the quality of their contributions over the years? The company is right to get rid of that person and probably should have done so even sooner. If anything, my experience as a strategy consultant (10 years now) has shown me that too many executives don’t make the tough decisions that need to be made when they need to be made, but prefer to continue to hope for a change in the company’s fortunes. If anything, that would be the reason I would argue CEOs don’t deserve their money. They are too slow to cut bait on failures, both people failures and strategic failures. And the person who became CEO probably did take more risks over time than the low-on-the-totem-pole engineer.
And, yeah, it’s not going to elicit any sympathy, but CEOs may have millions in the bank after being fired, but how much of that is already spoken for by the liabilities they have at that time?
BS Inc.
January 23, 2014 at 8:02 PM
Clearly you don’t know how intellectual property development works within universities. First off, yes, the university owns whatever the professor does, just like in a business. That is the trade-off: work for us, says the uni, and we will front the tens of millions of assets you need to get your job done. Assets which the professor would find extremely difficult to attain on his own, as it would require “risk” from outside investors. And second, unis are more generous than businesses in that they actually allow the professors a slice of any fees generated from their intellectual property. You can look up a Northwestern Chemistry professor and see how well he’s done, for instance (or some Stanford professors). Nevertheless, the up-front costs a business or institution provides goes completely unnoticed in your simple deduction.
Also, your conflation of “risk-taking” with “value-creation” is naive. Your criticism of the “systemically wealthy” – the business exec or lawyer or general ladder-climber – glosses over the fact that these people often sell their souls to work their way up. Just look at the bios of most Fortune 500 management teams – generally they’ve all been at the company for two decades, as well as having to pay their dues with the obligatory MBA. True, most of those roles can be filled by people off the street – hell, just look at the back story of Steven Jay Russell who conned his way into a CFO position and excelled! – but people off the street did not make the “correct” decisions in working their way up to eligibility. To stick around at a company or industry so long, to be willing to relocate, to be willing to work 80 hour weeks, etc. are all “risks” that it will pay off down the road; sometimes it doesn’t. Now, you can be butt-hurt that this is what the world rewards. But eventually the inefficiency of stacking a business with well-paid slaves who can’t think comes full circle: see Kodak. So clearly, SOME value is being created to keep these businesses afloat.
Joseph Hazani (@jhazani)
January 24, 2014 at 12:13 AM
Lion, I think you’re confusing your misunderstandings of Libertarianism with Libertarianism, again.
Even libertarian-direction writers like Murray Rothbard are way ahead of you in your critique of markets, ‘libertarianism’ and value.
rob
January 24, 2014 at 1:23 AM
“Is a CEO who makes millions of dollars a year really more of a risk-taker than the scientist or engineer who makes $100K/year?”
Plenty of engineers and programmers end up wealthy CEO’s i.e. Jack Welch, Lee Iacocca, Bill Gates, Mark Zuckerberg, Larry Ellison, Page & Brin, etc. Wozniak, of course, preferred engineering to management and chose to leave.
An actual entrepreneur explains here that he’s not a risk-taker at all:
Of course entrepreneurs take risk. Most businesses fail. It doesn’t mean they’re trying to take risks. No one wants unnecessary risk.
“Businesses don’t make money by taking risks, they make money by having monopoly power with respect some desired good or service.”
Businesses make money by minimizing unnecessary risks. Monopoly is a great way to minimize risk. But libertarians oppose monopolies as much as anyone. It violates the free market. Fortunately, monopoly is more myth than reality. In fact, one of the few places a true monopoly really exists is in government.
The whole video is great but I’ve linked it to play the last 2 minutes because that’s the relevant part..
The Robber Baron Myth
“the economy probably has too much risk-taking rather than too little. Thus it’s rather irresponsible of libertarian types to tell people they need to take more risk.”
Libertarians don’t tell people to take more risk. People make their own judgements on how much risk they can tolerate. Some risks are unavoidable but people do everything they can to minimize them. Even when you’re playing it safe there’s still “risk”. Let’s use your portfolio as an example. If you buy shares in a risky company you might make a lot of money or it might go bankrupt and lose it all. But what happens if you bury it in the backyard? You’ll still lose money due to inflation. You have to invest your money somewhere. So you do as much research and planning as you can to maximize your profit and minimize your risk. It’s the same when it’s your own business.
destructure
January 24, 2014 at 2:40 AM
It seems to me that what you’re ultimately saying is that the free market isn’t fair because people don’t get paid according to the value you think they’ve created. People don’t get paid according the value I think they’ve created either. But, in a free market, every dollar that changes hand was paid voluntarily. And that’s a lot more fair than taking the freedom from individuals to make their own decisions and putting it in the hands of bureaucrats. What’s more, history has shown that it ultimately leads to the most prosperity for the most people as well.
However, it does gall me to hear billionaires crowing about wanting bigger government. So I’d be more than happy to raise taxes on them until they think they’re paying their fair share.
destructure
January 24, 2014 at 3:04 AM
‘But, in a free market, every dollar that changes hand was paid voluntarily. And that’s a lot more fair than taking the freedom from individuals to make their own decisions and putting it in the hands of bureaucrats. What’s more, history has shown that it ultimately leads to the most prosperity for the most people as well.’
rot and rot and rot. eventually you’ll rot through.
jorge videla
January 24, 2014 at 10:33 PM
And when you die, your regret will be that you didn’t write enough blog comments.
Glengarry
January 26, 2014 at 11:43 AM
No, mixed market economies yield the most prosperity for the most people. Northern European countries deliver a better life to their citizens then ours, and that’s also true of many of the technocrat Asian nations.
asdf
January 26, 2014 at 11:41 AM
“Northern European countries deliver a better life to their citizens then ours, and that’s also true of many of the technocrat Asian nations.”
Japan has been in a slump for almost two decades. As for the Northern European countries, I’ll let the American Thinker address that.
http://www.americanthinker.com/2013/02/scandinavian_models_look_great_but.html
destructure
January 26, 2014 at 11:05 PM
America has been in a slump if your in the 99% too. And I’ve lived in Japan in the not too distant past. Their government does a much better job.
Your linked article just tells us NAM immigration sucks. We already know this. No system of government can survive NAMs.
asdf
January 26, 2014 at 11:46 PM
Agreed. So why assume North European and NE Asian countries have better government and not jut better people?
destructure
January 27, 2014 at 9:14 PM
In defense of libertarians, they don’t claim (at least the intelligent types) that the free market is a fair market.
Just like nothing is fair in life, nothing is fair in business. The question we should ask ourselves is whether State intervention can make things more fair. The historical assessment overwhelmingly says ‘no’. It just displaces injustice toward other victims.
I am certainly not, in principle, against a nerdy techno-utopia redistributing money from “dumb” uses to smart uses (like funding AI projects), but the electoral dynamic for that would be… well… difficult to establish.
Thomas
January 24, 2014 at 9:22 AM
As far as I can tell, they DO believe that the free market is fair because they believe the people who made the most money are those who created the most value. Which is why they hate progressive taxation, because they belive that progressive taxation is “punishment” for the most righteous value creators.
Lion of the Blogosphere
January 24, 2014 at 9:29 AM