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Economic illiteracy and executive pay
Gerard Jackson
For those who are confused about the nature of Bracks’ economic policies they should look no further than Tim Pallas, one of Bracks’ chief advisors. As a former ACTU (Australian Council of Trade Unions) assistant secretary he reflects the ‘economic’ thinking of the ALP’s rightwing, which means one should pay attention to his past announcements.
In his previous incarnation as a union hack Pallas lambasted senior managers as hypocrites for allegedly demanding wage restraint from employees while they enjoyed significant pay rises. This is pretty rich coming from a man whose organisation destroyed hundred thousands jobs and who battles daily to maintain a high level of unemployment.
However, Pallas’s attack did serve the purpose of drawing attention earnings differentials. Although there had been a great deal of moralising and exhorting there has been absolutely no attempt to explain why average wages (and much of the argument is based on averages) should move in tandem with executive pay, or why there should be a fixed relationship between them.
What commentators do not realise is that there is no average wage. The concept is a statistical fiction which has had the most damaging economic consequences. It is individual wage rates that matter in the market place and not some statistical average. The same goes for executive pay. And what determines pay is the supply and demand for particular kinds of labour. Why there should be any relationship between the pay of a lorry driver an executive of, for example, IBM has yet to be explained by economic illiterates like Pallas.
Executive pay has risen faster than pay in most other occupations because the demand for executives has risen significantly compared with demand for other types of labour. It really is this simple. Companies pay what they must, not only to attract executives but to also keep the ones they already have. In today's increasingly competitive world, executives who cannot perform quickly find themselves replaced by those who can.
To state, as Prime Minister Howard once did, that companies “have a moral responsibility to exercise restraint” regarding executive pay is pure cant. If companies could pay less for their executives they would and Howard knows it. To “exercise restraint” would mean going without much- needed labour. Not a clever policy.
If people’s income is being freely determined in the market place there can be no wage injustice. As the Spanish Scholastics explained 500 years ago the ‘just wage’ is the market wage. What raises real wages, and hence living standards, for all (and this is what it is really all about) is economic growth. This means we must accelerate the rate of capital accumulation if living standards are to rise faster. A policy of invoking the dangerous fantasy of ‘wage justice’ and appealing to envy will not raise real wages but it will be divisive, as is the intention. This is nothing more than the politics of envy and ignorance.
Many commentators have raised the possibility that the gap between executive incomes and wages in Australia might reach American levels. So what. As I have already stated so long as incomes are dictated by market forces there is no injustice and there will certainly be no misallocation of labour. These incomes are not gained at the expense of labour or shareholders, quite the reverse.
Despite wailing about increasing income disparities, especially in the US, I have yet to hear an informed explanation of why any market outcome regarding incomes is unjust. (I certainly won’t get one from a union ideologue like Pallas). The intelligent thing would be to use economic reasoning to find out why the American demand for certain types of executive labour seems to have exploded. Unfortunately critics of market outcomes are more concerned with ideology than the truth.
Some critics are clearly implying that executive incomes are rigged at the expense of shareholders and workers. It needs to be understood that even if this were true it still would not be directly at the expense of workers but shareholders. I stress not directly because in all likelihood such fraudulent arrangements would involve inferior executives whose lack of ability would damage the company’s performance.
The argument assumes shareholders are powerless and market forces are impotent. (This is really another version of the separation-of-control-from-ownership argument.) This misconception springs from the idea that there emerges in big corporations a division of ownership. However, companies run by badly performing managements will invite takeovers by superior managed companies who will purchase undervalued shares, as many an inefficient management has discovered to its cost.
So long as the sale of shares are unrestricted and the use of proxies exist the possibility of removing inefficient or corrupt management is very real. The dramatic retirement of Prescott from BHP some years ago is a stark example of this process at work. Problems only emerge when governments impose takeover laws and foreign investment restrictions that are used by incompetent boards to prevent a shareholder revolt.
It is therefore in the economic interests of the country that such laws and restrictions be abolished. Moreover, I also think that the law should act to make CEO packages transparent. Regardless of what arrogant former CEOs like Hugh Morgan* assert, shareholders have every right to know how much their top employee is being paid.
The reality is that the exploitation of shareholders by management on the scale claimed by critics of executive pay is just another leftist spectre. In fact, many actions that are mistakenly called exploitation are merely a part of the executive’s remuneration package. The trouble starts when the costs of the package exceeds the value of the executive’s contribution to the company’s welfare. And this does happen. The result is usually labelled premature unemployment.
Given Pallas’s ignorance on all matters economic, including history and the history of economic thought, it is no wonder that Bracks’ so-called economic policies of tax, spend and regulate are eating away at the state’s prosperity.
Note: The market case is not helped by the likes of Senator Abetz who in a 1992 address to the H.R. Nicholls Society labelled penalty rates as ‘outrageous’ and ‘monstrous’. That a penalty rate, like all other factor payments, is a market phenomenon that is easily explained by standard economic thinking is something that Abetz apparently overlooked. Is that because he gets his ‘economic advice’ from the H.R. Nicholls Society, of which Hugh Morgan is a founding member.
*The following article exposes Hugh Morgan’s sloppy thinking and his haughty belief in the divine right of directors and CEOs.
Workplace reform, Hugh Morgan’s arrogance and executive pay
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 30 January 2006