Wojtek writes: >
> >Is executive salary, or a part of it, rent from an economic point of view?
> >And if so, how can the rent component in that salary be determined?
> >
> >I'm asking this question because a mainstream economist I'm working with
> >argued that exec's salary can actually reflect the exec's worth (i.e. what
> >he, rarely she, produces). Since the productivity of an exec (or for that
> >matter, any white collar worker) cannot be directly measured -- how can such
> >a position be intelligently rebutted?
>
> These are two separate questions: that is, an executive could be paid an
> amount equal to something that might plausibly be construed as his or her
> marginal product, and yet still be earning (lots of) economic rent. I'd say
> that conditions in executive labor markets, particular in the US, are such
> that many or most executives earn economic rent, whether or not they're paid
> the value of their marginal product.
>
> Details:
>
> 1) By its nature, executive labor is more or less a fixed-coefficient input
> in the production process. This is especially the case for _chief_
> executive officers---once you've got 1 of them, the value of any more
> plunges dramatically. An immediate consequence is that "marginal
> productivity" of the executive has to be interpreted with care, since beyond
> a given point (in the case of CEOs, that point presumably = one person) the
> relevant derivative simply doesn't exist.
>
> Therefore "marginal productivity" has to be understood in a discrete sense,
> as the difference in (discounted average) firm profits with and without the
> services of a given CEO. Whether or not a given CEO receives this amount
> depends primarily on the long-run elasticity of demand for CEO
> services--which depends in turn on the long-run supply elasticity of firms,
> or less vaguely, stockholders and other firm types of firm owners. CEOs are
> guaranteed to receive their full marginal product, defined in the above
> sense, only if this elasticity is infinite. In this case Keynes is probably
> right--in the "long run" required for this prediction to hold, we're all dead.
>
> 2) But nothing in (1) determines whether executives earn economic rents,
> since the latter has to do with conditions of market supply *relative to*
> market demand. Executives will earn economic rents even given "price-taking"
> behavior if they are on the "short side" of the market--i.e., the supply of
> executives hits its limit before the demand for executive services does.
> Alternatively, and maybe more plausibly, executives will receive economic
> rent if they are difficult for firms to find and/or replace, and
> consequently enjoy bargaining power in their negotiations with firms that
> hire them.
>
> Thus, to guarantee that executives receive no economic rent, you'd have to
> be sure that a) they enjoy no bargaining power vis-a-vis firms, and b) the
> (long-run) supply of executives is infinitely elastic at the zero-rent wage
> (and all CEOs are alike, so that all face zero rents if any one does).
>
> So the claim that executives do not typically receive rents depends on
> pretty strenuous conditions. How to prove that they in fact receive rents?
> Ask first who has proved that they receive _no_ rents--I'd love to see the
> study claiming to do this. As a first pass, the evidence that executive pay
> _does not_ vary predictably with firm profitability argues against the
> relevance of marginal productivity theory in markets for executive labor
> power, since the marginal product of an executive, especially the chief
> executive, is best thought of in terms of differences in profitability
> flowing from the presence of that input.
>
> To address the issue of economic rent directly, you could provide evidence
> for the existence of mobility barriers in the market for executive labor
> power, but this is easier said than done. You might look at Dickens and
> Lang's articles supporting "dual labor market" theory for clues on how to
> proceed on this issue.
>
> In solidarity, Gil Skillman
>
Hi Gil,
Hope you are doing well.
Really, this whole marginal productivity theory is like not-
soelegantly quantified Calvinism. Instead of the Calvinist notion of
pre-destination and wealth is the sign of being in "God's grace"(and
poverty means God has it in for you), here we have some meaningless
yet very pernicious tautologies. Here we have you are rich because
you are paid (in the long-run) according to your MRP (Factor Suppy and
elasticity of Supply assumed "given") and your MRP (MP x MR) is high
relative to the MRPs of those who are poor (who have low MPs and/or
produce products/services that command low MRs).
Karl Meninger once said: A neurotic is one who builds castles in the
sky, the neurotic is the one who moves in--and the shrink collects
the rent." In the case of neoclassical theory (in my opinion the AIDS
of economics), and especially in the case of marginal productivity
theory, the theorists have not only moved into the theoretical castle
and are renovating (bounded vs full rationality, asymmetrical vs
perfect information, limited vs full factor mobility, satisficing vs
maximization) and poor people are paying the rents (excuse the pun)
through barbaric policies constructed upon neoclassical metaphysics
in the service of comforting the inflicters (as opposed to comforting
the inflicted or inflicting the comfortable).
In the case of CEOs like all administrators, they are typically
megalomaniacs who do their own versions of "assortative mating" (like
selects like). They are in the position of rationalizing/supporting
the need for each other and in the position of leveraging each other
in terms of Supply and elasticity of supply for CEO's; thus they are
in a position of managing tight and relatively inelastic supply of
CEOs (one source of economic rent); they are in the position of
influencing perceptions of those who vote on their salaries (most on
the Boards of Directors wouldn't even know how to calculate MP of CEO
"labor" or MR of the "product" of CEO "labor" or even really define
what the "product" of CEO "labor" is) and with all sorts of
interlocking relationships (one study by the FTC found 39 individuals
holding 455 directorships between them) the real question should be:
What other than economic rent is reflected in typical CEO salaries).
Whenever the neoclassicals get caught with their meaningless and
metaphysical tautologies/assertions being exposed, there is another
retreat and attempt to "chop off the toes so that the shoe fits"
(carving up reality with artifacts, contrived syllogisms and
more extended ceteris paribus) rather than simply trying to find
another theoretical shoe that better fits--the facts and reality. So
we go from perfect to "bounded" rationality, from perfect to
"limited" factor mobility, from maximizing to "satisficing", from
perfect to "asymmetrical" information with each retreat trying to
protect a bankrupt and dangerous paradigm--and a whole
institutionalized network of neoclassical "true believers" who have
built CVs and vested interests on the basis of neoclassical mysticism
and just refuse to repudiate their pasts and basis for their academic
careers. And what is worse, to resolve the ongoing congnitive
dissonance problems (bankrupt theory vs continually refuting facts and
aspects of reality), they continue to infect the discipline with this
crap and continue to create new corps of functionaries and grad-
student clones spouting the same stuff with some modifications.
Here I am not talking about Gil who obviously is well-trained outside
of the neoclassical paradigm, but it just blows my mind how anyone
can talk about the "marginal product" or "marginal revenue" of the
"product" of CEO "services" or indeed about any kind of real open
market for CEO's (almost always inside jobs) or ""elastic supply" of
CEOs, or "equilibrium salary/benefits rate" or any of that nonsense.
When Michael Ovitz left Disney after screwing up and not being able
to share power with fellow megalomaniac and friend Eisner, he bailed
out with a package worth about $120-$150 million. What the hell does
that--or any CEO's salary/benefits--have do do with MRPs of CEOs? It
does have something to do with tight and inelastic supply of CEOs but
here we get into the "squishy"--non "operationalizable"--realms of
psychology, history, political economy, power, asymmetrical
info/mobility, networking, corporate and mainstream culture,
power/privilege perpetuation mechanisms etc--all of which, "squishy"
or not, have more to do/say about CEOs and the factors governing
levels/trends/components of CEO salaries/benefits that neoclassicism
and marginal productivity theory--elegant quantification and all--
will ever have to say about the subject.
When CEOs help to screw up a company, they are able to golden
parachute out and blame it on the lazy workers, when a company
rebounds or increases in market share and profitability, it is
supposedly all due to the presence of the CEO. The fact is that with
the myriad determinants of "profitability", many of which are outside
of the control of the firm or anyone inside the firm, it is ludicrous
to suggest that we can measure/quantify differences in profitability
with/without the presence of the CEO. To even attempt to do so, is
not only an arrogant slap against the productivities of all those
workers who had something to do with the profitability of the firm--
with or without the CEO--it is basically to move into the castle and
construct/implement theories with the result that the "rents"--
economic and otherwise--will be paid by the poorest and most
vulnerable.
Jim Craven
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