Reason Writers Around Town: Shikha Dalmia on the Myth of a Market Meritocracy

At the Davos conference last month, French President Nicolas Sarkozy—no doubt wearing one of his fabulously expensive designer suits—proclaimed that the recent financial meltdown demonstrated that letting markets decide executive compensation was "morally indefensible." As he put it, "There are remuneration packages that will no longer be tolerated because they bear no relationship to merit."

But as Shikha Dalmia explains in her latest Forbes column, markets don't reward merit; they reward value—two very different things. If Sarkozy does not appreciate the difference, it's not his fault actually. Most advocates of markets have failed to fully make this distinction, perpetuating a cult of market meritocracy—something that has hindered, not helped, the cause of free markets. To rescue markets, in other words, one has to rescue them from their friends first.

Read all about it here.

Comments

[Suki]

no doubt wearing one of his fabulously expensive designer suits

That is sooo hot.

roclaimed that the recent financial meltdown demonstrated that letting markets decide executive compensation was "morally indefensible."

That is so stupid. Proof that you don't have to have a brain to dress well.

[DJF]

And the markets rewarded the value of companies which bought or frightened politicians so that they would fork over huge amounts of taxpayer money to those companies. Goldman Sachs for example is obviously a high value company since it owns so many politicians, bureaucrats, economists and journalists. In some cases they seem to have a corner on the market

[Nitori Kawashiro]

"To rescue markets, in other words, one has to rescue them from their friends first."

Isn't said that the only people that hate capitalism more than socialists are capitalists?

[Mike]

markets don't reward merit; they reward value

Where value is defined by "what the market rewards".

[R C Dean]

Where value is defined by "what the market rewards" other people's willingness to pay for what you are offering .

"While I've written much over the years that promotes a free-market approach as the better way to tackle many things in life, I don't buy it as the automatic cure-all that some people say it is, based on the premise that price automatically indicates the worth of anything. The fallacy, it seems to me, lies in the claim that the market caters to majority needs as indicated by price, whereas in reality it caters to the whims of those most able to pay."

-James P. Hogan
"Revisiting Economics" February 5, 2002
Mr. Hogan is a two-time winner of the Prometheus Award "to honor libertarian fiction".

[Old Mexican]

Re: Anonymous,

"While I've written much over the years that promotes a free-market approach as the better way to tackle many things in life, I don't buy it as the automatic cure-all that some people say it is, based on the premise that price automatically indicates the worth of anything.

Gee, we start wrongly here. The price is NOT an indicator of the worth of anything, but the point where the mrket clears.

The fallacy, it seems to me, lies in the claim that the market caters to majority needs as indicated by price

That's probably HIS fallacy.

whereas in reality it caters to the whims of those most able to pay."

Bwa ha ha ha ha!! Sure, Mr. Hogan, sure. Leave aside the fact that sellers want to make a buck as well - stupid them to invest in machinery and capital goods, if all they had to do was to seek those with the most ability to pay.

[zoltan]

How does he afford his expensive suits? Is he allowed to have enough money to do that and not anyone else?

[Tonio]

I would suspect that he gets a lot of freebies, being President and all. Good publicity for the designers.

[Episiarch]

He's the President. Of France. It's in their constitution that he has to wear designer suits.

[John Tagliaferro]

Nice one Warty.

[Rhayader]

I try to explain this distinction every time somebody bitches that sports stars make more than doctors. Doctors will make 10 mil a year as soon as they start moving season tickets.

[SugarFree]

A French politician discussing merit and compensation is like listening to a plant describe the motives of a mammal.

[Tonio]

+1

[John Tagliaferro]

Very excellent.

[P Brooks]

Ayn Rand evinced a "pyramid of ability" in capitalism under which "the man at the top contributes the most to all those below him." What's more, this Nietzsche of capitalism opined: "Man at the bottom who, left to himself, would starve in his hopeless ineptitude, contributes nothing to those above him, but receives the bonus of their brain."

Holy fuck.

[John Tagliaferro]

The pyramids are proof that slavery gets shit done.

[Nitori Kawashiro]

(Sound of the QI klaxon).

[Old Mexican]

But as Shikha Dalmia explains in her latest Forbes column, markets don't reward merit; they reward value ? two very different things.

Actually, markets don't reward anything. Markets are not about rewards but about exchanges. What people value in someone's labor is productivity. A person that receives a high income does so because he exchanged highly productive labor for a high amount of currency.

If Sarkozy does not appreciate the difference, it's not his fault actually.

Yes, it IS his fault. He's a demagogue, and that fact will not change even if market advocates correctly defined the concepts all the time.

[The Squatting Fields]

" A person that receives a high income does so because he exchanged highly productive labor for a high amount of currency."

No way. I make a ton of money and I don't do shit for it.

[Old Mexican]

Re: The Squatting Fields,

No way. I make a ton of money and I don't do shit for it.

Don't worry, an e-mail has been sent to your boss. The imbalance in the Cosmos will be corrected...

[The Squatting Fields]

So in real life you're Harley Sorensen*

*I was working for a non-prophet about ten years ago and emailed a comment to Soerensen, who was writing for the San Francisco Examiner. The comment was only two or three words, civil, and profanity free. He responded by looking up my non-prophet employer on the web, finding a list of it's foundation supporters and threatening that he would let them know that their money was being wasted on the likes of me. No one stifles discent more rabidly than MSM journalists.

Harley Sorensen: What a piece of shit.

[The Squatting Fields]

I meant dissent.

[Suki]

Was this non-prophet a non-believer too or just wrong a lot about God?

[Old Mexican]

I am not a non-prohept, just a false one.

[The Squatting Fields]

Well fuck me and my spelling.

[JD]

"markets don't reward anything" - In a strict sense, you're right, of course; markets are not set up for the purpose of rewarding anybody. In practice, though, you could say that they reward value, because what people in a free market pay for is (the perception of) value added.

"A person that receives a high income does so because he exchanged highly productive labor for a high amount of currency."

You've never seen a lawyer's bill, have you?

[Old Mexican]

Re: Anonymous,

You've never seen a lawyer's bill, have you?

If you received one, is because you seeked his counsel at that moment, you valued his knowledge at that moment. Buyer's remorse is always post facto and as hindsights it is always 20/20; buyer's remorse, however, is not relevant when it comes to value judgments, which are done at the very moment of the transaction or exchange.

"If you received one, is because you seeked his counsel at that moment, you valued his knowledge at that moment."

Your assumption is faulty.

I received one because I was sued and lost. This makes me a horrible delinquent in the eyes of the law, so you can dismiss everything I say.

The state determined that nearly $7,000 in attorneys fees was "reasonable" to collect $400 (in late fees only; no principal was involved).

In the affidavit of attorney's fees, the plaintiffs attorneys provided plenty of precedent for attorneys fees "far in excess of the amount awarded."

The irony is that the plaintiff -- even though victorious -- actually lost money (over $1,000), because the judge determined that the attorney's fees were "somewhat excessive," and didn't require me to pay the full amount.

When lawsuits are that profitable, it creates a series of perverse incentives. The repeat players have no reason to control costs, and every motive to inflate them. Win or lose, the lawyers get paid, and the plaintiff in my case will just spread that cost along to their other clients. It's other people's money.

And finally, as the author of "The Misandry Bubble" wrote,

"Lawyers, like any other professional group, will seek conditions that are good for business. What makes attorneys different from, say, engineers or salespeople, is that a) they know precisely how to lobby for changes to the legal system, bypassing voters and the US constitution, that guarantees more revenue for them, and b) what benefits them is directly harmful to the fabric of society in general."

He was speaking specifically about divorce lawyers, but the statement is true of many -- if not most -- lawyers.

[Old Mexican]

Anonymous,

You missed the point - the very moment you retained a lawyer, YOU valued his services enough to DO SO, buyer's remorse and any post facto dwellings and soul searchings nothwithstanding. YOU had choices at that very moment, so YOU HAD TO VALUE hiring an attorney MORE than the other options.

[chroma]

I think *you* missed it, OM. Anon didn't retain a lawyer at all. He was sued and was forced to pay the plaintiff's fees.

[adam]

You really have a hard time reading and thinking critically

[The Squatting Fields]

Bill?

My attorney's work on retainer.

[P Brooks]

Meanwhile, the Presidential Suit has apparently decided he doesn't "begrudge" bankers their compensation as much as it might originally have appeared.

His buddy Ploufe must have told him there's an election coming up.

[Gilbert Martin]

Which release of Obama is this version?

9.0, 10.0?

There have been so many updates I've lost count.

[TickleStick]

I guess the market has determined that bus drivers are worth 6 figures:

Madison's highest paid city government employee last year wasn't the mayor. It wasn't the police chief. It wasn't even the head of Metro Transit.

It was bus driver John E. Nelson.

Nelson earned $159,258 in 2009, including $109,892 in overtime and other pay.

He and his colleague, driver Greg Tatman, who earned $125,598, were among the city's top 20 earners for 2009, city records show.

They're among the seven bus drivers who made more than $100,000 last year thanks to a union contract that lets the most senior drivers who have the highest base salaries get first crack at overtime.

And there was a lot of overtime ? $1.94 million last year, $467,200 more than the bus system budgeted for and the most ever for the system ? as employees exhausted sick leave and took advantage of unpaid leave through the federal Family Medical Leave Act, officials said.

http://www.twincities.com/ci_14358113?source=most_viewed

[Old Mexican]

The answer is: That was not the market. Employment paid through legal plunder is not market choice.

[adam]

Similar to the way executive compensation is decided (as opposed to banker and trader compensation, which from all appearances is market based).

[Old Mexican]

Re: Adam,

Similar to the way executive compensation is decided[...]

That's false. Companies have to compete against each other to retain talent. Instead, government employee pay is detrmined by politics alone.

[adam]

Umm, I can make the same (untrue) claim that local governments have to compete against other local governments to keep talent.

[Old Mexican]

Re: Adam,

Umm, I can make the same (untrue) claim that local governments have to compete against other local governments to keep talent.

Yeah, sure - tell that to the public employees' unions.

[adam]

You seem to understand that having one party on both sides of a negotiation can result in higher than justified compensation when it comes to governments, but you can't seem to get the point when it comes to corporate executives.

[Old Mexican]

You're conflating the directors (of the board) with the executives. Besides this, you cannot remotely compare the public sector with the private - the private sector may hire their executives as they see fit - it is THEIR money. And CEOs are hired and fired all the time by different companies - your caricature of how they obtain their salary being irrelevant.

[adam]

Whose money is it exactly? Don't you think that the laws governing who gets to decide what to do with that money matter?

[Old Mexican]

Re: Adam,

Whose money is it exactly?

The stockholders. It is them that ultimately set up the board of directors, which could be shareholders themselves. Who else is there?

Don't you think that the laws governing who gets to decide what to do with that money matter?

I don't think there should be ANY laws governing these private matters besides "Thou shall not steal" and "Thou shall not defraud". Laws that purport to regulate the behavior of companies and their members tend to make things worse by giving shareholders a false sense of security and less incentive to be more attentive to their board's actions or performance. Ultimately, it is NOT the market that creates the problems, it is the government.

[The Squatting Fields]

True, but no one would believe you.

[adam]

Markets don't really define executive compensation right now. Executive compensation, at least in the US, is defined by a board of directors that's effectively picked by the executives. There's no real negotiation or assessment of value. It's just collusion. Executive compensation could be fixed if corporate governance rules were changed to stop executives ability to pick the board.

[Old Mexican]

Re: Adam,

Markets don't really define executive compensation right now. Executive compensation, at least in the US, is defined by a board of directors that's effectively picked by the executives.

It's their money, Adam - those companies can do whatever they damned please with THEIR property, and these boards still have to compete with other boards to retain good executives, so the market indeed defines executive pay!

If you don't think that is a good approach, don't invest in those companies. The mischaracterizations by Sarkozy are irrelevant - who cares what HE thinks?

[The Squatting Fields]

"Markets don't really define executive compensation right now. Executive compensation, at least in the US, is defined by a board of directors that's effectively picked by the executives."

No, they are chosen by the Board via a Nomination Committee.

[adam]

So naive

[adam]

I think you miss the point. If a CEO can pick the person on the other side of the negotiation, he can get pretty much any salary he wants, regardless of whether any other company wants him or not.

[Old Mexican]

Re: Adam,

Two things:

1) Even if that were so, it is still THEIR money (the shareholders and board of directors). Who cares? The company still has to compete to retain their talent with other companies, so whatever salary the CEO and other executives receive, it will ALWAYS be compared to whatever other companies can offer. ALWAYS.

2) Companies do not normally have their boards chosen by the CEO - it's the other way around.

[adam]

You're quite naive and uninformed. Boards are selected according to the corporate law of the state in which they are incorporated and, if a publicly traded company, federal securities law. The law generally allows the executives to put up a slate and use corporate funds to back it. If shareholders want to put up a competing slate, they generally have to use their own funds and jump through a number of wickets (it differs by state). Unless there is a large wealthy activist investor(s), the result is that the executive supported slate wins.

You can say it's their money all you want, but it's really the shareholders money. And if the law is tilted to allow executives to make off with corporate funds (which it is), then that seems to me to be something worth the government's attention.

[Old Mexican]

Re: Adam,

Boards are selected according to the corporate law of the state in which they are incorporated and, if a publicly traded company, federal securities law. The law generally allows the executives to put up a slate and use corporate funds to back it. If shareholders want to put up a competing slate, they generally have to use their own funds and jump through a number of wickets (it differs by state). Unless there is a large wealthy activist investor(s), the result is that the executive supported slate wins.

You can say it's their money all you want, but it's really the shareholders money. And if the law is tilted to allow executives to make off with corporate funds (which it is), then that seems to me to be something worth the government's attention.

You're conflating the directors with the executives. Don't tell me what I know - I work for a big company.

[The Squatting Fields]

Me too. For the Chairman of a $10B publicly held corporation. Board members pick Board members and CEOs.

[adam]

Yes, and legislatures set the salaries of government employees and the terms of their employment. The legislatures have to set the wages at a level to be competitive in the labor market and attract the best talent, while not spending more than they need since they have their considering the taxpayers and voters interests. Clearly, the employees have no way of influencing the legislators other than as voters, so it's just a fair market based process, right? That's about as stupid as this drivel that a CEO has no influence over the selection of the board.

[Old Mexican]

Re: Adam,

Yes, and legislatures set the salaries of government employees and the terms of their employment.

Yeah, they act so independently - the unions being just passive decorations. Sure.

The legislatures have to set the wages at a level to be competitive in the labor market and attract the best talent[...]

Who's naive, Kate? The government does no such thing - it will ALWAYS price the labor much, way above the market not to draw up better talent but to avoid issues with the unions. It is the UNIONS that set the wages, through lobbying and/or direct confrontation.

while not spending more than they need since they have their considering the taxpayers and voters interests.

Oh, sure, because the legislatures only have the taxpayers interests in mind.

Please - spare me. I live in California, I can see the muck from here . . .

Clearly, the employees have no way of influencing the legislators other than as voters,

Clearly . . . shit. And here I thought all that lobbying and cajoling from the Unions had a purpose.

so it's just a fair market based process, right?

You tell me, adam - what happens if you stop paying taxes? Instead, if you re a shareholder of company Rotten, Inc,. and you don't like what the board pays the CEO, you can always cash in and leave.

That's about as stupid as this drivel that a CEO has no influence over the selection of the board.

Sure! Even before he's hired! The power of the Force must not be underestimated.

You're trying to argue by analogy - learn how to do it, first, before you make an ass of yourself. The Public Sector operates in a different universe than the private sector, to begin with because of the different incentives for each. You cannot compare them, at all.

[adam]

No, I'm not confusing anything. I guess if you work for a big company, then you must know all about selecting directors and proxy rules. I give up- you're either dumb or playing dumb.

[Gilbert Martin]

The shareholders can always vote with their feet and sell their stock, Adam.

That is a form of market discipline.

If a company is mismanaged bad enough and the executives overpaid enough, they will lose out to competitors in the same industry and/or become vulnerable to a hostile takeover.

No such discipline exists in the public sector.

[adam]

You're right, there is some market discipline, but it's weak. There are studies showing that companies with highly paid CEO's tend to underperform in the stock market. But a CEO can do a lot of looting in the meantime- to the extent that the laws on selecting directors cause this, then it seems worth it to change them- it makes us all better off.

[Old Mexican]

Re: Adam,

You're right, there is some market discipline, but it's weak. There are studies showing that companies with highly paid CEO's tend to underperform in the stock market.

You don't seem to have many critical thinking skills or you're describing the studies very poorly - what's "highly paid"? What's the benchmark? Says who? Who can relate the pay with the performance, on what standards?

But a CEO can do a lot of looting in the meantime- to the extent that the laws on selecting directors cause this, then it seems worth it to change them- it makes us all better off.

You're pretty loose with your terminology - what do you mean by "looting"? If a CEO steals (which is what "looting" means) then he's taking property that does not belong to him - did he, or she?

Or is more the cse of your own bias against CEOs which fogs your judgment and reason?

[Gilbert Martin]

On the contrary, we would all be better off if the federal government actually confined itself to it's enumerated powers.

Deciding CEO pay or how corporate boards of directors are selected or structured are not among them.

[Old Mexican]

Again, your caricature of how CEOs are paid is irrelevant. I can play dumb, but I don't do it all the time - seems to me you, instead, clock in more hours than I.