Home > Behavioural economics, Politics > High Pay Isn’t the Only Market Failure.

High Pay Isn’t the Only Market Failure.

Cameron has been over the newspapers in recent days and was on the Andrew Marr show talking about what he calls “crony capitalism”.

He also said something that as a free-marketeer must have been very hard for him to say in that there had been a market failure with regard to high pay. As I’ve blogged before, high pay isn’t the only market failure. There is a market “failure” at low pay, medium pay and just in general.

I say “market failure” but it isn’t market failure, its human reasoning failure. Its our inability to calculate something’s worth.

Humans and I of course include myself in that, have this inability to calculate the worth of something especially and this is probably more difficult, what someone deserves in pay. And any number we do come up with is completely arbitrary. Add to this, the fact that we can be over motivated or overpaid i.e. as we increase our pay or our motivation beyond a certain level, we diminish our productivity. Add to that, the fact that we can be under motivated or underpaid  i.e. we feel that we are worth more than what we’re being paid and so our productivity isn’t as high as it could be. Add to all that the politics of jealousy i.e. executives seeing what other CEOs are earning and saying that they are worth just as much if not more than another CEO who is performing worse than them.

If you then look at how disastrously our economy is moving, yes you can blame Osborne/Darling/Brown (although there are slightly different pressures on them potentially leading to the same over motivation, decrease in performance) is that we have workers at the bottom who feel undervalued and therefore not being as productive as they should be and you have workers at the top who are over motivated and therefore not being as productive as they should be. What does this lead the renumeration committees to do. Why increase their pay? (This is Cameron’s “crony capitalism”) They think that they are under motivated and in order to get more growth in the company and more productive you need to increase the executives pay so they perform better whilst slashing/freezing the truly under motivated workers increases their productivity levels?

Renumeration committees logic is quite frankly ridiculous.

There isn’t just a high pay problem, there is a pay problem non-stop. I really wish that one of the leaders preferably Nick would actually stand up and shout about this fact.

The question is how do we deal with this problem? Presumably we don’t want the state telling companies how much to pay their workers and their executives.

One way to change it is to put workers on renumeration committees to force up their own pay and to pull down executives pay. Make shareholders votes be legally binding especially on pay structures. This would work better the more workers were shareholders. Although Cameron wasn’t prepared to say that workers would be put on to renumeration committees.

Cameron on Marr talking about executive pay.

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