A fundamental aspect of the market is that it is, in theory, self-correcting. If I’m unhappy with how much McDonald’s charges for its burgers, then I am entirely free to exit from my “relationship” with McDonald’s and enter into a relationship with Burger King. And if I’m unhappy with fast food in general… then I’m free to exit from fast food entirely and make my own food. The freedom that consumers have to easily exit and spend their money elsewhere is the only incentive that producers have to effectively serve consumers.
Of course investors in McDonald’s also have the same freedom of easy exit. If they aren’t happy with how much money McDonald’s CEO is making… then they are entirely free to exit from the relationship by selling their shares. Same thing if investors aren’t happy with how much money that McDonald’s is spending on meat or accountants or on anything else. If Burger King is doing a better job of reducing costs… then investors are entirely free to take their money from McDonald’s and give it to Burger King instead.
Now, if you’re simply endeavoring to inform investors that CEOs are making too much money… then great, awesome. But I’m pretty sure that you’re actually endeavoring to encourage the regulation of CEO pay. Which is not great… or awesome. Because, as I said in my first reply, you would be overriding/overruling all the people who are actually there.
When I’m personally there at a supermarket and I have an artichoke in my hand… I’m considering whether the artichoke is truly worth it for me to purchase. I’m not considering whether the artichoke is truly worth it for you to purchase because I don’t even know you. I don’t know when was the last time that you had an artichoke. I don’t even know if you like artichokes. And I’m certainly not spending your money… I’m spending my own money. So it would be entirely absurd for me to try and determine whether it’s worth it for you to purchase artichokes. And it would be just as absurd for you to try and determine whether it’s worth it for me to purchase artichokes.
Just like it sure doesn’t make sense for you to overrule my valuation of artichokes… it sure doesn’t make sense for you overrule Frank the artichoke farmer’s valuation of labor. You aren’t there. I am not there. Frank is there. He’s not paying for labor with my money… or your money… he’s paying for labor with his own money. So he should be the only one to decide how much he values the unique productivity of any given employee. Of course this isn’t how it works. The minimum wage regulation prevents Frank from paying anything less than the minimum wage. Despite the fact that you aren’t there… despite the fact that you are a million miles away and entirely clueless about how productive any of his employees actually are… you have absolutely no problem overruling Frank’s valuation of his employees’ productivity.
To be perfectly clear, I’m really not trying to argue that Frank will perfectly valuate his employees’ productivity. I’m not arguing that Frank has a perfect grasp on reality. There’s absolutely no need to worry about Frank’s grasp of reality because of the self-correcting nature of the market. If Frank’s grasp of reality is extremely poor and he mistakenly spends way too much or way too little on anything… then consumers and investors can easily jump ship. Same thing with employees. Everybody who is actually there is free to exit from the relationship as soon as they individually perceive that Frank is barking up the wrong trees and tilting at windmills.
Of course this general concept really isn’t new or novel…
What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. — Adam Smith, The Wealth of Nations
In my first reply I briefly brought up the problem with overruling the millions of people who are actually there. You ignored the problem so here I am bringing it up again but obviously in much greater detail this time. Are you going to ignore it this time? Or are you actually going to address it?
Now let’s consider the opposite system… the government. What if I’m unhappy with how much money congresspeople are getting paid? Can I easily exit from the relationship? Not as easily as investors can exit from their relationship with McDonald’s. What if I’m unhappy with how congresspeople are spending my tax dollars? Can I easily exit from the relationship? Not as easily as consumers can exit from their relationship with McDonald’s.
So are you voicing your concern about the problem of relationships that we can’t easily exit from? Nope. You’re doing the exact opposite. You’re voicing your concern about the “problem” of relationships that we can easily exit from. It’s entirely outlandish.
As to whether the UK welfare policy was optimum to produce JK Rowling’s art, it was certainly sufficient, because we have the Harry Potter books. The question is, would we have more or less art to consume under different sociological structures? How many great books haven’t you got to read because their authors had to “go and get a proper job”? How many mediocre books have been published because access to the spare time required to produce them is rationed to those whose parents have means?
Neither of us wants anybody’s talent to be wasted. This is a very important point that we both agree on. But I’m pretty sure that we minimize waste by maximizing people’s freedom to easily exit from less productive relationships.
Right now you can’t easily exit your funding from the UK’s public welfare organizations… or education organizations… or healthcare organizations. Without your freedom to easily exit your funding from these organizations… why in the world would you have any confidence that they are doing a better job than they would be doing if you did have the freedom to easily exit your funding?
When funding is guaranteed regardless of the results… or even worse… if bad results guarantee more funding… then why in the world would you have any confidence in the quality of the results?
Disconnecting pay and performance will guarantee suboptimal performance. Another concept that really isn’t new…
Public services are never better performed than when their reward comes only in consequence of their being performed, and is proportioned to the diligence employed in performing them. — Adam Smith, Wealth of Nations
Of course incentives matter. But it has to be entirely up to the people who actually earned the money to decide for themselves how diligently a public service is being performed.
Let the environmentalists decide for themselves, with their own tax dollars, how diligently the Environmental Protection Agency (EPA) is protecting the environment. If the EPA is truly doing a good job of protecting the environment… then their funding/feedback will reflect this. Environmentalists will be more than happy to give lots of their tax dollars to the EPA.
What’s the alternative? To allow people who don’t at all care about the environment to determine how diligently the EPA is protecting the environment? Does congress truly care about the environment? If environmentalists are genuinely happy with how much congress cares about the environment then the environmentalists would not have any reason to choose the option of exiting from their happy relationship with congress.
The option to exit is obviously unnecessary when a relationship is good. But whether a relationship is good or not should be entirely up to each and every person to decide for themselves.
Here you and I are in a relationship. Clearly it’s not a romantic relationship… it’s entirely platonic. Is it an economic relationship? Well… yeah. We’re certainly spending our time and using our energy and talent and knowledge to create products for each other’s consumption.
Are you happy with our economic relationship? Can anybody else answer this question better than you can? I sure don’t think so… which is why I super respect and cherish and value your freedom to easily exit from our relationship. I’m pretty sure though that you won’t be able to find a more profitable relationship. But… maybe I’m wrong! It’s entirely possible that I’m wrong… so I super respect and cherish and value your freedom to easily exit from our relationship.
Let people judge and determine on their own how valuable/profitable/beneficial their relationships are. If they unhappy with their relationships for any reason… then they should be entirely free to easily exit from them.
As I said in my first reply… there is a “minor” detail… public goods. Right now we read stories for free on Medium. This isn’t a problem. The problem is when we read and enjoy stories… but we don’t use our cash to clearly communicate our valuation of the enjoyable stories. This is the free-rider problem. It’s a problem because again… incentives matter.
The solution is simple. We’d each pay $1 dollar a month but we’d have the freedom to choose which stories we spend our pennies on. So if we do enjoy a story, then we might as well convey and communicate our enjoyment by spending our pennies on the story. Our payments will provide the writer, and other writers, with the incentive to supply similar stories. But if too many similar stories are supplied… then they’ll receive less pennies and different stories will receive more pennies.
The self-correcting nature of the market really isn’t a new concept…
It is thus that the private interests and passions of individuals naturally dispose them to turn their stocks towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead them to divide and distribute the stock of every society among all the different employments carried on in it as nearly as possible in the proportion which is most agreeable to the interest of the whole society. — Adam Smith, Wealth of Nations
This feedback loop certainly isn’t unique to humans. Bees and ants also use individual sacrifices to encourage each other to behave beneficially. When a foraging insect discovers a new supply of food… the insect will sacrifice its calories (dancing for the bees, emitting pheromones for the ants) in order to clearly communicate its valuation of the food supply to the other insects. The more calories that the discoverer is willing to sacrifice… the greater its valuation of the supply. And the greater its valuation of the supply… the more of its fellow insects that it will successfully encourage to help transport the food back to the colony/hive. When these insects return to their home with the food, they will also report, via the sacrificial expenditure of their calories, their own valuations of the food supply. If the food supply is still substantial… then more insects will be recruited. As the food supply dwindles… the reporting insects will sacrifice less and less calories… and less and less insects will be recruited.
Hopefully it should be really clear that the allocation of insects should reflect the value of the different supplies of food. It doesn’t make sense for a large percentage of the colony/hive to be allocated to a small supply of food. In order for the insects to be efficiently allocated… it’s entirely necessary for the amount of calories that each insect sacrifices to accurately reflect its actual valuation of the food supplies.
With the current system on Medium… we have the incentive to be dishonest with each other regarding our valuation of stories. This logically will result in the inefficient allocation of resources. People will waste lots of time reading and writing less valuable stories. This problem can easily be solved by Medium simply creating a pragmatarian market. If Medium did so then the incentive to be dishonest would go right out the window. We’d be paying $1 dollar a month anyways so we might as well use the pennies to communicate our honest valuation of stories. Knowing each other’s true valuation of stories would ensure the efficient allocation of time, attention and talent.
As you might have noticed, my response has an abundance of Adam Smith. Your original story, on the other hand, suffered from a severe shortage of Smith. There was absolutely no Smith in your story.
And for sure it’s entirely possible that Smith is wrong. I really don’t discount this possibility. But if you know for a fact that he is wrong… then you should have started your story with your complete deconstruction of Smith. Once you entirely annihilated Smith’s concepts… then you would have had a clear path to construct your own concepts.
