Thoughts about equitable wages

I must have done something right in my last blog post because somebody finally commented and disagreed with what I said. I’m glad to see that people are still reading the blog and thinking about what I’ve said. Keep those comments coming!

So, because I thought Stephanie’s comments on my last post deserved a fuller reply than would fit nicely into the comments section, I’m going to take the chance to respond to what she said. First, her comment:

I have to disagree with you on one of your underlying premises. I don’t believe that the wealth large business owners and investors accumulate is deservedly theirs. If all employees were paid an equitable wage and the product was priced right, business owners would not make huge amounts of profit. The basic premise that someone deserves millions of dollars for their idea and that their work is worth more than others is a faulty premise. The employee that carries out the ideas of the owner should be making similar wages, in my opinion. If a company is making millions of dollars, then the item is overpriced and the price should be reduced in order to increase everyone’s well-being and avoid the huge discrepancies in lifestyles that currently exist.

There are several underlying presumptions here; I’ll address two of them. I’ll also point out that I’m borrowing ideas liberally from Hayek’s The Road to Serfdom here; his chapters “Planning and the Rule of Law”, “Who, Whom”, and “Security and Freedom” have much more detailed analysis of the basic presumptions of Stephanie’s questions than I’m giving here.

And before I begin, some additional disclaimers. This post is shorter than I’d like it to be. It’s not a complete answer to Stephanie’s objection. I have other thoughts on this subject that I haven’t included here. I make assumptions that I don’t fully explain or explore. I might change bits of my position in later posts.

All that’s ok, because we’re having a conversation. So, here goes:

Business owners don’t deserve their wealth.

As I’ve said before, I’m committed to the free market. Four primary principles undergird that commitment. First, a society interested in maximizing its citizens’ welfare must operate by the rule of law. Second, that society must allow individuals the greatest degree of individual liberty possible. Third, that society must hold its citizens responsible for the consequences of their actions. And fourth, that society must respect the ownership of private property.

So I look at the question whether a business owner deserves his wealth very simply. Each of the principles above is important here: if we are to respect the ownership of private property and to encourage the exercise of individual liberty, we must allow reasonably intelligent parties to bargain for what they want. Assuming the rules of law effectively prohibit coercion and dishonesty in any private transaction, I must conclude that each party to a transaction deserves to own what he bargained for because the other parties willingly traded with him.

Therefore, if a business owner manages to trade enough of his “things” (money, time, assets, knowledge, etc.) to accumulate wealth without coercion or deceit, it follows that he deserves to own that wealth as a natural consequence of the parties’ choices.

Granted, some business owners lie and cheat and steal. But to say that those business owners don’t deserve their wealth is not the same thing as to say all business owners don’t deserve their wealth.

There is an “equitable wage” which can be determined without regard to the market and which employees should be paid.

Hayek addresses this issue really well. Basically, the question is “how are we to determine what is an equitable wage?” If you begin with the premise that the market fails to determine an equitable wage, it’s quite natural to conclude that some other entity—a bureaucrat, a committee, or some other authority—ought to determine what an equitable wage is.

But the problem with the idea of an “equitable wage” is that it assumes its own conclusion. People who talk about equitable wages already don’t accept the idea that the market approximates a fair wage. Once you accept the premise that the market doesn’t actually dictate a fair wage, you have to look to some other source to find it. It therefore becomes the province of a third party to determine what is “fair” in any transaction. And because each transaction affects several other transactions in such a way that all transactions are ultimately related, it becomes necessary to determine what is fair in every transaction, which requires centralized economic planning.

But in ceding the power to a central planner to determine what is fair or equitable, we would violate the principle that holds us accountable for our own decisions. And because there’s a very real likelihood that I don’t want to make a bargain on the terms set by the third party, it also becomes necessary to coerce me into accepting the transaction (or a given job), violating both the prohibition against coercion and the principle of maximizing individual liberty.

At the risk of invoking Godwin’s Law, what we are describing is socialism. And because socialism requires the violation of these basic principles, I simply can’t prefer its centrally-planned economy to a free market based economy.

Hayek also points out that socialism can’t actually deliver a perfectly equitable wage in the sense of a completely equal wage for each individual in society. At its best, socialism promises “a more just and equal” distribution of wealth. “Not equality in the absolute sense, but ‘greater equality’ is the only goal which is seriously aimed at.”

To my mind, that’s not a bargain worth making. I’ll take the risk of the market if it means preserving my economic freedom. If I’m economically free—if I’m free to make any bargain I want so long as I don’t violate basic principles like “don’t lie, don’t steal, and don’t coerce others”—then I’m free to decide I won’t do any work on the Sabbath because God commanded me not to or to decide that I won’t produce military ordnance because I’m a conscientious objector or to decide that I’m going to pay my employees three times the market wage for their kind of work because I think the market wage is simply too low.

No such freedom exists in a centrally-planned economy. And so whatever socialism is, it’s not better than capitalism.

On moral sentiments

In a fundamental sort of way, this blog is really not about capitalism, or socialism, or any other -ism at all.

Really, it’s about changing how we approach the world, both in how we perceive it and in how we participate in it.

Most importantly, it’s about how we interact with the people who surround us.

Adam Smith, in The Theory of Moral Sentiments, said “And hence it is, that to feel much for others and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature.”

That’s an important concept coming from the man who most people consider the father of modern capitalism. It’s especially unfortunate that most people’s understanding of capitalism is completely divorced from this concept.

If more people thought of capitalism as an exercise in indulging our benevolent tendencies instead of our selfish ones, I suppose I wouldn’t be talking about finding a system that’s “better than capitalism.”

When we think about the possibilities that come with a successful business, my model proposes a radically different metric for success. I saw in the news today that Zulily (think Groupon meets mommy-blogger) just sold itself for $2.4 billion. Although that valuation is a discount from its IPO price 2 years ago, it’s not a bad outcome for a company that didn’t exist 10 years ago. It’s founders and (hopefully most of) its stockholders will walk away with considerable money in their pockets.

What if the founders of such a company said to themselves, “one metric of our success will be how many family trees we can change before we exit.” It might mean paying employees more than strictly required. It might mean spreading equity ownership as broadly as possible, or trying to create as many millionaires as possible when the sale does happen. (Really rough math, that I know doesn’t actually reflect reality, tells me you could create 2,400 millionaires out of the Zulily sale alone. Talk about changing family trees).

This is not to say the founders of such a company don’t deserve their wealth. Most do. By and large, they put their own family trees on the line to build successful businesses and provide employment for others. And stockholders of these companies deserve the returns on their capital as well.

But there’s no need to impoverish founders and stockholders in order to indulge our benevolent tendencies. All it takes is for those of us who would be founders or stockholders to ask how much more we can do for those who are not yet founders or stockholders.

Can we teach them to understand better than they do? Can we use our position to influence them to reach for more meaningful pursuits? As they take more responsibility for us and our companies, can we reward them richly and in a way that inspires them not only to give more to the company, but to give more to others who need help?

Truth be told, finding what’s better than capitalism isn’t really about capitalism at all.


More on Gravity Payments

I’ve been thinking a lot over the last few weeks about Dan Price’s choice to increase the salaries of his employees at the expense of his own and all the press coverage he’s gotten over it.

As I’ve thought, I’ve taken time to ponder the central question of my post a few weeks ago: what are the first principles here?

There were at least two principles at work in Dan’s decision:

  1. Make life better for his employees by paying them as much as he could without sacrificing the integrity of his business. In this case, that meant cutting his own salary to pay for their raises.
  2. Maintain (or improve) service to his customers. It appears he hoped to achieve this by reducing the stress he saw his employees deal with because of their financial position.

To my mind, both principles are unequivocally correct. So I’m disturbed with the glee that some commentators have shown at the struggles Dan is now facing.

I’m disturbed because I usually tend to agree with these commentators, but on this point I don’t.

I’m disturbed because they seem to think that somehow his decision to spread his own wealth around represents a sneaking kind of socialism that ought to be stamped out before it can spread.

Early on when I started writing this blog, I considered writing a couple of posts about the difference between liberalism and socialism. Socialism (which manifests recently in the U.S. under its old-new nom de guerre, progressivism), is the ideological system that entails “the abolition of private enterprise, of private ownership of the means of production, and the creation of a system of ‘planned economy’ in which the entrepreneur working for profit is replaced by a central planning body.”1.

Liberalism, on the other hand, is not the ideology espoused by the modern Left. This liberalism is classic liberalism, and is somewhat more (although not entirely) ideologically connected to the modern conservative movement. It is the ideology in which the Rule of Law, private property, and free markets are allowed to govern as much as possible, so as to ensure maximum economic, personal, political, and religious freedom.

So when Rush Limbaugh and other commentators call what Dan Price is doing “socialism,” they really are just plain wrong. Dan’s decision to pay his employees more than the market demands is not socialism. It’s not calculated to abolish free enterprise, neither does it entail the creation of a centrally-planned economy.

That’s not to say that it doesn’t share some features with socialism. Certainly it shares at least one goal: the redistribution of some of Dan’s wealth to those who are less affluent.

But so does charity.

If Dan Price had decided on April 15th that he was going to give away 93% of his income every year to the Boys and Girls Club, no one would accuse him of engaging in “pure, unadulterated socialism.” Assuming he held the same kind of press conference, he might get a few minutes of congratulatory fame in the press, but by and large we’d forget him in a week or so.

We also wouldn’t be talking about him if he decided to make sure every one of his employees makes 5% more next year than they made this year. I can’t imagine him throwing a press conference to announce that sort of decision. But if he did, I have a hard time seeing him receive more than a collective “meh.”

Both of these things are examples of true capitalism, even though both decisions amount to the redistribution some of his own wealth to others who are presumably less affluent.

So what is it about Dan Price and Gravity Payments that makes some want to brand him a socialist?

I submit that it’s the unfamiliarity of his decision.

In most people’s understanding of capitalism, financial affluence is the ultimate purpose of economic freedom. Or, to say it another way, for most Americans there is no higher economic goal than to be “independently wealthy.” And for many people, taxes and other government interference are the greatest visible obstacle to that wealth.

So given the current political climate in the U.S.—especially in cities like Seattle—where the cries for “income equality” are tied closely to calls for raising the state-mandated minimum wage and other socialist policy proposals, it’s all too easy to see a headline like “CEO guarantees every worker a $70,000 working wage” and simply think “Aha! Socialism!” without really considering the issue.

But if you ask me, Dan’s idea is exactly the sort of thing we should want to spread. Dan made the choice to give up his own wealth in order to accomplish something that meant more to him than his own wealth. Namely, helping his employees achieve the kind of financial independence that would help them be happy.

Maybe I approve of his decision because its closely aligned with my own goals. If I were in his position, I’d take great satisfaction in paying my employees as much as I could.

I don’t know Dan and I don’t know what really motivated him, so I can’t say for sure that he wasn’t motivated by his own socialist tendencies. I’m also certain there were better tactical decisions he could have made in raising his employees’ wages the way he wanted. But whatever his motivations and whatever his failings, what he did wasn’t socialism. It was better than capitalism.

It was liberalism at its finest.

  1. F. A. Hayek, The Road to Serfdom, 2007, p. 83

Looking Back at Dan

A few months ago I wrote about Dan Price of Gravity Payments in Seattle. He made a splash for announcing that he was raising the salaries of all his employees to at least $70,000 per year by cutting his own million-dollar salary to pay for the raises. Even Rush Limbaugh got in on the act, saying that the move was “pure, unadulterated socialism.

I thought then, and I still think, that Dan’s idea is a brilliant one.

Over the last few days, however, Dan has gotten more press because of the financial “woes” he’s facing. Fox News reports that he’s taken to renting out his apartment in order to make ends meet. The New York Times gives a fuller, somewhat more nuanced explanation of the situation, pointing out that the financial impact of his decision to give raises has been mixed; he lost a couple of his best employees and a few of his customers, but he’s also earned new customers and a great deal of publicity from the change.

And as much as I like El Rushbo (I grew up listening to him), he’s dead wrong. Tocqueville explained the difference between democracy and socialism expertly: “Democracy and socialism have nothing in common but one word: equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude.” The equality of socialism is imposed by the central planners who substitute their own judgment for the judgment of each individual.

Dan’s decision, on the other hand, is a perfect example of the liberty Tocqueville describes. Dan looked at his business and at his own well-being and said, in effect, “I can do better for my employees without great cost to myself.” No government actor forced him to it. No bureaucrat requires any employee to accept Dan’s offer of employment. And no one demands that any other business owner follow his lead.

That’s the very essence of a free-market decision.

For his part, Dan has offered to “give up everything I have personally and everything I’ll have for years to come” as part of his effort to make this change work. That’s the power of a change like the one Dan Price has made. Undoubtedly Dan has made mistakes. No question his efforts will take refining over the coming months and years. The beauty of the free market is that he is free to make the decision.

Be that as it may, it’s a line at the very end of the New York Times piece that matters most to me here. One of Gravity Payments’ newest customers, Mario Zahariev, realized that after switching from another provider to Gravity Payments he’d be saving nearly $800 per month in card processing fees. Instead of pocketing the difference (which, I’d stress, he’d have every right to do), Mario decided to use the money he’d save to give raises to his 8 employees.

Dan’s made his decision and for now it looks like he’s sticking with it. I’m still impressed by his willingness to give up his own salary in order to make his employees’ lives better. Nick Hanauer, a Seattle venture capitalist, said of Dan “Who can tell what that last big thing is that catalyzes big change?”

Who can tell indeed.