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September 3, 2007

a thought for Labor Day

Nelson D. Schwartz, the New York Times, August 26:

Although corporate jets tend to use smaller airports in the New York area, it's possible that a crowded 737 might have to wait for a tiny Gulfstream to take off in Miami or at Dulles, outside Washington.

The users of corporate jets defend this practice, saying they deserve equal takeoff rights. "On a business flight, you might have people going to Wall Street from companies who are creating jobs and generating billions of dollars in commerce," Mr. [Steve] Brown [of the National Business Aviation Association] says. "People on a commercial flight might be going on vacation or going to New York to go to the theater."

The old populist and socialist reply was: Workers make things of value. Those who boss them around or make profits from investments are just skimming off the top. In the words of Ralph Chaplin's "Solidarity Forever" (1915):

It is we who plowed the prairies; built the cities where they trade;
Dug the mines and built the workshops, endless miles of railroad laid
* * *
All the world that's owned by idle drones is ours and ours alone.
We have laid the wide foundations; built it skyward stone by stone.
It is ours, not to slave in, but to master and to own.

According to the labor theory of value, those people sitting in the Gulfstream jets are "idle drones." The ones who wait in coach class (or those who cannot afford to fly at all) are the people who create all value. Pope John Paul II seemed to agree; see On Human Work (Laborem exercens) of 1981.

But the labor theory of value is problematic, because clearly the people in the Gulfstreams "work," even if all they do is make decisions about where to invest. Their work can have an enormous influence on the products of the economy. If affecting output is a measure of how much they work, then it is they who build the cities and dig the mines.

And they are enormously well paid for their pains. Corporate executives take home about 400 times as much pay as average workers. They use some of that pay, as well as their leverage over corporate resources, to obtain conveniences, such as flying in corporate jets that use public runways. And they feel important and worthy, as Mr. Brown of the National Business Aviation Association implies.

If one's work is to make decisions, there is no doubt that one's impact is consequential. But the consequences can be negative instead of positive. To paraphrase Mr. Brown, those people on the Gulfstreams might be flying to Wall Street to make boneheaded decisions that cost jobs, or selfish decisions that benefit them at the expense of their workers. Their risk is very limited; their expected gain is enormous.

Further, we might wonder whether their salaries and perks are worth the cost. Imagine that a corporate executive adds $10 million to the company's bottom line by making a good decision. Does that mean that the company needs to pay him $10 million to obtain his services? Not if the decision was basically determined by the facts, in which case anyone with appropriate technical skills could have made the same call. Not if the decision was basically lucky, in which case the company could have flipped a coin. And not if the decision was determined by many of his underlings' input.

The theory of markets suggests that companies in a competitive environment will never overpay for decisions, any more than they will overpay for crude oil or real estate. But that ignores the possibility of very systematic bias among the whole class of decision-makers, who are likely to overestimate the impact of their own brains and underestimate the importance of the people who work for them. Labor Day is for the folks in coach, and those who never fly at all.

September 3, 2007 9:19 AM | category: none


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