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Home Publications Blogs Beat the Press Steven Pearlstein Doesn't Understand Market Economies

Steven Pearlstein Doesn't Understand Market Economies

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Wednesday, 13 October 2010 07:11

In a confused column today, Steven Pearlstein touted the need for wages in the United States to fall. He focused on the wages of autoworkers, but implied that the wages of less-educated workers more generally must fall. At the end of the column Pearlstein told readers:

"I'm sure many of you are reading this and thinking that if anyone is forced to take a pay cut to rebalance the economy, surely it ought to be overpaid investment bankers, corporate executives and newspaper columnists. That's how things would work in a socialist paradise, but not in market economies, which are much better at producing efficiency than fairness."

Well no, it is not the case that a "market economy" led to the high salaries of investment bankers, corporate executives, and newspaper columnists, while forcing wage cuts on auto workers. In fact, there are a wide variety of government interventions that created this situation.

For example, there was the government bailout of the banks two years ago. By offering trillions of dollars in loans and guarantees the government kept Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and other Wall Street giants in business. In a market economy, the top executives of these companies would be walking the unemployment lines right now instead of getting bonus checks in the tens of millions of dollars.

The executives of these banks also benefit from the "too big to fail" subsidy. This means that creditors will lend to these banks at lower interest rates because they know the government will bail them out if the bank gets into trouble.

Corporate executives get ridiculously high pay in the United States (as opposed to Europe, Japan, or South Korea) because the government's rules of corporate governance allow corporate executives to essentially run companies in their own interest. The CEOs largely appoint the board of directors (a ridiculously plush sinecure) who in turn decide the CEOs' pay. In systems where the corporations are more directly subject to shareholder control, CEOs get paid far lower salaries.

Finally the pay of columnists and highly educated workers is inflated as a result of the fact that these workers are largely shielded from international competition. The laws make it difficult for companies to bring in foreign professionals to undercut the pay of doctors, lawyers, columnists, even if they are every bit as competent as the native born workers they would be replacing.

By contrast, trade policy was deliberately designed to put U.S. manufacturing workers in direct competition with the lowest paid workers in the world. Also, hotels, restaurant owners and other employers of low-skilled workers have no problem at all hiring undocumented workers at low wages to keep down pay in these sectors. This also is a policy decision -- the government has decided not to require these employers to obey employment law.

In short, the inequality that Pearlstein notes has nothing to do with the dictates of a market economy. It is the result of the people at the top rigging the rules to their benefit. They got the government to stack the deck in their favor and then hired people like Pearlstein to tell everyone that it was just the natural workings of the market.

Comments (13)Add Comment
Nice Post
written by Aditya Savara, October 13, 2010 9:44
Nice post Dean, no need to elaborate :)
..., Low-rated comment [Show]
Stupid Liberals, Low-rated comment [Show]
Liberal democracyhas never dared face the fact that industrial capitalism is an intensely coercive form of organization of society
written by Scott ffolliott, October 13, 2010 10:08
‘Liberal democracy,’ Robert Lynd wrote twenty-five years ago, ‘has never dared face the fact that industrial capitalism is an intensely coercive form of organization of society that cumulatively constrains men and all of their institutions to work the will of the minority who hold and wield economic power; and that this relentless warping of men’s lives and forms of associations becomes less and less the result of voluntary decisions by “bad” men or “good men” and more and more an impersonal web of coercions dictated by the need to keep “the system” running.’ – The State of Capitalist Society p. 74 c 1969 - Ralph Miliband
...
written by fuller schmidt, October 13, 2010 10:17
You have to read all of the words, FBide. Another excellent post Izzatzo (and Dean).
...
written by diesel, October 13, 2010 11:58
Efficiency is fairness and fairness is efficiency.

Just compare European social democracies with first/third world U.S.A. They lead in virtually every indicator of social health. Sure we have more autos and TVs in this consumer paradise, and for some people those indices measure quality of life. Actually, they seem to be a surrogate, an etheric compensation for what's missing in our social life.

Most of the professions mentioned function as guild systems. Owners tolerate them because the members manage the plebeian class, leaving the owner's hands clean. Their pay is determined by their masters, not by any magical system of efficient markets. In gratitude for their bigger pile of tokens, they throw in their lot with their owners, acting as sword and shield. They are bribed, boughten off to betray their lowly union brothers. Divide and conquer.

Mistakenly, Marx thought they were the natural allies of workers because all the technical skills needed to organize and produce resides in these two classes. The owners were the unnecessary fifth wheel. But unfortunately, humans do not create strictly rational, efficiently-organized societies. Other, irrational drives determine social organization as well. And so we have a top heavy economy ruled by speculative finance and a useless class of hereditary owners.
...
written by diesel, October 13, 2010 12:13
I recommend the books by Frans De Waal and other primatologists for insight into the origins of fairness in humans. Fairness is not an "invention" of culture, neither is our notion of justice or any other of the higher virtues. We seem to be born with an innate capacity to develop along these lines. While reason may elaborate their structure in complex settings, the impulse itself is innate. All these guys need to catch up on their reading in the natural sciences.
Live and Learn -- or Regret
written by Ethan, October 13, 2010 4:28
In the late 1970's I was working, in the US, for an Italian corporation. I saw an ad in the WSJ that a large law firm in the city where I lived was looking for a lawyer with Italian language skills and European law experience.

I had an Ivy League undergraduate, top 5 law schools JD with honors, a year's study of European business law at a German university, excellent German and fair Italian language skills, 6 years experience at a large law firm, and 8 years experience in a corporate law department doing international work -- much of it in Italy. I wanted to return to law firm practice, so I sent in a resume.

A few days later the law firm called me and said they actually were trying to get a visa and work permit for one of their Italian partners to come here, and the ad was merely to show the position couldn't be filled by a US citizen. THEY ASKED ME TO WITHDRAW MY RESUME. Thinking, I guess, to curry favor with them, I withdrew my resume. I have remembered it and regretted it for 30 years. I should have put them to the test.
Ethan Proved One Huge Point
written by Jack, October 13, 2010 6:11
"I guess, to curry favor with them, I withdrew my resume. I have remembered it and regretted it for 30 years."

Ethan, in my view, proved one point: he like other spine-less people capitulated to companies.

Sorry. Firms have been able to get away with too many violations.
...
written by fresnodan, October 14, 2010 5:59
"By contrast, trade policy was deliberately designed to put U.S. manufacturing workers in direct competition with the lowest paid workers in the world. Also, hotels, restaurant owners and other employers of low-skilled workers have no problem at all hiring undocumented workers at low wages to keep down pay in these sectors. This also is a policy decision -- the government has decided not to require these employers to obey employment law."

Wow, at first I thought I would just read standard liberal indoctrination. But someone who is actually willing to point out that illegal aliens (er, undocumneted workers) actually affect workers, and that the real problem is all the rules and regulations that are ignored in hiring them.
Well, I will have to concede your intellectual honesty and your willingness to argue against your "side."
Refreshing.

Managing Director
written by Joe Firestone, October 15, 2010 8:13
Thanks, Dean. I really enjoyed this pushback.
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Re: Steven Pearlstein (who he, anyhow?) on "market economies"
written by The Ninth, October 25, 2010 6:15
So Pearlstein writes this:

"I'm sure many of you are reading this and thinking that if anyone is forced to take a pay cut to rebalance the economy, surely it ought to be overpaid investment bankers, corporate executives and newspaper columnists.That's how things would work in a socialist paradise, but not in market economies, which are much better at producing efficiency than fairness."

No doubt he, like our senescent pal Alan "I guess I was wrong--the market will NOT police itself" Greenspan, would quote with approval, from the hundreds of thousands of phrases in Adam Smith's writings, the "invisible hand of the market" comment he made, once, in "Inquiry into etc. ...Wealth of Nations".

But here's another Adam Smith quote, pointed out by the late Howard Zinn:

Book V--Lectures on Jurisprudence: Tuesday, Feb. 22, 1763, page 207, et sequitur:

"Laws and government may be considered in this and indeed in every case as a combination of the rich to oppress the poor, and preserve to themselves the inequality of the goods which would otherwise be soon destroyed by the attacks of the poor, who if not hindered by the government would soon reduce the others to an equality with themselves by open violence. The government and laws hinder the poor from ever acquiring the wealth by violence which they would otherwise exert on the rich; they tell them they must either continue poor or acquire wealth in the same manner as they [208] have done."


[note: Which is, of course, difficult, given that among what the have-nots have not are the connections, power, advantages, etc., of the "haves," our mostly male, white, European-spawned one hundredth of one percent of the Richey Riches, oiligarchs, or pluto- or urano-crats, depending on which stellar object you hold as the last planet in our solar system.]

Above that note, Smith calls property "the grand fund of all dispute." He continues, as if he'd dialed up his time machine (those ubiquitous funny telephone booths the British have (and that Dr. No uses)) and traveled to 2010 to check out how we're doing [but perhaps I'm being anachronistic?]:

"But here when in the manner above mentioned
some have great wealth and others nothing, it is necessary that the
arm of authority should be continually stretched forth, and permanent
laws or regulations made which may ascertain [protect] the property of the rich
from the inroads of the poor, who would otherwise continually make
incroachments upon it, and settle in what the infringement of this property
consists and in what cases they will be liable to punishment."


Although I didn't study economics in collitch, grad school & law school, I've been doing the auto-didact thing and readin' a whole lot since I was retired by a gang in Mumbai (formerly Bombay, formerly Mumbai). A good place to start is with Howard Zinn's A People's History of the United States, 1492 to the Present. It ain't a pretty sight, the picture Zinn paints. Certainly no "shining city upon a hill"; rather, perhaps the most efficient committer/abettor of genocide the world has ever seen.

Ted Rall has a nice "Partial List of US Wars, Invasions and Military Actions, 1798-present" (adapted from a list created by GlobalPolicy.org) that goes on for 10 pages, in small type, pp. 72-81, The Anti-American Manifesto.

The only socialism we have in this country is, as many have recently pointed out, is socialism for the rich; a "perquisite" exclusively for our richest "citizens." Our military protects their foreign "investments," (more like rapine); taxpayers provide their local police, court system, highways, airports, low-price energy, protect their property--and pay their gambling debts when they loose our money.

Much is made of the "huge" donations the Wall Street Casino makes/made to Republicrats and Demicans alike. It runs in the millions of dollars. What is not concurrently considered is the return on that political investment (or ROPI, as folks are now calling it). So the gamblers donated what, $67 million?

What did they get in return? Some $762 BILLION, wasn't it? give or take a billion here and there. I called up my arithmetic calculator to figger the ROPI: something like $14,872 for every $1 invested--a ROPI of 14,872% (ten thousand eight hundred seventy-two per cent return on political investment, near enough).

And some CEOs are proud that their company makes 8%, 15%, (newspapers, 29%--but it's still not enough)? What pikers! They should just move to Washington DC and invest in the Gang of 535-plus-2, where every $1 invested returns $14,872. (SEC caveat: Your results may vary).

bw


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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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