People don’t always get what they deserve under capitalism. But there’s nothing wrong with that.
In a 10-part video series on economic “myths,” Robert Reich is going after common free market talking points, arguing that they are baseless. To address these arguments, I’m writing a series of response articles—one for each video—called Responding to Reich. Part 1 and Part 2 are already in the books. Today, it’s time to address Myth #3: Income & Wealth are Deserved.
“Get ready for this lie,” Reich opens. “‘The richest people have worked the hardest and therefore deserve their wealth.’ Bunk!”
Right off the bat I would take issue with this framing. Reich is obviously correct that the richest people aren’t always the ones who’ve worked the hardest. There are entrepreneurs who put in little effort and got lucky, there are people who married into wealth or received a sizable inheritance, and there are people who have won the lottery.
But free marketeers—good ones, anyways—don’t argue that wealth is deserved because of hard work. We argue that high incomes are deserved in a free market, because the person receiving them is clearly creating a lot of value for others. But aside from that we would readily admit that quite a few rich people never earned their wealth and don’t really “deserve” it in that sense. All we’d say is that they deserve to keep it, because as long as they didn’t acquire it through coercion, it’s rightfully theirs.
In a sense, then, I half agree with Reich. If the myth he’s ostensibly debunking is “All income and wealth are deserved,” then, yes, that’s a myth. The guy who won the lottery didn’t exactly work for it. But as we’ll see in a moment, Reich is also trying to argue that a CEO’s high salary isn’t deserved. And that’s a point on which I disagree.
Do CEOs Set Their Own Pay?
Reich lays out his argument as follows:
Income and wealth increasingly depend on who has the power to set the rules of the game. CEOs of large corporations and Wall Street’s top traders effectively set their own pay. And their pay has gone into the stratosphere. They’ve linked their pay to the stock market through stock options, used corporate stock buybacks to increase stock prices, and timed the sale of their options to those increases. Some get inside information about corporate profits and losses before the rest of the public and trade on that information. Others create or work for companies that have monopolized their markets. That means they can charge consumers higher prices than if they had to compete for those consumers. And they can keep wages low because workers have fewer options of whom to work for. Others use their political influence to get changes in laws, regulations, and taxes that benefit themselves and their corporations while harming those who don’t have this kind of influence.
Let’s unpack these comments one at a time.
First, the idea that CEOs effectively set their own pay is just silly. If this were really true, why only put pay into the stratosphere? Why not the mesosphere, the thermosphere, or the exosphere?
The only explanation as to why CEO pay isn’t even higher is that there must be some force holding it down. But if there’s a force holding it down, it means CEOs can’t just pick whichever number they like. Instead, they take the highest number the market will give them, just like everyone else.
When Reich says, “They’ve linked their pay to the stock market through stock options,” he’s making it sound like the CEOs came up with some scheme. But that’s not how it works. It was the board of directors who made that choice. They decide what the CEO’s compensation package will look like. Presumably, boards are aware that CEOs can use buybacks and options. That’s a factor they should take into account when determining what compensation package to offer. But if the CEO exploits a “loophole” in his compensation package, that’s just part of the deal that the board willingly signed up for. “What is a loophole?” wrote the economist Ludwig von Mises. “If the law does not punish a definite action or does not tax a definite thing, this is not a loophole. It is simply the law.” The same goes for compensation rules.
As for trading on profits and losses before they are announced—which Reich correctly identifies on the screen as insider trading—that’s highly illegal and therefore highly risky. This is hardly an example of CEOs rigging the game in their own favor.
Monopolies are clearly an issue, but only because of government interference in the market. It is government licensing and regulatory systems that protect companies from competition and thus allow them to get away with charging higher prices and paying lower wages than would otherwise exist. So sure, CEOs don’t deserve high pay when the government is protecting their business. I suppose I should clarify my position: CEOs deserve their pay when it’s earned in a free market. And the idea of a free-market “monopoly” is dubious to say the least—but that’s a longer conversation than we have space for here.
Reich’s final complaint is about lobbying for special rules and taxes that benefit one company or sector over another. This falls in the same category as monopoly: I agree it’s a problem, but I’m not defending the claim that current CEO pay is deserved. I’m defending the claim that free-market CEO pay, where such uneven playing fields don’t exist, would be deserved, because it would reflect the value the CEO is bringing to the company. Reich has offered no compelling arguments against that position.
The Reality of Luck
Having made these points, Reich pivots to talking about those who became wealthy by good fortune:
Others were just lucky enough to be born into or marry into wealth. These days the most important predictor of someone’s future income and wealth in the United States is the income and wealth of their parents. Sixty percent of all wealth is inherited. And we’re on the cusp of the biggest intergenerational transfer of wealth in history, from rich Boomers to their children.
As I mentioned earlier, I pretty much agree with Reich on this. If you received a large inheritance or married into wealth, that’s not something you “deserved.”
Is that a problem for capitalism? I don’t think so. True, it’s tempting to say capitalism creates a world where “everyone gets what they deserve,” but I think we should just bite the bullet here: it doesn’t. And that’s okay, because respecting people’s right to their own property is simply more important than making sure everyone gets what they “deserve” and nothing more.
Besides, if the government taxed all these gifts so it could redistribute them, how would we ever determine who deserves what? Any other recipients of this money would be just as undeserving of it as the children who would otherwise inherit it.
Fairness and Free Markets
After a few other comments, Reich wraps up the video as follows:
Wealth doesn’t measure how hard someone has worked or what they deserve, but how well our economic system has worked for them.
Again, he’s partly correct. Government rules rigging the market mean that a lot of people who are currently rich don’t actually deserve their wealth. And even in a free market, Reich is right to point out that wealth doesn’t always reflect hard work or deservedness. But it often does, and in fact, the freer the market, the more that’s true.
Reich bemoans the particularly corrupt ways that companies rig the game, but the truth is that all market interference calls into question the deservedness of the victors, that is, the wealthy. When the government imposes tariffs, regulations, licensing, and various other devices for controlling the market, it is getting in the way of free competition. And the more that the level playing field of free competition is compromised, the more we have reason to doubt that the rich really deserve their wealth.
The same goes for taxation. When the government takes taxes and spends them on public services or hands out the money to others, do those beneficiaries really deserve what they receive? Clearly not. But the taxpayers very often do deserve the money they are forced to hand over, because in most cases they earned it.
“What is your ‘fair share’ of what someone else has worked for?” Thomas Sowell famously asks. The answer, of course, is zero. As such, the more taxation there is, the more we are moving away from fairness.
Do you see the irony here?
Reich is trying to indict capitalism for violating the principle that “people should get what they deserve.” But the big-government system Reich himself champions is far worse on that metric than free-market capitalism! If you think capitalism is unfair, just wait until you see the amount of undeserved wealth that exists in the kind of highly regulated, high-tax market that Reich advocates.
Capitalists should absolutely bite the bullet on the fact that free markets don’t always result in perfect fairness, but the other thing we should do when this topic comes up is turn the conversation around. “If you care so much about the unfairness of people getting what they don’t deserve,” we should say, “why do you champion all these taxes and regulations that clearly exacerbate the problem?”
I would love to hear a good answer to that question. Until then, I have to conclude that the principle of fairness isn’t actually a goal for these people. It’s just a convenient tool for attacking capitalism.
Additional Reading:
Responding to Reich, Part 1: Is Economics Objective? by Patrick Carroll
Responding to Reich, Part 2: Yes, the Government Obstructs the Market by Patrick Carroll
