Tuesday, 23 July 2013

Now this is just stupid (updated)

Kiwiblog writes,
Simon Collins reports:
The Government should stop giving contracts – and knighthoods – to companies that pay their bosses more than three times their lowest-paid workers, an economist has suggested.

Dr Geoff Bertram, a retired Victoria University economist who inspired a Labour Party plan to force down electricity prices, made the proposal at a conference on inequality in Wellington yesterday.
Seriously I find it hard to believe an economist could come out this such an idea, after all as Steven Landsburg pointed out back in 1993,
Most of economics can be summarized in four words: "People respond to incentives." The rest is commentary.
Has Bertram really thought about the incentives in his idea? If he had he would know that they are all bad. These ideas have been tried and failed. Many worker cooperatives have payment schemes which limit the ratio of the highest paid person to the lowest, e.g. 3 to 1, 6 to 1 etc, in an effort to create a more equal division of the firm's residual. Ricketts (1999: 20) outlines the general problem with this as '[...] to minimise antagonism a rough equality in the division of the residual will be necessary and this may conflict with outside opportunities. Those with high transfer earnings reflecting high productivity elsewhere will desert the co-operative. It is for these reasons that control of the firm by its labour force is usually found in circumstances which permit a high degree of common interest'. Jossa (2009: 709-10) explains the basic issue in terms of the management of capitalistic versus co-operative firms: '[g]iven the tendency of cooperatives to distribute their income equitably among all the members, it is difficult to deny that few cooperatives are in a position to pay the high salaries that able managers can expect to earn in capitalistic firms. Whenever a group of people resolve to work as a team-we may add-the member who outperforms the others in initiative and organizational skills will inevitably take the lead. The crux of the matter is that such a person has no incentive to establish a cooperative and share power and earnings with others. He or she will prefer to found a capitalistic firm, where he or she will hold all authority and, if sole owner, appropriate the whole of the surplus [references deleted]'.

In other words having a payment scheme which imposes a tight limit on the payments to the most able within the firm gives an large incentive for these people to leave. And these are the very people the firm needs to succeed.

Update: Eric Crampton also seems to see some problems with the Bertram suggestion while Matt Nolan thinks Bertram's being "reasonably disingenuous".

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