Thomas Aquinas and John Paul II on Executive Pay

Anna , I appreciate this exchange on income inequality and executive pay. I agree with you that “the rise in executive pay is due to many factors, not merely to an increase in their productivity or abilities.” My point was that the increase in their abilities has been so dramatic that it was going to confront us with this question of long-term income inequalities regardless of the impact of other factors.

Based on what you write, I would identify two main points of disagreement. (I would also quibble with some of the factual assertions you quote from outside sources in your post, but that’s not really worth getting into.)

1) Your whole post is predicated on the assumption that to whatever extent you can show a failure of rationality on the part of the buyer (in this case, the company, which is purchasing the executive’s work), to that extent you have demonstrated that the price is not rationally related to the real value of the thing being purchased. This assumption comes through clearly in the hinge of your argument, which is your statement that “if that rise is not merely the result of executive talent or the natural move of the free market, then we could try to rein in CEOs’ compensation without suffering dire economic consequences.”

The assumption is false. It stems from a conflation of the subjective rationality of the buyer with the objective operation of the price system and (even more fundamentally) the fallacy of thinking that it is possible to evaluate prices quantitatively  against some standard of value that is independent of the subjective valuations of buyers and sellers.

Let’s say I buy bananas at Safeway for $3 a bunch when I would have preferred to buy them for $2 a bunch at Target, for the sole reason that I was unaware Target was selling them for $2. Let’s further stipulate that my lack of awareness of the better price is attributable to a blameworthy defect in rationality on my part (rather than, say, a rational and legitimate judgment that I have more valuable things to do with my time than shop around for better banana prices). Even so, this contributes pricisely nothing to consideration of such questions as whether Safeway is acting unjustly in charging $3, or if the “real” value of a bunch of bananas (or the ”ideal” value or the “rational” value or any other term you choose) is $3 or $2 or some other number.

Thomas Aquinas devoted a good deal of attention to deconstructing these fallacies; see John Mueller’s Redeeming Economics for a thoughtful consideration of Thomistic price theory.

2) Your key statement (“If that rise is not merely the result of executive talent or the natural move of the free market, then we could try to rein in CEOs’ compensation without suffering dire economic consequences”) also assumes that if we grant some entity—unspecified in your post—an arbitrary power to engage in a large-scale price fixing scheme affecting the leadership of every major company in America, this scheme A) might succeed in actually reducing executive compensation, B) might do so without creating massive disruptions throughout the economy, and C) might do so without dehumanizing the persons affected.

A) will not happen because price controls never actually exercise much control over the price; what they mostly do is transfer a part of the price into non-monetary forms of payment; B) will not happen because, in sharp contrast to “safety net” programs that don’t directly interfere with the price system, price controls have a devastating effect on whatever sector of the economy is subjected to them—just try to rent an apartment in Manhattan; C) will not happen because price controls must always, by their very nature, grant the controlling class arbitrary (and therefore dehumanizing) power over the controlled class.

John Paul II’s critique of socialism in Centesimus Annus provides all the basic ideas at work here. His sharp distinction between protecting the dignity of the vulnerable on the one hand, and on the other hand arbitrarily limiting or tearing down the success of those who get ahead through what he calls ”know-how, technology and skill,” is in strong continuity with Aquinas’ contributions to price theory and remains an important touchstone of Christian ethical engagement with this whole set of issues.