Updated: May 16, 2019
A small Seattle company shows that capitalism can have a heart (Kristoff, 2019).”
CEO pay in the US is going out of site, often upward of 300 times the median pay in many companies. As a case in point, Melin, Zhao and Perry (2019) point to recent commentary by an heir of the founders of Disney, Abigail Disney, whose grandfather Roy Disney and grand uncle Walt Disney started the company, on how level of executive pay seen at Disney has “had a corrosive effect on society.” According to the article, she made the point last month on CNBC that “Jesus Christ himself isn’t worth 500 times median workers’ pay.” The current Disney CEO is at a ratio of 1427:1, the "1" referring to median pay in Disney of $46, 127. The average CEO compensation package is around $12M at this time ( https://www.wsj.com/graphics/ceo-pay-2019/?mod=article_inline&mod=hp_lead_pos6 ), showing the CEO of Discovery with a $129M package.
This is what economists refer to as an externality, sometimes unintended, in this case extreme inequality in the Market driving health and social problems; tribal, identity politics; and, economic instability, resulting in a Market Failure to manage itself. Metaeconomics recognizes the pervasiveness of such externalities, due to everyone being in this together, as represented in an appropriate shared Other (in this case, shared views of a reasonable compensation package, reasonable inequalty)interest. So, what could be done about this, short of Government nudging to change pay scales and compensation packages, and, in the extreme, moving to regulation and control?
The Market can self-correct. In the case of Disney, consumers could send signals either favoring the Disney compensation package by buying ever more of the Disney product. Conversely, consumers could boycott, and otherwise stop spending on Disney product. This is the classic Friedman-like, Chicago school economics solution.
The Market can also self-correct in still another way. CEOs could buy into a more reasonable Other-interest. Indeed, some CEOs and company owners are stepping forward, freely choosing to make adjustments: Their shared Other-interest is shifting away from the winner-takes-all-frame. While several lower paid employees had been in the $30-40000 range of salary, Dan Price, one of the owners of Gravity, a credit card payment processing company, decided to raise these individuals and others to a minimum of $70000 (see Kristoff, 2019; also see Keegan)). This was accomplished in part by Price reducing his own salary from $1.1 M to $70000. Intriguingly, Seattle also passed an ordinance, about the same time, that raised the minimum wage for all workers in the city to a minimum of $15/hour.
This activity raised a firestorm of reaction in the extreme political elements associated with the Right Isle. As Kristoff (2019) notes, on Fox Business, Company Owner Price was labeled the “lunatic of all lunatics,” and Rush Limbaugh declared, “I hope this company is a case study in M.B.A. programs on how socialism does not work, because it’s going to fail.”
So, what is going on? Is Dan Price a lunatic? Is this a case study in socialism, which inherently will fail? Or, is this something more akin to the Kristoff implicit claim in the subtitle that capitalism could have a heart, acting with empathy and not just ego, i.e. be something more like what we might call a good capitalism, where incentives are still provided to move up the wealth ladder, but the ladder is not so long that those toward the bottom cannot ever make it to the next rung? Metaeconomics can help make sense of this story, and, add new insights into the wage, salary and compensation package controversy in general.
So what actually happened? Well, we do not have enough data, information to do a thorough empirically based analysis, but Metaeconomics points in some intriguing directions, so we can speculate in a different way about what is going on. First, the owner reduced his salary from $1.1M per year to $70,000 per year, which helped with $1.03 M coming out of the “pay owners” account and into the “pay employees” account: He was willing to leave some money on the table, seeing it was not going to detract from Gravity doing just fine. That is, if the typical salary for the lower echelon in the wage structure was around $30000, shifting the $1.03 M to the employee account means about 25 employees could be paid out of the salary savings at the top, i.e. $1,030,000/$40,000 = 25-26 with higher pay. We don’t know from the Kristoff article how many were increased to $70,000, but doing so had less of an impact on capital available in the firm to stay productive, leaving a lot more than lunatic socialism based analysis would imply.
Next, a couple of the higher paid, upper employees became very concerned about losing ground relative speaking, e.g. someone earning say $100,000 not getting a raise while many were now making $70,000, left the company (Kristof, 2019). This points to how leveling the distribution of salaries can take incentive away from some, who want to stay relatively speaking higher on the ladder. Changing the distribution to reduce drastic inequities could well make a company more productive; going too far could be counterproductive.
We might guess that these people were eventually replaced (employee count increased overall from 120 to 200, so a reasonable guess), perhaps at about the same pay scale as those who left, albeit this would be a piece of data we would want to collect, as maybe it would have been necessary to scale up the entire salary range? In addition, several new hires arrived on the scene looking for employment; they wanted to work for a company that shifted the balance a bit away from Self-interest only toward more orientation to a shared Other-interest in more reasonable salary distributions, especially reduce the owners income, and in their view a resulting better working environment because of it. As Kristoff (2019) describes it:
Tammi Kroll, a Yahoo executive, took an 80 percent pay cut to move to Gravity, where she is now chief operating officer….“My whole goal when I went to school was to make more money,” said Kroll, who comes from a working-class background. But as she rose in the corporate world and her taxable income topped $1 million, she had an epiphany: “Money doesn’t make you happy, doesn’t make you a better person.” When she heard about Gravity, her heart leapt — and so did she.
Like Adam Smith (1759) suggested, balance can bring happiness.
On the supply side, credit card processing services increased in volume from $3.8 B before the wages were increased to $10.2 B at the current time. Why did the services business increase? Well, we do not have enough data and information to know exactly why it increased this much, but Metaeconomics does suggest, again, it could be about the ethic, the new Moral Dimension represented in the company by its owner. As Kristoff (2019) notes:
Jody Hall… who worries about income inequality, owns a nearby cafe, Cupcake Royale. She chooses Gravity to process her payments, admires what (the company) has done and offers her own employees health care
This is to say, businesses who agreed with Gravity on just what the shared Other-interest needs to be regarding salary distribution, gave Gravity more business.
For Dan Price, the Moral Dimension is part of his business, again from Kristoff (2019):
He grew up in rural Idaho in an intensely Christian family and spent three hours a day listening to Limbaugh and two hours memorizing Scripture. He’s less religious today, but he says ethics remain deeply important to him.
It is ironic that Rush Limbaugh may have inadvertently nudged Dan Price into acting the opposite from what Limbaugh sees as best for Gravity, and companies in general, instead bringing the Moral Dimension that address income inequality into the company. Importantly, framing in the Lunatic Socialism way is also a kind of shared Other-interest, but arguably more in line with a Moral Order which has everyone maximizing Ego based Self-interest-only, an inequity is not part of that brand of Other-interest, and, as a result, perhaps without regard for overall good in a good capitalism? This Lunatic Socialism framing appears to preclude, otherwise ignores, the Moral Dimension representing a concern about the distribution of income and wealth, and inequality?
This suggests another empirical question that Metaeconomics would point too asking: Do Fox Business and Limbaugh prefer what can easily become a Bad Capitalism, an Extreme Greed Capitalism, and see it superior to anything that considers Ethics, Moral Community, and Tempering Greed on the way to Good Capitalism? Arguably, yes, but Metaeconomics always leads to an arguable, but eventually fact based position, because it is based in empirical reality not ideology, and asks questions about the Moral Dimension. Is Dan Pine and his Gravity Payments company managing to do Good Capitalism, not Lunatic Socialism?
Intriguingly, employees of Gravity presented a brand new Tesla to Dan Price one day (Kristof, 2019). His $70000 salary had him driving an older car that needed to be replaced. Empathy, and the shared Other-interest it produces, goes both ways, which Adam Smith(1759) also argues, and is a key part of a Good Capitalism.
Kristoff, Nicholas. "The $70000-a-Year Minimum Wage." New York: New York Times (March 30, 2019).
Smith, Adam. The Theory of Moral Sentiments, edited by D.D. and A.L. Macfie Raphael. Indianapolis, Indiana: Liberty Fund, Inc., 1759/1790.