Derek Jeter principle defines market economics
The Derek Jeter principle defines market economics
By Thomas Sowell
Hoover Institution at Stanford University
January 14, 2007 6:00 AM
One question often asked by those obsessed with income gaps and disparities is:
"Is anyone really worth the millions of dollars a year that some people receive as personal income?"
Such a question presupposes there is such a thing as real worth. That assumption goes back to the Middle Ages, when people thought there was a fair and just price for things.
If there were an objective value - whether of goods or labor - economic transactions would make no sense.
When you buy a computer, the only reason you part with your money is the computer is worth more to you than the money. The only reason someone sells you the computer is the money is worth more to them than the computer.
The difference in value of the same thing to different people is the whole basis for economic transactions.
If there was any such thing as an objective value, these transactions would make no sense. Why bother making an exchange if what you get is no more valuable to you than what you give?
If there is an objective value of a computer that's greater than what's being paid for it, the seller has been cheated and is a fool to keep making such transactions.
Similarly, if the objective value is less than what is paid, the buyer is a fool to keep buying something that isn't worth its price.
It's the same story when Derek Jeter gets paid millions of dollars to play shortstop for the New York Yankees.
He gains by exchanging his time and skills for the money team owner George Steinbrenner pays him. Steinbrenner also gains by paying Jeter to play shortstop - which helps bring in more money in gate receipts, the sale of television rights and other sources of revenue.
As for the rest of us, it's none of our business what Steinbrenner pays Jeter. It's their deal. If we don't understand it, there's no reason why our ignorance should influence what happens.
The medieval notion that there is an objective, fair and just price dies hard, though even in medieval times St. Thomas Aquinas saw some of the problems with the idea.
The British classical economists of the 18th and early 19th centuries saw cost of production as an objective basis for prices.
Since the 1870s, economists around the world have recognized that value is subjective and have incorporated that into their analysis of prices, based on supply and demand.
If something costs more to produce than people are willing to pay, the producer just loses money.
A principle that seems obvious, after it has been articulated, might take generations to evolve and be incorporated into our thinking.
Yet here we are, in the 21st century, still talking about whether people are paid more or less than they are really worth - and we're hot to give government the power to do something if we don't understand why some people are paid so much or so little.
If ignorance is bad, confusion is worse. Productivity, for example, is often confused with merit.
If Derek Jeter worked like a dog for years to perfect his skills as a baseball player, some might think he had earned the big bucks he gets.
If he was just born with natural talent and the whole thing is a breeze to him, that would mean he didn't really merit such a huge payoff.
Steinbrenner isn't paying for Jeter's merit. He's paying for his productivity, whether at bat or in the field. Somebody who worked twice as hard and was still only half as good never would get the same money Jeter gets.
Many poverty-stricken people in the Third World work harder than most Americans work. But, for a number of reasons, they don't produce as much. That's why these countries are poor.
Transferring wealth from 300 million Americans and spreading it out over 2 billion people in India and China isn't going to do much. Enabling more people in India or China to become more productive can help them and us - and has.
Multinational corporations are among the biggest spreaders of greater productivity to Third World countries, and they usually pay higher wages than local employers.
Moral exhibitionists who are hot for the redistribution of other people's money are among the biggest critics of multinational corporations.
Sowell is a senior fellow at the Hoover Institution at Stanford University. His Web site is www.tsowell.com.
Copyright © 1998 - 2006 ONI Stockton, Inc., All Rights Reserved
By Thomas Sowell
Hoover Institution at Stanford University
January 14, 2007 6:00 AM
One question often asked by those obsessed with income gaps and disparities is:
"Is anyone really worth the millions of dollars a year that some people receive as personal income?"
Such a question presupposes there is such a thing as real worth. That assumption goes back to the Middle Ages, when people thought there was a fair and just price for things.
If there were an objective value - whether of goods or labor - economic transactions would make no sense.
When you buy a computer, the only reason you part with your money is the computer is worth more to you than the money. The only reason someone sells you the computer is the money is worth more to them than the computer.
The difference in value of the same thing to different people is the whole basis for economic transactions.
If there was any such thing as an objective value, these transactions would make no sense. Why bother making an exchange if what you get is no more valuable to you than what you give?
If there is an objective value of a computer that's greater than what's being paid for it, the seller has been cheated and is a fool to keep making such transactions.
Similarly, if the objective value is less than what is paid, the buyer is a fool to keep buying something that isn't worth its price.
It's the same story when Derek Jeter gets paid millions of dollars to play shortstop for the New York Yankees.
He gains by exchanging his time and skills for the money team owner George Steinbrenner pays him. Steinbrenner also gains by paying Jeter to play shortstop - which helps bring in more money in gate receipts, the sale of television rights and other sources of revenue.
As for the rest of us, it's none of our business what Steinbrenner pays Jeter. It's their deal. If we don't understand it, there's no reason why our ignorance should influence what happens.
The medieval notion that there is an objective, fair and just price dies hard, though even in medieval times St. Thomas Aquinas saw some of the problems with the idea.
The British classical economists of the 18th and early 19th centuries saw cost of production as an objective basis for prices.
Since the 1870s, economists around the world have recognized that value is subjective and have incorporated that into their analysis of prices, based on supply and demand.
If something costs more to produce than people are willing to pay, the producer just loses money.
A principle that seems obvious, after it has been articulated, might take generations to evolve and be incorporated into our thinking.
Yet here we are, in the 21st century, still talking about whether people are paid more or less than they are really worth - and we're hot to give government the power to do something if we don't understand why some people are paid so much or so little.
If ignorance is bad, confusion is worse. Productivity, for example, is often confused with merit.
If Derek Jeter worked like a dog for years to perfect his skills as a baseball player, some might think he had earned the big bucks he gets.
If he was just born with natural talent and the whole thing is a breeze to him, that would mean he didn't really merit such a huge payoff.
Steinbrenner isn't paying for Jeter's merit. He's paying for his productivity, whether at bat or in the field. Somebody who worked twice as hard and was still only half as good never would get the same money Jeter gets.
Many poverty-stricken people in the Third World work harder than most Americans work. But, for a number of reasons, they don't produce as much. That's why these countries are poor.
Transferring wealth from 300 million Americans and spreading it out over 2 billion people in India and China isn't going to do much. Enabling more people in India or China to become more productive can help them and us - and has.
Multinational corporations are among the biggest spreaders of greater productivity to Third World countries, and they usually pay higher wages than local employers.
Moral exhibitionists who are hot for the redistribution of other people's money are among the biggest critics of multinational corporations.
Sowell is a senior fellow at the Hoover Institution at Stanford University. His Web site is www.tsowell.com.
Copyright © 1998 - 2006 ONI Stockton, Inc., All Rights Reserved
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