In a bid to prove her free market credentials – and those of her chancellor – Liz Truss has widely trailed the idea of lifting the cap on bankers’ bonuses. Cue outrage from the usual quarters.
At the same time, there was another headline in the Guardian on remuneration which might be thought would cause significant spluttering: “Lamar Jackson turned down $133 million. His decision makes sense”.
Jackson, the brilliant quarterback for the Baltimore Ravens American football team, has actually rejected a $250m offer for a five year contract. The 133m would merely be an upfront payment.
Although your average football fan may occasionally grumble about the amounts which his or her favourite player receives, by and large these are accepted. In the same way, no one seems to begrudge the $100m plus chunks of money which seem to tumble on a regular basis into the bank accounts of actors such as Daniel Craig.
In contrast, the bosses of energy firms are “fat cats” for receiving far less than this, and should be cast into the deepest pit of Hell.
It is, apparently, perfectly acceptable for some people to make unbelievable amounts of money but not for others. In fact, it is completely rational to think that it is acceptable for Chelsea to pay £15m (and more) a year to Raheem Sterling, but at the same time be enraged by the £6m which Shell fork out for their chief executive.
As Erik Brynjolfsson at Stanford and Andrew McAfee at MIT have argued, changes in technology have allowed a small number of individuals to command superstar incomes in a way which was not possible a generation ago.
A hundred years ago, for example, the only people who could have any direct experience of Manchester United playing soccer live were those present in the stadium during the game. Now, Manchester United can be watched by hundreds of millions around the world.
When providing cultural services (and using the word “culture” in a wide sense), a performer or author must make the same effort almost regardless of whether a hundred or a hundred thousand people watch them, read their book or listen to them. In other words, the costs of production do not really rise with the size of the market. This was the theory of Chicago economist Sherwin Rosen, forty years ago, in his paper “the economics of superstars”.
But technology enables people to be excluded from consuming the product. If you don’t pay, you don’t get to see it. The combination of these two points means a relatively small number of sellers can, in principle, service the entire market. The more talented they are, the fewer still are needed. Why bother watching the National League North when Manchester United are playing City on subscription media.
This argument works very well for sports, film and music. It enables us to put aside our squeamishness over massive piles of money. But it is much less obvious that it is relevant to the pay of chief executive officers and investment bankers.
The instinctive dislike which many people feel toward the massive rise in rewards for corporate executives and bankers is supported by some high level economic theory. Especially, when the price rises of those companies are threatening the livelihoods of others. It may not be Shell’s fault the price of gas has shot up – but we blame them all the same.
Indeed, it may be thanks to the fruits of a banker’s labour he is given a massive bonus. Still, most are unlikely to find it palatable.