[PEN-L:11203] rent question

[James Devine <jdevine@xxxxxxxxxxxxxxx>]

Wojtek: I recommend that you look at Frank & Cook's THE
WINNER-TAKE-ALL-SOCIETY (Penguin). Even though they don't use the
terminology of rent, their analysis fits with it. It's generally well
written, for a nonprofessional-economist audience. (It's in the broad
tradition of segmented labor markets theory of the sort that Gil cites,
though they don't use that terminology either.)

Though many if not most of Gil's points are valid, I agree with Jim Craven
that marginal product framework that Gil uses is not totally appropriate to
this question. After all, top executives are not "factors of production"
who are hired by someone in exchange for a salary (so that marginal cost of
hiring = marginal benefit, salary = marginal revenue product under perfect
comp.) Rather, to a large extent they are _hiring themselves_. Similarly,
they have part-ownership of the firm, receiving some of the profits
(residual income). The executive salary stats you see almost always include
"property income" (such as stock options) along with "labor income."

However, Gil has a point. The issue of whether or not top exec salaries
constitute "rent" is usually a question from the stock-holder point of view
(not, say, the societal perspective of Marx). Are "we stockholders"
overpaying "our" execs? Thus marginal productivity logic is not that far
off. (Marginal products are defined in terms of benefits to the firm,
contribution to profits, not in terms of benefits to the working class,
society as a whole, future generations, etc.)

I don't think the micro-analysis of scarcity-rent is very different between
neoclassical theory and Marxian theory. Neoclassical scarcity-rent refers
to a surplus of income received beyond that needed to bring forth the
supply of whatever is being sold (i.e., its opportunity cost). Marx only
applied rent theory to land and natural resources, with a nod to the issue
of temporarily scarce commodities, but I see no reason why it can't be
generalized to other products (such as executives). As such, Marxian rent
is formally similar to the neoclassical rent: marginal products can be
calculated from Marx's rent tables in vol. III of CAPITAL.

What's different in Marxian theory is the that micro-analysis is
constrained and shaped by the societal framework. Exec rents -- assuming
they exist -- represent redistributions of surplus-value from other
fractions of the ruling class, where the total amount of surplus-value to
be distributed is determined at any specific time in commodity production
for society as a whole (the exploitation of labor), which is in turn
dependent on the state of class relations on the level of society as a
whole. (Top exec rents are thus similar to not only land-owners' rents but
interest income, redistributions that do not arise directly from production
but from the scarcity of a necessary commodity.) The competition between
the various fractions of the ruling class is intensified as exec rents
rise. Ceteris paribus, this encourages the raising of the rate of
exploitation over time, so that there is more surplus-value to redistribute
to execs, bond-holding rentiers, etc. This hike may not happen, of course,
if working-class resistance is strong enough. [*]

Do exec rents exist? Such rents mean that top managers receive income
because of their scarcity and their power (once in office) rather than the
cost of producing their skills or that of the effort required for their
jobs. The anti-rent (apologetic) position justifies high pay by the
personal cost of the supply of effort and other aspects of the individuals
rather than the institutions within which the individuals work (the "demand
side"); it's solely a supply-side theory.

The cost of producing the exec's skills represents one hurdle for becoming
insiders, but it is hardly the only one. A lot of people have MBAs but only
one in a few thousand gets into the executive suite; in F & C's terms, the
few win a lottery, while many who are equally qualified or almost so get
nothing but the basic MBA salary. Many of the other skills that top execs
have -- such as how to back-stab peers and kiss up to superiors -- are
learned as part of the job. That is, they are gained by insiders as part of
what C. Wright Mills terms the virtuous circle of wealth (in WHITE COLLAR,
p. 111). Note that they were paid handsomely at the time of this learning
process, so that the cost of this education is minor.

I don't think the cost of effort has anything to do with exec's high
salaries. Many people, including unskilled gardeners, work much harder than
top execs and get paid less. More importantly, the top execs are the type
of people who really enjoy their jobs, including the effort. Wielding power
is pleasureable, as is wheeling and dealing, hanging out with similar sorts
with similar tastes, flying on executive airplanes, drinking executive
Scotch, etc. (much of which, BTW, is deductible from the corporate income
tax because it's a cost of doing business and not subject to the individual
income tax because it's not individual income).

It might be argued that the high salaries are justified by the amount of
responsibility that these execs have (as with brain surgeons, where one
little mistake can be a disaster). This is an answer which goes beyond the
issue of rent. It is also sticky, since it avoids the question of
"responsible to whom?" Execs are not held responsible to society, but only
to the stock-holders. Because they make decisions that have major external
effects (polluting Bhopal, abandoning and thus destroying old mill towns,
etc.) their power is not the same as responsibility of the sort that
justifies the high salary of a brain surgeon. In fact, the stock-holders
may easily reward the execs for such actions. That is, here marginal
product framework (i.e., the benefits to the owners) becomes irrelevant.

To get a rough idea of whether or not top exec salaries are "rent," compare
the top salary/average wage rate ratio to the profit rate across firms and
over time. I think you'll find a lot of situations where unprofitable firms
pay exorbitant salaries and vice-versa. (I don't have the data at hand.)
Also, the exec salary/wage ratio was much lower during the 1960s than it is
now, while profit rates were significantly higher then.

[*] Some workers can also get scarcity-rent, meaning that they take
advantage of their scarcity to get a higher wage than would be indicated by
the overall average rate of surplus-value (adjusting for their skill), as
when longshore workers take advantages of the bottlenecks of their
industry. They capture back some of the surplus-value that would normally
be squeezed from them (where "normal" is defined in terms of the whole
society). To some extent, this happens with many workers, when they are
paid a small wage premium over what's necessary to get them to bring their
labor-power to the workplace in order to motivate work.

Shoot, I broke my resolution. Well, I'll keep it down to one message a day
(at most).

in pen-l solidarity,

Jim Devine   jdevine@xxxxxxxxxxxxxxx
jim_devine@xxxxxxxxxxxxxx
Econ. Dept., Loyola Marymount Univ.
7900 Loyola Blvd., Los Angeles, CA 90045-8410 USA
310/338-2948 (daytime, during workweek); FAX: 310/338-1950
"It takes a busload of faith to get by." -- Lou Reed.