Economic arguments -- like this one, over CEO pay -- often remind me of John Kenneth Galbraith's brilliant essay on the chief failing of economics: Its inability, or unwillingness, to model power. "In eliding power," he wrote, " in making economics a nonpolitical project, neoclassical theory destroys the relation of economics to the real world. In that world, power is decisive in what happens...In consequence, neoclassical and neo-Keynesian economics relegates its players to the social sidelines. They either call no plays or urge the wrong ones. To change the metaphor, they manipulate levers to which no machinery is attached."
How else do you respond to economists who, innocent as babes, claim that rocketing CEO pay is just a factor of a better stock market, larger firms, and more competition for CEOs? You might wonder, as other economists have, why such effects failed to develop prior to the 1970s. An observer might suggest that prior to the 1970s, the corporate class held less power, and were constrained by a political culture -- not to mention confiscatory marginal tax rates -- that would have done more than merely bemoan their inexplicably expanding pay. That's, uh, not the case today. But since such politico-cultural realities can't easily be modeled, they can't much be discussed, either, and so we pretend that there must be some graphable, comprehensible, economically rational explanation for the exponential increases in CEO pay, even as it's pretty clear that the only rational event were the CEOs realizing they could get more, and then working the system until they did.
Related: Fun with CEO pay!
