THIS APPENDIX was occasioned by a question put to me by Dr. Robert A. McIvor during his pre-publication reading of the manuscript. This was his question:
How would a job market determine the incomes of professional sports figures? Apparently, any given player's contribution to the revenues of his employer can now be so precisely evaluated, and those revenues are in general so high-the team's gate receipts, television viewership, advertising deals, product sponsorship, and so on-that the incomes of the players with the greatest followings are now obscenely high. Would the job market offer any remedy for this?
There are at least four job-market mechanisms that allow us to predict that the "obscenely high" incomes of sports stars are likely to be far less in job-market economies than they are in our current labor-market ones, and a fifth mechanism that applies only to the incomes of corporate executives. Most of these mechanisms apply to the equally "obscenely high" incomes of entertainment stars.
Before explaining why some American incomes are "off the chart" in comparison with the highest incomes paid in other countries, and how job markets will automatically moderate some of these excesses, I would like to caution the reader once again that some of the "inequality remedies" offered by job markets will not be in any sense self-installing. One remedy, at least-the second one listed below-will require a political decision to put it into practice, and this may not always be forthcoming.
Here are the five principal remedies that job markets will offer for extremely high incomes:
- Employee Choice: In sports, as in other kinds of work that can be "performance-measured"-either by box-office receipts or by increases in the value of a company's stockshares-even the "high performers" won't be selected by their employers. If employees buy their jobs in job markets, they'll be selecting themselves for those jobs...after meeting whatever qualifications the employers require. The monetary and other rewards that highly-qualified people will choose-as characteristics of the jobs they'll decide to buy-will obviously seem appropriate to them, or they won't buy. So curiously enough, the question of the productivity of an employer's "most productive workers" from the employer's or stockholder's point of view won't even arise when employment is negotiated by job markets! What will be important in determining the credit-rates of high-performance jobs, and hence the monetary rewards of the workers who perform in them, is the satisfactoriness of the job as measured by the values of the workers who buy them...in short, its promised value to the prospective buyer, not just in monetary terms but in all the other satisfactions promised by jobs: the fun, fame, education, personal challenge that it offers, as well as whatever fortune is promised by its credit-rate and job-size.
- The "Maximin" Ratio: The range of monetary rewards-as measured by the ratio between the highest and lowest credit rates to be found in a nation's job market, which we have called its "maximin ratio"-is certain to diminish in nearly all job-market societies. But whether and by how much a democratic people will choose to diminish their national maximin-ratio will be a political decision and reflect the values of that particular nation's electoral majority.
In the U.S.A. today, for example, the present minimum wage-which is paid to people like hamburger fryers-is about $5/hr. At the other extreme, some U.S. corporate executives earned an annual compensation of around $20m in 1996, which is a "wage" of around $10k/hour.1 That range, in turn, produces a maximin ratio of 10,000/5 = 2,000, certainly the highest in the world...perhaps in human history. Given job markets, such ratios can be, if people want them to be, drastically reduced. Ratios of around 10-at most, 20-will be mathematically sufficient to run job markets.
(As an example of this, if 4 significant digits of the credit-rate turn out to be meaningful to job-market shoppers, as I believe they will be, there are 11,001 distinct values of the credit-rate between 4.000 to .2000 if the maximin equals 20. Reducing it to 10 with a range of 3.000 to 0.3000, say-which retains about the same degree of skewedness-reduces the number of significantly different values of the credit rate by only 2,000, leaving 9,001 values for the computer to select from. If it turns out that only three digits of the credit rate are significant to shoppers-which, as a supermarket shopper, I sincerely doubt-there are still 1,101 and 901 different values, respectively, for the computer to manipulate. Even this smaller amount of discrimination might well be sufficient, mathematically, to operate many nations' job markets.)
Of course the citizens of countries like the U.S.A. and India may choose to retain the presently huge income differentials among their citizens if they wish to. But when and if either of these two great democracies acquires a job market, the chances are it won't want to retain all its former inequality...especially as there will no longer be any economic reason for doing so.
- Employees' Agendas: Employees have very different agendas from employers; and the goal of maximizing a company's profit is an employer's goal, very seldom an employee's. So this, too, is likely to cut down on the gross revenues out of which "obscenely high" incomes are now being paid. Sports players in particular want to play the game well; want to learn to play it even better than they already do, break records if they're good enough, be part of a winning team-or at least a good one-and retire early with good records, savings in the bank, and without permanent injury to their bodies. Sports-club owners' interests are of course quite different; but their interests too can be vigorously pursued under job markets. Owners can pursue their interests in fielding teams that fill stadiums by devising good training programs for their players, by writing qualifications that really work to sift out the superb talent they're looking for from talent that's merely good, and by giving tests before employment that successfully predict high-performance. But hiring a star who is already known to pull in "massive gate receipts" is, for all these reasons, not likely to an option under job markets.
- Generally Reduced Spectacle-Revenues: This factor applies only to the incomes of sports and entertainment luminaries, not to corporate executives. But for these more public luminaries, simply reducing the revenues coming into their industries is likely to make a very large difference in their incomes. What will happen is that, for the several reasons listed below, the gate receipts and media earnings of the sports and entertainment industries aren't likely to be so "huge" under job-market conditions as they are today. The current sources of sports revenues are mainly ticket sales and media earnings from televised events. Product endorsements also contribute to the incomes of star players; but these revenues, too, ultimately come from advertising. All three of these sources of sports-club and player's revenues are likely to be diminished in job-market economies. There are four distinct reasons for this:
- The Effect of Cost-plus-P PricingThe cost-plus-p price of a ticket to witness an extraordinary event is likely to be only a small fraction of what such tickets cost today, relative to the other things we purchase. This in itself will sharply cut back the cost of such products to the spectacle-going public. While the government's scarcity taxes-as discussed below-might well push up the customer's price of an extraordinary seat ar an ordinary event, or of the prices of all the seats at an extraordinary event-even to heights approaching current levels-this will not add to producers' revenues, but to the government's. Producers' revenues, because of cost-plus-p pricing, can be expected to go down and stay down, relative to the rest of the economy, once spectacle-production is treated just like any other industry in a job-market economy.
- The Effect of Scarcity Taxing: This novel mechanism is likely to have large effects on both sports and entertainment industries; so it will repay us to examine it with some care.
Given the human passion for spectator sports and other public spectacles, plus the finiteness of any stadium or auditorium's seating capacity, tickets to live performances of anything of enduring interest will probably always be in short supply. So whenever the public's desire to see such spectacles exceeds the seating capacity available, the sale of tickets to them will provide occasions for job-market governments to apply a "scarcity tax."
As applied to stadium, auditorium, or theater tickets, a scarcity tax would have as its mathematical objective to "just fill the seats" and the tax itself would be added to the cost-plus-p price of the ticket. That base price, in turn, will reflect the cost of using the seat plus its occupant's share of the cost of the production; and, so treated, the magnitude of the tax on a ticket for a very special day and seat could well be 10 or 15 times the base price paid to the producer. In this way the ticket's price to the consumer would reflect not only the relative desirability of that seat's position in the house but also the relative popularity of the event itself, and do both without creating a "windfall profit" for the producer. Taxation of this mathematically exquisite kind could therefore contribute a large proportion of the revenues of any government whose people liked spectacles, but who had, for the best of other reasons, adopted a cost-plus-constant-profit method of pricing...a method that would apply even to their spectacles. For such a people would then need some other, fairer and more rational way of dealing with the scarcities created by their love of spectacles than opportunistic pricing by scalpers has ever provided.
Moreover, scarcity-taxing could, by its very exquisiteness, also convey a sense of fairness to spectacle-attending publics. Such publics seem always to know they're privileged when it's true they are-that is, when many more people would like to see a certain spectacle than can possibly be seated for it-and they are often quite willing to pay large surcharges over cost for that privilege...ask any scalper or his customers. In job-market economies, such consumers will have the additional satisfaction of knowing that the government's surcharge on an already fair price-the cost-plus-fair-profit price that the producer receives for her efforts-has also been "fairly calculated", that is, calculated to "just fill the seats" by minimizing both the number of people left standing outside-willing to pay the price but not able to get in-and the number of seats left empty because their tax-augmented prices were too high.
But the real relevance of scarcity taxing to the "obscene incomes" question is that the owners of the teams or entertainment companies that put on such spectacles will not see the effects of scarcity in their own revenues. They will simply not have such "huge gate-receipts" to divvy up among themselves, their performers, and their performers' agents. In the job-market world, the revenues derived from the "scarcity value" of a ticket to a one-of-a-kind football-match-or, for that matter, from the pleasure of eating early strawberries-will have been contrived by most job-market countries to be one of the financial pillars of their public sectors. For such taxes are a deliberately chosen-and utterly fair-way of dealing with those aspects of scarcity that cost-based prices alone cannot provide.
So in the countries that adopt job markets, scarcity taxes are likely to become known as the sane alternative to the cruelties-as in the illegal drug traffic-as well as the excesses-as in our current sports and entertainment industries-of the "opportunistic" methods of pricing we use now to deal with any sort of scarcity: from illegal drugs to tickets to a football match. In fact, spectacle-producing industries under job markets are likely be transformed by scarcity taxes into industries with a newly benevolent public aura about them...simply because they will be generating such a large proportion of the public's revenues. It seems quite likely, therefore-although perhaps astonishing to us-that people will actually not mind paying this new kind of tax, that even producers will come to accept that the products of their efforts should be taxed in this sane new way. No one needs early strawberries, or to actually see Joe Montana make his last deathless pass into the end-zone. One can always forego such experiences. But those who do want them really want them, and will not mind paying the "outrageous" prices they may still have to pay for them. For in that way they will also be supporting their nation's space effort, say, or its research into leukemia, or its comforting of blind children, or its putting the Library of Congress into everybody's laps. As a consequence, those who will be losing "obscene" incomes as job-market technology develops can be comforted by knowing that these other good things are now happening through the job market's harnessing of a natural phenomenon that was once a generator of grotesque unfairness in their societies.
- A Decline in Advertising Revenues: Possibly even more effective than scarcity taxes in eliminating "obscenely-high" incomes will be the very likely decline, in the next millennium, in invasive advertising. There are many reasons why this will happen, most of them economic. If advertising revenues do decline, relative to the rest of the economy, that decline will lead inevitably to a decline in the very large contribution that advertising now makes to obscenely high incomes. This takes place now both through revenue-sharing by the media with the owners of spectacle-producing businesses, and through product endorsement by players and other star performers in these industries.
The expected decline in advertising revenues will not be confined to job-market economies; but, for several reasons, will take place especially swiftly in them. One of those reasons is that commerce in job-market economies will be cost-driven. So, given cost-plus-p pricing in the economy at large, advertising budgets are likely to shrink rapidly as advertising itself becomes technologically more efficient. When price is cost-driven, any more efficient means of doing anything will lower the prices of the products to which that something is done. So as more pleasant, less intrusive, more informative, and above all less lavish ways of conveying product information to consumers are developed through and by the Information Revolution, the prices paid by consumers for those products will inevitably go down. (The contribution of advertising to the retail price of nationally-advertised products in the U.S.A. today is astonishingly high, in the case of some food products, well over fifty percent. Dawson & Foster (1996), who report that an estimated 1 trillion dollars-one in every six dollars of GDP-is spent annually in the U.S. on marketing.) With the almost inevitable increase now looming in the sheer efficiency of advertising technology, this very large component of cost once dedicated to advertising will drop to nearly zero. Once this techno-economic transformation is well underway-and it has already begun; see "Tremble, Everyone" (1997)-unsolicited advertising of all kinds, whether of the kind that invades our privacy, such as the junk mail and telephone-marketing we endure today in the U.S.A., or of the kind that destroys the integrity of a work of art-such as a television network's solemn efforts to sell armpit deodorant between scenes of a serious play-is likely to be completely replaced, in job-market economies, by consumer-initiated presentations of product information.
Besides being consumer-initiated, most of the new high-tech advertising will also be interactive, and so capable of tailoring both the amount and kind of information provided by the manufacturer to exactly fit the inquirer's needs. This will lead to an extraordinary increase in the efficiency of producer-to-consumer communication; so once such powerful information technologies become universally available, no national advertiser in a cost-plus-p economy will be able to ignore them and survive. Even in non-job market economies the effects of the new technology are almost certain to be momentous.
So there is no question that, before very long, consumers throughout the high-tech world will be consulting "interactive catalogs" on the Internet, or visiting manufacturers' electronic "sites" on the World Wide Web, or be doing other informative things that have not been invented yet. And in all these cases, the purpose of consumer-initiated inquiry will be to get comparative data on some set of competing products in which the inquirer has some interest. Moreover, consumers will do this only when they want this information, not when the manufacturer wants to thrust it on them.
In short, thrusting advertisements on millions, even billions, of indifferent consumers will soon become so inefficient a thing to do with one's advertising budget-as well as the consumer-annoying one it has always been-that as soon as these much more cost-effective means of attracting customers become available to advertisers, they will be used. The invasive species of advertising is likely to disappear altogether. With its departure, the enormous present cost to the consumer of the goods now being advertised by inefficient means will sharply diminish, and with that decrease in cost will come the decline in the advertising revenues out of which today's spectacular sports and entertainment professionals are largely paid.
- A Political Sea-Change: There is also a possible political sea-change in the offing that may help nudge this change in advertising technology along. As the effect on the planet of human over-consumption-much of which, we know, is now advertising-induced-is more and more squarely faced by the more responsible of Earth's human inhabitants, the policy of limiting advertising to consumer-solicited information-when that option becomes technically feasible (as it nearly is today)-may become a socially desirable goal as well as a commercially efficient one, and be written into law to hasten it along. Given these two developments-the technical means to do it and the sense of planetary stewardship that is beginning to grow now all over the world-there will probably not be such large advertising revenues for sports-club owners and their players, or television networks and their performers, to divvy up.
- CEO Compensation and The Stock Exchange: There is a fifth income-diminishing factor, but this one applies only to the "obscene incomes" now paid to corporate executives, especially to American ones. This is the natural decline in the nominal value of stockshares that can be expected to occur under any inflation-free currency, including the job market's credit-hour.
As equilibration technology spreads, the prices of stockshares on national stock-markets are, for a variety of reasons, likely also to become equilibrated, that is, to stabilize. So if job-market technology does spread from nation to nation-and we do not, of course, know that it will-stock prices in whatever economies of the future world have become equilibrated are likely to be much less volatile than in whatever non-equilibrated ones are left in it, and so to be much less likely to encourage betting. As a large proportion of the "obscenely high" incomes of today's CEOs often comes from successful runs of exactly this kind of financial "betting," reducing it in any given country will reduce at least one component of obscenely high incomes in that country.
Possibly even more important for the "obscenely high incomes" question is the likelihood that, as job markets spread from nation to nation, there will also be a steady reduction in the amount of "excess money" loose in the world economy. The very amount of excess money in the world today-some 14 trillion in U.S. dollars in 1994-encourages gambling with our capital resources. A reduction in the world money-supply will inevitably be brought about by the spread of job markets, even though one nation at a time. As job markets spread, the very act of adopting them will remove from the money supply of the adopting nation that portion of its local money that is surplus over its local inventory; and job markets will perform this international service for us by a process described in Chapter 14 ("Transition to a Job Market") and in more detail in Appendix C ("Two Transition Problems"). So this mechanism, too, will gradually diminish the amount of surplus money available to be lavished on high incomes.
So if job markets do eventually replace labor markets around the planet, the long bull-market in the nominal value of stockshares that we have seen in the last few centuries is likely to end. For, as measured in inflation-free credit-hour money, equity values will steadily diminish instead of rising as they do today. So the present bias that favors gamblers will be taken out of the stockmarket's roulette wheel. Of course, the use value of most companies' assets will continue to increase; but use is not likely to be very meaningful on stock exchanges. In fact, the long-term deflation of the price of everything is likely to be so strongly associated in people's minds with a steadily increasing good thing, namely the increasing productivity of human labor, as to be insignificant when seen also to affect the stockmarket. For both these reasons, then, the current practice-in the U.S., at any rate-of paying CEOs salaries and stock-options that reflect the hoped-for rise in their company's equity value during their tenure is likely to disappear. For that equity value is, when measured in credit-hours, not very likely to increase. Obviously we will have to find other standards by which to measure a CEO's performance, like how well she manages her company's productive operations.
1. The Economist, in "Executive Pay" (1995), reports that, in 1994, 65% of the Chief Executive Officers of publicly-traded American companies earned more than $1m. This was "up 63% from the year before," according to Forbes. Leading the pack were Stephen Hilbert, an insurance company CEO, at $40m; Lawrence Coss, head of a home-financing company, at $29m; and James Donald, head of a telecommunications manufacturer, at $25m. It is noteworthy that two of the top three earners were heads of financial companies. These are, of course, the companies that gain most from the overblown world money-supply and from the structure of modern financial capitalism, the edifice that is managed by, and used to justify the huge salaries of, these very CEOs.In "The Need for Greed" (1996), The Economist said that Jack Welch's, GE's CEO's, 1995 earnings of $22m "in salary, bonus, share options, and other benefits" a then-new high in industrial CEO earnings. TE contrasted CEO earnings in about a dozen industrial countries: America was highest, the average pay of its CEOs in companies with $250m or more in revenues being $0.94m, the next five highest countries-France, Japan, Germany, Britain, and Italy-ranged from $0.58m to $0.46m, or about half the U.S. average and with a very small variance. Smith (1994) reported the maximum compensations of CEOs in the three leading industrial nations in 1993. They were around $15m in the U.S., around $2m in Germany, and around $1m in Japan. These large differences among the maxima-notably greater than the differences among the means-probably better reflect the deep cultural differences among these three leading industrial nations.BACK