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George W. and Keynes: Together at Last

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                     Keynes                                       Bush

Quick, what do these two gentlemen have in common?  They both believe that governments must intervene aggressively to ensure that the ‘free market’ does not self-destruct under the weight of greed and socially and economically destructive self-interest.  That’s right.  In case you somehow missed it, George W. and American Congress have announced that the free market needs strong government intervention to survive.  So the government is buying huge stakes in American banks and attaching regulatory conditions to the buyout that I find pretty telling.  As a British Telegram columnist announced cynically in a recent editorial, “We’re All Socialists Now”.

One of central conditions for providing the huge payments to the bank bosses is that the banks must stop giving “golden parachutes”–large payments to executives who leave the banks–and must claw back executive pay.  Why?  Because the government believes that many executives are ‘overpaid’.  Huh?  Neo-classical economists argue that the state should not regulate wage levels, because doing so will lead to market distortions that ultimately are harmful.   If the ‘market’ says an executive is worth trillions of dollars, and a factory worker worth $3 per hour, then that’s what those people should be paid.   Isn’t that what conservative, neo-classical economics is supposed to teach us?

Even the godfather of market-based law and economists conceded that many so-called policy experts have become too invested in the ideology of free markets governing themselves.  Richard Posner wrote recently:

Why were the warnings (of the impending market crash) ignored rather than investigated? First, preconceptions played a role. Many economists and political leaders are heavily invested in a free market ideology which teaches that markets are robust and self-regulating.

But if neo-conservatives are prepared to accept that sometimes, ‘free’ labour markets produce wages that are ‘too high’, and that this justifies government intervention, does this mean they’d now accept that wages that are ‘too low’ should justify government intervention too?   If free markets produce ‘inappropriately high’ wages, can they not also produce ‘inappropriately low wages’?  Most neo-conservatives argue against mininum wage laws, but have not traditionally expressed much concern about the huge salaries of executives.   They argue that a raise in minimum wage from $6 to $7 per hour will cause huge job losses, such as in this piece by The Fraser Institute.  Yet an increase in the pay of an executive from $1 million to $3 million per year is considered fine, if that is what the ‘market’ for executives dictates.

But this concession by George W. that states need to regulate compensation seems to throw into question the free market ideology in which both he and our own Stephen Harper place so much faith.  Do you think that Canadian governents should regulate executive compensation levels?  If so, how?

One proposal often bantered about is capping executive pay by a ratio between the executive pay and the pay of the lowest earning employee in the corporation.  This story reports that on average, executives are making about 350 times more than the lowerst paid workers!   Do you like this idea?

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2 Responses to George W. and Keynes: Together at Last

  1. Ryan Reply

    October 16, 2008 at 4:58 pm

    Perhaps the classical economists didn’t anticipate the extreme degree of wealth concentration that’s occurring these days, and evidenced by executive compensation. How about a graduated profit tax scheme, which is then redistributed to struggling small businesses? Same goes for executive bonuses, which is then redistributed to lowest paid employees?

  2. Alex Reply

    October 21, 2008 at 12:45 pm

    Watching Fox News last night, I can’t believe how big of an issue this has created in the American election. Say the words “government intervention” or “redistribution of wealth” and suddenly, you’re inviting the communists to Washington. I have a friend in Texas that have told me he honestly believes that Obama’s tax plan will bring about the death of democracy.

    Kinda weird to think that after 8 years, Bush is the driving force for government intervention.

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