Thomas Sowell is not disturbed by the fact that people don’t understand why CEO’s make so much money.
Ninety-nine percent of all the things that happen in this world “make no sense” to any given individual. Do you understand how your automobile’s transmission works? Could you repair it if something went wrong?
Do you understand how aspirin stops headaches? How to make yogurt?
Years ago, a famous essay pointed out that nobody knows how to make a simple lead pencil. That is, there is no single individual anywhere who knows how to grow the wood, mine the graphite, produce the rubber, and manufacture the paint.
Complex economic processes cause all these things to be done and coordinated by a wide variety of people, just in order to produce something as simple as a lead pencil. Multiply that by a hundred or a thousand when it comes to the complexity of producing a car or a computer.
If you cannot understand something as simple as making a lead pencil, why should you be surprised that you don’t understand why someone is making a lot more money than somebody else?
Dale Franks has an amusing example:
For instance, let’s say we have a society of 1000 people, each of whom has $100. One of the people, who is a talented musician, decides to hold a concert, and charge $10 per ticket. All of the other members of our little society decide to attend, and by the time the concert’s over, our musician now has $10,090, while the other 999 people have only $90. Our musician now has 112 times the wealth of anyone else in the society.
Well, this hardly seems fair does it?
These talented generalists are scarce and can have a huge effect on profits. Sure, they command high pay. Too high? The Yankees’ Alex Rodriguez earned $29 million from June 2005 to this summer. Jeff Immelt of General Electric makes less than Dr. Phil does. If a good CEO can boost profits by $200 million, he’s easily worth $10 million, or more.
Indeed, it’s amusing that people get much so outraged by high executive salaries but don’t bat an eye at an actor making $20 million to make a movie. Then again, Jeff Immelt doesn’t have his own TV show, so how smart can he really be?