In a recent column in the Washington Post, Steven Pearlstein questions whether someone such as Steve Schwarzman, co-founder of the Blackstone Group, deserve his extraordinary compensation ($786.5 million in 2018) (see here). Of course, the ultra-liberal Pearlstein’s answer is no. He denies the economic theory that the marketplace objectively determines what a person contributes to economic output, which would provide a standard to measure and justify compensation.
Rather, Pearlstein liberal-splains that markets are “social constructs” with rules and norms that are “politically and socially” determined. Duh. The government is obviously involved when it establishes the legal framework within which individuals are free to pursue their interests as they create value for others. But Pearlstein uses his “social construct” epiphany to imply that because the government properly creates the framework for economic activity, any and all government intervention in the economy is similarly appropriate. This is false.
A system that sets up individuals and firms to direct economic activity within their areas of expertise and to coordinate their efforts through prices in a free market is fundamentally different from a system in which government officials and politicians attempt to directly manage economic activity. Not to mention that we know from experience that societies characterized by the first approach enjoy greater prosperity and equality than those that are more centrally controlled. These approaches are mutually exclusive and Pearlstein is wrong to confuse the two.
In claiming that everything is political, Pearlstein is able to call for compensation based not on the value that one creates for others in a free market, but rather on obeying the wishes of liberals like Pearlstein. For Pearlstein, compensation should be determined by what society (i.e., Pearlstein) considers to be “fair and just.” Attempting to fix each individual’s position based on some idea of moral merit shows that Pearlstein would benefit by reviewing Friedrich Hayek’s discussion of value and merit in Hayek’s book The Constitution of Liberty.
Hayek points out that in a free system, it is “neither desirable nor practicable that material rewards should be made generally to correspond to what men recognize as merit.” The idea of merit is too vague and impossible to ascertain and implement: “merit is not a matter of the objective outcome but of subjective effort.” A free society is simply not in a “position to judge the merit” of anyone’s achievements.
Pearlstein admits that he does not know of a more objective system than a market-based one for determining compensation. In reality, market-based value creation is objective in the only way that is workable. Pearlstein dismisses market-based arguments as nothing more than “free-market ideology,” but we might more appropriately view Pearlstein’s writing as so much authoritarian propaganda designed to destroy the liberty that creates prosperity in the first place.