I witnessed a conversation yesterday that fascinated me.
One of the two was wondering how one can be worth $1 million when it’s the labor who produces the goods or provides the service.
More specifically, he was approaching from the premise that someone believed they were worth that much and should be payed accordingly.
The other presented this scenario: there’s a specialty retail shop on the east side of town – say a jeweler – with an excellent staff. They’re attentive, they remember the customers and are always helpful.
They are making $10/hour. Say a business owner from the west side shops there and enjoys the experience. After a few visits, he decides he would like his customer service staff to provide the same experience, so he offers the staff a job at his shop.
He offers each of them, in individual meetings, $14/hour. Two accept. One doesn’t because he doesn’t want to travel from the east side to the west every day. But the owner really wants them because of their skills and offers that last one $17/hour.
The last person accepts that offer, and all go on to work there. Another jeweler from out-of-town shops there one day and meets one of the two making $14/hour. They are so impressed, that they want to hire them and have them move to a new state to work there. He offers $22/hour to do this.
This can do on and on, but the point was that these people didn’t just decide they were worth that much. The market decided it because someone was willing to pay it. And they proved, with their skill and talent (which I realize isn’t always the case when one gets promoted – but even that is the market at work), that they were worth more than their original wage.
Go back to the person making $1 million/year. He didn’t just decide he was worth that, although I’m sure he had some idea of what he should get paid based on his degree, experience, the market, etc.
What made him worth $1 million/year is that there was a company who valued his vision, intelligence, experience or whatever so much that they were willing to pay that.
So what happens when the government caps pay in any industry? Those who can make more – usually the more talented – will go somewhere else to make it. This will leave the banks with less-talented people trying to dig them out of a very rough and dynamic situation.
Sounds like a self-fulfilling prophecy of failure, to me. This is why the free market is best able to determine and solve problems like the one’s we’re experiencing right now.
When the government determines pricing, it introduces a virus into an otherwise healthy system, and unintended, negative consequences almost always results.