Luck Run Amok—Part 10
Misjudging Talent
One possible explanation for why the highly paid are highly paid is that they are worth it. There is even a long-established theory in economics that says that rational, profit-maximizing companies pay employees their marginal revenue product, which is a fancy name for the additional revenue employees generate for the firm. Someone who is paid $100,000 a year must be increasing the firm’s annual revenue by $100,000; otherwise, they wouldn’t be paid $100,000. Someone who is paid $1 million must be increasing the firm’s annual revenue by $1 million. Someone who is paid $10 million, well, you get the picture. People are paid what they are worth. End of story.
This theory is similar to most economic theories. It can be derived mathematically from a model of rational economic decisions; it has an elegant simplicity; and it contains an important truth. The important truth is that profit-maximizing firms should think on the margin. Instead of dividing, say, $100 million in revenue equally among its employees, a firm should pay its more productive people more or, else, it will lose them to wiser firms.
Unfortunately, like many economic theories, there is not a close correspondence between the beautiful theory and the real world. The great British economist, John Maynard Keynes, once wrote that,
The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight as the only remedy for the unfortunate collisions which are occurring.
Even today, some economists respond to the criticism that their models are unrealistic by suggesting that the problem is with the world, not their models. If more people studied economics, more people would behave the way economists assume they behave.
Such condescending arguments have been around for a long time. Keynes dismissed their wishful thinking:
Professional economists, after Malthus, were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation . . . It may well be that the classical theory represents the way in which we should like our economy to behave. But to assume that it actually does so is to assume our difficulties away.
