Monday, July 6, 2015

Gravity Payments and the Middle Class

In April, Dan Price, the CEO of a company called Gravity Payments a made big news splash by implementing a wage policy that dramatically reduced his own salary while dramatically raising the salaries of many of his employees. Price’s goal is to phase in a company-wide $70,000 “minimum wage.” At the time of the change, the company employed 120 people. As ABC News reported on April 14, 2015:

Dan Price, 30, announced this week that any employee at his company, Gravity Payments, making less than $70,000 annually will receive a $5,000-per-year raise or be paid a minimum of $50,000, whichever is greater. The aim: By December 2017, everyone will earn $70,000 or more.

To facilitate this change, Price said his salary will decrease to $70,000 from about $1 million until or unless the company's profits are greater than last year's approximately $2.2 million.

"My salary wasn't $1 million because I need that much to live, but that's what it would cost to replace me as a CEO," Price told ABC News. "I think CEO pay is way out of whack. It ended up impacting me, because I want the company to be sustainable even if something happens to me. Temporarily, I’m going down to the minimum until the company gets back to where it was."

In response to the New Jersey Star-Ledger’s 4/16/15 editorial Who will be the next CEO to embrace a salary cut?, which concerned Gravity Payments’ new policy, a correspondent with the screen name gyre posted these comments:

Dan Price is an unusual CEO, but we've seen other CEO's over the years go down his same path. I'm talking about the CEO's of Ben and Jerry's and the CEO of Malden Mills as prime examples of business owners who have figured out how to create a middle class in America. So many people who comment on are unable to grasp that the disparity between the rich and poor is a CHOICE that people make. Any economic system is a human invention. It can be modeled any way that the wealthy people choose. And, ultimately the poor, working poor, and middle class will make their own choice about the system that has been created for them; not necessarily because they want to, but because they have to. Well done, Dan Price.

Price’s scheme included cutting his own salary from $1 million to the same $70,000 as his other employees.

I left this reply to gyre:

I strongly and respectfully disagree. The “middle class” is not a welfare class of people whose well-being depends on favors from wealthy businessmen or nanny government. The hallmark of the middle class is self-reliance, not parasitism. The middle class is the product of economic freedom, which is a product of political freedom. Every individual, if left free, has it within his power to raise himself up economically by making himself more valuable productively in order to entice employers to pay more for his services—or to start his own business, become an employer, and strive for business success and great wealth. There are two types of “disparity between the rich and poor,” and we must distinguish between the two: Disparity resulting from economic/political freedom, and disparity resulting from statism. The first is moral and to be celebrated, the second is corrupt.

As to Price’s new wage policy: Is it practical to remove the incentive for individual employees to increase their income by improving their personal productive contribution? It’s doubtful, and I wouldn’t entrust my savings in the stock of a company that had this egalitarian type of compensation policy. How well can a company function if each person is tied to the same level of income, no matter what? Ask yourself how you’d feel if your extra effort and superior ability gets you no more than the co-worker next to you who exerts only minimal effort. I think profit-sharing and merit-based raises is a better way to give employees a chance to share in the company’s fortunes, without destroying the incentives that the company needs to thrive. Be that as it may, if Price’s company thrives, more power to it. It may work for a small company, where everyone knows everyone else. But if the policy fails, the company and its employees take the consequences, and its customers go elsewhere. Price is not modeling an “economic system.” Nor is he forcing anything on anyone. Nobody “has to” stay with his (or any) company. He’s just modeling his own company. That is the way a proper economic “system” should work.


[At the time I wrote this, I was under the impression that Price’s scheme required everyone to make the same money. But it seems that some pay disparity will still occur at Gravity Payments. But that is irrelevant to the subject of this post.]

There is a touch of mysticism in gyre’s comment. He speaks of “the wealthy people” as a single, organic entity, as the communists thought of the “proletariat”; the Nazi’s of the “aryan race”; or the welfare statist’s of “the poor’ and now the “middle class.” But there are only individual people, of varying degrees of wealth, each of whom exerts control over his own life.

It’s true that those in charge of the government can impose an economic system (actually, a political system) on all others, and that when that happens its always people comprised of some of that society’s richest individuals doing the imposing. For example, we have a mixed economy; a mixture of freedom and government controls. A mixed economy is imposed by means of the imposition of government controls. In a mixed economy, people who get rich by cronyism (government favoritism) rise alongside people who get rich by production and trade. But a “system” can only be imposed under statism, not a republic constitutionally restricted to protecting individual rights.

A free market system, which is the inevitable consequence of a constitutional republic, is not a really “system” at all, in the sense of something controlled by some elite. A free market is a type of societal organization “controlled” by the commulative choices of all individual participants in their use of trade as a means of pursuing their own personal goals. Another name for this type of “control” is the law of supply and demand, or simply “the market.” But since nothing is imposed by government on people who don’t violate others’ rights, there is no system being imposed by anyone, since no individual can impose his will on others. The only type of association open to all individuals is voluntary trade. The only type of “control” anyone can exert is over his own decisionmaking, which constitutes his own piece of the market.

But gyre implies that, if you want to make $70,000 a year, but no one is willing to pay you more than $48,000, you are a helpless victim of some all-powerful entity. In gyre’s mind, “the wealthy people” have somehow managed to impose on you a “system” in which you can only get $48,000.

From Middle Class to Welfare Class

1 comment:

Mike Kevitt said...

A mixed economy is imposed by the imposition of gvt. controls. Aren't those controls elements of statism, even at the point of seemingly innocuous beginnings, even though 'the' economy is mostly free? Isn't this an imposition of a system, by 'political' power, by some richer people, upon the portion of 'the' economy any controls apply to, subjecting everybody in that portion to the system? Couldn't, and probably wouldn't, this hold some of the subjects' incomes artificially low while giving some other people artificially high incomes? Wouldn't such a system be an all-powerful legislated entity, manned by those individuals who run it? Wouldn't this be a real entity, not a super-naturalistic fancy? Those whose incomes are artificially low would be victims, although not totally helpless. They can vote. They can try to muscle in on the racket or find a new line of work in a free part of 'the' economy. But they've still been forced They've still been victimized.