December 30, 2006

BASEBALL AS ECONOMIC METAPHOR (via Mike Daley):

A dangerous obsession: Part IV (Thomas Sowell, December 29, 2006, Townhall)

One of the questions often asked by those obsessed with income "gaps" and "disparities" is: "Is anyone really worth the millions of dollars a year that some people receive as personal income?"

Such a question presupposes that there is such a thing as "real" worth. That assumption goes back to the Middle Ages, when people thought that there was a "fair and just price" for things. [...]

It is the same story when Derek Jeter gets paid millions of dollars to play shortstop for the Yankees. He gains by exchanging his time and skills for the money that George Steinbrenner pays him. But Steinbrenner also gains by paying Jeter to play shortstop -- which helps bring in more money in gate receipts, the sale of television rights, and other sources of revenue.

As for the rest of us, it is none of our business what Steinbrenner pays Jeter. It's their deal. If we don't understand it, there is no reason why our ignorance should influence what happens.

The medieval notion that there is an objective "fair and just price" dies hard, though even in medieval times St. Thomas Aquinas saw some of the problems with the idea.

The British classical economists of the 18th and early 19th centuries saw cost of production as an objective basis for prices. But, since the 1870s, economists around the world have recognized that value is subjective, and have incorporated that into their analysis of prices, based on supply and demand.

If something costs more to produce than people are willing to pay, then the producer just loses money. But a principle that seems obvious, after it has been articulated, may take generations to evolve and be incorporated into our thinking.

Yet here we are, in the 21st century, still talking about whether people are paid more or less than they are "really" worth -- and we are hot to give government the power to "do something" if we don't understand why some people are paid so much or so little.

If ignorance is bad, confusion is worse. Productivity, for example, is often confused with merit.

If Derek Jeter worked like a dog for years to perfect his skills as a baseball player, some might think that he had earned the big bucks he gets. But if he was just born with natural talent and the whole thing is a breeze to him, that would mean he didn't really merit such a huge payoff.

But Steinbrenner is not paying for Jeter's merit. He is paying for his productivity, whether at bat or in the field. Somebody who worked twice as hard and was still only half as good would never get the same money that Jeter gets.


One interesting economic carryover is that the Yankees' overestimate of Derek Jeter's productivity not only forces them to pay him far more than he's worth but to play him at SS, a position he can't handle as well as the guy to his right.

Posted by Orrin Judd at December 30, 2006 12:00 AM
Comments

Goods and services are "worth" exactly what someone will pay for them.

Posted by: erp at December 31, 2006 10:26 AM
« UNCHARTED WATERS: | Main | ALL ABOUT SYNERGY: »