Scaling arguments and CEO compensation

It is easy to argue that objects fall at the same speed in vacuum, regardless of mass. Just imagine two identical uniform cubic bricks dropping from a height. Since the two bricks are identical, they drop at the same speed. Now imagine placing the starting bricks closer and closer to each other, until eventually they join up. The resulting brick has twice the mass of the originals, and assuming there is not discontinuity in behaviour, it should also fall at the same rate.

Similarly, imagine an economy with four people in it – a baker, a shoemaker, a farmer and a blacksmith. The four people sell each other goods at prices that result in no savings or loans. Now imagine another world, except it only has 3 people, and the shoemaker and the blacksmith are now the same person – i.e. the shoemaker/blacksmith makes in total the same things as the two people in the first world, and consumes in total the same amount as the two people in the first world. This second situation does not change the standard of living of the baker and the farmer at all, but assuming equal incomes in the first world, income inequality is higher in the second world.

If I am the farmer, should I care that I live in the second world instead of the first?

wikipedia

4 Responses to “Scaling arguments and CEO compensation”

  1. Thomas says:

    A rational farmer wouldn’t, but a human farmer would care ;)

    Also, I assume you were alluding to CEO compensation (in your title). Suppose the CEO’s pay is 100 times that of the average employee, to be “rationally fair” like in the example you gave, the CEO needs to do 100 times more work (whatever the operator “times” means in this case) than the average employee. Is that true? From the point of a disgruntled employee, probably not. From the point of view of the CEO, probably yes.

  2. Chiao says:

    Stockholders have the right to be unhappy, because they are paying the CEO. It’s really none of the business of other employees. It’s the buyer who decides what price is fair, not bystanders.

    There are legitimate reasons for the farmer to be unhappy. The shoemaker/blacksmith is now effectively a cartel, and has more bargaining power because they have guaranteed internal trust. If he uses his blacksmithing monopoly to gain unfair advantage in the shoemaking business, that leads to unnecessary monopoly loss, and falls under anti-trust.

  3. Thomas says:

    I didn’t realize you were talking about “care” in the economic sense and not the human sense ;)

  4. Chiao says:

    I’m not worried about cameras stealing my soul either. Should I be?