Prices provide a signal, not a cause

Over at the always awesome Stumbling and Mumbling blog (seriously, I could write a post about every single post this guy has done) the question is asked regarding whether society should set a “maximum wage”.  While he says that such a policy can be justified in theory he states the following:

My point here is that high CEO pay is not the disease, but the symptom – of the fact that CEOs have too much power. Treating the symptom is not sufficient, and might even be counter-productive.

I would note that, in terms of thinking about “excessive power” we need to ask ourselves about the framework that business works within.  Large businesses will be subject to waste, empire building, asymmetric information, and organisational issues – but just because there are issues does not mean that anything can be done to improve them, it may just be the way things are.

The key point is that an “excessive wage” just like a “price” that is “out of whack” is a signal, a symptom, of some underlying issue.  It should be a call to try and understand how the allocation of resources is working in the market, and whether any issues exist, not a call to arbitrarily mess around with prices.