Friday, September 28, 2012

The Truth about CEOs

NBC News brought us up to date yesterday about a university study of CEO pay:

Basically what these folks from the University of Delaware found is:
  • If you assume that you have to pay a company CEO huge megabucks because other companies pay their CEOs those sums, your company will not perform any better and is probably wasting its money.
  • If you want your CEO to do well, pick somebody who actually has experience in the business you're in. Don't hire a successful CEO from a totally different type of company.
Now, if we lived in a sensible world, these observations would produce the usual response when we read about an academic study: "Everyone already knew that anyway so why did these silly professors have to get a grant to study this?" But we don't live in a sensible world. We live in a world where economism has somehow morphed itself into everyday common sense, and so we do need to learn these lessons.

Why are the lessons of economism at odds with these very sensible findings--and how have those beliefs led to out-of-sight CEO pay and the creation of an overclass of the wealthy to whom all other Americans so willingly defer? First, as I explained in The Golden Calf, economism has repackaged old religious beliefs that go toward imagining that if you're rich, you must be especially favored by God. So it's simply God's will that you'll be showered with riches and that the rest of us should kiss the hem of your whatever.

The more subtle answer is that economism is joined at the hip with the most simplistic form of neoclassical economics, which in turn believes that everything of importance in the world can be predicted by means of its mathematical models. These models are basically the doctrine of the supposedly free market. This worship of neoclassical economics and its presumed mathematical precision (a precision purchased at the cost of grossly misrepresenting the real world) leads to the impression that it's possible to be an expert in the free market, and to have a sort of financial wisdom that transcends any specific industry. On this basis, people readily imagine that if you managed to make a ton of money as CEO of a widget company, you can become president of a hospital system and be equally successful (at making money at least, even if none of the patients get any healthier).

Let's for a minute apply this to Mitt Romney. He's running for president on the platform that he, much better than that idiot Obama who never "met a paycheck" as they like to intone, knows how to get the American economy moving forward again. And how does he know this? Presumably because he was successful, in terms at least of personal wealth accumulation, as an executive of a certain sort of firm, a venture capital company.

Again, let's assume for a minute we lived in a sensible world. In that world people would note two things. First, being president of the U.S. is quite different from running a business, and there's no reason whatever to believe that somebody skilled at one would be skilled at the other. Second, what Romney proved to be good at was doing one very specific form of financial dealing--which actually amounts to leveraging huge amounts of debt and then forcing others to pay off that debt for you, as Matt Taibbi explained for us in detail in the August 29 issue of Rolling Stone (subscription required).

Maybe some day we will live in a sensible world again.

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