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Source link: http://archive.mises.org/9400/prof-reisman-on-bonuses-corporate-jets-the-fate-of-capitalism-and-ignorant-and-vicious-liberal-media/

Prof. Reisman on Bonuses, Corporate Jets, the Fate of Capitalism, and Ignorant and Vicious Liberal Media

February 8, 2009 by

Amidst mounting unemployment, hundreds of billions of dollars of lost wealth and savings, very great hardships and gripping uncertainty about future economic conditions it is easy to be swayed by emotions and acts of empty symbolism. In such an environment, anger and sense of hopelessness are easily transformed into hatred and contempt of those who happen to do much better than oneself and, by implication, of the economic system that produces and tolerates the obvious hardships and opulence to exist side-by-side. Demagogues have already begun mobilizing people around proposals to punish the better-off and bring down whatever substance still remains of a free-enterprise economic system.

One such proposal that one hears nowadays very often is to compel the equality in suffering and sacrifice. Many business executives have bowed to the public opinion and already agreed to very substantial cuts in their salaries. A moment of honest reflection, however, should be enough to understand that to share in sacrifice can never create a single job or increase productivity of labor by a single unit. It will not and cannot produce anything of real and lasting value for anyone involved; it is a recipe for destruction. Sacrifice and sharing of wealth can never be a foundation for rational economic policy and continuous economic progress that raises the living standard of everyone in terms of a growing supply of more and better consumers’ goods. Its only appeal is symbolic which in itself is of a very limited or non-existent constructive psychological value. Only psychopaths will find in equal sacrifice something that, in the words of Sen. Claire McCaskill, creates “confidence that we can face down these problems and move forward.” It will have no such effect. But the only thing it will certainly create is a constant worry over whether the guy next-door is sacrificing more or less and how to bring him down if he still happens to have some more.

It is, therefore, a great fortune and the only hope indeed to have people such as Prof. Reisman who never tire to point out the absurdities of such proposals and defend what is just and truly works for everybody’s benefit. In his most recent article, New York Times Columnist Maureen Dowd Wants Soviet-Style Show Trials with Capitalist Defendants in Shackles, Prof. Reisman once again disentangles the enormous web of confusions, misrepresentations intermixed with feelings of naked envy, resentment, and blind lust for destruction that characterizes the writings of commentators and opinion makers of leading news outlets in the United States.

Some highlights of this superb article.

First of all, to blame the allegedly prevalent laissez-faire ideology in our economic system for the present crisis is to set up and knock down a straw man. In terms of institutional and economic policy fundamentals, United States’ economy is a mixed economy, i.e. a heavily regulated economy. And it is the major elements of statism and government intervention (particularly related to the structure and functioning of financial markets) which ought to be held accountable for the present crisis, not the few remnants of economic freedom and its necessary element – profit motive.

In a mixed economy, every significant-sized business must fear what the government can do to it. It needs protection, in the form of political connections. It secures these through appointing former government officials to its board of directors, paying such officials lavish consulting fees, and giving lavish campaign contributions to candidates for public office. In these ways it buys the protection it needs.

But soon businesses learn that their protectors can also be used to gain lucrative government contracts, government subsidies, and monopolistic privileges ranging from tariffs and licensing laws to antitrust suits against competitors. Thus, it is not long before the upper echelons of large firms become populated not only with men who cower before the government but also with those who seek to manipulate the government to their advantage, which is where we are today.

Prof. Reisman then turns to the “burning” question of Wall Street bonuses, John Thain case, corporate jets, and bailouts. He shows why private business firms awarding bonuses, ordering corporate jets and the like have a very legitimate economic/efficiency reasons to do so and should therefore be free to do at their discretion. The bottom-line of the discussion is that competition under capitalism

is a system in which absurd, self-destructive behavior severely punishes whoever is guilty of it. Such people suffer losses, go bankrupt, and lose their ability to have significant further economic influence. Their example then serves as a lesson to others to avoid such behavior.

Everything changes once such massive intrusions as bailouts become a very significant economic factor:

Government bailouts put everything in a different light. They give everyone in the country the right to second guess every decision of the firms that have received the bailouts, on the grounds that the money used by those firms is theirs, the taxpayers.

Understandably, the taxpayers become furious about things like bonuses, corporate jets, and expensive office remodelings. They see themselves simply as being made to pay for these things. This is because, unlike the shareholders of a private company, the taxpayers will never have any possible financial benefit even if the expenditures might actually be perfectly reasonable and well made if they took place in the context of a privately owned company. And unlike the shareholders of a private company, they were never given a choice about whether or not they wanted their funds to be turned over to this or that company. Their funds were simply seized in order that others might have the means with which to pay bonuses and financially profit from and/or personally enjoy such things as corporate jets and expensive offices.

In short, it is an article that needs to be read carefully and understood by anyone who cares about justice, human progress and is therefore serious about defending economic freedom and laissez-faire capitalism. If you like this article and many other articles by Prof. Reisman, please make sure to download or, even better, buy a hardcopy of his enormously valuable book Capitalism: A Treatise on Economics. There you will find the strongest case for capitalism, by far surpassing the writings and theories even of his teacher Ludwig von Mises and any other defender of capitalism in analytical coherency, depth and clarity of the overall argument.

It is in these times of despair and hopelessness that we are particularly in need of powerful beacons of reason and sound economic theory. Prof. Reisman’s writings provide the best intellectual weapons to stop the avalanche of anti-capitalistic filth of ignorant media and educational centers and reverse the course of history.

{ 7 comments }

I Hate Taxes February 8, 2009 at 4:38 pm

“Understandably, the taxpayers become furious about things like bonuses, corporate jets, and expensive office remodelings.”

No, I don’t understand why taxpayers should be angry about how their tax money is being spent.

They should instead be angry about how their tax money is being collected… by force and intimidation.

I become furious about being forced to pay taxes, period.

Marc Sheffner February 8, 2009 at 7:37 pm

See ‘Atlas Shrugged’. “It’s deja vu all over again.”

lpcowboy February 9, 2009 at 12:06 am

While Reisman is correct in theory, I believe he overlooks the specific facts of the current situation.

The data indicates members of the financial sector are systematically overpaid. More than 40% of wages are attributable to rents which would not exist in a pure capitalist system. Financial professionals earn more than their peers in professions such as engineering and medicine who have equivlent education and intelligence – a fact which appears inexplicable. A cold, hard look at both the going-concern value of these firms – if any – and individual performance shows most individuals in finance do not warrant the compensation awarded.

Clearly, the private sector needs to adjust compensation to a sustainable level by witholding business until this is corrected. In the case of the government-controled firms it is entirley appropriate to insist compensation be limited until the business can be redistributed to viable entities. If the bailed-out firms can’t or won’t do this they can take the matter up with their trustees in bankruptcy.

With respect to corporate jets, there is little to suggest that a CEO’s time is sufficently valuable to justify their expense. CEOs primary value is in their credability as a leader and their secondary value is in their judgement. Simply because a CEO may earn an average of several thousand per hour doesn’t mean each additional hour worked brings in several thousand in revenue – the marginal benifit is much lower. In the case of the “big three”, they have such low credibility it’s hard to see that anything they could do with their time would help their businesses postpone their inevitable slide into liquidation.

As the Professor suggests, jets are a way of awarding avoiding tax on compensation. Firms are looking for ways to reduce compensation for all employees, and eliminating the jet is preferred over cutting their base pay by many CEOs. This seems an entirely appropriate way of reducing costs, and it is not unreasonable for the government to insist on the same cost-cutting measures as would any other investor.

I should also add that turboprops offer many of the same benifits as jets, but with lower overhead and are almost always more cost-effective.

Gil February 9, 2009 at 1:41 am

Aw heck, why not paraphrase folks, such as I. H. Taxes, and say something along the lines of “What CEOs get is none of the public’s or government’s business, the only people who have a right to complain about the CEOs are their respective shareholders, everyone else should butt out!”?

I Hate Taxes February 9, 2009 at 11:20 am

Gil,

If the government is buying stocks or preferred stocks in the company, that qualifies him as a shareholder.

If he is the major shareholder, then he can complain and decide CEO’s pay.

But I repeat, it’s none of the government’s business to tax my earnings. Let the government buy businesses with it’s own money, not mine.

M.A. Buonarroti February 9, 2009 at 1:55 pm

I would like every one to say a great big “Hello,” to America’s newest multi-millionaire: Mr. Barak Hussein Obamba of Mombasa, Hawaii, Jakarta, NYC, Cambridge, MA, and Washington DC. AKA Barry Soetoro, Barry Dunham.

Mr. Obama-Soetoro, or POTUS, as he likes to be called, raised close to $1 BILLION in campaign funds. He spent … give or take a few hundred million … about $600 Million.

The rest of that money, dear friends, is his. All quite legal. Ralph Nader has been living on this for years, John Kerry cleared about $18 Million, the Clintons (in case you wondered what jump-started theeir family fortune) much more than that.

Unspent campaign contributions are the property of the candidate. (Ask Pat Buchanan …about $10 Million.)

Wouldn’t it be marvelous to know exactly how much The Messiah picked up during his campaign?

Regards, MAB

M.A. Buonarroti February 9, 2009 at 1:56 pm

I would like every one to say a great big “Hello,” to America’s newest multi-millionaire: Mr. Barak Hussein Obamba of Mombasa, Hawaii, Jakarta, NYC, Cambridge, MA, and Washington DC. AKA Barry Soetoro, Barry Dunham.

Mr. Obama-Soetoro, or POTUS, as he likes to be called, raised close to $1 BILLION in campaign funds. He spent … give or take a few hundred million … about $600 Million.

The rest of that money, dear friends, is his. All quite legal. Ralph Nader has been living on this for years, John Kerry cleared about $18 Million, the Clintons (in case you wondered what jump-started theeir family fortune) much more than that.

Unspent campaign contributions are the property of the candidate. (Ask Pat Buchanan …about $10 Million.)

Wouldn’t it be marvelous to know exactly how much The Messiah picked up during his campaign?

Regards, MAB

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