Paul Graham on creation of wealth

Paul Graham writes about creation of wealth. This text originally appeared in "Hackers and Painters" book and was published online in November 2006:

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In the United States, the CEO of a large public company makes about 100 times as much as the average person. Basketball players make about 128 times as much, and baseball players 72 times as much. Editorials quote this kind of statistic with horror. But I have no trouble imagining that one person could be 100 times as productive as another. In ancient Rome the price of slaves varied by a factor of 50 depending on their skills. And that's without considering motivation, or the extra leverage in productivity that you can get from modern technology.

Editorials about athletes' or CEOs' salaries remind me of early Christian writers, arguing from first principles about whether the Earth was round, when they could just walk outside and check. How much someone's work is worth is not a policy question. It's something the market already determines.

"Are they really worth 100 of us?" editorialists ask. Depends on what you mean by worth. If you mean worth in the sense of what people will pay for their skills, the answer is yes, apparently.

A few CEOs' incomes reflect some kind of wrongdoing. But are there not others whose incomes really do reflect the wealth they generate? Steve Jobs saved a company that was in a terminal decline. And not merely in the way a turnaround specialist does, by cutting costs; he had to decide what Apple's next products should be. Few others could have done it. And regardless of the case with CEOs, it's hard to see how anyone could argue that the salaries of professional basketball players don't reflect supply and demand.

It may seem unlikely in principle that one individual could really generate so much more wealth than another. The key to this mystery is to revisit that question, are they really worth 100 of us? Would a basketball team trade one of their players for 100 random people? What would Apple's next product look like if you replaced Steve Jobs with a committee of 100 random people? These things don't scale linearly. Perhaps the CEO or the professional athlete has only ten times (whatever that means) the skill and determination of an ordinary person. But it makes all the difference that it's concentrated in one individual.
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Comments

[bravomail]

the prob with CEOs that they get bonuses if company stocks doing good, and even if company stocks doing bad. It's not about salary.