Reason for a New Age

Posts Tagged ‘demand’

More on Pricing

Posted by publius2point0 on 2010/01/06

Continuing on from the previous two posts, I will discuss the topic of pricing and salaries further.

“Supply” is something which can generally be easily expressed. There are three t-shirts.

“Demand”, on the other hand, is generally quite unexplainable. Quantifying it as an average amount that people will pay is really the only way to express it. But what sort of logic or irrationality goes into deciding the demand for a thing is really just guesswork. I can walk you through some of the reasons why people might pay more or less for a certain thing than you might think seems reasonable, but at heart the most one can ever say about why something costs what it does is that it’s that way because that’s how the pulling forces of supply and demand judged it in society’s mind.

Let’s examine, as a test case, management. In modern society, a manager is generally paid more than his subordinates. This isn’t always the case–for instance, I’m sure that somewhere there’s some PHD biochem engineer making an astonishing salary, while some fellow who knows little more than how to balance a couple of numbers oversees him and makes some less astonishing salary. But generally it can be said that a boss makes more than his direct employees.

Argument by Scarcity
One argument for this difference is scarcity. While as anyone can shovel coal from bin A to burner B, only one out of every ten shovelers has the people skills to effectively manage. This man, finding himself to be specifically desirous and rivals in short supply can argue that it would be hard to find someone else besides him to fill the position. He would be more desirous to competitors than his fellow shovelers, for he has a skill that most do not. Hence, it is in the company’s interest to offer him enough that he will stay with them and do this work.

In this view, you could say that there are a progression of skills necessary to advance up each rank in the company hierarchy. You need to have people skills, you need to have sales skills, you need to understand the business, you need to understand the market and the customers, you need to have problem solving skills, and you need to be able to strategize. The person who has all of these skills is almost certainly in very very short supply. If you find him, you need to offer him enough to interest him in joining you as your CEO rather than that he go elsewhere, compete against you, or retire.

And of course many skills are trained. Our PHD biochem engineer is in short supply for his knowledge and for being able to demonstrate his temerity in problem solving. He also has many years worth of expensive schooling to pay for. He is not only in short supply, but also has to ask for extra money, just to pay for the education he received. He will certainly continue to look about until he finds someone willing to pay that amount, and if you aren’t willing to pay that, you shouldn’t expect to be able to find anyone of those qualifications to work for you.

The scarcity of workers of certain skills is somewhat like a union, bargaining on behalf of the whole set of workers of that class. Unlike a union though, it doesn’t require any sort of organization to run. Humans, understanding humans and the world around them, notice when they’ve attracted attention, i.e. when they are desired. A person who is more desired than the person next to him gets to ask for gifts.

Argument by Bribery
Another possible cause for this discrepancy is the perception of hassle, stress, or general undesirability of a job. You might think that this only accounts for jobs like garbage men or coal miners, but personally I would argue that this is not an insignificant factor for managerial types as well. At the lowest levels, dealing with general workers can often be like herding cats. You have to deal with office politics, petty disputes, make sure that everyone is feeling wanted, make sure that they are receiving the things that they need, and of course sometimes you have to tell someone that they’re out a job. Minus a higher salary, and especially as you’ve already saved up a decent nest-egg towards retirement, why else accept a higher–and hence more stressful–position unless someone should bribe you into it?

In a sense, this is a reverse version of scarcity. Rather than saying that there are few people qualified for a job, you are saying that there are few people who want to work this job. You have to pay them enough for them to convince themselves to forgo their basic sanity.

Argument by Production
When a person manages 10 people, their ability to perform well is affected by his abilities as a manager. A poor manager can cause the work flow to all but stop, while an excellent manager can see drastic leaps in the performance of his workers. The CEO of a company is, similarly, the difference between continued growth or the entire collapse of the business. As such you can say that, while not directly producing the goods of the business, the managerial staff is responsible for some percentage of that output. As such, their wage is simply the product of that percentile.

If 1000 worker bees make $10,000 worth of goods in a day, and the managerial staff is, overall, responsible for the complete failure or success of those products making it to market, then the entire managerial staff can be considered to be worth at least 50% of all income. The CEO can be considered to be 50% of all of the managerial staff, and so on down the line. Overall, this would work out to something like:

1000 Workers @ ($10,000 * 50% / 1000) = $5 per day
100 Managers @ ($10,000 * 25% / 100) = $25 per day
10 Section Heads @ ($10,000 * 12.5% / 10) = $125 per day
1 CEO @ ($10,000 * 12.5% / 1) = $1250 per day

Obviously, that would be after expenses.

While not a particularly realistic example, it does demonstrate that an argument could be made for this is a fair method of payment. Where such an argument can be made, it likely is a factor in the consideration of how much to pay a person. How much of a factor though wouldn’t be decided on any sort of logic like the above, rather it would be based more on gut feelings and so on.

Argument by production works more in favor of professions like money lending. A money lender doesn’t directly create nor even manage the production of goods. Yet, nevertheless, there would not be those goods if the moneylender didn’t exist. Again, how much value they add to society, in terms of production, is hard to quantify, but that they are doing something that is perceived to be of value is evidenced by the fact that people are willing to trade for it up to the amount that that person is being paid.

A business has no interest in paying a person more than they are worth in terms of making money in return. All other factors accounted for then, you would expect to match the end produce that is attributable to any individual based solely on his salary. But indeed, there are those factors, mucking it up.

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