I started writing a post about people buying and reselling PS5s within which there were a few concepts I wanted to rant on about and emphasize.  However, as these elaborations became a longer in length than the rest of the post, I thought it would be better to just separate them into different articles.  Each one for the most part is understandable individually.  However, reading both, I believe will paint the most complete picture.

Rant on Free Markets

Currently, I do not believe that perfectly free markets are correct, and at least in the United States there are definitely many aspects of it that could be dramatically improved.  However, the free market system framework is ultimately the most efficient and fair, despite the appearance of unfairness that many critics of the system point out.  Usually, the unfairness argument is from an effort perspective.  For example, as mentioned in the PS5 post, an accomplished software engineer may be able to create a shopping bot to snipe a PS5 in a trivial amount of time.  Meanwhile somebody else may need to spend several days learning how to do the same task or more likely be forced to pay a third party to do it for them.  A common belief that I believe many people have, and which I believe is incorrect, is that the compensation of a person should be proportional to the effort they put in.  In this case, since an average person has to put in more way more effort and cost in procuring a console than a software engineer, then they should get a higher ultimate payout right?

Obviously this is ridiculous.  We live, and I do hope we continue to live, in a society that rewards people mostly based on their results and the value they provide, NOT the amount of effort they put in.  Cutting every blade on a lawn with scissors by hand will certainly take a lot of effort.  Conversely, mowing a lawn with a good mower is relatively easy.  However, only a fool would expect the hand-cutter to be compensated more than the mower user.

As ridiculous as the argument sound in the examples provided above, some people attempt to make this argument in regards to equity of compensation in general.  There are many different ways in which this argument is made but it usually boils down to “How could it possibly be fair that the CEO of a company makes several millions of dollars the average employees only makes thousands.  There’s no way that the CEO works 1,000x harder than the average employee” or “This dude’s job looks super easy, how come he makes so much money?”

To answer the questions above, we can use this formula:  The maximum wage that a person can earn is their:

min(marginal contribution value, cost of replacement)

From a firm’s and society’s this is optimal and intuitive.  Any firm that pays an executive $x means that said executive both brings in both more than $x to the firm.  Additionally, it also means it would cost the firm more than $x to find a suitable replacement.  High paid executives may not work a thousand times higher than their average employee but the value they bring in is much higher and harder to replace.

I will admit that how someone gets into a cushy position can oftentimes not fair, which we will discuss next. 

Rant on Barriers to Entry, Economic Rent, and Management Entrenchment

In a perfectly competitive market free of friction, information asymmetries, and emotions, the story could end here, with everyone getting paid exactly what they are worth.  Unfortunately, the world we live in has all of those things and therefore also does contain a degree of unfairness.  When people are talking about equity and regulation, I believe that these are the things that we should work towards improving.

The first is that the way in which people get into some aforementioned “cushy” positions is not often fair.  An entrepreneur who builds a new company from the ground up does not belong in this category as everything this person earned was a direct product of the effort and ingenuity put in.  That being said, having the freedom and ability to take risks is a privilege in itself, but I’m just gonna cut this line of reasoning here since we can literally go down this rabbit hole of where privilege comes from perpetually.

We can contrast this with cushy positions that are hired into.  Common examples are high finance, law, tech, and medicine.  For example, Wall Street is intimidating for many people, but from what I’ve seen, a lot of jobs in it don’t require a ton of specialized knowledge or skills.  I’ve been to some recruiting events where current employees have literally said that a well-trained monkey could do most of the required tasks.  If that’s the case then, why aren’t the wages here being driven down if we have so much theoretical supply?  After all, there’s never a shortage of Wall Street wannabes.  The first reason is that these firms, for example large banks, have very high barriers to entry.  Because of regulation and economies of scale,  it is not feasible for upstarts to compete with them in many areas even if the employees of said upstarts are as good or even better.  As a result, the large incumbent firms can collect economic rent, money that exceeds what is socially necessary due to a firm having exclusionary control of resources, and pass it onto their employees.

In terms of inequity, the people who actually know and are able to prepare for these positions in the first place are people who likely have prior connections, i.e. either their direct family members or friends already in the industry.  Although these positions do not necessarily require specialized skill and talent, they do require some background knowledge and preparation.  It should therefore be unsurprising that the individuals with prior knowledge and connections have both an easier time getting an interview in the first place as well as better and earlier preparation.

I talk about finance because that’s the industry I’m most familiar with.  However, I’m sure similar things happen in other industries as well and perhaps to even a greater extent.  For example, law and medicine require expensive graduate degrees which are obviously a deterrent to less wealthy individuals.

Nevertheless, the beauty of the free market system is that even with disadvantages, no one is theoretically locked out.  Sure it will certainly take a lot more effort and maybe a little bit of luck, but anyone can achieve these positions if they put in a serious effort.

I say it’s a little bit of luck, but in reality, depending on the loftiness of the ambition, it could be a lot of luck.  Paradoxically though, in order to achieve anything, it is necessary to have the mentality that accomplishments are primarily a result of skill and hard work.  The reason being that someone who believes that luck is too big of a factor won’t even both putting any of the requisite work in the first place, which will setup for a 100% chance of failure.  A great video explains this in more detail.

However, for aspiring cushy position seekers, I personally would encourage you to consider other avenues as well.  Sure collecting economic rent can be nice (as for full disclosure I do currently work in finance), but engaging in new discoveries, creating useful products and services, and engaging in one’s interests can ultimately be more profitable and productive to society.  For example, I know some, though to be quite frank not that many; after all humans are greedy and lazy, people who could’ve chosen economic rent collection but decided to do something else.

Another severe source of inefficiency management entrenchment.  Corporate governance is complex and oftentimes will be built upon layers and layers of bureaucracy and opaqueness.  As a result, ineffective management can introduce policies that make it easy for them to be rewarded when times are good and hard for them to be punished when times are bad.  Even if they do drive their companies to the ground and eventually get terminated, they can often be ensured a cushy landing for themselves.

I say management, but in theory this logic could be applied to any type of employee as well.  The problem is culturally if you apply this concept to high-wage earners, you’re a progressive who wants to remove incompetent managers.  However, if you apply the same logic to lower wage workers, you’re labelled as an evil union-buster.  Of course, unemployment for an overpaid manager vs. a factory worker will have very different personal consequences.  However, it’s important to keep in mind that this line is never clear and that when we are making judgements, we stay logically consistent.

Rant on Overvaluing “Hard” Work

The above points also hint on how I’m not that big of a fan of some of the flawed themes that I believe parents / teachers hammer into students.  The theme that irritates me the most is the teaching that the most important thing when working on anything is the effort put in.  This is fundamentally wrong.  The most important thing is to get good results.  Now, I’m not saying that it’s wrong to not work hard.  In fact, it is impossible to accomplish anything without putting in the requisite work.  However, the subtlety that I introduce is that hard work is necessary but not sufficient.  There are two others themes that are just as important.

The first, which is almost cliche at this point, is to “work smarter, not harder”.  The classic example is the story of how two lumberjacks were tasked with cutting down a tree.  One immediately started hacking at it, while the second spent a considerable amount of time sharpening his saw.  Unsurprisingly, the second individual was able to finish both faster and with much less effort.  Obviously, it’s not hard to draw parallels between this and cutting grass (using a mower vs by hand) or even getting a PS5 (learning how to build a bot vs waiting outside in the cold).

The second theme is to make sure what you’re working towards is actually worth doing.  Every action you take has an opportunity cost, which is usually time.  For example, we can again use people buying and flipping PS5s as an example.  Many people simply do not even try to buy and flip because for them, the expected profit is less than the cost of the time and effort required.

However, if this was not the case for you, and you saw a grotesquely unfair amount of profit, then maybe you should’ve done this instead of whatever else you were doing.  For example, if you’re working at a low paying job, then maybe it’s worth taking a day off work to learn how to secure a PS5.  For those who argue that “I don’t have the privilege / time to put into this since I have work, classes, mandatory club commitments, and a million other things”, I have two things to say to you.  The first is you’d be surprised how much time you can allocate to something if you really wanted to.  Particularly, I would guess there are many low-value things that could be cut out.  The second is that if you truly don’t have time, then that simply means that you implicitly value all your other activities at more than the expected profit from doing this.  If this is indeed the case, then honestly “Good for you! I’m happy that you have such a fulfilled life”.  However, that also means you shouldn’t criticize people who have different priorities and activities.  Basically the main point is you may currently be working hard and making progress towards whatever you want to achieve.  However, it’s important to ensure that whatever you are working towards is actually worth achieving.  If you see other people working towards a different set of priorities and get angry, that’s usually a pretty good sign that you’re insecure about your own personal goals and priorities.