Murphy Battles Anti-Market Economics and Ethics

by David Gordon
by David Gordon

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The Politically Incorrect Guide to Capitalism. By Robert P. Murphy. Regnery, 2007. Xii + 206 pages.

Robert Murphy's admirable book is much more than a conventional defense of capitalism. Murphy includes standard material, e.g., why price controls, minimum wage legislation, and rent control do not work. Though it was once controversial to point to the inadequacies of these measures, now even mainstream textbooks hasten to condemn them. Murphy goes far beyond this. He takes on the most difficult and controversial challenges to the free market, and offers convincing responses to them.

Few matters excite critics of the market to rage as the high salaries of corporate CEOs; Paul Krugman, e.g., in his Conscience of a Liberal, makes little effort to conceal his envy at those who dare to earn more than he does. The response by defenders of the market is obvious: if the market pays the CEOs high salaries, this indicates that those who pay the salaries expect the executives to generate sufficient profits to justify their high compensation. Critics are often invited to found their own corporations.

But is not this defense of the high salaries open to objection? The claim is that financial success justifies the high salaries: how, then, can one justify enormous severance packages to CEOs who fail? Surely one cannot here appeal to market efficiency. Murphy accepts the challenge:

Unlike routine managerial work, the task of a CEO often involves bold innovation. If the steps necessary to turn a particular company around and earn millions were "obvious," the company wouldn't be in trouble in the first place. When a new CEO comes in with ambitious plans, he knows that failure is entirely possible. If the shareholders said, "We'll pay you $20 million if you succeed, but nothing if you fail," it wouldn't be a very attractive offer at all. This is because the type of person who gets picked to head a major corporation could easily make hundreds of thousands, if not millions, for certain by consulting or offering other services less glamorous than being CEOs. (p. 21)

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Copyright © 2008 Ludwig von Mises Institute

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