Are Exceptionally High Wages Really Rent?
Dan Sullivan and H. William Batt
[Reprinted from a Land-Theory online
discussion, 1 August 2002]
There is a real division of opinion about whether the income of
prominent sports stars, film and music stars, and other such
celebrities' income is rent or wages. Most neoclassical economists
regard it as rent, regarding it as a natural endowment rather than due
to any skills that they may have honed. (Ironically, the
neoclassicists regard rent as a trivial aspect of the total economy,
typically listing it as about 1 percent. At the same time they don't
see the significance of rent in other natural resources like the land
area itself, the spectrum, and other elements of nature.)
The conventional view of rent, agreed upon by both classical and
neoclassical economists, is that it is that part of a payment that is
above that necessary to keep any resource -- land, labor, or capital
-- in economic production. Hence, if Babe Ruth would have been willing
to play for free, any income that he got, or the owner of the Yankees
got, would be economic rent. So also with certain starlets that do
nothing except appear in public to be pretty: all their compensation
is in economic rent. Dan Sullivan, taking issue with the Baumol and
Blinder taxt, clearly disagrees.
The return to Jordan and Spears is not rent, nor are they capital.
They are people, and the return is wages. Exceptionally high wages go
to those with exceptionally applications of high talents. They do not
enjoy a monopoly, as anyone is allowed to endeavor to do what they are
Dan, I don't think this is the way that the neoclassical economists
use the term rent. They see any "natural endowment," even in
persons, as rent.
Then they have fallen into absurdity, as all persons are differently
endowed, so that everyone who is employable at all has an endowment
over and above someone else.
I have just checked some of the conventional textbooks I have on the
shelf, and I'll choose the passages from Baumol and Blinder, fifth
edition, pp 752-754. They're about as authoritatively reflective of
the mainstream economics as one can get.
Note that the following is not Batt's own nonsense. It is just more
evidence of the depths of absurdity to which neoclassical economics
Generalization: What Determines John Elway's Salary?
Baumol and Blinder: "Land is not the only scarce input
whose supply is fixed, at least in the short run. Toward the beginning
of this century some economists realized that the economic analysis of
rent can be applied to inputs other than land (see box on page 756 for
some current research uses of the concept. The boxed reference on page
756 talks about TV and radio station licenses.). As we will see, this
extension yield some noteworthy insights."
Radio and TV licenses are land titles of another sort, as the
magnetic spectrum is a natural resource. Thus there is no "extension"
at that point.
Baumol and Blinder: "Consider as an example the earnings
of John Elway, star quarterback of the Denver Broncos. Football
Players seem to have little in common with plots of land in downtown
Chicago. Yet, to an economist, the same analysis -- the theory of rent
-- explains the incomes of those two factors of production. To
understand why, we first note that there is only one John Elway (or so
he would like management to believe). That is, he is a scarce input
whose supply is fixed just like the supply of land. Because he is in
fixed supply, the price of his services must be determined in a way
that is similar to the determination of land rents. Hence, economists
have arrived at a more general definition of economic rent as any
payment made to a factor above the amount necessary to keep that
factor in its present employment."
Yes, supply and demand apply to all three factors of production.
Thus, when the typewriter was new, the ability to type commanded a
very high salary. When it became commonplace, the question, "Can
you type?" became viewed as an insult to women. Yet it is
absurdity to call the pay once afforded a typist "rent."
Baumol and Blinder: "To understand the concept of
economic rent, it is useful to divide the payment for any input into
two parts. The first part is simply the minimum payment needed to
acquire the input: the cost of producing a ball bearing or the
compensation for the unpleasantness, hard work, and loss of leisure
involved in performing labor. The second part of the payment is a
bonus that does not go to every input, but only to those that re of
particularly high quality. Payments to workers with exceptional
natural skills are a good example. These bonuses are like the extra
payment for a better piece of land, and so are called economic rents."
This is sheer nonsense. The premium paid to a better worker is still
a wage, and the premium paid for a better piece of equipment is still
interest. Only payment for privileges is rent. Perhaps, if the labor
force were artificially restricted by laws protecting unions, or by
the threat of union violence, that premium could be called rent, but
the mere payment of a higher wage to get the benefit of a higher
performance is just that -- a higher wage.
Baumol and Blinder: "Notice that only the first part of
the factor payment is essential to induce the owner to supply the
input. IF a worker is not paid at least this first part, he will not
supply his labor. But the additional payment -- the economic rent --
is pure gravy. The skillful worker is happy to have it as an extra.
But it is not a deciding consideration in the choice of whether or not
Again, that is absurd. If the worker will do the same quality of work
for that employer for less money, the employer will offer less money.
The fact is that paying less money incurs the risk that the worker
will *not* perform at the same level for that employer. He might not
work as hard, he might take his services elsewhere, or he might
retire. There is not mechanism whereby John Elway or any other athlete
commands a premium other than his ability to turn down the offer.
Baumol and Blinder: "A moment's thought shows how this
general notion of rent applies both to land and to John Elway. The
total quantity of land available for use is the same whether rent is
high, low, or zero; no payments to landlords are necessary to induce
land to be supplied to the market. So., by definition, the payments to
landholders for their land are entirely economic rent -- payments that
are not necessary to induce the provision of the land to the economy.
John Elway is (almost) similar to land in this respect. His athletic
talents are somewhat unique and cannot be reproduced."
That is flat out nonsense. There is a continuing supply of future
quarterbacks arising from the efforts of thousands of high-school
athletes and hundreds of college athletes, all striving to be the
best. The author acts like someone pulled Elway fully formed out of a
turnip patch, when in fact Elway and many like him applied their
talents with passion and dedication in hopes of becoming great
quarterbacks. They all gambled on this, and Elway was one of the few
big winners. This does not make his payment rent by any stretch of the
Baumol and Blinder: "What determines the income of such a
factor? Since the quantity supplied of such a unique, nonreproducible
factor is absolutely fixed."
There are many great quarterbacks, some of whom might have been
better than Elway. This same nonsense was stated about Joe Montana
until he retired and the back- up quarterbacks stepped in and
continued the same game plan without a hitch.
Baumol and Blinder: "...and therefore unresponsive to
price, the analysis of rent determination summarized in Figure 35-6
applies. The position of the demand curve determines the price."
The highest quality commands the highest price whether we are
speaking of land, labor or capital. When the task at hand is
winner-take-all competition, the value of top quality is particularly
high. None of that has bearing on what the factor of production is or
on what the return to that factor is properly called.
Baumol and Blinder: "Figure 35-8 summarizes the "John
Elway market." Vertical supply curve SS=92 represents the fact
that no matter what wage he is paid there is only one John Elway."
However, there was, during Elway's career, also one Jim Kelly, one
Joe Montana, one Troy Aitman, one Dan Marino, etc. Only Denver fans
and this author believe that nobody compared to Elway. And if Elway
was better than some other quarterback, how much of the difference
stems from Elway working harder, having better coaches instruct him
along the way, etc.?
Baumol and Blinder: "Demand curve DD is a marginal
productivity curve of sorts, but not quite the kind we encountered
earlier in the chapter. Since the question, "What would be the
value of a second unit of John Elway?" is nonsensical."
Again, an absurd statement. It is no more nonsensical than saying a
second Dan Sullivan working in the steel mill. There was, in fact, no
second Dan Sullivan, either, but there were other people who could do
the job. So are there other people who can quarterback winning
football teams. Denver might not have one of them at the moment, but
that is beside the point.
Of course, Elway was the "winningest quarterback," but this
is more due to Denver's high altitude, to which opposing teams were
unaccustomed, than to one particular player. The overwhelming majority
of his wins and of his famous comebacks were at home, and during his
tenure as a starting quarterback, the Dallas Cowboys won more
Superbowls than his team did.
This is not to negate his greatness, but only to negate the
presumption that he is some freak of nature, so superior to mere
mortals that the laws of economics do not apply to him.
Baumol and Blinder: "The demand curve is constructed by
considering only the portion of his time demanded at various wage
levels. The curve indicates that at an annual salary of $6 million, no
employer can afford even a little bit of Elway. At a lower salary of,
say, $3 million per year, however, there re enough profitable uses to
absorb two-thirds of his time. At $2 million per year, Elway's full
time is demanded; and at lower wage rates, the demand for his time
exceeds the amount of it that is for sale."
Where does he get this garbage? "A little bit of Elway" has
no value whatsoever. Nobody is interested in less than 100% dedicated
performance and the passion to do whatever it takes to win. There are
very few people who have that dedication and passion, which is why
their wages are so high. It is no different than in a competitive
fast-food joint, where energetic workers keep their jobs and get
raises, while slow, lazy workers stay at minimum wage or get fired.
Are the energetic workers collecting "rent"?
Baumol and Blinder: "Equilibrium is at point E in the
diagram, where the supply of and demand for his time are equal. His
annual salary here is $2 million. Now we can ask: How much of John
Elway's salary is economic rent? According to the economic definition
of rent, his entire $2 million salary is rent. Since, according to the
vertical supply schedule, Elway's financial reward is unnecessary to
get him to supply his services, every penny he earns is rent."
Here again is an absurdity. It is not like he grew up in Denver and
wanted to play for the Broncos regardless, for he was raised in
California and went to college in California. It is not even a
foregone conclusion that he would play football, as the Yankees had
drafted him in the first round to play baseball. And, certainly it is
absurd to assume that he would play continuously for sixteen years
without any pay at all.
Baumol and Blinder: "This is why we said that top
athletes like John Elway are almost good examples of pure rent. For,
in fact, if his salary were low enough, Elway might well prefer to
stay home rather than work. Suppose, for example, that $50,000 per
year is the lowest salary at which Elway will offer even one minute of
his services, and that his labor supply then increases with his wage
up to an annual salary of $300,000, at which point he is willing to
work full time. Then, while his equilibrium salary will still be $2
million per year, not all of it will be rent, because some of it, at
least $50,000, is required to get him to supply any services at all."
Spoken like a true neoclassical, as if human beings, like land and
capital, were mere objects to be manipulated, not free agents who
choose not only where to work, but what kind of work to do and how
much of themselves to put into their work.
I wonder how much of this economist's salary is rent? After all, here
I am, writing what is far more coherent, for no money at all. Why
doesn't his employer just put him behind a typewriter with an infinite
number of other monkeys and give him an occasional banana for pounding