Navigators of the Economy

Life aboard ship in the age of sail was brutal, even by the standards of the day. Ordinary sailors worked in horrific conditions for months on end for little pay and often for nothing more than just a stake in the profits of the voyage. 

Easily, the cushiest  job on a ship was that of navigator. Navigators were quite often hired guns who had no other duties. A navigator often needed to work no more than four hours a day. He would come on deck two or three times a day to take sightings, then return to his cabin for an hour’s worth of calculations. Compared to the physically taxing, mindlessly repetitive and dangerous work of a sailor, navigators did nothing and risked nothing. 

Yet navigators often received as much as much as 25% share in the profits in a voyage. Even when they worked for pay, they received a wage many, many times that of sailors who did much more arduous and even critical work. Why did those who owned shares in a voyage, from the cabin boy to the landlubber investors tolerate paying the navigators so much?

The answer is obvious: if the navigator made a mistake, it didn’t matter how hard everyone else on the ship worked or how competently they did their jobs. The skill of the person doing the navigating determined the success of the voyage or even if anyone survived. People paid navigators a lot because if they didn’t, it didn’t really matter how much they paid anyone else.

In the modern economy, executive managers fill the same function for companies as navigators did for ships. Just as in the case of sea voyages, if the manager does not make the correct decision, then it really doesn’t matter how hard or competently anyone else works. 

For example, few jobs in the modern world are as difficult as that of oil field roughneck. Roughnecks do the grinding and dangerous work of drilling oil wells. However, competence and work ethic of the individual roughnecks does not ultimately determine whether any particular drill succeeds or not. The critical factor is the decisions made by the manager who decides where to drill. If the manager picks poorly, then the best roughnecks will drill a dry hole. If the managers can’t eventually hit oil, the roughnecks are out of a job no matter their individual skill

All businesses ultimately rely on their top managers making the correct decisions. In the end, it does not matter how much effort an executive puts into a decision, it simply matters that, like navigators, they make the correct one. 

Most critics of executive managers argue from a crypto-Marxist perspective in which wealth does not arise from conscious effort of human beings but just “happens” as a result of impersonal natural forces guiding the economy.  This is clearly a childish notion given even a cursory examination of the history of business. 

We usually ignore executives until they make a bad or painful decision such as laying people off. People suddenly complain that the executives don’t deserve their pay. However, people seldom consider that everyone who has a job working for someone else has that job because of the good decisions that some executives made. Everything we have that is created by private enterprise exist because some executive made the correct decision about what to make and how to make it. 

There is no evidence that squabbling politicians spending other peoples money to win votes in the next election will produce better results overall than investors in individual businesses picking their own employees. People who believe otherwise usually do so based on hindsight analysis of a tiny handful of decisions out of an economy based on millions of competent high level decisions. 

It is easy to imagine some age-of-sail Marxist declaring that the navigator should not make any more than the ordinary sailor, but it is easy to imagine that the ordinary sailor would be worse off on a ship on which he made as much money as the navigator. In the end, if you work for a business or require the products and services a business produces, you shouldn’t care how much the people at the top make. You should only care that, on the whole, they make more good decisions than bad ones. 

Since most companies make money, hire employees and produce goods, I think we can say that most executives earn their pay. 

[Update: See this post for an explanation of why it costs so much to hire executives to run large companies.]