The Threat of Gravity Payments

Sales representatives work Wednesday, April 15, 2015, at Gravity Payments, a credit card payment processor based in Seattle.
Sales representatives work Wednesday, April 15, 2015, at Gravity Payments, a credit card payment processor based in Seattle. Gravity CEO Dan Price told his employees this week that he was cutting his roughly $1 million salary and using company profits so they would each earn a base salary of $70,000, to be phased in over three years. (AP Photo/Ted S. Warren)

I won't pretend that I understand what the digital company Gravity Payments actually does (in fact, I don't understand what most digital companies do) but I want to congratulate CEO Dan Price for providing us all with a useful economics lesson.

You've undoubtedly heard that Price recently decided to cut his own salary in order to help finance a radical experiment in employee pay: everyone who works for Gravity Payments, based in Seattle, will now make $70,000/year. He delivered the news to all 120 Gravity employees on April 13.

Actually, the economics lesson didn't come from Mr. Price directly. Rather, it has come from the angry, near hysterical reactions that have greeted this $70,000 piece of news. As reported in the New York Times, Sandi Krakowski, identified as "an author and Facebook marketing expert," whatever that might mean, lamented on Twitter: "His mind-set will hurt everyone." Meanwhile, Mika Brzezinski told Mr. Price on MSNBC's "Morning Joe" show that people probably think "you're a terrible manager."

And The Great Bloviator himself, Rush Limbaugh, ruptured a vessel railing against Mr. Price's move as "pure, unadulterated socialism, which," the Bloviator quickly reminded his listeners "has never worked." Never mind that Mr. Price was acting on his own as the head of a private sector company, not carrying out some government dictate.

So what, exactly, is so bad about Price's salary strategy that it has made some people so upset? Paying $70,000 across the board may or may not be good for Gravity Payment's business; that's beside the point. By implementing an egalitarian salary structure at his company Mr. Price has committed an economic heresy, and like all heretics he is being denounced by the keepers of the true faith.

The orthodoxy about what workers earn is simple: it must be rigorously hierarchical; those at the top must earn more than those at the bottom; and most importantly those hierarchical wages reflect what workers genuinely deserve because they are set by the magical, impersonal and infallible forces of the labor market.

So the fact that American CEOs now make 475 times what the average workers in those companies earn simply represents the market at work -- unavoidable, nothing you can do about it, like any other natural law at work. And if you don't like them apples, I suggest you become a CEO too.

The heresy that Dan Price has committed, therefore, is to suggest that salary structures might actually be matters of choice, that they reflect a company's priorities and not just a set of immovable economic imperatives. And once you start pulling the curtain back from the way corporations work, who knows what Oz-like things you might discover.

Like this little bit of logic bait 'n switch sitting at the center of the salary orthodoxy. We must pay astronomically high salaries to executives because they are worth it, and because Jaime Dimon would quit on the spot if his salary were reduced from $20 million/year to, say, $15 million. Big money buys big talent. As Diana Furchtgott-Roth of the right-leaning Manhattan Institute summed it up, in the labor market "you get what you pay for."

But only, apparently, in the executive suites. "Over-paying" workers in the bottom tier "may make them lazy" as some of Mr. Price's critics have charged. Here's how Patrick Rogers, Associate Professor of "strategic marketing" (as opposed to what? "unstrategic marketing" -- who invents these faux subjects??!!) at North Carolina A&T's business school put it: "The sad thing is that Mr. Price probably thinks happy workers are productive workers."

Silly Dan Price! Doesn't he get it?? Economic necessity demands that we make CEO's happy while simultaneously making cubicle workers miserable, because that's the only way to improve their productivity. The beatings will continue until morale improves! Or until those doing the beatings take a break for some well-deserved spa treatments.

Viewing workers in this way is not economic reasoning, of course; it amounts to Calvinist moralizing. In fact, most economic policies are shaped by a set of moral values more than by a set of natural facts. For at least a generation we have celebrated the rich while vilifying the poor, and we have shaped our economic policies to reflect and reinforce those attitudes.

This is what Dan Price has risked exposing and why so many of the orthodox are rooting for Gravity Payments to fail. After all, if the company does well, it will be a bit harder to ignore that charlatan behind the curtain everywhere else.

Steven Conn will be the W. E. Smith Professor of History at Miami University in Oxford, Ohio starting in the fall. His most recent book is Americans Against the City: Anti-Urbanism in the 20th Century.