Wednesday, August 5, 2015

New Disclosure Requirements from the SEC...

Today, Bloomberg came out with a report that the U.S. Securities and Exchange Commission (SEC) has approved, by a vote of 3 to 2, a measure requiring companies to disclose the gap between the pay of the CEO and the pay of a typical worker. Proponents of the measure feel that the public should be aware of - and no doubt outraged by - the level of income inequality within companies. Meanwhile, heartless capitalists, like myself, may support this new type of disclosure for a different reason. Hayek (1945) said that, "we must look at the price system [and in this case, the wage system] as such a mechanism for communicating information if we want to understand it's real function -...The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action." I'm concerned about the level of income inequality.  But my concern is that we don't have enough of it. I, therefore, support the measure to disclose the income inequality within companies if only to identify which firms efficiently allocate human capital. Who wants to work for a company that doesn't properly reward the accumulation of human capital and instead equalizes incomes of employees.We now have an observation of what happens when firms start to minimize income inequality instead of maximize profit. It doesn't work out so well.

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