Lord Turner, the chairman of the Financial Services Authority (FSA) in the UK last week proposed a Tax on banks to curb bonuses. My first reaction was that of derision. I immediately went online to see the details. There weren't too many details but there were a lot of derisive comments. Always mistrusting mob intelligence I began to re-evaluate my initial reaction.
In the past I would have taken a more dogmatic approach on such issues based on commonly used presumption "the market knows best". Taking the market knows best approach is actually the oldest approach in the book. It has led to a lot of innovation in the 20th century, but also a lot of human suffering in Czarist Russia, Medieval India, Africa, S. America etc... The "market knows best" with out regulation, pragmatism, and most importantly focus on development of civilization leads to serfdom in one form or the other.
So what has all this to do with curbs on pay? 2 years ago I would not have even imagined that I would even entertain the thought of accepting mechanisms to regulate compensation in any industry, because of course "the market forces decision is the best".
When we discuss curb on pay there is show of tremendous indignation from many of the well educated, free market followers (me included). But we have to ask ourselves will we have the courage to show the same indignation when we see teachers who are supposed to educate our children being paid very low wages like is happening in most countries (Singapore where I currently live is fortunately an exception to this). Would we show the same indignation when the best minds working on cutting edge technologies in the areas of medicine, renewable energy etc are paid a fraction of what they would be paid if they redirected their work to develop financial tools. Do we show indignation when we see that no amount of profit taking is "enough". Would we have self doubt if we were was paid a Million dollar bonus on a failed project or would we take the money?
The question I guess is what is enough? What amount of regulation is enough? What amount of profit taking is enough? I am inclined to think that having strong intellectual/ideological foundation mixed with a healthy dose of pragmatism is essential. Most importantly it is essential not to be irrationally attached to an ideology. May be this is the essence of creative destruction.