Comprehension
Read the passage and answer the questions that follow.
Under capitalism, the argument goes, it’s every man for himself. Through the relentless pursuit of self-interest, everyone benefits, as if an invisible hand were guiding each of us toward the common good. Everyone should accordingly try to get as much as they can, not only for their goods but also for their labour. What ever the market price is, in turn, what the buyer should pay. Just like the idea that there should be a minimum wage, the idea that there should be a maximum wage seems to undermine the very freedom that the free market is supposed to guarantee.
This view, however, has some dramatic consequences. One is the explosion in economic inequality that almost all liberal capitalist democracies have experienced over the past 30-40 years. The difference between the top and the bottom of the income distribution now lies about where it did in the Gilded Age and the roaring 1920s, up until the Great Depression. Unlike these earlier periods, however, this rise in economic inequality has not been driven by returns on capital assets. This time, one of the most important contributors to the rise has been the payment of extraordinarily high levels of compensation to corporate executives... More troubling still, while the compensation for corporate executives has been almost continually rising during this period, real (inflation-adjusted) wages for almost everybody else have been stagnating.
Many people find this upsetting but, even so, they tend to treat it as something capitalism requires us to tolerate. Others think it is something that capitalism requires us to applaud. But nothing in capitalism actually says that such sky-high levels of compensation are permissible. What capitalism says instead is that people need incentives to be maximally productive. But will someone who makes 100millionayearreallyworkharderthansomeonewhomakes10 million? Compensation, like everything else, has what economists call ’diminishing marginal utility’. More of it has less and less of an incentivising effect, until eventually it has no incentivising effect at all-people are already working as hard as they can. At which point capitalism suggests that we should not pay someone even more money, for we are going to get nothing in return.
But wait- aren’t CEOs just getting paid the market rate for their labour? Their compensation is calculated according to a formula set when they were hired and, as long as this formula represents the going wage, then this is what they should receive. The market rate for CEO labour, however, is not set in a competitive manner. The formula is set by a special group of the company’s directors, called ’the compensation committee’.... Next time someone hires a CEO and another compensation committee conducts a survey, the average will be higher. The market is not bidding up the price; the price is going up simply because everyone always wants to beat the current average. We have what economists call a market failure. Setting a maximum wage would therefore not interfere with market freedom because, in this instance, the market is not working
Under capitalism, the argument goes, it’s every man for himself. Through the relentless pursuit of self-interest, everyone benefits, as if an invisible hand were guiding each of us toward the common good. Everyone should accordingly try to get as much as they can, not only for their goods but also for their labour. What ever the market price is, in turn, what the buyer should pay. Just like the idea that there should be a minimum wage, the idea that there should be a maximum wage seems to undermine the very freedom that the free market is supposed to guarantee.
This view, however, has some dramatic consequences. One is the explosion in economic inequality that almost all liberal capitalist democracies have experienced over the past 30-40 years. The difference between the top and the bottom of the income distribution now lies about where it did in the Gilded Age and the roaring 1920s, up until the Great Depression. Unlike these earlier periods, however, this rise in economic inequality has not been driven by returns on capital assets. This time, one of the most important contributors to the rise has been the payment of extraordinarily high levels of compensation to corporate executives... More troubling still, while the compensation for corporate executives has been almost continually rising during this period, real (inflation-adjusted) wages for almost everybody else have been stagnating.
Many people find this upsetting but, even so, they tend to treat it as something capitalism requires us to tolerate. Others think it is something that capitalism requires us to applaud. But nothing in capitalism actually says that such sky-high levels of compensation are permissible. What capitalism says instead is that people need incentives to be maximally productive. But will someone who makes 100millionayearreallyworkharderthansomeonewhomakes10 million? Compensation, like everything else, has what economists call ’diminishing marginal utility’. More of it has less and less of an incentivising effect, until eventually it has no incentivising effect at all-people are already working as hard as they can. At which point capitalism suggests that we should not pay someone even more money, for we are going to get nothing in return.
But wait- aren’t CEOs just getting paid the market rate for their labour? Their compensation is calculated according to a formula set when they were hired and, as long as this formula represents the going wage, then this is what they should receive. The market rate for CEO labour, however, is not set in a competitive manner. The formula is set by a special group of the company’s directors, called ’the compensation committee’.... Next time someone hires a CEO and another compensation committee conducts a survey, the average will be higher. The market is not bidding up the price; the price is going up simply because everyone always wants to beat the current average. We have what economists call a market failure. Setting a maximum wage would therefore not interfere with market freedom because, in this instance, the market is not working
Question: 1
In the first paragraph the author puts forth the view that:
In the first paragraph the author puts forth the view that:
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When analyzing passages, look for statements that directly explain or challenge a core principle, like the free market in this case.
Updated On: Apr 19, 2025
- fixing a maximum wage goes against the tenets of a free market system
- the common good is best served by market forces guiding the economy
- people benefit most when they are paid the maximum amount possible for their work
- individual self-interest determines salaries and wages for each worker
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The Correct Option is A
Solution and Explanation
The first paragraph introduces the view that the idea of a maximum wage contradicts the principles of a free market system, where individuals’ compensation is determined by market forces.
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Question: 2
The author ascribes the increasing gap in economic levels in recent times to:
The author ascribes the increasing gap in economic levels in recent times to:
Show Hint
When analyzing economic discussions, focus on terms like "marginal utility," which relate to diminishing returns and income distribution.
Updated On: Apr 19, 2025
- diminishing marginal utility in liberal capitalist democracies
- high compensation levels for top executives
- incentivising top executives to increase their productivity
- a decline in the return on capital assets compared to human assets
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The Correct Option is A
Solution and Explanation
The author attributes the growing economic inequality to the diminishing marginal utility of wealth in capitalist economies, leading to disparities in income and wealth.
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Question: 3
The writer argues that while salaries tend to be capped as people cannot work any harder,
The writer argues that while salaries tend to be capped as people cannot work any harder,
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Look for how economic concepts like "competition" and "marginal utility" are used to explain the rise in certain wages and income disparities.
Updated On: Apr 19, 2025
- longer work hours always increase compensation
- competition for the top executives bids up salaries
- marginal utility increases as people tend to work more
- differences will always emerge among different ability levels
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The Correct Option is B
Solution and Explanation
The passage highlights that, while salary caps may limit how much individuals can earn for working more hours, competition for highly paid positions, such as executives, drives up salaries.
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Question: 4
We can infer from the sentence on the Gilded Age and the Great Depression (in the 1920s) that:
We can infer from the sentence on the Gilded Age and the Great Depression (in the 1920s) that:
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When making inferences from a passage, focus on recurring themes such as historical patterns and long-term trends.
Updated On: Apr 19, 2025
- wide gaps in income distribution have always existed through the centuries
- productivity increased in most capitalist liberal economies from the twentieth century
- incomes had become more equal in the latter part of the twentieth century
- these were times of greater equality of opportunity than the present day
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The Correct Option is A
Solution and Explanation
The passage mentions the rise in income inequality during the 1920s, which aligns with the historical context of long-standing income distribution gaps.
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Question: 5
The author concludes there is “a market failure” in the remunerations of top executives (last paragraph) as:
The author concludes there is “a market failure” in the remunerations of top executives (last paragraph) as:
Show Hint
Look for how the passage presents the consequences of market forces, especially in relation to high-level compensation.
Updated On: Apr 19, 2025
- they are paid high salaries to compensate for the failures of the market
- competition trumps the rules of the market in their compensations
- a result of the constraints on their compensations
- market failures have resulted from the high compensations they receive
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The Correct Option is A
Solution and Explanation
The author suggests that CEOs’ high salaries reflect compensation for their role in a market that may not be functioning optimally.
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