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Money is widely associated with value (the economics textbooks literally say it is a store of value), but that does not mean that all value can be expressed as a sum of cash.
Despite recent turmoil under new management, Twitter is still a valuable source of knowledge, insight and, occasionally, provocative statements that make you question your intuitions. The other week, economics blogger Noah Smith cited an old tweet saying, “The saddest part of free market ideology is that, if you know your job is beneficial to society, the capitalists will use this against you and pay you less, because they know people want to do jobs that help society.” If money corresponds to value, and if we genuinely value those jobs that serve the needs of our society more than others, isn’t it odd that they are generally low paid?
An economic conundrum
None other than Adam Smith, the father of modern economics, was confronted with a similarly puzzling observation. How was it that diamonds, by no means essential to human life and society, were so much more expensive than water, without which humanity would perish very quickly? His intuition was as obvious as it was incorrect: water is easily accessible and requires (well, at least in Smith’s time) little or no processing, while diamonds needed laborious mining and processing, so the reason one was so much more expensive is that it required more costly labour. But if someone simply found a finished, cut diamond, and they took it to market, it would not fetch a lower price than one that had just been processed, despite the fact that it had not cost the seller anything. (As a brief aside, this classic comparison may be about to lose its illustrative power, as lab-grown synthetic diamonds are causing a major drop in the price of this commodity.)
It is not the labour content (or more generally, the overall cost of production) that determines the price of a good, but supply and demand, and marginal utility. If there is enough water to provide everyone with all they need, its price will be low; if diamonds are scarce, and more people want them than there are available, their price will be high. When people have no water and no diamonds, they will first seek to acquire water to drink in order to survive. For the parched individual, water has a much higher economic utility than diamonds. As long as nobody has enough water to survive comfortably, everyone’s resources will go towards acquiring sufficient water, and a diamond seller will do no business at all, at any price – the demand is zero. But once people have enough water to survive, every additional litre becomes less critical – its marginal utility falls – until, at some point, people will decide there are better things to spend their money on than yet more water – including diamonds. If you have all the water you need, then the utility of a diamond can exceed the utility of an additional amount of water.
The same logic holds in the labour market. The ‘societal utility’ of teachers, nurses and refuse collectors is, by many people, seen as higher than that of management consultants, commodity traders or lawyers, and yet the pay of the former is typically a small fraction of that of the latter. There are plenty of people who want to be teachers, nurses and refuse collectors (and similar occupations with a high societal utility), and provided the salary on offer (determined by supply and demand) is adequate, the demand is met. Society can then move on to meeting the demand for subsequent tiers of increasingly less vital occupations. In each of those the pay will naturally also be established by relative supply and demand.
But a question remains unanswered: what is it that sets the salary of these jobs, which are so valued, at such modest levels?
Utility in the eye of the job (be)holder
Some wage differentials between jobs can be explained by differences in the employee profile (education, skills, experience, knowledge), which affect the pool of candidates for certain occupations, or in the job profile (physical effort, hazardous, unpleasant or uncomfortable environment, unsocial working hours, great responsibility) and how that affects the comparative attractiveness of a job. Together these translate into differences in supply and demand.
But another factor, which may well dominate in certain circumstances, is in the utility of a job as perceived by the worker. In most cases, the primary constituent of this utility is the wage – everyone has bills to pay – but there can be more, sometimes a lot more, to a job. Some people seek purpose and fulfilment in a job, alongside the pecuniary rewards. Did I say “alongside”? This implies a degree of independence that does not match reality. Fulfilment and material compensation are intertwined, and most people make a trade-off between the two: all else being equal (pay and benefits, working conditions etc.), they’d rather do a job that has meaning to them – which means that they’d only take the job with less meaning if it pays more, and by implication that they’d prefer to take the more meaningful job, even if it pays less money.
People’s willingness to accept – the minimum for which they are prepared to do the job – combines the material reward and the spiritual (for want of a better word) fulfilment, and they are willing to trade one kind of benefit for the other. Those for whom the nature of the work is intrinsically strongly motivating will need less extrinsic motivation.
Is there something wrong, or morally questionable about this? Many people believe that people who perform societally beneficial jobs, like teachers, nurses and refuse collectors, deserve to be paid more, and the comment which triggered this essay implies that employers might take advantage of people who are intrinsically motivated to do such jobs, and hence are willing to work for less money. But do they, really? If the employee gets superior value out of a job that pays less, but that is intrinsically more valuable than other jobs that pay more, it is hard to maintain that they are short-changed. Whether that intrinsic value lies in the fact that the office is in a beautiful period building rather than a non-descript concrete bunker, that the work is highly stimulating rather than mind-numbing, or that the work is beneficial to society rather than just about making a profit, is neither here nor there: we all trade off all these aspects, according to how important we individually find them. (Interestingly, as Noah Smith observed, if there were exploitation, it would be mostly in nonprofits, as this is where people who are strongly motivated by doing societally beneficial work would gravitate.)
And there is more: if an organization’s mission is indeed to do work that benefits society, it would make good sense for its managers to recruit people who strongly identify with its purpose, and who are primarily driven by intrinsic motivation, rather than by their paycheque. By offering a modest salary, those would be exactly the people who really want to work there. With more money on offer, especially if, somehow, extra compensation was available in recognition of the societal benefit of the role, people who are only motivated by the cash – the least appropriate for the job – would be applying in droves. Worse, even for the staff that are genuinely driven by the organization’s mission, the extra money might eventually crowd out their intrinsic motivation.
Deep within our own thinking, we effortlessly combine intrinsic and extrinsic motives and value when we make decisions. But that does not mean we can measure intrinsic value – to ourselves, or to society – by an extrinsic yardstick like money.
Koenfucius 
If modest salary is a good thing because it gets people who only intrinsically want to work in that field, then why are we paying doctors so well?
If the answer is “we need doctors who are good at their job regardless the source of motivation (intrinsic vs. extrinsic)” why does this not hold when talking, for example, about teachers?
Well some doctors work for a modest salary, but on the whole – as always – it’s supply and demand in the market that determines the price, i.e., the wage. If “we” offered less pay, then there would be unfilled vacancies, and people would leave the profession. It is what is happening with nurses (I wrote about this earlier this year: https://koenfucius.wordpress.com/2023/03/03/wages-benchmarks-and-markets/). If there are not enough good teachers (I do not know whether that is the case), then yes, the combination of extrinsic and intrinsic reward is too low. My daughter used to be a teacher, and she left the profession not because the pay was too low, but because the working conditions were not good, i.e., the intrinsic reward was negative.