The famed English author Charles Dickens wrote A Tale of Two Cities. Today, we are going to consider “a tale of two theories.”

One theory of wage determination, believed by all too many people, is that pay greatly depends upon employer generosity. The CEOs of major corporations and sports stars such as LeBron James earn annually in the tens of millions. Why? They are fortunate enough to work for generous companies (interestingly, our progressive friends object, strenuously, to CEO pay being so high, but not to that of top athletes, singers, movie stars who gross in the same neighborhood). Many lawyers, doctors, accountants, professors, journalists, engineers take home at the six-figure level because their firms are moderately kind. And those who ask if you “want fries with that?” or push a broom are unfortunate in their choice of employer and thus compensation: they work for a bunch of skinflints and cheapskates.

Economists tend to adhere to a very different theory: productivity (actually, discounted marginal revenue productivity, but we need not go into all of that). What is this? Take Joe Blow for example. He is a semi-skilled worker. Joe can do all sorts of things for many companies. Right now, one of them produces $10,000 hourly. If Mr. Blow is added to its workforce, receipts rise to $10,020. We attribute all the difference to him; ceteris paribus (all else equal) conditions hold. His marginal productivity is thus $20 per hour.

What will his wage tend to be? Well,...

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