The Average School Teacher Is Paid More than Tom Cruise – A Basic Lesson in Economics

I’m going to prove that the average school teacher earns more money than Tom Cruise.  No, seriously.

In my article Exchange Your Best Efforts for the Best Efforts of Others, I was discussing the idea of Ayn Rand that money is a by product of virtue in a free society where no exploitation or theft exists.  That is, a dentist charges money for years of study, which represents his “best effort” and then goes to the best tailor in his town and buys a suit for church which represents the tailor’s “best effort”, etc.

A question, submitted by crabhooves, was posed:

I don’t think it translates as cleanly as that. Is Tom Cruise worth more than a primary school teacher? He’s many times richer than your average school teacher, but he’s not worth more. Society values his efforts less but he gets paid more because we only need a handful of stars but we need hundreds of thousands of teachers so the money isn’t diluted.

[mainbodyad]My answer: It does translate that cleanly.  Your economic model is incomplete (toward the end you started to hit on the reason why, so I suspect you are intelligent and understand the idea even if you don’t have the formal term for the concept).  To be honest, most people make that mistake.  It is so common, in fact, that I almost wrote that exact question into the article but cut it because I thought it was already too long so I’m really happy you brought it up for discussion!

When we spend money, we exchange our cash for value.  We pay what we think something is worth based upon our own opportunity cost.  A guy making $10 per hour cannot fathom paying $400 for a shirt because, after accounting for income taxes, it would take 57 hours of his labor to pay for it.  A woman making $200 per hour wouldn’t think about it twice because her opportunity cost is lower.

The Movie Star vs. The School Teacher

How does this apply to Tom Cruise vs. a school teacher?  A school teacher obviously provides a service that is more important to humanity – the ability to read, write, add and subtract.  Education is the very basis of a civilized society because it is with that tool we are able to do amazing things such as build bridges, cure disease, or compose concertos.

We need to start with two basic facts as our premise:

• Tom Cruise’s customers are potential movie theater ticket buyers.
• A school teacher’s customers are potential students that will be in his or her classroom to learn

When a parent is looking for a teacher for his or her child, they want someone who can give individual attention and teach a given skill.  Studies have shown that parents often pay more for homes in high class school districts despite the higher property taxes (a good school, in fact, is one of the greatest drivers of residential real estate values).

[mainbodyad]One of the hallmarks of a good school is one with a low student-to-teacher ratio.  In other words, on a per customer basis, individual members of society are willing to spend exponentially more on a teacher than they are on a movie ticket to see Tom Cruise.  This is true even in public schools!  Once you get to private schools, where tuition for K-12 can reach into the tens of thousands of dollars per year, it is even more evident.

For Tom Cruise, his customers are only willing to pay $10 for a movie ticket, of which maybe $1 goes to him if he is heavily involved in the project.

That means that an average American is willing to spend thousands of dollars per year on a handful of teachers for themselves and their children, and only a few bucks on movies.  They value education much more highly than they do entertainment if you add up all of the school budgets of all the educational institutions in America compared to the value of Hollywood.  In exact figures:

• The United States Motion Picture Industry consists of 11,000+ companies with combined revenues of $55 billion per year.  This includes the movie businesses of Disney, Fox, MGM, Paramount, Sony, Universal, and Warner Bros.  The top 50 companies control 80% of the market.
• The United States school districts alone – not even counting private colleges and such! – spent approximately $562.3 billion in 2006-2007 (the most recent figures I could find), “including about $476.8 billion in current expenditures for public elementary and secondary education. Of the remaining expenditures, $62.9 billion was spent on capital outlay, $14.7 billion on interest payments on debt, and $7.8 billion on other programs (programs such as community services and adult education, which are not a part of public elementary and secondary education).”

As a people, we value education 10-1 to movies, with a much larger margin if we were add in money spent on self-education products, books, trade schools and private universities.

The “Model” You Are Missing Is the Economic Concept of Scalability

How is it, then, that Tom Cruise is richer?  Scalability.  In economics, scalability refers to the idea that once the product has been made, there is little or no additional cost to produce further units.  For Johnson & Johnson, it takes $1 billion or more in research to create the first pill.  Every pill thereafter costs a few pennies. That is because their business is scalable.

Cruise is in a business that is scalable, like Gates at Microsoft or Jobs at Apple.  He makes a movie and, if people like it, they each are willing to pay a very small amount of their annual income for a few hours of entertainment.  He made Risky Business and The Firm once, decades ago.  He is still collecting profit from it because someone who has never seen one of the movies can now spent a few dollars to download it on iTunes. The key is: Cruise had to do the same amount of work regardless of if 1 person or 100,000,000 people buy his film.

Your local school teacher is paid far more by each of her customers than Cruise is by his.  The only difference is, there is a practical limit to the total pupils she can instruct.  If she tried to run a kindergarten with 100,000,000 people, it wouldn’t even be physically, logistically possible.  You could not fit that many people into an arena and teach them a subject.

This means that we have discovered:

• Individual members of society value the services of teachers on a per customer basis far more than they value the services of a movie star;
• Teaching is not a scalable profession, so there is a practical limit to the number of students, or “customers” a good teacher can have, limiting his or her earnings;
• Even though movie stars are paid far less and valued far less on a per customer basis, they are able to collect millions of tiny payments for people who find their work valuable enough to entertain them for a few hours.  The scalable nature of their work means that lots of pennies from millions of people end up to be more absolute dollars than a lot of dollars from a few people, which is the model followed by a teacher.

Teaching Isn’t a Free Market Profession Due to Unions

The movie star provides less value on a per customer basis.  But to society overall, his value is higher because he has solved a “need” for more people.  This is consistent with the notion that the more good you do for the most people, they higher your wealth will be in a free market society.

In fact, the average teacher earns far more than the average actor.  It would be particularly enlightening to see all of the money society pays teachers, professors and educators and contrast it with all of the money earned by actors and actresses from their primary occupation (waiting tables doesn’t count).

The value of a “good” teacher is often held down by teachers unions, which insist on a seniority-based system that rewards showing up in the morning, not being effective.  This is an example of a non-free market system.  It artificially inflates the value of bad teachers and punishes those who are excellent.

To illustrate the point: Imagine that you have a child in 3rd grade.

There are four (4) possible teachers your kid will have for the entire year.  You know that one of them is a much better educator and that those children who have gone through her class come out much better prepared for the future. Another teacher is incredibly ineffective and everyone knows it.  She has been there for 45 years, is biding time to retire, and hates her job.

Now, imagine that a free market system is established whereby parents, like you, have to bid on which teacher they get for their kid.  Seriously, just like eBay.  You have to go to a school website, and enter a dollar amount you are willing to pay to have for each teacher.

You know what the results are going to be.  The great teacher will be earning $100,000+ per year and the bad teacher will be earning, if she is lucky, $5,000 per year.

But the free market system has been hijacked by politically connected unions so the relationship between best value exchanged for best value has been perverted into an abomination that bears little to no relationship to services rendered.

Of course, we don’t want only the children of rich parents to get the best teachers so there would need to be a “pool” or voucher assigned to each parent that they could use to vote on the teacher they want.  The teacher who received 90% of the parents’ vote would get 90% of the compensation budget the school district set aside for that year.

This leads us to an interesting human observation: The only teacher that would oppose such a compensation system is one that instinctively knows they are below average and want to act as parasites on their more effective colleagues. They know they cannot compete with the “best efforts” of their co-workers and so demand “equal” treatment at the expense of students.  The moral perversion is, they have the audacity to feel superior about their position!  They hold a nation hostage by their gross incompetence and castrate their more effective associates.

Teachers Who Are Scalable Earn More Than Movie Stars

Some educators have discovered the economic concept of scalability and earn far more than movie stars because, again, people are much more wiling to spend more money per customer on bettering themselves than they are being entertained.

Take the company Rosetta Stone, Inc.  The company was founded in 1992, so has been around less time than Tom Cruise.  It teaches people how to speak and read different languages.  Only, instead of limiting the skill to a single teacher in a single classroom, the lessons are recorded on video-based software so there is no practical limit to those who can take advantage of the knowledge.

Customers pay less for automated software such as Rosetta Stone than they do for personal instructors (e.g., they may pay $1,000 to $3,000 for an introductory German course but pay $249 for a comparable software package teaching German), mostly due to the fact they can interact with a teacher one-on-one.  They can speak to him or her, get feedback, and possibly even learn more rapidly (if the teacher is good).

Today, though, Rosetta Stone has a market capitalization of almost $458,000,000.  It generates $252,271,000 in annual sales and pre-tax operating profit of $20,532,000.  Fewer people buy Rosetta Software each year than see a Tom Cruise movie, but the fact they are willing to pay a lot more for knowledge than entertainment means Rosetta Stone has a far higher net worth than Tom Cruise does, amassed in a shorter period of time.  (Some of this is due to the fact that Rosetta Stone doesn’t rely on a single person whereas, if Tom Cruise died, his movie career for future films is over … unless he played a reanimated zombie.)

The Summary

In short, the bottom line is:

• On a per customer and per family basis, teachers are far more valuable than movie stars and individuals are willing to exchange a much higher percentage of their “best efforts” for the skill of the teacher than they are the entertainment of the movie star.
• Movie stars are less valuable, relatively, but can reach more people due to scalability.  As such, they provide a much smaller service for much less money per customer but because they provide it to more absolute customers, they earn higher absolute dollars.

That is: A teacher is far more valued by society on a microeconomics level.  A movie star provides more value on an intermediate level.  But on a super macroeconomic level, the earnings of all teachers, educators and professors combined would dwarf those of all actors and actresses, including the Tom Cruises, because society has far more gainfully employed educators than it does actors and it is willing to pay the average educator more than the average actor.

As I said in the beginning, the mistake from which you suffer is common because your model was incomplete.  On both a microeconomic and macroeconomic level, teachers are paid more and more valued by society.  There are a few individual actors and athletes that utilize the economic law of scalability so that their absolute earnings are enormous.

This is in no way inconsistent with the idea that that what we give, in a free exchange, represents our relative value to the civilization. After all, if I were to give up my role as an investor and start sweeping floors, my “reward” from society would be fewer claim checks on my fellow man to exchange for the things I desire.  By necessity, the cashmere socks would be replaced with cotton and the Versace eye glasses with a cheap knockoff.

That means when a school teacher buys a $400 necklace at Tiffany & Company and Angelina Joli buys a $400,000 necklace at Tiffany & Company, both are exchanging their best efforts for the best efforts of others.  The difference is, the school teacher has provided more value to fewer customers and the movie star has provided less value to far, far more customers.  It the teacher can convert her knowledge into a scalable system, like Rosetta Stone, she would likely be richer than the rare success in entertainment who made their money with scalability.