I’ve been observing the ongoing debate about high pay for corporate executives that was kicked off by the furor over bonuses at AIG. Many ordinary people are still mad enough to get out their pitchforks, and join protest tours of wealthy Connecticut neighborhoods organized by well-funded left-wing hate groups. But most thinking people have understood that giving the government carte blanche to rewrite private contracts retroactively is a very bad way to respond to the awkwardness of the AIG situation.

Now the old populist question has arisen again: What do we give up anyway, if we just make it illegal for anyone to earn more than, let’s say, $10 million a year?

(I’m sure Matthew Yglesias listens to utilitarian arguments to the contrary, so long as they come from economists who are politically left-wing. Since I don’t qualify as one, it’s a safe bet that Mr. Yglesias cares little for my opinion. But since I myself care very much about my opinion, I’ll offer it to you anyway.)

The conversation puts me in mind of the famous dictum by Milton Friedman: people who have problems with free-market capitalism generally don’t have a problem with capitalism. They have a problem with freedom itself. The argument for a society-wide cap on income is an argument against allowing people to freely enter into arrangements that result in some people receiving a high income.

But there are some very important distinctions that we need to make. High income can result from high productivity, or from rent-seeking, and it’s worth understanding the difference. And the American people don’t have a problem with high incomes per se. Their problem is a different one.

It’s often said that Americans don’t begrudge a high income to people who earn it. But it turns out that some people are more valuable than others, and for reasons having quite little to do with how hard they work. The standard example, of course, is pitchers for Major League Baseball teams, the best of whom can easily receive more than $100,000 every single time they throw a little white ball at an opposing batter.*

Can it be said that the pitcher works any harder than the schoolteacher who puts in about the same number of hours? What explains the salary differential? Simply the fact that a great many people are willing, indeed eager, to pay the pitcher a very large amount of money to see him work.

Leave aside the possibility that somewhere there are teachers of such rare insight and genius that they could perform in baseball stadia before large crowds of obsessed fans. The fact remains that there is high demand for the services of pitchers who provide the most entertainment value. If we cap their income, then the extra revenue will still be paid by the customers. It will just increase the compensation of the baseball team owners and all the other people involved in providing the service.

If we seriously propose to cap the income of pitchers, we’re actually saying that we want to limit the willingness of ordinary people to pay for the services of others as they see fit. The question is about freedom, not justice.

If we allow people to choose for themselves how they want to spend their money, then they will direct it towards those people who deliver the value that people want to spend money on. And they’ll determine the value of specific people relative to others using an economic process (“economy” comes from a Greek root meaning to allocate constrained resources among competing alternatives). Because of the way the world is made, this means that some people will receive a lot more money than others.

But is there truly any injustice in this? Consider the alternative. If we say that a baseball pitcher, or a top movie star, a great trader, a gifted entrepreneur, or even a well-motivated and hard-working local beer distributor should submit to an arbitrary salary cap, then what happens? The extra value created by that individual will go to other people, who are quite likely to be politically favored. The inevitable outcome is pervasive corruption. The free-market solution is better.

What about people who demonstrably do create less value than the amount of their income? I would certainly put a large number of CEOs in this category. Have you ever had to fire a CEO for poor performance? I’ve fired several. The problem you have is that the CEO’s contract anticipates being fired for poor performance, and it generally forces you to pay him much or most of his compensation anyway. This is very much like the standard deal received by baseball pitchers, who get paid even if they suffer a season-ending injury. Do we want to solve this problem legislatively? If you try that, then what you lose is the ability for the market to discover and reward the small handful of CEOs who really do deliver consistent value.

I think that being a CEO is a lot like being a baseball pitcher. A pitcher can only count on receiving $100,000+ per pitch as long as he does well. CEOs should also be rewarded largely on performance (to a much greater extent than they currently are), just as entrepreneurs are.

Yet to see a problem in the high, nearly-assured compensation given to top officers of huge companies is to miss a very important point. For an egregious example, think of the parade of senior men at Fannie Mae and Freddie Mac. One of them even had a long-term romantic affair with Barney Frank. The problem is that, because of tight arrangements with government, the largest companies really don’t have to perform well. They’re insulated from competition in ways that also make it possible for their CEOs to receive high income even if they destroy shareholder value.

But that should properly be a matter for those shareholders. We really ought to solve the problem of unfair government support for large businesses. Unfortunately all of Washington’s policies, from financial bailouts to increased innovation-killing regulations and taxes, are taking us in the other direction. If you don’t like big CEO pay for poor performance, you’ll hate the future even more than the present.

This leaves us with what the American people really want. They don’t want to see salary caps at all, and certainly not for successful people. They want to avoid rewarding failure with tax dollars. It’s a measure of the PR challenge that business people face today, that many ordinary people think all business leaders are corrupt and have their hands in the public till. I do a lot of live radio interviews, and when I’m introduced as the CEO of Bayshore Networks LLC, these days I’m often asked whether I have to wear a disguise in public.

I’ve said from the beginning of the current bailout mess that government-assisted companies are necessarily to be deemed as failures. This includes everyone from Bear Stearns to General Motors to AIG to Fannie Mae/Freddie Mac to Citigroup. It’s simply not just to expend public dollars to prop up failed enterprises. I’ve said many times that we simply can’t let them fail in an unordered way, because the collateral damage is too great. But neither can we let them continue to operate indefinitely.

Common shareholders of assisted companies need to be wiped out, and the operations should be sold off or liquidated in an orderly fashion. That’s what I had hoped would happen to AIG, Fannie/Freddie, and GM. Instead, our current government acts as if it can run these businesses indefinitely, even as it says with its lips that it can’t and shouldn’t.

That’s a true injustice, and that does amount to rewarding failure with taxpayer dollars. That makes me mad as hell, mad enough to take up a pitchfork and march. But I won’t be marching to the neighborhoods where CEOs reside. I’ll be marching up Capitol Hill and the White House.

* A note to reader and baseball fan Paul Mezzina: Allow me to express my profound appreciation to you for discovering and pointing out a serious flaw in my analysis of the compensation of baseball pitchers. I had indeed done a thumbnail analysis of Mariano Rivera, the Yankees’ closer, based on what I thought were reasonable guesses. They indeed were “in the ballpark [sic],” compared with the actual numbers you supplied. But what I was reaching for [sic] was the figure of $100,000 per inning pitched, rather than per pitch thrown. My apologies for the error [sic], and thanks again to Mr. Mezzina for what can only be described as a great catch [sic].