Uwe E. Reinhardt is an economics professor at Princeton.

The payment of physician income has been the subject of a lively debate for centuries. In fact, one finds it addressed at length in the famous Code of Hammurabi, chiseled into stone tablets some 4,000 years ago by edict of the Babylonian King Hammurabi along, by the way, with a malpractice system that makes today’s look like a pussycat.

Adam Smith, who generally is regarded as the father of modern economics, mused at length on the compensation of physicians in his celebrated book “An Inquiry Into the Nature and Causes of the Wealth of Nations” (1776).

Chapter 10 of Book 1, titled “Wages and Profit in the different Employments of Labour and Stock,” is a gracefully written treatment of what we now call labor-market theory. It is well worth a read.

“Honour makes a great part of the reward of all honourable professions,” Smith wrote. “In point of pecuniary gain, all things considered, they are generally under-recompensed, as I shall endeavour to show by and by. … Disgrace has the contrary effect. The most detestable of all employments, that of public executioner, is, in proportion to the quantity of work done, better paid than any common trade whatever.” (Italics added.)

Today we teach students that seemingly mysterious differences in the pecuniary income of different occupations can be explained in part by what we call “compensating variations in the psychic income” associated with different occupations.

Remarkably, in his treatise on compensation, Smith then departed sharply from the traditional demand-and-supply framework he popularized and we economists usually employ to explore employment and wages. Instead, for physicians and lawyers he appeared to lean on the medieval doctrine of “just price.” Thus he wrote:

We trust our health to the physician: our fortune and sometimes our life and reputation to the lawyer and attorney. Such confidence could not safely be reposed in people of a very mean or low condition. Their reward must be such, therefore, as may give them that rank in the society which so important a trust requires. The long time and the great expense which must be laid out in their education, when combined with this circumstance, necessarily enhance still further the price of their labour.

Although I’m a card-carrying economist who normally is quite comfortable with our supply-demand framework for virtually anything, I do find Adam Smith’s perspective persuasive.

But what income would give physicians “that rank in the society which so important a trust requires”?

Suppose we say, as I would, that the income physicians earn after practice expenses, working full time caring for patients, should put them somewhere into the top fifth percentile of the nation’s distribution of income (meaning 95 percent of families would have a lower annual income). What income level might we then be talking about?

The chart below presents the distribution of money income of American families in 2007, as published by the U.S. Bureau of the Census. The data are for 2007, the latest year published at this site; but these distributions do not shift substantially in the span of two years.

Source: U.S. Bureau of the Census, 2009 Annual Social and Economic Supplement, Table FIN-07

It turns out that an annual income of $250,000 or so would comfortably meet the fifth percentile threshold. Many primary-care physicians — especially pediatricians — are considerably below that threshold. Physicians who derive a substantial part of their incomes from procedures — such as tests or imaging — are situated much above the threshold. They are comfortably in the top second percentile of the income distribution.

From the perspective of the “just price doctrine,” of course, one can easily understand, that against the huge and relatively easily earned incomes of executives in banking and business, physicians feel vastly “undercompensated” — just as Adam Smith predicted it.

To illustrate, a recent Princeton graduate (B.A.) with a job secured on Wall Street estimated wistfully that, in the midst of the current banking crisis, his first-year pay, including bonus, probably would not be much more than $200,000. How happy many pediatricians would be with such an income!

On the other hand, one gains perspective on the matter by ruminating a bit on this quotation from Adam Smith, also in the above cited chapter:

“What a common soldier may lose is obvious enough. Without regarding the danger, however, young volunteers never enlist so readily as at the beginning of a new war; and though they have scarce any chance of preferment, they figure to themselves, in their youthful fancies, a thousand occasions of acquiring honour and distinction which never occur. These romantic hopes make the whole price of their blood. Their pay is less than that of common labourers, and in actual service their fatigues are much greater.” (Italics added.)

As the rest of us whine about our unjust pay, let us think from time to time of our sailors, soldiers and Marines, so willing to work so hard and to pay such a huge price for an imagined “honour” that most of the rest of us rarely ever bother to bestow on them.