Rich man, poor man, superstar

As economic inequality grows, the winner-takes-all ethos is spreading to all sections of society

Diane Coyle
Sunday 23 October 2011 08:46

The Church of England entered the political fray again at the start of this week with a fresh call for help for the poorest 30 per cent in society. Income distribution has become an urgent moral matter in Britain because of the sharp increase in inequality during the past 20 years. Incomes in Britain are growing further apart faster than anywhere else in the industrialised world.

We are still not as polarised as the US, where the economist Richard Freeman has described the deterioration in prospects for unskilled American men, especially young men, as an ''economic disaster''. For example, not only are these men more likely to be unemployed; if they were in work their pay, adjusted for inflation, actually fell by a staggering amount during the 1980s - by a fifth for young males with less than 12 years of schooling.

The most likely explanation for the increasing inequality in the US and UK, and rising unemployment on the Continent, is a growing divergence in people's ability to create economic value - their productivity, or underlying ability to earn.

When this occurs, one of two things can happen. Either the distribution of earnings will widen to a corresponding degree, and employers will continue to be willing to hire the least productive people because they can pay them relatively less. Or, if the framework of employment legislation prevents this, then companies will stop wanting to hire the individuals with lowest earnings ability. Unemployment for the unskilled will stick at a high level.

New technology is a highly plausible explanation for greater inequality in how productive people are in their work. The case is well made by two American economists, Robert Frank of Cornell University and Philip Cook of Duke University, in their book The Winner-Takes-All Society. Their argument is that information and communications technology has extended the ''superstar'' phenomenon to wide areas of the economy. Thus any opera diva, tennis champion or movie star can easily reach a world-wide audience. Consumers will prefer to see or hear them, even at a slightly higher cost, because of their known star quality. There is much less of a market for the tenth or twentieth best.

Frank and Cook point out that superstar status increasingly applies outside the conventional areas of sport and entertainment. A global brand will make its manufacturer far more money than a very similar product that does not achieve the same recognition in the market place. That means there are superstar product designers, engineers, advertising executives and so on - anybody with a proven record of success will become a celebrity in his or her own field. The authors write: "The winner-take-all markets ... have permeated law, journalism, consulting, medicine, investment banking, corporate management, publishing, design, fashion, even the hallowed halls of academe."

Information and communications technology has helped this spread in two ways. It decreases the cost of delivering a service or product and it increases the market for the service. If I am a star opera singer, once I have sung and recorded an aria it can be very cheaply disseminated; and the market for my singing is likely to be world-wide, not just the people who can get to the nearest opera house. The same is true if I am a star surgeon. Technology means I can diagnose and treat patients around the world, and I will be known around the world.

Frank and Cook go on to argue that this is inefficient in economic terms. They have a series of arguments. First, they say, superstar economies generate income inequality, which is a social bad. True, but not an economic inefficiency.

Second, they argue that winner-take-all markets cause effort to be misallocated. Everybody wants to be a superstar, so too many people pile into professions where the winner-take-all conditions apply. They write: "In increasing numbers our best and brightest graduates pursue top positions in law, finance, consulting and other overcrowded arenas, forsaking careers in engineering, manufacturing, civil service, teaching and other occupations in which an infusion of additional talent would yield greater benefit to society."

Apart from the fact that this contradicts their earlier argument that the superstar phenomenon now encompasses engineers, surgeons and professors, it is also breathtakingly value-laden about what careers are "socially useful". The despised law, finance and consulting form a large and growing part of modern post-industrial economies. If they are so much in demand it is hard to see in what sense they are not useful.

The third argument relies on a separate point about overcrowding into less socially useful areas. Frank and Cook see an analogy with the "tragedy of the commons" whereby common land is overgrazed because individuals' private benefits carry a social cost. So, they suggest, there is overcrowding into the field of mergers and acquisitions law because successful candidates do not realise that their job is gained only at the expense of a rival's failure to get in. All those failed candidates would contribute more to the economy if they had decided to be teachers in the first place.

The analogy is false, of course. Land is in fixed supply; the supply of M&A jobs - or demand for lawyers - is growing. The fact that not all of them become stars does not imply that there is an inefficiently large number of lawyers. If there were, real pay for lawyers at the bottom of the heap would decline.

The book's conclusion - that very high incomes should be very heavily taxed - plays well in some political circles. It would be an interesting proposition to put to the voters - should incomes over, say, pounds 100,000 a year, be taxed at 75 per cent? Governments that tried it would probably find many of their "winners" emigrating.

Nor would tax punishment change the underlying economic forces. In a weightless economy driven by information technology, individuals' earning power varies more than in a heavy economy. Different people doing the same job will actually be serving different markets - from a small-town solicitor or attorney through a specialist employment lawyer to a global star every international corporation wants to hire for its most important cases. In fact, the dispersion will probably increase.

In the long run, the hope must be that the technological revolution will create a rising economic tide that eventually benefits everybody. For all the social horrors and inequality of the Industrial Revolution, it is easy to forget that it had transformed living standards within a generation. The inequality and tension are features of the transition. Policies for adjusting to a new kind of economy will have to focus on helping the poor rather than penalising the rich. Which is where the Church of England came in.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

View comments