TBR: The Winner-Take- All Society
Today’s book, The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us, by Robert Frank and Philip Cook, is somewhat dated in the details (it was first published in 1995) and can be repetitive at times, but is nonetheless a must-read for anyone interested in inequality in American society. Frank and Cook were among the first to note that the biggest driving force in inequality today is not the gap between the very poor and everyone else, but the one between the very rich and everyone else. Paul Krugman is probably the person who has spent the most time in recent years discussing this fact. As Krugman noted in the NY Times in February:
"Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34 percent, or about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn’t a ticket to big income gains.
But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent. No, that’s not a misprint."
Frank and Cook labelled this phenomenon "the winner-take-all society" and argued that a variety of technological, political and economic factors have combined to create highly competitive national or global markets in which relative position is more important than absolute skill, and in which the very few top performers in any given field capture the vast majority of the returns. The most obvious examples are in sports and the arts — while the superstars get millions in endorsements and appearance fees, no one can name the 100th best tennis player or violinist in world. Frank and Cook argue that the same thing is going on for doctors, lawyers, authors, and CEOs.
While I’m not entirely convinced by their explanations for why this happens (for one thing, in most fields it is not possible to rank people’s performance as accurately as in pro golf), I don’t think there’s any doubt that the description of the phenomenon is dead on. The math is beyond me, but I am assured by people I generally trust that there are a wide variety of occupations in which the earnings distribution can best be explained by assuming that there are a series of "tournaments" in which only the winners proceed into the next rounds, and that small differences in skill thus are magnified into huge differences in earnings. This probably explains a significant portion of the penalty for part-time work — it handicaps people at early levels of the tournament and makes it unlikely that they’ll get into the "leagues" with the really high payoffs.
It’s hard to pin Frank and Cook down on a left-right scale. They are economists, and I think they overstate the role of markets and understate the role of institutional structures in creating the outcomes that they describe. (See this American Prospect article for a good sample of their approach.) But they believe that there are huge inefficiencies in this distribution — because people don’t take into account the effect of their entry into competition on other people, more people than is economically efficient compete for the few prestigious slots — and thus argue for progressive taxation, especially if tied to consumption.
After I finished this book, I had a really interesting conversation with T. about how the idea of the winner-take-all society interacts with the long tail — the ability for even very small niche products to find their audience using the powers of the internet. I think our conclusion is that the long tail makes it possible to opt from the tournaments without giving up entirely on being in the game. T’s example is that while it’s harder and harder to get a book (commercially) published these days, he thinks he makes more money self-publishing his game than he could make if it were picked up by a publisher, even recognizing that they could get it into distribution channels that he can’t reach. But I think that for most people, the money they are going to make from their piece of the long tail is for all practical purposes, indistinguishable from zero.
November 15th, 2006 at 8:36 pm
I actually see this at work in academia. It’s all about getting a handful of prized positions and if you take anything less than that then something must be wrong with you. What if you’re happy in the long tail?
Speaking of the long tail–how do the blogads work out for you?
November 15th, 2006 at 9:26 pm
This is definitely true in law. The concentric circle effect: top10% in college gets into the “best” law schools, top 10% in “best” law schools gets into the “best” firms with the highest compensation (or the best clerkships if you want to go the legal academia route), top 10% at the “best” firms make partner, top 10% of partners (the real rainmakers) get the lion’s share of partner compensation. there are some exceptions and shifts in the circles in various places – for example, plaintiffs’ attorneys can make gigantic windfalls with a large class action, where the big corporate firm attorneys are more likely to have more predictable and very large but not gigantic compensation.
November 15th, 2006 at 10:05 pm
I am not sure how these theories apply to medicine. With a husband in the medical field I am aware of low insurance compensations and the extensive hours required even after years of experience. Unless a doctor is employed by a huge medical research firm or owns medical facilites or even patents most physicians are not extensively wealthy. Hospital physicians are a paid little over $100,000. This is a much larger income than other professions, but with the cost of medical school and malpractice insurance doesn’t it all balance out. I never understand the comparison of doctors with other professions since they are saving lives and not solely making money off of products and the stock market.
November 16th, 2006 at 9:47 am
Also not sure how the theory applies in high tech.
In the environments where you’re working on shipped product (i.e. a company that sells software, such as Microsoft or Adobe), one person’s brilliance can be scaled. If you get a super-talented programmer working in that sort of environment, they can produce something so brilliant it hurts. And it can be sold hundreds and thousands of times. Very big incentive to hire the absolute best.
In applied environments (i.e. IT staff at a non-software company) it’s a little different. A great break & fix guy can still troubleshoot only so many machines on a given day; the best project manager in the world can only do one big rollout at a time. Things start changing a little when you reach higher levels — for example a good CIO is a very hard thing to find, plus they burn out quickly. On the other hand, lots of companies don’t even realize they have a great CIO. Their other C-level execs are clueless about technology and just know that the CIO gives really boring presentations. So CIO compensation varies.
Now that I consider, it seems one of the variables here is whether it’s obvious *externally* that a person performs better than their peers. In computer work it can be very difficult — even for other computer people — to tell who is good and who is not. You often have to work with a person for months to learn enough to judge them well. But some of these fields you mention — like sports for example, or law — perform in very public ways and have clear metrics. You either win or you lose! I wonder if that makes it seem easier to find “the best”.
November 16th, 2006 at 10:13 am
Frank and Cook actually discuss how this theory applies to dentistry. Apparently most dentists don’t make all that much money, but a few make huge amounts. They are mostly dentists who do lots of elective cosmetic procedures, which aren’t limited by insurance reimbursement. (Tom Lehrer’s old joke has become a reality — it is actually possible to specialize in diseases of the rich.) Similarly, while most doctors make good money but not fortunes, a handful of surgeons at the top of their fields get rich. Because no one ever asks their friends to recommend a “good enough surgeon.”
Jen, I think you’re right that IT staff in non-computer companies aren’t in a winner-take-all economy. Neither are K-12 teachers. Neither of them benefit from the expansion of scale that make superstar salaries possible. Microsoft makes a fortune because millions of people buy their product.
One of the things that Frank and Cook are very clear about is that if you want to make lots of money, it helps to be in industries where lots of money is flowing around. It’s not that bond traders are smarter than doctors, it’s that when you’re tossing billions of dollars around, their huge bonuses are rounding errors.
And blogads is working fine for me — as long as I don’t expect to pay my mortgage with them. I get a couple of hundred dollars a year for doing what I’d do anyway.
November 19th, 2006 at 5:11 pm
I wrote a long (too long) post on this and it got eaten. Probably a good thing. :-). As Laura mentions academia has certainly been functioning as a tournament model. The Sloan Foundation wrote and published an analysis on the model, in academic science, and it’s consequences (in the 80’s?). The problem with the structure, is that the tail provides neither security nor a living wage (not just the lack of prestige Laura complains of). And, it’s a model that is incompatible with child-bearing years, resulting in more women dropping out of the tournament, being over-represented in poorly compensated tail.
I agree that law functions on the same model, but believe the model is more severe in science.
The question is whether the tail is livable — it’s not in acting or sports, but folks tend to drop out of the competition young.
bj
December 30th, 2007 at 7:34 am
Rayleigh Distribution! Who knew?
http://rightcoast.typepad.com/rightcoast/2007/12/why-are-law-pro.html#more
March 13th, 2010 at 9:10 pm
Have I got inequality for YOU!
“Women of all races bring home less income and own fewer assets, on average, than men of the same race, but for single black women the disparities are so overwhelmingly great that even in their prime working years their median wealth amounts to only $5.”
http://www.post-gazette.com/pg/10068/1041225-28.stm
My wife and I have squirreled away enough to last couple of years if income stopped – it’s striking to be reminded how close to trouble a lot of people are.