Opinion

Chrystia Freeland

The winner-take-all economy

By Peter Rudegeair
July 8, 2011

Cornell University economist Robert H. Frank sat down with Chrystia at the Aspen Ideas Festival to chat about the earnings potential of superstar dentists and world-class sopranos, the unlikelihood of an Atlas Shrugged-esque strike of the elites and Charles Darwin’s contributions to economic thought. Here’s a transcript of some of the highlights of their conversation.

On the upsides and downsides of the winner-take-all phenomenon

CHRYSTIA FREELAND: If the super-talented are getting super rewards, maybe in the past they were not getting the appropriate rewards. I mean, maybe this is really American capitalism working the way most Americans want it to work.

ROBERT H. FRANK: Well there are two things in your question. One is the upside of the whole phenomenon is that we now get to listen to the best soprano rather than the hundredth best.  In 1890 there were 1,300 opera houses in the state of Iowa alone. You had to listen to music live and in-person. You couldn’t hear the best soprano because she couldn’t be everywhere at once. Now there’s a contest to see who the best soprano is.  That winner then records the master disc and get’s stamped out onto CD’s at virtually no cost so we could all listen to the best soprano.

[...]

That’s the upside.  The downside is that there’s been a huge concentration of wealth and income that’s occurred because of this.  If you thought you needed those concentrated rewards to get people to put forth effort in these domains, that would be one thing.  But there’s absolutely no evidence of that. People just want to be the best performer whether or not–

CHRYSTIA FREELAND: People don’t work for money?

ROBERT H. FRANK: They do work for money.  So if you didn’t give them any money, they — but there’s this odd vision that if the forty vice presidents of a big corporation who want to be CEO faced a slightly higher tax rate, they’d all knock off on Friday and play golf in the afternoon.  There are lots of reasons to want to be the CEO of a big company.  After-tax pay is not the primary one among them.

CHRYSTIA FREELAND: You don’t think you would have a sort of Atlas Shrugged-esque strike of the super-competent?

ROBERT H. FRANK: Absolutely you wouldn’t see that. Let one of those forty vice presidents go on strike. The other thirty-nine will silently cheer.  “That means my chances of moving up just went up a little bit,” they’ll say.

Why inequality is not a result of elites gaming the political system

CHRYSTIA FREELAND: So Larry Bartels and Jacob Hacker have been advocating a different explanation as a primary one.  Their argument is it’s much more about politics, and it’s much more about elites managing to shape the political system, to shape the legal system so that they get more of the gains.  You don’t buy that?

ROBERT H. FRANK: I think if you look specific sectors you can make a very strong case for exactly that.

CHRYSTIA FREELAND: Maybe finance?

ROBERT H. FRANK: The financial-services industry I think is people’s exhibit number 1 of that kind of phenomenon. But if you look more broadly at the data the same pattern shows up no matter how you slice it.  If you look at dentists, you see the same pattern of income shift as you’ve seen in the population at large. Stagnation–

CHRYSTIA FREELAND: And you don’t think dentists have a big lobby in Washington that is shifting the gains to–

ROBERT H. FRANK: There’s nothing you can point to with dentists. Real-estate agents, it’s the same thing.  You see it with technology experts.  You see it with English majors.

Why Charles Darwin, not Adam Smith, will be remembered as the godfather of economics in a hundred years

ROBERT H. FRANK: The reason I predict Darwin will eventually supplant Smith is that he had a subtly different but profoundly important understanding of the way the competitive process plays out.  Smith’s modern disciples, and he wasn’t really quite this narrow, but their version of his great idea was that if you turn selfish people loose and let them seek their own advantage in the marketplace you’ll get the greatest good for society as a whole.  And oftentimes we do see results like that.  Darwin’s view was that traits in evolution are selected because they help the individual survive and reproduce.  Sometimes traits that meet that test help the group as a whole, but other times they’re bad for the group as a whole.

[...]

CHRYSTIA FREELAND: And you think economists have lost sight right now of that notion of behaviors that are good for the group needing to also be favored?

ROBERT H. FRANK: Yeah, what I think economists have not recognized clearly is that when markets fail, it’s generally not because there’s not enough competition; that was Adam Smith’s view. It was because competition itself produces these failures.

Comments
2 comments so far | RSS Comments RSS

Very interesting and worthwhile set of interviews.

Robert mentions how at other times in history where there have been technological changes to open up new markets, there has been a similar concentration of wealth as we are seeing today. Presumably then, some time after these changes, the concentration of wealth begins to even out?

Could this high concentration of wealth then be a case of the innovators, those who discover how to best take advantage of the new changes, being able to take the lion’s share of the new wealth opened up, with the rest then catching up with these ideas later?

Posted by Kyle-M | Report as abusive
 

The fundamental issue is that there’s an exceptionally weak correlation between wealth and social contributions in the form of innovation, talent, creativity, and so on.

While some wealthy people are genuinely productive and innovative, many – especially in the CEO and financial classes – are simply game players who understand corporate strategy and financial practices, but have no ability to make a *practical* positive contribution beyond that.

Put simply, we reward the wrong behaviours and talents for the wrong reasons, and mass unemployment – which is a mass denial of potential creative talent – is the result.

The most recent burst of innovation during the 50s and 60s happened during a period of intensive government subsidy of R&D.

The Randian mythology of the colossal genius individualistic inventor is largely nonsense. The reality is that we’re all embedded in cooperative frameworks, and no individual can survive without those frameworks – never mind innovate without their support.

Posted by RichardLyonn | Report as abusive
 

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