Superstar economics: It’s all showbiz now

June 7, 2011

By Laurence Copeland. The opinions expressed are his own.

It seems barely a week goes by without another shock report about the ever-widening gap between those at the top of the earnings distribution and the rest of us. The facts are by now well-established. Throughout the Western world, but most noticeably in Britain and America, the earnings of the top one or two percent are accelerating into the stratosphere, leaving the middle class a long way behind, and the working class completely out of sight. How can one explain this global phenomenon?

Academic economics seems to be taking a surprisingly long time to reach a definitive answer, but I suspect there will turn out to be two long term trends at work here.

First, globalisation has doubled or tripled the supply of unskilled and semi-skilled labour. As long as China remained locked in Maoist isolation and the Indian economy had to carry the full burden of the Licence Raj, their respective workforces were shut off from the global labour market. The fact that products could theoretically be manufactured far cheaper in those countries was unimportant, because in practice Western firms could never take advantage of their rock-bottom labour costs.

Now that they have opened up and it is possible to outsource manufacturing to China and the paperwork to India, there is less and less left for our workers and middle-managers to do – unless, of course, they are willing to work for more competitive (i.e. lower) wages.

Moreover, the second phase of this transition is well underway, as the emerging economies start to exploit their vast pools of underemployed (and often excellent) graduates to move up the value chain, where they increasingly compete with our engineers, programmers, and even lawyers and doctors.

All over Europe and North America, people are asking: where will it all end?

The bad news for us in the West is that it will probably carry on for many years, maybe even decades, simply because there are still vast reservoirs of unemployed peasant-farmers in India, China, Brazil, Mexico and Argentina, and behind them wait Vietnam, Indonesia, maybe even the Philippines, and eventually (we hope) Africa. Until those reserve armies of the unemployed have been exhausted, there will be downward pressure on wages – unless globalisation is halted, a danger we must avoid at all costs.

Against this, there is good news, however. First, this trend does not necessarily mean wages have to fall in real terms. It simply means they will rise less rapidly than they would have done in the absence of globalisation – in the language of economists, wages will be lower. In particular, most of us will see our earnings increase less rapidly than will those who are sheltered from third-world competition – which means for the most part those at the top of the income and wealth distribution: corporate lawyers, senior management, creative talent of one kind or another (as well as civil servants).

Moreover, even if globalisation ultimately causes wages in the industrialised world actually to fall, they are unlikely to go down to Third World levels – and even if they do, it will be to Third World levels which have themselves risen a long way above where they are today.

In any case, it should never be forgetten that we in the West have no God-given right to a superior standard of living. Through most of history, as far as one can tell, India and China were as rich as any European country. What is going on now could simply be a reversion to the long run trend, which was temporarily interrupted for the two centuries since the Industrial Revolution gave the West a headstart on the road to affluence.

However, I am sure there is a second force which is driving inequality worldwide, a mechanism we could call Superstar Economics. It is best understood through the example of football, which is an almost perfect model of the world of work as it will be in the future (I hope no readers are contemplating suicide at this point).

We all know that footballers earn a fortune, don’t they?

Well, no, actually they don’t. In fact, most get paid rather modestly. It is only the handful of pampered stars at the top who are paid a king’s ransom, while the run-of-the-mill players in the lowest divisions have to take part-time jobs outside football and rely on their wives’ wages to make ends meet. The gap between football’s elite and the rest is vast – and ever-growing. Why?

For the most part, the answer has little directly to do with the supposed greed of the players or the influx of billionaire owners. It is a matter of technology: radio, TV and now the internet.

As a kid growing up in inner-city Manchester, all the boys in my primary school supported one of the city’s two big teams. It was quite a shock to discover, when I went to grammar school, that in fact there were boys (it was always boys in those days) who were just as loyal to the little clubs on the periphery of the city: Stockport, Rochdale, Bury and many others. It was natural for them, because they came from proud local communities and, since they couldn’t afford to travel very far, they had very little choice anyway.

As a result, with support far more evenly spread than is the case today, so was the wealth of the clubs and the wages they could afford to pay.

Nowadays, neither kids nor parents see any reason to support their local club. In fact, they see no reason to make do with anything but the very best. If they cannot afford the prices at the nearest Premiership ground, they can see the world’s best on TV (or on the internet, legally or illegally). Why make do with an inferior product?

Hence, millions watch the stars, while ever fewer can be bothered to watch their local heroes. In the same way that local theatre succumbed to cinema and live music has been largely killed off by recorded music, local football is now merely a shadow of its former self.

The key point is that modern technology – TV, videocams, instant messaging etc – will make this model applicable to more and more markets. Why would a student want to go to lectures at his local college when he can watch interactive video lectures given by a Nobel laureate in Harvard? Why consult the best lawyer in your home town when you can have a few minutes with the country’s top silk on video-link? If you need heart surgery, why not get the world’s best cardiac surgeon to operate remotely? If it’s not yet possible, it’s surely on the horizon, and in the meantime, it is certainly feasible for the surgeon at your local hospital to keep an open link to a superstar consultant for advice if things go wrong during an operation.

In each case, the effect is to increase the demand for the superstar’s services, while reducing the demand for everyone else’s. Wherever skill or expertise is required, the rewards accrue to the lucky few, while the rest of us have to compete by offering our services ever more cheaply. More and more service industries will go the way of sports and showbiz (which are in any case more or less the same thing nowadays).

Does this future sound unappealing?

There are a couple of reasons why it may not be such a grim prospect after all. First, as with globalisation, low wage has to be understood in relative, not absolute terms. Like Second and Third Division footballers, we may still see our standard of living rise, but at the same time we will all fall further and further behind the Premiership superstars. Experience shows that, while people are willing to pay a premium for the superior attraction of the “live effect” (live music, face-to-face contact with teachers or consultants etc), it is rarely large enough to change these facts of modern life.

However, the millions of kids who watched Barcelona win the Champions League recently saw football of a standard their grandparents could never have witnessed when they were children, mainly because the cost would have been prohibitive. Modern technology makes star performances accessible not just in physical terms, but also by making them cheap. In other words, it makes it possible for stars to get rich by cutting their price per unit and selling many times more units. For example, an internet university could afford to charge far lower tuition fees than an ivy-covered brick institution of the conventional kind, while still employing Ivy League professors and paying them salaries to match.

In short, both globalisation and technology may make us relatively worse off as producers, but they will make us vastly better off as consumers – which suits me fine, because by the time these changes have a serious impact on universities, I’ll no longer be a producer – just a consumer (or dead, of course).

Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs.

Image – Barcelona’s Lionel Messi celebrates a second goal against Manchester United during their Champions League final soccer match at Wembley stadium in London May 28, 2011. REUTERS/Eddie Keogh

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What is overlooked here is that a University does not just sell education, it also sells exclusivity. It does not matter if Harvard gives you the best education: if a few million per year can get a Harvard degree, then its value is diminished greatly.

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