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In conventional labor markets, reward is proportional to absolute performance, which in turn is generally modeled as proportional to human capital—an amalgam of talent, experience, education, training, and other factors that affect productivity. Thus, in the classic piece-rate scheme, a worker who assembles 101 widgets in a week gets paid 1 percent more than a coworker who assembles only 100. In contrast, a winner-take-all market is one in which small differences in performance often translate into very large differences in economic reward.
The winner-take-all perspective urges us to look first to the nature of the positions people hold, rather than to their personal characteristics. An economist under the influence of the human capital metaphor might ask: Why not save money by hiring two mediocre people to fill an important position instead of paying the exorbitant salary required to attract someone unusually good? Although that sort of substitution might work for jobs involving routinized tasks and flexible staffing arrangements, it often will not be feasible in the professions. Two average surgeons or CEOs or novelists or quarterbacks are often a poor substitute for a single gifted one. The result is that for positions for which additional talent has great value to the employer or the marketplace, there is no reason to expect that the market will compensate individuals in proportion to their human capital. For these positions—ones that confer the greatest leverage or “amplification” of human talent—small increments of talent have great value and may be greatly rewarded as a result of the normal competitive market process.
Technology has greatly extended the power and reach of the planet’s most gifted performers. The printing press let a relatively few gifted storytellers displace millions of village raconteurs. Now that we listen mostly to recorded music, the world’s best musicians can be everywhere at once. The electronic newswire has allowed a small number of syndicated columnists to displace a host of local journalists. And the proliferation of personal computers enabled a handful of software developers to replace thousands of tax accountants.
The dependence of economic reward on performance ranking is nothing new; what is new is the rapid erosion of the barriers that once prevented the top performers from serving broader markets. The global marketplace has been fostered by the reduction in trade barriers, vast improvements in information transmission and processing, the almost universal adoption of English as the language of business, and the emergence of a common popular culture.
Winner-take-all markets can be wasteful to the extent that they induce contestants for high rank to engage in costly and mutually offsetting investments to obtain positional advantage. In such cases, “positional arms control” schemes may reduce waste and improve economic efficiency. Such schemes range from market-specific policies, such as steroid bans for athletes and caps on the tax deductibility of executive compensation, to more general policies such as progressive income taxation.
Bibliography:
- Frank, Robert H., and Philip J. Cook. 1995. The Winner-Take-All Society. New York: Free Press.
- Marshall, Alfred. 1920. Principles of Economics. 8th ed. London: Macmillan.
- Rosen, Sherwin. 1981. The Economics of Superstars. American Economic Review 71 (5): 845–858
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