Inequality and Occupy Wall Street 3: the top 1% are superstars

To explain the fact that the top 1% now take home a larger share of total earnings than they ever have since the 1940s Occupiers need to understand the economics of superstars.

Talent is unique. Or as the late University of Chicago economist Sherwin Rosen stated, “hearing a succession of mediocre singers does not add up to a single outstanding performance.” When he was at his best there was only one Wayne Gretzky, and I guess that is why they nicknamed him “the Great One.” To those of us listening to the opera, or watching the hockey game, the superstar is one-of-a-kind. And because there are no substitutes they get paid much more than even the second best.

This only explains that there is a top 1%, and that as the most talented they get paid a good deal more than the rest of us. It does not explain what has changed, why have they been taking away a bigger and bigger slice of the pie since about 1980.

Rosen’s other insight in a 1981 article published in the American Economic Review called “The Economics of Superstars” was that the farther a superstar’s talent could be projected, the greater the earnings. It doesn’t take more effort for a talented novelist to write a book that will be read by 10 people or by 10 million; singing an aria to a small theater or to the Metropolitan Opera House requires no more preparation; playing hockey in a small market like Edmonton is no harder than playing in Madison Square Garden, and certainly no harder if your performance is projected farther still on national television.

The bigger the market, the greater the revenues, and this is pure gravy since there are no big increases in costs of production or declines in the quality of the consumers’ experience.

Since the 1980s globalization and changes in technology have, in fact, permitted superstars to command a larger and larger market. Writing in 1981 Rosen whimsically wondered about “what changes in the future will be wrought by cable, video cassettes, and home computers?” The digital revolution has not only decreased the costs of providing the services we enjoy, it has also increased the size of the audience an individual performer can attract. That is the reality we are living: everyone now has the opportunity to listen, watch, or to read the best in a way that was not possible only thirty years ago.

This applies not just to entertainers but also to the providers of all kinds of professional services—including lawyers, CEOs and the managers of hedge funds—allowing them to attract larger national and indeed global markets.

The top 1% are more talented and merit their earnings because we value in a unique way what they do, or so the story goes. At the same time changes in technology and market size have amplified their incomes in ways not seen for generations.

But where does this talent come from? And are there other ways of getting into the top 1%? If so, is the playing field level and do we all have the chance of getting there?

In future posts I will address these questions because they also bear on the issue of merit.