In 2003 Thomas Piketty and Emmanuel Saez introduced one of the more famous graphs in modern economics. Since updated to 2017, it looks like this:
Described verbally, the graph shows the time series of income inequality in the United states over a century, measured as the percent of all income accruing to those in the top 10% of the distribution. Once upon a time, this share was quite high. It dropped dramatically during World War II, a phenomenon often attributed to wartime wage and price controls. It then remained at a relatively steady and low level until sometime right around 1980, at which point the series reaches an inflection point and begins to rise. It's a rise less dramatic than the 1940s drop, but it has persisted for decades, to the point that inequality by this measure now exceeds that observed at any point in the last century.
What event precipitated the inflection around 1980? What broke the United States out of a nearly-four-decade period of stable, low inequality? There are theories. Reagan-era tax policy changes may have altered the distribution of reported income. Things like the decline of labor unions, the shrinking real value of the minimum wage, the rise in low-skilled immigration, international trade, skill-biased technological change, they come up. But can we peg them to that very clear turning point?
Let me pose another hypothesis: that inequality at the very top end of the income distribution began to rise because a prominent new scientific argument gave intellectual cover to those in a position to claim a greater share of the economy's spoils. What prominent new argument? Sherwin Rosen's classic paper, "The Economics of Superstars," published in the American Economic Review in 1981.
Let's take a step back. Economic theory suggests that in competitive labor markets, workers are paid the value of what they produce for their employer. The key word here being "competitive." Vast numbers of workers are not paid the value of what they produce. Take schoolteachers. Recent research suggests the value that high-performing teachers add to society might run more than a quarter-million dollars per year, based on the future outcomes of the students they teach. Yet the average teacher is paid closer to a fifth of that amount. The standard theoretical retort to this sort of observation goes back to the word "competitive." Labor markets may not, in fact, be competitive all the time. Teachers living in one location, for example, may discover that there's only one school system for which they might reasonably work.
There's a broader shortcoming to economic theory in the labor market, which posits that people must be paid to work because otherwise they would just consume leisure all the time. This argument disregards the key role that work plays in determining self-worth. People, in many cases, have a need to work and will do it for free if they can't find a way to be paid for it.
Set theory aside. The key point: in reality compensation reflects much more than the value of what one produces. It reflects bargaining power, social norms over what is acceptable, non-monetary aspects of employment like prestige, fringe benefits, and working conditions, and more.
Enter Rosen. The key argument of his paper: modern technology has produced scenarios where the very best performers in certain fields provide value to a vast number of people. Collecting even a small payment from each of them yields a very large reward. "Performer" being a key descriptor of the type of work being done. That word appears six times in Rosen's text. "Author" appears five times, "musician" three times (along with "violinist" and other such terms), "arts" appears twice, "athlete" appears twice (along with "football" and "basketball" once each).
"Businessman" appears just twice. Once in a footnote, and once in a concluding quotation taken from earlier work by Alfred Marshall. Rosen intended his idea to be applied in the main to occupations for which new technology had enabled a mass market to enjoy the work of the very best performers. The notion that the argument might apply to the very best chief executives or financiers appears nowhere in Rosen's own words.
Yet in the decades since the release of "The Economics of Superstars" the interpretation has shifted, to serve as an explanation for rising compensation of executives and other businessmen rather than performers more traditionally defined. A Google news search for the terms "Sherwin Rosen," "superstar" along with the word "musician" yields nine hits. Replace the word "musician" with the term "CEO," a term that appears nowhere in the original text, and the hit count quintuples.
So let me claim Rosen's work, which in the most charitable description thought of applications to business leadership only tangentially, was co-opted. Given the key role of social norms in determining what is an "acceptable" level of executive compensation, the scientific cover afforded by the argument that some leaders are, too, "superstars" may be part of the paradigm shift that clearly occurred after 1980. Recognize this: Rosen's work, referenced by many as an explanation for the phenomenon of escalating inequality, antedates what it is claimed to explain.
Maybe executives and financiers are indeed "superstars." The question then is this. What, in the technology of investing or corporate management, plays the role that television, radio, and other technologies played in Rosen's description of the performing arts? And how did that technology manage to emerge only after Rosen wrote his article? There's certainly an argument to be made that Rosen was merely prescient, rather than co-opted, though it should be said that the speculative commentary concluding his paper references "cable, video cassettes, and home computers" (p.857) rather than finance or corporate management. Any effort to distinguish prescience from co-optation would rest heavily on the answers to these two questions.
An intriguing final footnote: Rosen suggested (p.856) that the superstar theory should also apply to economists.
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