The “Markets” for Top “Talent”
posted by Frank Pasquale
The stories we tell ourselves about inequality matter. As incomes of the top 0.1% and top 0.01% grow ever more stratospheric, “low wage workers are paid less now than they were from the 1950s-1970s.” Is this just, as Steve Schwartzman suggests, the natural consequence of globalization? Tim Harford suggested as much in the FT last week:
The uncomfortable truth is that market forces – that is, the result of freely agreed contracts – are probably behind much of the rise in inequality. Globalisation and technological change favour the highly skilled. . . . [A]t the very top, winner-take-all markets are emerging, where the best or luckiest entrepreneurs, fund managers, authors or athletes hoover up most of the gains.
The most important word in that paragraph is “luckiest.” What deserves comment is Harford’s argument that “freely agreed contracts” are deciding who is “hoovering up” the most. He elaborates a bit later:
Worried that chief executives are filling their boots thanks to the weak governance of publicly listed companies? So am I, but partners in law firms are also doing very nicely, as are the bosses of privately owned companies, as are the managers of hedge funds, as are top sports stars. Governance arrangements in each case are different.
Let’s start with the law firm partners. There is a classic division in any firm: minders, grinders, and finders (respectively, the brilliant, hard-working, and well-connected attorneys). If we looked hard at partner pay, we may well find that the “finders” of business—those with good connections to wealthy clients—are taking a bigger slice of the pie. There are lots of brilliant attorneys, but there are not many who went to Eton or Andover with MegaCorp’s general counsel. Harford worries about excess “intergenerational transmission” of privilege now and in the future, but why not acknowledge how much of it occurred in the past? Moreover, why attribute the networks of privilege among the connected to “contract,” when filaments of culture and status are what really bind them? We need sociology and anthropology here as much as economics.
What about top sports stars—a favorite “macho” comparison among defenders of the status quo? Most are the indirect beneficiaries of rent-seeking by content owners and cable near-monopolies. Just as insurers and big health care providers can gradually ratchet up revenues together because of their concentration relative to the employers purchasing coverage for employees, the content owners and conduits do the same. They may be “freely agreeing” to contract, but try to tell your cable provider that you don’t want ESPN. That deal is take it or leave it.
What about the hedge funds? Certainly that must be one last bastion of rugged capitalist individualism? Depends on the hedge fund we’re talking about. Where is it getting its funding? What contacts with industry does it have? Do those with an inside track at the Fed think of the fund as “too big to fail?” As in much of finance, perceptions can become reality, and the contracts between the fund manager and investors are made in the shadow of an array of institutions either directly or indirectly succored by the state or the Fed.
Harford deserves credit for noting just how rigged executive compensation is. He also recognizes how socially corrosive the hyperinequality of the US and UK will be in the future, as past “winners” arrange educational and business opportunities into fiefdoms of self-perpetuating privilege. But look into the history behind today’s top earners, and the very things Harford sees as threats to opportunity in coming decades are clear features of the past. The future is now.
Photo Credit: Dan Ancona.