In his 1981 paper entitled “The Economics of Superstars” economist Sherwin Rosen put forth the idea that technological innovation combined with increasingly global markets would allow industry leaders, i.e., “superstars,” to capture outsized returns1. By being able to replicate their competitive advantage at such a low marginal cost they’d be able to out-compete all other market participants. From the music industry to sports and finance we can certainly find evidence of this trend.
As a result of this competitive dynamic extreme inequality often emerges; CEOs in the US earn on average 273 times the average worker, and the pay going to the top 1% of pop musicians has increased from 26% to 56% in just 30 years2,3. On average each of these industries may be faring slightly better or worse than average, but the distribution has clearly skewed. Left unaddressed this gap can grow unabated – the “superstar” is able to reinvest their gains into developing their competitive advantage, further distancing themselves from others in the market.
Is this growing inequality, instigated by technology and globalization, our destiny? The answer is far from clear. Aside from the academic and technical debates about whether or not the creative destruction experienced in the short-term can be overcome by newly realized gains, it’s also possible that the same factors that led to the creation of industry superstars could be the same factors that lead to their demise.
The “superstar” should not be regarded in isolation. Those who produce the technology that enables superstars to profit also have incentives, and often that means reaching as broad of an audience as possible. The result: a greater segment of the population is “enabled” to achieve skill parity with the current superstars. As a result, the lifespan of superstars should shorten as their competitive advantage becomes more vulnerable.
Consider for instance the current consumer technology landscape. The effort required to bring a product to market is incomparable to that of five or ten years ago – new entrants no longer need to know how to code the entire technology stack; instead, they can rely on a number of other specialized providers to trade money for resources and spend more time focused on the truly differentiating factors, such as product design and user experience. Google, the clear “superstar” of the online search world, faces threats from all sides by niche competitors, almost all of whom leverage others’ investments in infrastructure technology. Similar dynamics are occurring in other fields long dominated by industry leaders – law firms and financial advisors’s margins are being squeezed by the likes of Legalzoom and Covestor who are able to compete courtesy the efficiency gained by technology and automation.
The presence of a second superstar in an industry can have profound impact. To maintain their edge significantly more effort and investment is required, be it research and development, training or “giving” profits away in the form of price cuts, additional features, improved service, etc. This investment “arms race” results in increased demand for tangential products and services, spreading value around the industry by means other than forced redistribution (i.e., taxes).
So if the presence of multiple industry superstars at least partly reduces the negative impacts brought about by technology and innovation, how can this situation be encouraged?
Foundational Education In addition to teaching technical fundamentals there should also be emphasis placed on non-technical subjects that address philosophical and human behavior topics – these are both less likely to be automated and will also be increasingly important as the technology component becomes commoditized. Differentiation in the future will be just as much about the user experience and design as it is about technical prowess.
Marc Andreessen, one of the early internet pioneers and a successful venture capitalist, remarked that in the future there will be two types of people: those who tell the computer what to do and those whom the computer tells what to do4. Telling the computer what to do goes well beyond the technical coding and extends to areas such as how it will be used by the end user and what role it plays in their life. Technology will become so interwoven into other fields that it will cease to be thought of separately; thus, understanding these other fields will be just as important. Steve Jobs famously attributes much of his career success to a calligraphy class he took while at Stanford, and this attention to design detail went on to be core to Apple’s rise – who knows what will inspire tomorrow’s superstar.
It should also go without saying that ensuring equal access to education is paramount to minimizing the reenforcing nature of superstars.
Distributed Investment Besides superior skill, large investment hurdles also reduce competition and reinforce the unequal returns superstars earn. Lowering this barrier is critical to unleashing new potential superstars on an industry. Private investments, such as open-source software and corporate joint-ventures, as well as public investments, like the Human Genome Project and the recently announced plan to map the human brain, should be supported as they can distribute the upfront investment costs required to compete.
If tax breaks are given to individuals and companies for donating resources to a very specific cause, why not institute a similar policy to those who “donate” their services to society at large? Enabling smaller players in this fashion promotes healthier marketplace competition and levels the playing field, hopefully lessening off the need for charitable organizations and safety nets.
Forward-Looking Safety Nets Creative destruction is a painful but inevitable and necessary process. While the long-term outcomes are almost always beneficial, in the short-term there are bound to be “losers.” Safety nets should be designed in such a way to accept that this process is natural and be forward-looking, rather than try to preserve the status quo.
Incentives aimed at retraining and hiring affected workers in growing fields should be core parts of any safety net. While these programs have historically had a mixed track record, “77% of those who received training through the federal dislocated-worker program had jobs within three months of finishing,” compared with only 53% who “received other services through the Workforce Investment Act, such as resume help and job-search assistance”5. Often the biggest determinant of whether or not an individual lands a job after such training is the health of the overall economy, meaning that countercyclical programs and hiring incentives are essential.
To pronounce judgement on technology and automation, be it in a positive or negative light, skirts the fact that in many respects it is inevitable; individuals and companies will always look for ways to lessen the effort or cost required to perform a particular task. Therefore, the dialogue must shift towards how to deal with its side effects, rather than how to prevent its negative effects in the first place. Using market forces to level the playing field and lessen the outsized gains superstars earn compared to the average worker is a necessary step towards a more functional and egalitarian economy.
1 “The Economics of Superstars” Sherwin Rosen The American Economic Review Vol. 71, No. 5 (Dec., 1981), pp. 845-858 2 “Congrats, CEOs! You’re making 273 times the pay of the average worker.” Lydia DePillis The Washington Post June 26, 2013 3 “How Superstars’ Pay Stifles Everyone Else” Eduardo Porter The New York Times, adapted from his book The Price of Everything: Solving the Mystery of Why We Pay What We Do December 25, 2010 4 “Jobs, Productivity and the Great Decoupling” ERIK BRYNJOLFSSON and ANDREW McAFEE The New York Times December 11, 2012 5 “U.S. Faces Uphill Battle in Retraining the Jobless” IANTHE JEANNE DUGAN and JUSTIN SCHECK The Wall Street Journal August 1, 2012