Mind the Gap

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| May 2004When people care enough about something to do it well, those who
do it best tend to be far better than everyone else. There's a
huge gap between Leonardo and second-rate contemporaries like
Borgognone. You see the same gap between Raymond Chandler and the
average writer of detective novels. A top-ranked professional chess
player could play ten thousand games against an ordinary club player
without losing once.Like chess or painting or writing novels, making money is a very
specialized skill. But for some reason we treat this skill
differently. No one complains when a few people surpass all the
rest at playing chess or writing novels, but when a few people make
more money than the rest, we get editorials saying this is wrong.Why? The pattern of variation seems no different than for any other
skill. What causes people to react so strongly when the skill is
making money?I think there are three reasons we treat making money as different:
the misleading model of wealth we learn as children; the disreputable
way in which, till recently, most fortunes were accumulated; and
the worry that great variations in income are somehow bad for
society. As far as I can tell, the first is mistaken, the second
outdated, and the third empirically false. Could it be that, in a
modern democracy, variation in income is actually a sign of health?The Daddy Model of WealthWhen I was five I thought electricity was created by electric
sockets. I didn't realize there were power plants out there
generating it. Likewise, it doesn't occur to most kids that wealth
is something that has to be generated. It seems to be something
that flows from parents.Because of the circumstances in which they encounter it, children
tend to misunderstand wealth. They confuse it with money. They
think that there is a fixed amount of it. And they think of it as
something that's distributed by authorities (and so should be
distributed equally), rather than something that has to be created
(and might be created unequally).In fact, wealth is not money. Money is just a convenient way of
trading one form of wealth for another. Wealth is the underlying
stuff—the goods and services we buy. When you travel to a
rich or poor country, you don't have to look at people's bank
accounts to tell which kind you're in. You can see
wealth—in buildings and streets, in the clothes and the health
of the people.Where does wealth come from? People make it. This was easier to
grasp when most people lived on farms, and made many of the things
they wanted with their own hands. Then you could see in the house,
the herds, and the granary the wealth that each family created. It
was obvious then too that the wealth of the world was not a fixed
quantity that had to be shared out, like slices of a pie. If you
wanted more wealth, you could make it.This is just as true today, though few of us create wealth directly
for ourselves (except for a few vestigial domestic tasks). Mostly
we create wealth for other people in exchange for money, which we
then trade for the forms of wealth we want.
[1]Because kids are unable to create wealth, whatever they have has
to be given to them. And when wealth is something you're given,
then of course it seems that it should be distributed equally.
[2]
As in most families it is. The kids see to that. "Unfair," they
cry, when one sibling gets more than another.In the real world, you can't keep living off your parents. If you
want something, you either have to make it, or do something of
equivalent value for someone else, in order to get them to give you
enough money to buy it. In the real world, wealth is (except for
a few specialists like thieves and speculators) something you have
to create, not something that's distributed by Daddy. And since
the ability and desire to create it vary from person to person,
it's not made equally.You get paid by doing or making something people want, and those
who make more money are often simply better at doing what people
want. Top actors make a lot more money than B-list actors. The
B-list actors might be almost as charismatic, but when people go
to the theater and look at the list of movies playing, they want
that extra oomph that the big stars have.Doing what people want is not the only way to get money, of course.
You could also rob banks, or solicit bribes, or establish a monopoly.
Such tricks account for some variation in wealth, and indeed for
some of the biggest individual fortunes, but they are not the root
cause of variation in income. The root cause of variation in income,
as Occam's Razor implies, is the same as the root cause of variation
in every other human skill.In the United States, the CEO of a large public company makes about
100 times as much as the average person.
[3]
Basketball players
make about 128 times as much, and baseball players 72 times as much.
Editorials quote this kind of statistic with horror. But I have
no trouble imagining that one person could be 100 times as productive
as another. In ancient Rome the price of slaves varied by
a factor of 50 depending on their skills.
[4]
And that's without
considering motivation, or the extra leverage in productivity that
you can get from modern technology.Editorials about athletes' or CEOs' salaries remind me of early
Christian writers, arguing from first principles about whether the
Earth was round, when they could just walk outside and check.
[5]
How much someone's work is worth is not a policy question. It's
something the market already determines."Are they really worth 100 of us?" editorialists ask. Depends on
what you mean by worth. If you mean worth in the sense of what
people will pay for their skills, the answer is yes, apparently.A few CEOs' incomes reflect some kind of wrongdoing. But are there
not others whose incomes really do reflect the wealth they generate?
Steve Jobs saved a company that was in a terminal decline. And not
merely in the way a turnaround specialist does, by cutting costs;
he had to decide what Apple's next products should be. Few others
could have done it. And regardless of the case with CEOs, it's
hard to see how anyone could argue that the salaries of professional
basketball players don't reflect supply and demand.It may seem unlikely in principle that one individual could really
generate so much more wealth than another. The key to this mystery
is to revisit that question, are they really worth 100 of us?
Would a basketball team trade one of their players for 100
random people? What would Apple's next product look like if you
replaced Steve Jobs with a committee of 100 random people?
[6]
These
things don't scale linearly. Perhaps the CEO or the professional
athlete has only ten times (whatever that means) the skill and
determination of an ordinary person. But it makes all the difference
that it's concentrated in one individual.When we say that one kind of work is overpaid and another underpaid,
what are we really saying? In a free market, prices are determined
by what buyers want. People like baseball more than poetry, so
baseball players make more than poets. To say that a certain kind
of work is underpaid is thus identical with saying that people want
the wrong things.Well, of course people want the wrong things. It seems odd to be
surprised by that. And it seems even odder to say that it's
unjust that certain kinds of work are underpaid.
[7]
Then
you're saying that it's unjust that people want the wrong things.
It's lamentable that people prefer reality TV and corndogs to
Shakespeare and steamed vegetables, but unjust? That seems like
saying that blue is heavy, or that up is circular.The appearance of the word "unjust" here is the unmistakable spectral
signature of the Daddy Model. Why else would this idea occur in
this odd context? Whereas if the speaker were still operating on
the Daddy Model, and saw wealth as something that flowed from a

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