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The Narrowing Road to Easy Street : High earnings concentrated among an elite few : THE WINNER-TAKE-ALL SOCIETY, By Robert H. Frank and Philip J. Cook (Martin Kessler Books--The Free Press: $25; 272 pp.)

December 17, 1995|Lester C. Thurow | Lester C. Thurow is Lemelson Professor of Economics and Management, Massachusetts Institute of Technology. His book "The Future of Capitalism" is due out in spring

In America, earnings are being concentrated at the top of the earnings distribution chart at rates that have never before been seen. Among men, the top 1% has been getting about 70% of the country's total earnings gains.

"The Winner Take All Society" attempts to explain why. In the Frank-Cook view, new information technologies have created bigger unified worldwide markets where the very best can sell their services to a much larger number of people, where there are enormous economies of scale and where the public has come to want only the very best.

The best examples come in sports. With worldwide television, the paying audience for a boxing match is not limited to those who can fit into a stadium. The costs of putting a match on TV are the same regardless of how many people watch it. Those who watch boxing matches can now see the very best and they gradually come to want to see only the very best. As a result, there is a very small number of boxers who in one night can earn tens of millions of dollars. At the same time, no one is willing to go to the local arena to watch lesser boxers even if their talent is only slightly less.

For those few who win, success compounds. Advertisers who use celebrity endorsements want only the really famous. Those who make most of the money in the ring make all of the money out of the ring.

Combine these two factors and the very top make gargantuan earnings.

In the Frank-Cook view there are two downsides to this phenomenon. The distribution of earnings becomes much more unequal and too many resources are wasted by people chasing the mirage of the big prize.

When it comes to sports and entertainment, Frank and Cook just have to have their finger on a big part of the answer. What isn't so clear, however, is how the winner-take-all argument applies to business executives, lawyers and other professionals.

In some professions, such as investment banking, it is possible to make similar arguments. The same information technologies have replaced local capital markets with global capital markets. It doesn't cost any more to make big trades than small trades and clients have an interest in having firms with recognizable names that can serve their global needs.

But there are other professions, law being the best example, where technology has changed almost not at all becoming, if anything, more cumbersome. Yet the concentration of legal income is occurring at a pace equal to that in areas where new technologies are having completely understandable effects.

Looking at business executives, it also isn't clear that the winner-take-all effect is at work. In previous periods when management earnings exploded for a very small number of people--the Robber Baron eras in the late 19th century and the 1920s--it was possible to identify what was going on. In the first case, business firms learned how to create monopolies and those few who created them (Rockefeller, Carnegie, Morgan) became very rich and in the second case, the economies of scale of mass manufacturing made people like Ford and Sloan rich. This time there isn't anything equivalent. Earnings at the top have exploded right across the whole business community.

What has been left out of the Frank-Cook argument is an important piece of sociology. Most stars require a supporting cast. In the past, the stars believed that if their earnings differentials became too big, the supporting players would rebel, become very uncooperative (refuse to pass the ball to the star) and the star would be unable to function. But those attitudes seem to have died. Stars now demand much bigger compensation packages. That isn't surprising, but what is surprising is that the other team members seem to be content with their smaller compensation packages. They don't refuse to pass the ball. They don't sabotage the star.

That change in attitudes can clearly be seen in America's law firms. The "rain makers" are no longer willing to share the profits they generate with other members of the team. If one looks at law firms that dissolve, disputes about how earnings are to be shared are almost always the cause.

Among executives the same attitudes are visible. It is now acceptable to raise the boss' salary while at the same time firing people and lowering wages. Just a short time ago that wasn't done. Workers would have gone on strike and demanded wage increases to match those of the boss. But today workers either aren't in unions or unions have been so weakened that they can only acquiesce.

What, if anything, should be done? Frank and Cook recommend a series of "positional arms control" measures. The best existing example of a positional arms control measure would be the laws prohibiting polygamy. If the state requires monogamy, every man is guaranteed a chance to have a wife. If the state allowed polygamy, many men would have to go without wives since there would not be enough women to go around.

One can agree or disagree with what they recommend as cures, but they have to be right when, at the end of the book, they assert that the forces that are causing the distribution of earnings to grow much more unequal are only going to intensify in the future. Then the issue becomes: Does America do something or does it simply let events run their course to see how unequal earnings can become before the system fractures? The latter may be an interesting experiment (perhaps the system can take much lower incomes at the bottom and much higher incomes at the top) but it is also a dangerous experiment.

In any case, "The Winner-Take-All Society" coins a good term for what is occurring, focuses attention on what should be America's major domestic issue, explains at least part of what is happening and raises issues that should be at the forefront of everyone's attention.

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