Winner take-all economics

Ezra Klein writes:

The top 1 percent, for instance, has gone from capturing about 8 percent of the
national income to 18 percent. But there's no obvious skills differential
between workers in the top 1 percent and the workers directly beneath them. It's
not like hedge fund managers are the only guys able to use Excel.

In a winner-take all economy, however, small differences in skills can mean large differences in returns and we have moved towards a winner take-all economy because technology has increased the size of the market that can be served by a single person or firm.  Sherwin Rosen laid this out in a 1981 classic, The Economics of Superstars and Robert Frank and Robin Cook have a good popular account, The Winner Take All Society.  Here is how I explained it a few years ago in a post titled Harry Potter and the Mystery of Inequality.

J.K. Rowling is the first author in the history of the world to earn a billion dollars
I do not disparage Rowling when I say that talent is not the
explanation for her monetary success.  Homer, Shakespeare and Tolkien
all earned much less.  Why?  Consider Homer, he told great stories but
he could earn no more in a night than say 50 people might pay for an
evening's entertainment.  Shakespeare did a little better.  The Globe theater could hold 3000 and unlike Homer, Shakespeare didn't have to be at the theater to earn.  Shakespeare's words were leveraged.

Tolkien's words were leveraged further. By selling books Tolkien
could sell to hundreds of thousands, even millions of buyers in a year
– more than have ever seen a Shakespeare play in 400 years.  And books
were cheaper to produce than actors which meant that Tolkien could earn
a greater share of the revenues than did Shakespeare (Shakespeare
incidentally also owned shares in the Globe.)

Rowling has the leverage of the book but also the movie, the video
game, and the toy.  And globalization, both economic and cultural,
means that Rowling's words, images, and products are translated,
transmitted and transported everywhere – this is the real magic of Ha-li Bo-te.

Rowling's success brings with it inequality. 
Time is limited and people want to read the same books that their
friends are reading so book publishing has a winner-take all
component.  Thus, greater leverage brings greater inequality.  The
average writer's income hasn't gone up much in the past thirty years
but today, for the first time ever, a handful of writers can be
multi-millionaires and even billionaires.  The top pulls away from the

The same forces that have generated greater
inequality in writing – the leveraging of intellect, the declining
importance of physical labor in the production of value, cultural and
economic globalization – are at work throughout the economy.  Thus, if
you really want to understand inequality today you must first
understand Harry Potter.

Hat tip to Matt Yglesias who understands the issue and points out how it applies to newspapers.


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