The Winner-Take-All Society.

Walker, Douglas M.

By Robert H. Frank and Philip J. Cook. New York: The Free Press, 1995. Pp. x, 272. $25.00.

Professors Frank and Cook describe what they consider to be an increasingly serious problem in the US. economy -- "winner-take-all" (WTA) markets. The first half of their book describes examples of this type of market, one in which very few participants are "successful." Those who do find material success do so in a big way, while the other participants receive little or no pecuniary reward for their efforts. Examples of WTA makets include professional sports, art, acting and music, the legal profession, and corporate management.

The authors argue that even when prospective WTA market participants correctly estimate the risk-adjusted net benefits of WTA work, too many people -- from a social perspective -- participate in those markets. Many of the WTA market participants could have alternatively been producing valuable goods or services in some other industry, and hence, national income is lower than it otherwise would have been [pp. 8-9].

The authors fail to give a convincing theoretical explanation of why we should consider WTA market participation socially wasteful. Workers choose to work in the industry which they expect will make them best-off. Market wages, to an extent, reflect the relative social value of output from each industry. But to argue that national income is lower than it could have been if some had chosen different careers is trivial -- and in no way does it imply social waste.

Salary is not the only important factor in choosing a career, and national income is not the only measure of social welfare. Is it correct to label it "socially wasteful" for someone to play basketball on high-school and college teams, with the hope of reaching the NBA? Perhaps that person enjoys playing basketball. Frank and Cook characterize an activity as socially wasteful if it does not immediately increase tangible goods output in an economy. (Interestingly, in his book Passions Within Reason [1988], Frank argues that in many situations, non-pecuniary incentives are more important than money. He seems to have changed his mind.)

Another major focus of The Winner-Take-All Society is the importance of relative living standards (i.e., positional "arms races") compared to absolute ones. While people certainly make some decisions based on what others do (i.e., keeping up with the Joneses), Prank and Cook seem to overstate the importance of this motivation:

Beyond some threshold, spending tends to be concentrated on second homes,

premium automobiles, jewelry, and other luxury items. Since the satisfaction

afforded by these items is largely social, or positional,

in nature, little would be sacrificed if there were an across-the-board

reduction in luxury consumption. If, for example, overall spending on

luxury automobiles were to decline, the satisfaction from driving a

relatively' high-qualify automobile would remain largely the same [p. 2151.

The authors ignore the fact that the hope of having the means to purchase second homes and premium automobiles is a strong incentive to work hard. People buy luxury goods for many reasons -- who is to determine which purchases are legitimate and which are "wasteful"? Would Frank and Cook object to my buying a $70 Claiborne shirt when I could buy a shirt for $5 at Wal-Mart? Is this an example of "positional consumption" that should be discouraged?

In arguing for government intervention to deter "excessive" positional consumption, the authors explain that WTA markets are not easily influenced by citizens:

Still less under any individual's control are the contents of books,

movies, and television

programs. We are free to choose, of course, from the existing menu of

items. But as

individuals we have virtually no control

over the contents of that menu [p. 205].

But, how can the authors expect our government to do a good job in determining the relative wastefulness of consumption, when to many people the government is a prototype of wasteful spending?

Frank and Cook point to flaws in the market process and suggest action to slow the growth of WTA markets:

Whereas free marketeers maintain that market incentives lead to socially

efficient results, our claim is that winner-take-all markets attract too many

contestants, result in inefficient patterns of consumption and investment,

and often degrade our culture. If these costs are to be avoided, firms and

individuals must somehow be restrained from taking advantage of readily

available profit opportunities [p. 19].

But market forces are not necessarily to blame. Competition, for example, also occurs in many non-market institutions. Two cases that receive substantial attention are university teaching and the legal profession. Neither of these institutions is the result solely of market forces. Although the authors cite the legal profession as one of the worst WTA markets, they call on its close associate, the federal government, to "correct" market incentives. The most effective policies for discouraging participation in WTA markets and the purchase of positional goods, in their opinion, are more progressive income taxes or, even better, progressive consumption taxes (i.e., luxury taxes).

Toward the beginning of the book, Frank and Cook write, "The critics of communism were right all along: The allocation of talent by central bureaucracy is a recipe for economic disaster" [p. 7]. Yet, this is exactly what the authors propose with their high taxes on WTA market winners: ". . . the effect of taxing the highest incomes in winner-take-all markets is to reduce the allocation of labor to such markets; and this, we have seen, tends to increase society's total income" [p. 123].

Although Frank and Cook offer little empirical support, their arguments are well-presented and will sound plausible to the careless reader. Their purpose, it seems, is to create yet another "market failure" requiring higher taxes. Prospective readers of The Winner-Take-All Society should consider some other, more socially productive, use of their time.