The paradox of superstars

The paradox of superstars
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What do Thomas Edison, Walt Disney, Warren Buffett, Michael Phelps, Steve Jobs, Elon MuskElon Reeve MuskMusk back on Twitter three days after giving it up We'll need a lot more billionaires to fund Bernie Sanders' 'Medicare for All' Trump's biggest impact on business has nothing to do with the economy MORE and Serena Williams have in common? They are all superstars in various fields — invention, movie-making, investing, Olympic gold medals, innovation, entrepreneurship and tennis grand slams. Their success reflects a fundamental generalization about human performance — that it’s not distributed normally. Rather, a few individuals are extremely successful (superstars) while the vast majority show zero success. The distribution of performance has a long right tail

A free market rewards such success with outstanding riches. As a result, a few individuals become extremely wealthy while the vast majority have modest wealth. This outcome seems extremely unfair. Politicians have railed against such inequity. A CEO’s $100 billion estate versus his employee’s $10 hourly pay is a powerful trope. Yet it assumes that such wealth accrued through luck or inheritance.

My extensive coauthored research in pioneering, startups, innovation and creativity suggests that such success flows from unusual talent, extreme effort, extraordinary risks and relentless persistence against failure. The explanation of luck is circular. It attributes success to the moment of success and ignores these prior factors. The explanation of inheritance ignores the fact that many of these superstars were immigrants or had humble starts.

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This is the paradox of extreme success: In any class of individuals with similar backgrounds, a few excel. While education enhances opportunity for all, equal education yields unequal results. Top universities recruit top students from high schools but still end up with a highly skewed distribution of performance with a few graduates who excel.

Further, contrary to expectations, my and others’ research finds that, in the U.S., immigrants account for billion-dollar startups as often as native-born citizens; outsiders routinely disrupt incumbents with new technologies; superstars do not beget superstars, at least in the same field. In sum, those un-endowed frequently upend those endowed. Thus, equal opportunities to perform create a few super stars, who win extreme rewards creating great inequity.

Critics of the wealth of superstars seem to undervalue not only their costs, risks and efforts but also the social benefits of their success. For example, Edison’s inventions of electricity, light bulb or phonographic record benefited millions of individuals. Steve Jobs’ iPhone created a revolution that has transformed multiple markets and has benefited billions, from rich brokers atop Wall Street to poor farmers in emerging markets. Measured against such benefits, the wealth of innovators is miniscule.

Yet the outcome of extreme distribution of wealth is troubling. How to deal with the inequity? The solutions are neither simple nor clear.

One simple solution is to ban all rewards for success. A society could live by the motto, “To each according to his needs, from each according to his abilities.” That principle was the foundation of the communist system of governments. The experiment was tried in the Soviet Union, pre 1978 Communist China, communist Eastern Europe and other countries. It failed. The reason is that it killed all incentive for effort, innovation and entrepreneurship. Sadly, some people in those nations became extremely wealthy. The reason is that the system rewarded politicians, bureaucrats or plain cheaters to game the laws and amass wealth. Instead of rewarding performance and effort, the system rewarded inefficient, costly opportunists and cheaters.

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A second solution is to limit or tax steeply the rewards of the successful. That experiment was also tried in socialist countries or some capitalist countries with tax rates in the 90 percent. That system did not work well because the wealthy found loopholes to avoid taxes. Rewards went to tax specialists, financial planners or plain cheaters who could game the tax code.

A third solution is to have a system that rewards creativity, innovation and entrepreneurship in an open and transparent system of rules. The current U.S. market approximates that system. It has resulted in a flowering of innovation, huge consumer benefits, creation of massive wealth, but also extreme distribution of wealth with a few highly successful winners. Critics claim that in the current high-tech environment, a winner-take-all, exaggerates these extremes. That is not correct.

Actually, new high-tech markets have created hundreds of thousands of new careers in which people can excel. These include design, hardware, software, mobile apps, e-tailing, blogging, social media and app-based services. In particular, the internet, digital economy and social media have democratized the entry of new firms, facilitating creativity, innovation and entrepreneurship as never before.

My coauthored research on 2,000 years of world history suggests that no past or current nation has generated so much innovation, startups and wealth as the current U.S. Most of the technologies that have transformed modern society have emerged in the U.S. The tempo is increasing not decreasing.

Yet, how to deal with the extreme wealth of superstars? The solution is not to deny, prevent or excessively tax such winners as in past experiments that failed. One potential solution is to incentivize such individuals to donate their wealth to public causes through naming rights and tax breaks. Another is to challenge such individuals to donate their wealth to creating replicas of themselves. A third is for wealthy business owners to offer bonuses and stock options to all employees, not just to managers. A fourth is to incentivize owners to rationalize the pay differential between the highest and lowest paid employees.

A free society will always have superstars who become super rich. The challenge is to spread the wealth without suppressing the opportunity to excel.

Dr. Gerard J. Tellis is director of the Center for Global Innovation, Neely Chair of American Enterprise and professor at the USC Marshall School of Business, LA. His past co-authored books include, Will and Vision: How Latecomers Grow to Dominate Markets and How Transformative Innovations Shaped the Rise of Nations: From Ancient Rome to Modern America and Effective Advertising and Social Media.