Depending on which economist you ask, big inequalities in wealth are either an essential engine for growth — the reward that motivates people to work hard, innovate, and prosper — or a ticking time bomb capable of unleashing mass misery, social upheaval, or even violent revolution.
Where do such massive differences in wealth come from? The positive narrative surrounding inequality might chalk them up to the talent and effort of high earners.
The distribution of wealth at the highest end of the scale is quite consistent with pure luck.
That coin-flip analogy does suggest a better way to differentiate between talent and luck: Instead of looking at specific individuals, look at the way wealth is distributed over the whole population at the high end of the wealth spectrum.
In the real world, in other words, the distribution of wealth at the highest end of the scale is quite consistent with pure luck.
If this is indeed the case-if the effects of talent are really so much smaller than the effects of luck at the high end of the wealth scale-then corporate boards might want to keep that fact in mind when setting the compensation plans for fund managers or CEOs: “Reward for performance” may actually be mostly a reward for luck.3, 4 Likewise when it comes to debates over raising taxes on the rich: The argument that this would be punishing talent might not hold.
Originally published at Cogly.
