My latest column for The Daily offers a framework for understanding how advanced economies are evolving:
In 1993, the economist Michael Kremer published “The O-Ring Theory of Economic Development,” a groundbreaking paper that advanced a deceptively simple premise. The title refers to the space shuttle Challenger, which disintegrated when its rubber O-rings failed to function as intended. One design flaw in a vehicle with thousands of components was enough to destroy the whole shebang, and the result was a national tragedy.
In an advanced economy, a larger and larger share of value is created in just this kind of highly complex production process, which requires the successful completion of hundreds or even thousands of tasks. Even something as basic as a pair of pants might move across half a dozen factories in as many countries, and any imperfection will doom said garment to the bargain basement. Mistakes are extremely expensive. And so mistakes are unacceptable. If this is true of the manufacture of garments, it is even more true when it comes to, say, coding a financial application that could make or break a startup.
If we think of a highly skilled worker as someone who is likely to complete a task successfully, it is easy to see why firms that sell complex, valuable goods and services will only want to hire such highly skilled workers. A firm that successfully manages to hire only the best of the best, understood as workers who are exceptionally good at completing difficult tasks, will prove vastly more successful than a firm that has even a few weak performers. The same worker will be more productive as a member of Team Awesome rather than Team Awful, and she’ll make more money, too. The firms, the sectors and indeed the countries with the highest concentration of highly skilled workers will race ahead of those without them, as skilled workers learn from each other, getting better more quickly in the process. The skilled get more skilled. So the next time you think that your salary is entirely a product of your own effort, remember that much depends on the team, including the national team, of which you happen to be a member.
One can imagine a firm deciding to invest a lot of time and effort in helping a C+ worker become a B- and eventually an A+. But that is time-consuming and expensive, it means that mistakes will be made in the meantime, and there is no guarantee that a worker who starts out as a C+ will ever become an A+ worker. The deck is stacked in favor of hiring A+ workers in the first place and paying them handsomely to keep them from jumping ship.
Is this kind of unfair? Well, yes, of course it is. It is a safe bet that A+ workers tend to have all kinds of advantages that C+ workers don’t. Many A+ surfers grew up in expensive beach resorts with loving, supportive parents who indulged their every whim. An A+ programmer like Mark Zuckerberg grew up upper-middle-class in the suburbs of New York, where his parents gave him every leg up they could. It is galling that A+ workers working with other A+ workers get better more quickly, while C+ workers are allowed to languish in third- and fourth-rate firms, where they don’t have the benefit of absorbing talent from others. Yet this profound unfairness doesn’t change the fact that mistakes are extremely expensive. The Zyngas and the Googles of the world aren’t going to start hiring C+ workers because it is the right thing to do, and forcing them to do so would be enormously counterproductive.
I hope you’ll take a look.