Yesterday I wrote about startup wealth and randomness and got a lot of good comments. One of them led me to an important way of summarizing my argument about the role of randomness:
If the world were a simulation and you ran it many times, you would see a company like WhatsApp emerge many times. But only a few of the runs would have the same founders (ditto for the name of the company, the exact implementation, etc)
While I wrote the post specifically about startup founders, employees and investors, I believe the same is true for many other top earners including corporate managers, artists, athletes, etc. For instance, someone takes on a difficult project inside a company and succeeds, setting off a steep career ascend culminating in a CEO position. If you looked at multiple “runs” of the world there are some (possibly many) in which the project fails and the person is fired – even if they are the same person and put in the same effort.
Because the economy is increasingly global with less friction for commerce (virtually none for say apps), we are winding up with power law distributions for outcomes. This is quite different from when local businesses dominated. If you made shoes, even very good shoes, in a pre-industrial world you might make more than the next shoe maker but not a lot more. So the distribution of shoe maker income was likely close to a normal distribution. Compare that to say the game app economy – if you write a successful game app it can be several orders of magnitude bigger. And so there we have a power law distribution.
Why am I writing about this? Because it is an important component of the transition from an industrial society to an information society. And because the old solutions, such as high inheritance taxes, won’t work well in a world of increased mobility and I also don’t believe in feeding existing government structures. More of this in future posts.
