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It's not profits that will drop to zero, it's economic profits. That includes implicit costs, which are excluded by accounting profits. http://www.investopedia

It's not profits that will drop to zero, it's economic profits. That includes implicit costs, which are excluded by accounting profits. http://www.investopedia.com/ask/answers/033015/what-difference-between-economic-profit-and-accounting-profit.asp http://www.investopedia.com/ask/answers/033015/what-differen... Of course, this is irrelevant to a graph of market income. Market income simply reflects how scarce certain skillsets are, income is not profit. The answer of why people aren't riding the elephants back onto the trunk might simply be because they can't - the implicit costs are too high. For example, suppose I gave you $1M to spend. Could you turn a nurse into a top trader, managing a $50M book? What if I gave you $2M? One very interesting theory about why this increase is happening now is the headhunter theory: historically, oligopolistic corporations were keeping pay down for the highest productivity employees. Now, as the market has become more competitive, executives/traders/high end developers/etc are better able to capture a larger piece of their true economic value. https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=EEAESEM2016&paper_id=1093 https://editorialexpress.com/cgi-bin/conference/download.cgi...

clavalle 10y ago
Can income be considered a type of profit in this context? I'm not an expert, but at first blush the term 'implicit costs' seems to be so much handwaving. I'm sure there is something concrete there somewhere but to just say 'Well these top earners naturally far outstrip other people and maintain that position over long periods of time without anyone jumping onto their boat because of implicit costs' seems a bit too magical to be useful.
- yummyfajitas 10y ago
  No, income is not profit. It's just the price of a good. There is no economic law that the price of gold should fall to the same price as other metals. Rather, economics says that if gold mining is a competitive industry, gold production will increase until the economic profit on producing more drops to the same level as economic profits in all other productive directions. Concretely, to understand why top earners outstrip others, it's important to figure out who they are. A lot of them are traders. A trader earning $20M/year makes that much because his trading desk produces $200M/year for the hedge fund he works for, and because no one else can. Now, suppose you want to take a nurse making $40k/year and bring her up to the trader's level. Suppose I give you $500k. Do you think you can do it? Concretely speaking, and without handwaving, what would you spend the money on? A harvard education (using up $240k already) is far from sufficient. Forget even bringing her into the 0.1%. How much money would you need to spend, and what would you spend it on, for her to reliably become a mid-level developer earning $200k/year? The implicit costs are hard to pin down. But when you ask how to move a specific person into a specific 1% or even 10% job, it suddenly becomes a lot clearer why this is hard.
  - clavalle 10y ago
    >Now, suppose you want to take a nurse making $40k/year and bring her up to the trader's level. Suppose I give you $500k. Do you think you can do it? Concretely speaking, and without handwaving, what would you spend the money on? A harvard education (using up $240k already) is far from sufficient. First, I'd spend a sizable amount attracting and testing nurses to find one with sufficient mathematical aptitude and motivation. We're not really talking about any random person from a population but whether a particular type of person exists in that group. If I could catch a person who would become a nurse earlier (assuming some aptitude and motivation in the desired direction) and train them to be a trader or a developer it could be cheaper -- not so much wasted time learning skills that would not be applicable. You seem to assume that people end up fulfilling their full earning aptitude and, if they are at the 'level' of a nurse, they are obviously not cut out for something more rarefied. You might be right, but I don't think it is wise to assume the end result, simply because it is the result that occurred, is proof that is the optimal result. If we assume that $20M/year traders are the ones skewing the data on the right side of the graph, the question is what is keeping others from entering that field and competing? I really don't think 'raw aptitude' is the ultimate answer. I don't have an answer, and that is my point -- we need to explore why such a deep moat exists and what we can do to drain it. If there are implicit costs that reduce the economic profit so that it is so divorced from accounting profit, what are they and can they be reduced? I don't think we can assume that all is as it should be and move on.
    - yummyfajitas 10y ago
      You seem to assume that people end up fulfilling their full earning aptitude and, if they are at the 'level' of a nurse, they are obviously not cut out for something more rarefied. I'm not assuming this at all. I'm just trying to illustrate that implicit costs are real, you just can't necessarily see what they are without delving into very concrete programs. E.g., running your gigantic screening program, the training program for folks with high aptitude who pass the screening, the ones who flunk out of the training program, etc. If you recall, tptacek and patio11 recently started a startup (starfighter) trying to do something along those lines. They've now moved on to something else. Now I don't think every single person with aptitude is already there - Zoho University demonstrates this pretty well. But I think exploiting the high hanging fruit is a lot harder than you think. If we assume that $20M/year traders are the ones skewing the data on the right side of the graph, the question is what is keeping others from entering that field and competing? Nothing. Trading is one of the most open, meritocratic and low barrier to entry fields out there. Just google how easy it is to get a Robin Hood or Interactive Brokers account [1]. In terms of barrier to entry, it's far lower than something like building a SAAS app. The only thing that prevents more people from doing it is the fact that predicting the future is hard. [1] I have an IB account, it took a couple of weeks to set everything up. I'm good at predicting the future, e.g. here's me publicly talking up my book (currently up 15%): https://twitter.com/stucchio/status/747493530277294082 https://twitter.com/stucchio/status/747493530277294082 But I'm not $20M/year good.

clavalle 10y ago

Can income be considered a type of profit in this context? I'm not an expert, but at first blush the term 'implicit costs' seems to be so much handwaving. I'm sure there is something concrete there somewhere but to just say 'Well these top earners naturally far outstrip other people and maintain that position over long periods of time without anyone jumping onto their boat because of implicit costs' seems a bit too magical to be useful.

yummyfajitas 10y ago
No, income is not profit. It's just the price of a good. There is no economic law that the price of gold should fall to the same price as other metals. Rather, economics says that if gold mining is a competitive industry, gold production will increase until the economic profit on producing more drops to the same level as economic profits in all other productive directions. Concretely, to understand why top earners outstrip others, it's important to figure out who they are. A lot of them are traders. A trader earning $20M/year makes that much because his trading desk produces $200M/year for the hedge fund he works for, and because no one else can. Now, suppose you want to take a nurse making $40k/year and bring her up to the trader's level. Suppose I give you $500k. Do you think you can do it? Concretely speaking, and without handwaving, what would you spend the money on? A harvard education (using up $240k already) is far from sufficient. Forget even bringing her into the 0.1%. How much money would you need to spend, and what would you spend it on, for her to reliably become a mid-level developer earning $200k/year? The implicit costs are hard to pin down. But when you ask how to move a specific person into a specific 1% or even 10% job, it suddenly becomes a lot clearer why this is hard.
- clavalle 10y ago
  >Now, suppose you want to take a nurse making $40k/year and bring her up to the trader's level. Suppose I give you $500k. Do you think you can do it? Concretely speaking, and without handwaving, what would you spend the money on? A harvard education (using up $240k already) is far from sufficient. First, I'd spend a sizable amount attracting and testing nurses to find one with sufficient mathematical aptitude and motivation. We're not really talking about any random person from a population but whether a particular type of person exists in that group. If I could catch a person who would become a nurse earlier (assuming some aptitude and motivation in the desired direction) and train them to be a trader or a developer it could be cheaper -- not so much wasted time learning skills that would not be applicable. You seem to assume that people end up fulfilling their full earning aptitude and, if they are at the 'level' of a nurse, they are obviously not cut out for something more rarefied. You might be right, but I don't think it is wise to assume the end result, simply because it is the result that occurred, is proof that is the optimal result. If we assume that $20M/year traders are the ones skewing the data on the right side of the graph, the question is what is keeping others from entering that field and competing? I really don't think 'raw aptitude' is the ultimate answer. I don't have an answer, and that is my point -- we need to explore why such a deep moat exists and what we can do to drain it. If there are implicit costs that reduce the economic profit so that it is so divorced from accounting profit, what are they and can they be reduced? I don't think we can assume that all is as it should be and move on.
  - yummyfajitas 10y ago
    You seem to assume that people end up fulfilling their full earning aptitude and, if they are at the 'level' of a nurse, they are obviously not cut out for something more rarefied. I'm not assuming this at all. I'm just trying to illustrate that implicit costs are real, you just can't necessarily see what they are without delving into very concrete programs. E.g., running your gigantic screening program, the training program for folks with high aptitude who pass the screening, the ones who flunk out of the training program, etc. If you recall, tptacek and patio11 recently started a startup (starfighter) trying to do something along those lines. They've now moved on to something else. Now I don't think every single person with aptitude is already there - Zoho University demonstrates this pretty well. But I think exploiting the high hanging fruit is a lot harder than you think. If we assume that $20M/year traders are the ones skewing the data on the right side of the graph, the question is what is keeping others from entering that field and competing? Nothing. Trading is one of the most open, meritocratic and low barrier to entry fields out there. Just google how easy it is to get a Robin Hood or Interactive Brokers account [1]. In terms of barrier to entry, it's far lower than something like building a SAAS app. The only thing that prevents more people from doing it is the fact that predicting the future is hard. [1] I have an IB account, it took a couple of weeks to set everything up. I'm good at predicting the future, e.g. here's me publicly talking up my book (currently up 15%): https://twitter.com/stucchio/status/747493530277294082 https://twitter.com/stucchio/status/747493530277294082 But I'm not $20M/year good.