Professor Robert Frank writes in the New York Times that “recent experiments suggest that chance events may influence market outcomes far more heavily than previously thought.” He cites sociology experiments which show that random chance is influential in determining the popularity of downloaded music. The “best” songs in the study (based on earlier surveys) weren’t always the most popular. The fact that chance may be an important component of commercial success is important to Frank because in his view “many conservatives celebrate market success as an almost inevitable consequence of talent and effort.”
Professor Frank concludes that “the fate of products in general … often entails an enormous amount of luck.” This statement is likely to reinforce the views of liberal New York Times readers who believe that high incomes are largely the result of good fortune and should therefore be taxed and redistributed to lower-income earners. The belief that higher marginal tax rates can discourage hard work and investment but has no effect on Lady Luck makes policies for income redistribution more palatable.
First, Professor Frank’s conclusion that luck is often enormously important for success is just his opinion and not a finding of empirical economic research. Second, readers should be cautioned that even if luck does play an “enormous” role in determining success, all else equal, this says nothing about optimal tax policy. Higher marginal rates can discourage hard work, investment and success even in Professor Frank’s world where luck plays a very important role, at the margin, in determining winners and losers.
Consider Michael Phelps’ success in the Olympics. In the 100m butterfly in 2008 in Beijing, Phelps beat Serbia’s Milorad Cavic by one one-hundredths of a second. The race is featured prominently in a Visa ad, narrated by Morgan Freeman. The ad recognizes Phelps’ good fortune noting that the difference between seven and eight gold medals, and a place in Olympic history was due to winning by less than the time it takes for lightning to strike. The ad also asks what might happen if lightning were to strike again in 2012? In the 200m butterfly last week Phelps was beaten by South Africa’s Chad Le Clos by just five one-hundredths of a second.
Luck played a role in both Olympic races, once to Phelps’ advantage and once to his detriment, and may have been the most important factor, on the day of the race, for determining who received the gold medal. But the fact that Phelps, Cavic and Le Clos were competing in an Olympics final was due much more to their talent and hard work than to luck. Yet if Professor Frank were to study competition among top athletes and find that the “best” athlete doesn’t always win, he might erroneously conclude that luck is the most important factor for athletic success.
The fact that luck can play an important role in a competition between two equally matched opponents says nothing about the hard work, effort, and commitment it takes to be in a position where a competitor can take advantage of opportunities and succeed (even if it means benefiting from pure luck). Talent and hard work are necessary, but not sufficient, factors for success. Had Phelps, Cavic, or Le Clos not trained hard and prepared for their races, they could not have been the beneficiaries of luck.
Labor economists have long recognized that luck can be the key determinant of success among competitors, yet higher taxes on lucky winners can reduce effort, output, and social welfare. Over thirty years ago Sherwin Rosen and Ed Lazear (former head of George W. Bush’s Council of Economic Advisors) wrote a paper describing how some labor contracts can be viewed as tournaments. In their study the effort put forth by each competitor depends on the difference between winning and losing prizes; the larger the return to winning the more effort each competitor exerts. In the end, if competitors have prepared equally and are equally talented, the winner is determined by random chance. The fact that the winner was determined by pure luck does not mean that a tax on the winning prize has no effect. Everyone will prepare less and exert less effort if the winning prize is expected to be just slightly larger than the losing prize.
Professor Frank believes that the sociology research he cites “provides an important moral lesson” that successful people “might also do well to remain more humbly mindful of their own good fortune.” I agree that humility is a virtue, but believe that good fortune and luck are more valuable to those who have worked hard and remain committed to their craft. As I watch the Olympics and am entertained by some of the most successful athletes in the world, I am impressed by their commitment, dedication and effort and not how lucky they have been. I feel the same way when I encounter people who are successful in other endeavors; they nearly always are among the most committed and hard-working people in their field. However, because success inevitably depends on some luck, (to quote W. E. Hickson), “if at first you don’t succeed, try, try again.”