How Well Do Differences in Human Capital Explain Incomes?

How well do differences in human capital explain those differences in incomes across the distribution? That's the primary economic model of earnings differences. Why do some people earn more than others? It's because they have more human capital, which is an amalgam of traits. But if you want to argue that it's human capital that explains the growing income gap, you really don't have any persuasive data to rest your case on.

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The world is a highly competitive place, and becoming successful requires hard work, dedication, and luck. This is the view of today’s guest, Professor Robert Frank, who helps us unravel the nuance of conspicuous consumption trends and the role of luck in gaining financial success. Professor Frank is the emeritus Henrietta Johnson Louis Professor of Management at Cornell University and holds an MA in statistics and a Ph.D. in Economics from UC Berkeley. He is also a prolific author, having written 12 books, financial textbooks, and many peer-reviewed articles in journals such as the American Economic Review, Econometrica, and Journal of Political Economy. He is passionate about how policy can help drive positive consumer behaviour, reduce inequality, and increase individual happiness. His work has also focused on the role of luck in achieving financial success which he covers in his book Success and Luck. In this episode, we unpack how individuals can improve societal collective action, the role of policy in driving those changes, and how luck interplays with success. We discuss economic and financial relativism, the dangers of conspicuous consumption, how expenditure cascades occur, and what influences consumption trends in society. We also dive into the topic of luck, whether wealthy people are happier, what behavioural changes are needed to create a better society, and more.

Key Points From This Episode:

Professor Frank describes the difference between departures from rational choice with regret and without regret. (0:04:34)
Whether he classifies his work as behavioural economics. (0:07:38)
An explanation of economic and financial relativism. (0:10:50)
The role of economic and financial relativism in consumption trends. (0:12:44)
Find out what constitutes a positional good. (0:16:56)
How the consumption of positional goods affects psychological well-being. (0:19:32)
Why people choose to engage in consumption arms races. (0:21:52)
The relationship between the consumption of luxury goods and happiness. (0:24:45)
What people can do to recognize and avoid negative consumption behaviours. (0:26:31)
How the spending of the super-rich impacts the spending habits of the typical consumer. (0:27:38)
Ways in which social media influencers have affected consumption. (0:30:32)
We learn about the link between consumption and inequality. (0:32:40)
How well differences in human capital explain differences in income. (0:35:04)
Professor Frank explains how likely it is that the most skilled person gets the best outcome in a competitive market. (0:38:13)
Professor Frank shares how they measure luck. (0:41:20)
The influence luck has on achieving a successful outcome. (0:42:09)
Find out if luck influences consumption trends and inequality. (0:44:03)
A thought experiment concerning the wealthy and higher taxes. (0:46:56)
We discuss whether winner-take-all markets are a good thing for society. (0:50:22)
How people should behave differently to help drive positive change. (0:53:06)
Advice for people to stay motivated and work hard. (0:57:19)
What Professor Frank thinks about working a job you hate for more money. (0:58:59)
He provides insight for people who work jobs they hate. (0:59:59)
His approach on the subject of luck and meritocracy with young kids. (1:00:47)
We discuss the idolization of financially successful people. (1:03:36)
How successful individuals should behave differently in an economy where luck plays such an important role. (1:05:38)
The response of successful people to Success and Luck. (1:08:15)
Steps people can take to positively affect those around them. (1:09:29)
Discover what Professor Frank’s position is on policy. (1:14:20)
We hear how Professor Frank defines success in his life. (1:18:33)