Big Break Theory
People often hope for a “big break” – a large, durable improvement in their situation. An unknown actor landing a major role in a big-budget film is the classic example. But big breaks seem to be everywhere: getting your first tenure-track job, becoming the new protege of the boss, or marrying someone way too good for you.
Once we accept that big breaks are common in reality, economists’ next task is to explain how they’re possible in theory. The top three models:
1. Discontinuity of the world. The simplest story claims that opportunities are extremely discontinuous. As a result, the gap between your best option and your second-best option is often large. So when market forces change, some people predictably experience benefits that seem all out of whack with the size of the shift.
2. Imperfect information. A subtler story says that while opportunities are fairly continuous, discovery of opportunities is costly and haphazard. For some people, of course, the crucial missed discovery is that, given their skills, they should be grateful for what they have. For most people, however, the reality is that there are many better ways to spend their lives… if only they could pinpoint them – or convince others that they’re deserving. Sadly, though, it takes a lifetime to uncover even a tiny fraction of your opportunities in this world.
3. Rationing. This story says that big breaks happen because markets don’t clear. Sometimes the reason is government regulation. Think about winners of each year’s Diversity Immigrant Visas: from Third World poverty to First World luxury by the luck of the draw. On a smaller scale, think about all the people praying for a rent-stabilized apartment in Manhattan – or an old-fashioned union job.
Still, the reason doesn’t have to be government. Social norms impede market-clearing too. Think about the hundreds of qualified applicants for every position in mortgage-backed securities or construction in 2010. Wages stayed high, but even interviews were almost impossible to find. The same goes, of course, for gender-role norms. Imagine a major war leads to a low male/female ratio. If social norms don’t adjust in men’s favor, there will be a shortage (in the technical supply-and-demand sense) of men. Women who still manage to marry on traditional terms enjoy a big break.
How important are these three stories? I say that #1 is rarely relevant; any appearance of extreme discontinuity in the world is just a reflection of our ignorance of the world’s countless intermediate possibilities. #2, in contrast, is always relevant. Even in a fairly simple society, the number of conceivable arrangements of resources is vast, and life’s too short to explore more than a handful. #3, finally, varies widely in relevance. The more market-oriented and less tradition-bound a society is, the less #3 matters. But I’ve yet to hear of a society where #3 wasn’t a big deal.
Am I too quick to dismiss #1? I think not. Heart-broken youths gravitate to such stories. But everyone older and wiser wisely avers that there are lots of good fish in the sea. And if #1 isn’t even true for matters of the heart, how could it be true for matters of hard-boiled business?