Tyler Cowen writes,

Good at finding the best talent:

1. Highly paid professional sports (those who care can play them in high school)

2. Finance and management consulting (lots of people from top schools consider these careers, and we get enough, even if non-elites are somewhat “locked out”)

3. Nerdy tech stuff (so many people are exposed to this at a young age and can be autodidactic)

…Bad at finding the best talent:

4. Education and teaching and religious leaders

5. Humanities scholars

6. Journalists

I wrote relevant essays on this topic twenty years ago. In From Allocating Capital to Allocating Talent, I wrote,

The optimum size for a firm may depend on how it solves the talent allocation problem. If senior executives can allocate talent wisely over a wide set of problems, then the firm can be large. If senior executives only can allocate talent wisely over a narrow set of problems, then the firm will need to be small.

That is one little nugget in an essay that contained insights that people are getting credit for “discovering” even now.

Another essay was Effective Tournaments.

The tournament for choosing CEO’s of large, established corporations probably is less effective than the academic tournament. It appears to me that idiosyncratic personal connections, timing, and luck play a big role in determining who gets to be a major CEO. By idiosyncratic personal connections, I mean relationships, such as country-club memberships, that do not affect the ability of the CEO to run the business profitably. Relationships with customers or suppliers are pertinent, rather than idiosyncratic.

I probably would not stick with that view today. I have since become more skeptical about the academic world. With increased specialization, each sub-field is controlled by a relatively narrow cadre of professors. This makes academics less of an open tournament than it was fifty years ago. I think that academic success today tends to have a much higher component of conformity and a corresponding lower component of skill.

Also, the CEO tournament is enhanced by the fact that there is churn among major companies. Fifty years ago, Jeff Bezos could never have become CEO of a major company. He still could never have become CEO of Wal-Mart, but he did the equivalent by growing Amazon. These companies that come from nowhere to turning into giants really strengthen the CEO tournament. It is a phenomenon that you do not see in Europe, and so my guess is that the CEO tournament is much less effective there.

I really like this sentence from that essay:

To be effective, a tournament must behave like an experiment with repeatable results.

If you ran the talent-selection experiment multiple times, would the same people rise to the top? In professional sports, I am inclined to think “yes.” In finance and management consulting, I am not so sure. In entrepreneurship, I am inclined to say “yes.” I know there is a lot of luck involved, but there are many, many decisions to be made, and the more decisions that are involved, the more opportunity there is for skill to triumph over luck. I made that sort of argument in another classic essay, The economics of Pop-Tarts.

I don’t know how to use my model to deal with all of the occupations listed in Tyler’s post. For example, I don’t think of the fields of teaching and education as tournaments.

Note: some folks liked the original article. MarketWatch reproduced it. David Henderson liked it and added comments.

One commenter writes,

“When you have little left to learn on your job, it is time to move on.”

Doesn’t that risk sentencing yourself to eventually being hit by the ‘Peter Principle’? And doesn’t society need people who are actually good at their current job rather than always trying to learn the next one?

I always thought that the ‘Peter Principle’ was part of the genre of flattering the unhappy employee who is convinced that he or she would thrive with a better boss (or thinks that he or she deserves to be the boss). FastCompany Magazine is a leading practitioner of the genre that boosts the hero/martyr self-image of the mid-level employee.

If the Peter Principle were really true, then management strategy consists of setting people up to fail. I don’t buy that. What good managers do is set you up to learn, but not to fail.

Another commenter writes,

there are positions you want dedicated experienced people that aren’t looking for something new. . . two of the three big Business failures I have experience is because our business worked to eliminate these experienced workers. Businesses need the high flyers but also need a high degree of agreeableness to work well.

In my essay, I say that after you learn your job you should train a successor. If an organization lets you go without training your successor, then institutional knowledge gets lost. So of course that is bad strategy.

But if the only way to retain institutional knowledge is to keep people doing the same job for many years, I think that the organization has a problem. That sounds to me like an organization that is not going to get any fresh ideas, and that means no growth in productivity. There are very few companies that can afford to do without productivity growth.

In any case, my rules are not suggestions for businesses. They are suggestions for you as an employee, regardless of what is in the best interest of the business. If you care about career advancement and personal growth, then you should not let your employer leave you in a position that is no longer challenging.

He writes,

To be both horizontal and vertical is incredibly difficult: horizontal companies often betray their economic model by trying to differentiate their vertical offerings; vertical companies lose their differentiation by trying to reach everyone. That, though, gives a hint as to how Amazon is building out its juggernaut: economic models — that is, the constraint on horizontal companies going vertical — can be overcome if the priority is not short-term profit maximization.

Read the whole post, which is too deep to summarize. I agree with his discussion of fixed cost and marginal cost. I am not as convinced as he is that Amazon’s investments will pay off. Sometimes a fixed investment is a scalable reduction in marginal cost, and sometimes it is a railroad to nowhere.

Years from now, of course, hindsight will be perfect. At that point, it will seem obvious whether Amazon has been correct all along or throwing away investors’ money.