Why do some professions earn so much?

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Why do some professions earn so much?

I spent my schooling years in Victoria, fortunate to be surrounded by some of the smartest of my generation. Many of my peers have gone on to become top professionals, some earning over a million dollars a year.

Because we spent our formative years together, I can say with full confidence, we were all equally smart, and all worked equally hard.

Even today, when we hang out for dinner, there isn’t much difference in our intellectual sharpness.

So why is it then, that individuals of equal talent, in 2 different professions, can command such vastly different salaries?

My original theory was that wealth needed to be generated by force multipliers. This could come in 3 ways

Money, Technology & Labour

Doctors and lawyers however have none of the above three force multipliers. And yet, they’re amongst the highest paid professionals.

I’ve recently come up with a better theory. In comes in 2 parts.

The first part is this:

#1 – Professionals who work in make or break scenarios, where the stakes are high, can name their price

On my deathbed, I’d pay every last penny I have to get the best doctor out there.

If I’m in a legal tussle, running the risk of going to jail, I’m going to pay top dollar for the best lawyer I can find.

A CEO, overseeing a large billion dollar acquisition, is going to hire the best M&A advisors to uncover all the risks of the transaction.

In a make or break situation, you want to hire the best. Money is no issue.

And since these high demand doctors, lawyers and bankers only have 24 hours a day; they start to raise their prices to the highest point which the market is willing to pay.

It’s supply and demand.

And that explains why TOP doctors, lawyers and bankers can earn so much.

But this “hire the best for make or break scenario” argument only works for the TOP professionals.

It doesn’t apply to all doctors, lawyers and bankers. So how do we explain how even the mediocre professionals, can still earn so well?

This is why my theory has two parts to it.

The second reason why doctors, lawyers and bankers earn so much is…..

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#2 – The work in some professions is difficult to discern between

You can’t tell how much lousier the #2 best lawyer is when compared to the #1 best lawyer. Similarly for lawyer #125 vs lawyer #25.

In other industries, this is possible. Restaurants, for example, get rated by consumers on HungryGoWhere. There’s data collected on who’s the best.

For doctors, lawyers and bankers though, it’s very opaque. There is no public rating system. We don’t currently track the % win rate of lawyers or % cure rate of doctors.

As a result of this opaqueness, we can’t tell apart the good from the mediocre.

Doctors, lawyers and bankers know this as well, so they all charge a high price anyways, pegging their rates to the top professionals.

And because we understand so little about medicine, law and finance, we have to trust them that they are indeed worth their high hourly pay.

Conclusion

And so, to summarise
1. Top professionals, in high stakes, make or break scenarios, can command massive salaries.
2. It’s hard to discern between talent in these professions. And so, everyone pegs their salary to the best.

What do you think of this theory?

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