Abilities and Skills

People vary enormously in their abilities-in physical, mental, and temperamental dimensions. However, these personal differ~nces are oflittle help in explaining the puzzle of income dispersion. Physical traits (such as strength or height or girth) and measured mental traits (such as intelligence quotient or tone perception) explain relatively little of the difference among the earnings of people.

This is ‘not to say that individual abilities matter little. The ability to hit a home run or chairman audience greatly enhances a person’s earning potential. But the skills valued in the marketplace are varied and often difficult to measure. Markets tend to reward willingness to take risks, ambition, luck, strokes of engineering genius, good judgment, and hard work-none of which is easily measured in standardized tests. As,Mark Twain might have said, “You don’t have to be smart to make money. But ‘you do have to know how to make money,”