The Reality of Meritocracy

Philosopher Rod Long recently argued that government intervention has practically ended the meritocracy of the market; I responded that the meritocracy of the market is still going strong, though it could be even stronger.  Now at Forbes.com, Shikha Dalmia eloquently defends the extreme position that even the freest markets are not and never were meritocratic – and that defenders of the free market should ditch meritocratic arguments altogether:

Markets don’t reward merit; they reward value–two very different things…. Most advocates of markets have failed to fully make  this distinction, perpetuating a cult of market meritocracy–something that has hindered, not helped, the cause of free markets.

Dalmia’s right, of course, that value and merit are different, and that when markets have to choose between the two, value prevails.  However, she doesn’t seem to consider the obvious retort: On the free market, value and merit are highly correlated, so markets reward merit after all.  Hard work, more work, and higher-quality work are all meritorious, and they all create value.  The same goes for more and cleverer ideas.

Since value and merit are not perfectly correlated, of course, meritocratic arguments occasionally backfire in free-marketeers’ faces.  The same goes for utilitarian arguments, economic prosperity arguments, etc.  So what?  Merit, utility, and prosperity aren’t everything, but they’re all important, and free markets do a pretty good job of promoting all three.  Why should advocates of free markets be afraid to point this out?

Dalmia goes on:

What’s good about markets in this line of thinking is that they identify the incandescent geniuses among us and catapult them to the top where their innate brilliance is harnessed to improve the lot of mankind. At once, then, markets yield economic progress and what Rand (and others) regard as justice–the biggest rewards to the best. The only problem with this neat little formulation is that it is wrong at every level.

Every level?  Let’s consider her arguments point-by-point:

For starters, the idea that value creation is a one-way street from the top to the bottom is not just offensive, but it ignores the principle of comparative advantage, a key breakthrough in market theory… Under the elaborate division of labor that ensues, both the less-endowed and the better-endowed contribute to each others well being.

This is a fine argument against Ayn Rand’s exaggerated claim that under capitalism the “man at the bottom… contributes nothing to those above him.”  But it is perfectly compatible with a sensible defense of market meritocracy.  Yes, geniuses profit by trading with non-geniuses.  But geniuses still merit and receive much higher pay on the free market.

The beauty of the market, Hayek brilliantly pointed out, is that it allows people to use knowledge of their particular circumstances to generate something valuable for others. And circumstances, he emphasized, are a matter of chance–not of gift.

This leaves me no choice but to quote the Big Jerk from Titanic: “I make my own luck.”  Yes, chance does play some role on the free market.  But abler and harder-working people heavily tilt the odds in their favor.

In a functioning market, Hayek insisted, financial compensation depends not on someone’s innate gifts or moral character. Nor even on the originality or technological brilliance of their products. Nor, for that matter, on the effort that goes into producing them. The sole and only issue is a product’s value to others.

Yes, but the “value of your products to others” heavily depends on your innate gifts and moral character.

Compare an innovation as incredibly mundane as a new plastic lid for paint cans with a whiz-bang, new computer chip. The painter could become just as rich as the computer whiz so long as the savings from spills that the lid offers are as great as the productivity gains from the chip. It matters not a whit that the lid maker is a drunk, wife-beating, out-of-work painter who stumbled upon this idea through pure serendipity when he tripped over a can of paint. Or that the computer whiz is a morally stellar Ph.D. who spent years perfecting his chip.

True, but on average, morally stellar Ph.D.s add a lot more value than drunk, unemployed wife-beaters.

Dalmia goes on to argue that free-market advocates never should have been meritocratic in the first place:

The idea that there is no god (or some secular version of him) meting out cosmic justice through the market’s invisible hand is unsettling, even to market advocates, but it shouldn’t be. It opens up the possibility of a defense of markets that is, as it were, more marketable.

How?

Few would dispute that markets are fairer than the aristocratic order they replaced where privilege was a birthright, not something to be earned. But the view that the super-gifted or the super-smart deserve the biggest rewards doesn’t seem a whole lot fairer given that these traits are arguably inherited, too.

I submit that almost anyone uncorrupted by Rawls will disagree.  When normal people see brilliant people succeed, they applaud.  They don’t whine that “brilliant people didn’t earn their brilliance,” whatever that might mean.

This conception, in fact, forces those who are less successful to internalize their failure–accept their second-class status as preordained–breeding alienation and resentment.

Consider: What do revolutionary socialists tell the have-nots to stoke the fires of alienation and resentment?  That successful people earned what they’ve got, fair and square?  Or that’s success is all a matter of chance?  I agree that there’s no need to rub people’s faces in their failures.  But if they’re complaining about their lot in life, it’s not just true, but helpful, to tell them to emulate successful people rather than resent them.

Hard work or some quality of character would offer a more palatable basis for building a case for markets, except that all the lowlifes who routinely make it rich in markets offer too much evidence to the contrary.

Sure, some “lowlifes” make it rich in markets.  Examples are on the cover of every tabloid.  But why should we think this is “routine”?   Judging the market’s meritocracy from tabloids is just availability bias.  On average, lazy, dishonest drunks are a lot less financially unsuccessful than hard-working, honest tee-totalers.

The need for embedding this Hayekian understanding of markets in the public consciousness cannot be overstated. And the first step in doing so might be purging the word “merit” from the vocabulary of markets and replacing it with “value.” … At once, then, it would be possible to oppose both the recent government bailouts and government regulations such as Sarkozy-style caps on executive salaries.

A “Hayekian understanding of market” might convince the public to oppose bailouts and salary caps, but the public could just as easily draw the lesson, “It’s all luck, so why not?”  A meritocratic understanding of the market, in contrast, has much clearer policy implications: Bailouts and salary caps are bad because they reward failure and punish success.

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