Bryan Caplan  

Merit and the Market: A Reply from Shikha Dalmia

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Last week, I replied to the Reason Foundation's Shikha Dalmia's pro-market case against market meritocracy.  She has kindly written a detailed reply, and asked me to post it here.  Enjoy.


Thanks, Bryan, for your spirited response. A few readers have already pointed out what I was going to say, so some of what I note below might be a bit redundant. But repetition is sometimes useful, so here goes:

The basic question I was addressing in the column was: Does merit make markets tick, or do markets make merit tick? My answer, emphatically, is the latter. If there were no Bill Gates, Steve Jobs, Warren Buffetts and all the other technical/financial geniuses - let's just pick a random name and call them John Galts! - in the former Soviet Union, it wasn't because there were no smart people in that country, it was because there were no markets, or they were highly suppressed. Markets - through price signals and profits -- make it possible for people to turn their smarts into a marketable commodity. This is a feature of markets that Nobel laureate Vernon Smith calls "ecological rationality." (On this point, I highly, highly recommend this pithy piece in the Freeman by Steven Horwitz.)

But by the same token, markets also allow people other than the John Galts to market whatever they've got - hard work, attitude, looks, even their vices. Which one of these attributes a market will assign a greater relative value to is open to question. Since value is generated by the free choices of consumers, it depends very much on what consumers want at any given time. If consumers assign a higher value to products that require brain power - computer chips, iPods, iPhones, books etc. etc. - than products that don't, then smart people will be the big winners. But if they don't, then smart people will be relative losers. Now, as a matter of fact, it is a safe bet that there will always be brain-powered industries in any economy so that smart people will always do well. That's arguably the case now and one reason why it is easy to find evidence linking merit with market rewards that Bryan alludes to. (Talk about "availability bias!").

The rewards that brains or any kind of meritorious quality reaps in the market are a contingent - not a necessary -- thing. To claim that brains will always win out over everything else in the market requires either omniscience or some quasi-religious belief that markets are an agent for certain preordained ends of distributive justice (in the classical Greek sense of the biggest rewards for the best - not in the egalitarian sense of equal rewards for all). They are not. They are a vehicle for procedural justice, as Hayek rightly insisted. They set the rules of the economic game - no forcing consumers to patronize certain businesses; no extracting of monopoly privileges etc. etc. - and then the chips fall where they may.

And if you doubt that the chips, under certain circumstances, can fall for the stupid as much as the brainiacs, consider the recent MTV hit, Jersey Shore, a reality show that has made a group of young, non-descript Italian-American kids from New Jersey multi-millionaires for marketing a lifestyle that is slothful, self-indulgent and completely devoid of any accomplishment. It is not these kids' virtues that are making them rich - it is their vices! Could anyone who believes in the merit theory of value have predicted this even five years ago?

Now, of course, it could be argued that the merit involved in the show is not of the kids - but whoever thought of putting them in it. True. But that person doesn't need to have a high IQ to come up with this idea. S/he needs to have some inside knowledge of the "guido" lifestyle and an intuition about its attraction/fascination to others. That's it.

To put it another way - the market rewards brilliant ideas, not brilliant people. And these ideas can come from anywhere. Markets are a completely non-ad hominem institution - they care only about the idea and its value to others, not its source - which is why they are inherently anti-elitist.

Hayek's great insight was that the reason why markets produce wealth and prosperity is not necessarily or primarily because they harness all the big ideas gestating in big brains - which is what Rand et al (and, I'm assuming, Bryan) believed. It is because markets create a mechanism to harness knowledge about the everyday stuff of life - the mundane, the trivial, the seemingly inconsequential. For every Bill Gates, there are thousands and thousands of little guys making money through their little innovations:  improved plastic caps; a tastier salad dressing; a better vegetable peeler.

Why is it important to keep this in mind? The reason is twofold (besides of course that it obfuscates how markets really function). One: The view that merit powers markets creates a sense of entitlement on the part of smart people that some portion of the world is rightfully theirs. The world owes them something. This is hugely off-putting to the vast rung of humanity (even non-Rawlsians). The sense of superiority of these smart people blinds them to the broader "ecological rationality" of the environment in which they operate. They think they are the ones who make markets tick - instead of the other way round. They think they are the market and what benefits their business, benefits everybody - a mindset that was captured in the immortal slogan: What's good for GM is good for the country! Two, conversely, when they lose in the market - especially to someone or some product they consider inferior -- they regard it as a symptom of market failure and demand corrective action in the form of government regulations to ensure that their competitors' products meet certain quality standards or are not made in sweat shops etc. etc.

Hayek has a brilliant, finely textured discussion of all of this in the chapter on Social or Distributive Justice in the second volume of Law, Legislation and Liberty that is well worth reading.  But let me conclude with Hayek's protest against those who have previously espoused Bryan's position:

"It is probably a misfortune that, especially in the USA, popular writers like Samuel Smiles and Horatio Alger, and later the sociologist W.G. Sumner, have defended free enterprise on the ground that it regularly rewards the deserving, and it bodes ill for the defence of it which is understood by the general public. That it has largely become the basis of the self-esteem of the businessman often gives him an air of self-righteousness which does not make him more popular."

 


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COMMENTS (14 to date)
Richard writes:

So Dalmia has employed a classic rhetorical device. She has equated "merit" with something else -- "brains" -- and then argued that the market doesn't necessarily reward brains. Except nobody said it did. The market rewards merit, which in addition to "book smarts" includes common sense, emotional intelligence, creativity, hard work, discipline, etc.

Dalmia's argument is the standard complaint of the intellecutal: Markets can't be fair, because if they were we intellectuals (the "big brains") would all be rich!

Steve Horwitz writes:

Richard,

I think you've totally misread Dalmia's purpose. She is not "complaining" nor does she think markets are "unfair." She's defending markets and as a descriptive fact she doesn't think they reward intelligence per se. She doesn't think markets should reward intelligence; she just thinks they don't. They reward the creation of value. And that is precisely the answer to the "big brains" - you don't get rich because what you do doesn't create things that others value.

Read it again, seriously.

e writes:

Read it again, I'm super serial!

Matt writes:

Bryan,
Are you two actually disagreeing? It seems you are both saying that markets are not meritocratous by design but as a by-product. It seems she is arguing that markets only reward merit 99.9% and you are saying, "No,no, it's almost 100%."

Or am I missing something...

Jeff writes:

Dalmia is completely correct in her analysis. As evidence, I'll hold up Sheri Schmelzer, the inventor of Jibbitz - these little button things you put in your Crocs as personalized decoration. She's become quite wealthy with her little idea. Her personal genius was to identify a market that no one else saw.

Now, if you think that putting button decorations into the ugliest shoes ever created is an obvious market, well, I guess we're done here. However, the meritocracy of ugly footwear adornment is not entirely obvious either. It really matters not if Sheri was a 180 IQ super-genius, what mattered was her particular knowledge and insight into the market - due to her position as a mother - and her motivation to exploit that market.

Given her knowledge of the existence of the market, there were probably tens of thousands of individuals better able to exploit the market at that time, based on their personal "merit". However, she is the one who had the correct combination of knowledge, insight, ability and motivation at the right moment in history to exploit the market.

So she gets to be fabulously wealthy. She's no John Gault - I mean, would society really collapse without properly decorated Crocs? She is, however, a perfect example of how the market rewards value.

alex s. writes:

The sentence "But that person doesn't need to have a high IQ to come up with this idea" makes it clear Dalmia has taken a such a narrow view of IQ as to render her point meaningless.

This is the key paragraph from the original article [emphasis added]: "But markets don't just expand and democratize the concept of merit; they render it moot. No longer does it matter what great qualities reside in you. What matters is if you can make them work for others. The concept of merit is replaced by that of value. Merit is intrinsic, concentrated and atomistic; value is relational, decentralized and social." This only makes sense if you accept that there is no merit in any idea that doesn't come from this narrow definition of intelligence.

I agree with Richard in the first comment here, that this is mostly a thin rhetorical argument. But I don't think Dalmia is actually making the argument so much as saying other people (the great bogeyman of the pundit world) make that argument, and so are disappointed when this false assumption is revealed. And the problem would be solved if we just used different words.

I think Caplan missed the point of the original article, partly by assuming Dalmia was trying to make a more serious point.

8 writes:

I think the clearest example is art. The term "sell-out" refers to someone who makes art for profit. More clear cut may be the
female math genius from Oxford who became a prostitute.

C. Mather writes:

Merit is a confusing term and its use leads to false disagreements. Ultimately, the liberal slogan of merit selection means nothing more than selection according to the criteria (needs) of the selector. Intelligence is not the only criterion for merit; there's also judgment.

GU writes:

Mr. Caplan is one of my favorite bloggers and I usually agree with him. But in this case: Caplan pwn3d! It was very gracious of him to post this pwnage on his own website though.

Loof writes:

Shikha Dalmia: Does merit make markets tick, or do markets make merit tick?

Merit makes markets and markets make merit, when they tick. Implying that markets make merit routinely tick isn’t real when ideal.

To make them tick properly economics should use two norms: one for merit making markets and another for markets making merit.


Loof writes:

Further, to be clear: private mercantile markets make less merit and mostly profit; public entrepreneurial markets make more merit and some profit.

Loof writes:

Another point from a reference, Steve Horwitz (Freeman 19/11/09) said:
"It’s not that markets do things well because entrepreneurs are smart; rather, entrepreneurs are able to do things well because markets are “smart” in that they are able, through prices and profits, to make more knowledge available to entrepreneurs than political processes do to bureaucrats. This feature of markets is what Nobel Laureate Vernon Smith calls “ecological rationality.”

Smith’s “ecological rationality” is applicable to public entrepreneurial markets; not to public government and private enterprise partnerships that make up mercantile markets. In going to the root (the radical) of the economic problem, the best public-private partnerships will have corporate bureaucrats working part-time with government bureaucrats on all levels: locally, regionally, nationally, internationally.

Joshua Lyle writes:

I think alex s. is on the right track; the problem is that we aren't really operating with a clear understanding of what "merit" is. But, to me, it makes sense to think of merit as having content in part determined by the market process and that can be apprehended by reflective equilibrium. Thus, to say that the market rewards this and that is to indicate that this and that may in fact be meritorious.

Current writes:

As Richard has written above Dalmia is trying to weedle out of the issue by claiming it's all about brains. Clearly no-one said it was.

Dalmia has stepped away from denying that market rewards have any relationship to merit to a more reasonable position, which is that they have some.

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