Bryan Caplan  

The Reality of Meritocracy

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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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COMMENTS (30 to date)
agnostic writes:

"Few would dispute that markets are fairer than the aristocratic order they replaced where privilege was a birthright, not something to be earned."

I'll argue! The aristocratic order was just as fair as the market order. There was a tacit rule schema for what traits were to be rewarded, and if you rose to the top because you possessed those traits, then your higher status was seen as fair.

The difference is which traits were rewarded, and so on what margin the elite-strivers competed -- violence in the aristocratic order, vs. the price and quality of sellers' products in a market order.

It would have been unfair if a militarily inept aristocrat who couldn't maintain public order held high status, and sure enough his competitors who had greater martial prowess and greater ability to maintain order did indeed drive him from office -- with the sword. Through constant exercise of their violence skills, they earned their higher status fair and square, rarely through birthright.

Both orders are fair, although there were different "rules of rewarding" by which the fairness of outcomes was judged. So fairness is built into any order: if those who are not favored by the reward structure rise, those who are favored will use their skills to displace them. The real difference is a moral question -- what traits do we want to see rewarded? Do markets deliver that more than the aristocratic order? Yes.

liberty writes:

"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." - Shikha Dalmia

I do not see why (though I haven't read the article yet). Arguably the executives with the high pay have not actually produced the value that they are being paid for, nor have the companies getting bailed out actually produced zero or negative value: the bubble and crash affected the profit and loss of firms, moving the seats around before everyone sat down.

Whether the bubble was caused by intervention in the first place or not, it certainly affected market valuation. One might argue that government had to step in to redistribute some of it back around. Clearly the bubble made exec pay too high (higher than the value they actually offered the market) and the job losses of firms hit by the crash were also unwarranted because these workers offered value to the market, but were just taken down by the crash.

Note that I do not believe any of this, but it is a plausible argument and fits squarely in with the idea that *usually* it is true value (not merit or luck) that determines success and wealth. It is just very easy to see how a bubble changes value in the market.

Arguably, the bubble would affect the merit version a little bit less, and luck possibly more.

JPIrving writes:

Geoff Colvin's Talent is Overrated is a great antidote to her arguments. Luck plays a role, but he makes a good case that more often than not, successful people are a product of years of obsessive dedication.

I think your right, she has a strange position. Even if nonlinear payoffs mean that just a bit of extra hard work or luck can be the difference between a BMW and a private jet, such a system is still meritocratic. Maybe she had to meet a deadline....?

Hume writes:

What's the response to the Rawlsian argument that the ability to work hard and dedicate yourself to your endeavors is itself the product of luck?

nicole writes:

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

I think Dalmia may go wrong by emphasizing morally stellar vs. drunk and wife-beating, but I think she's right that the focus needs to be on others and their perception of value. The point is that almost everyone thinks he is brilliant, morally stellar, hard-working, and therefore is not making enough money for things to be really meritocratic. But there is no ideal of "pure merit" that matters; it is only value in the eyes of others.

I also think her further point is probably right--does anyone remain uncorrupted by Rawls at this point? I'm starting to feel like not, but I may be reading the wrong blogs.

bbb writes:

I agree with the basic point that meritocracy is not a good argument for markets.

You try to argue that merit and value are closely correlated, but there is no reason to assume that. Prices and profits are indicators where to allocate future resources and efforts, not a reward for the intensity of past efforts. In the process of creative destruction it happens all the time that people who worked hard suffer a decline in economic status because of some change in conditions they could have no control over.

A much better defense of the market is that the market is the institutional embodiment of a society of equally free citizens, the central value of this ideal society being the absence of privilege for single individuals or groups, and the purpose of this social order being to allow the individuals to pursue their individual goals without discriminating in favor or against single groups of individuals. (note that this does not at all imply equality of outcomes or incomes). The order of the market is the order of actions that naturally emerges from such an institutional system.

Such an understanding of the marktet, which because of Hayeks repeated stress on the discriminating nature of interventions into the market process might be labeled "Hayekian", provides a very strong argument against bailouts: they are privilege that can be given to some groups of economic actors at the expense of the rest of society as a privilege, but not to all market participants, if "the market" is not to be destroyed. Bailouts are "bad" because they are a privilege to some and therefore against the central value of this system of society.

William writes:

@Hume:

One argument Bryan might use against Rawlsianism is that nobody really believes in the justice of that position. Taking grades as an example, nobody believes that giving every student an "A", regardless of effort, is a just policy. Nobody even believes that you can justly take all the real grades people earn and throw them in a hat to be assigned to students at random.

According to Rawls, "desert" has no relevance to the justice of a distribution. But that notion of justice violates common sense beliefs.

ajb writes:

I agree with Agnostic (as does North, etc.) that in earlier centuries, rewarding skills in warfare was rational and probably productive at the margin. Simply assuming away the problem of order misses the point that a libertarian society that promoted producers exclusively would have been rapidly invaded and destroyed both from within and without in say, 1100 AD. In fact, I believe it is only because of US hegemony that elites have developed a false sense of security in the last half century that places little weight on military power and assumes that an isolationist, defensive stance will be sufficient to hold off danger. The next bubble to burst will be the one that says, the world order can be maintained while undermining US power and legitimacy.

David R. Henderson writes:

Bryan,
Brilliant post.
Correction: on 3rd last graf, starting with "Sure, some 'lowlifes'", replace the word "unsuccessful" with "successful."

Thomas DeMeo writes:

Markets reward value, but only in the context of political positioning. A worker in a company is rewarded on the basis of their value to those above them in the corporate hierarchy, not necessarily on the basis of the greater market value they generate for the corporation.

Companies are similarly rewarded by the market. Coke and Pepsi don't generate superior soda, they build a complex political/value bundle to maintain a dominant position. Some of what they do is added value, but much of it isn't. The political side of the equation can often block added value from being available to the broader market.

Les Cargill writes:

At least in the US, there is resonance between emergent order and "corruption", in the "Boss Tweed" sense of the word "corruption". "Meritocratic" is resonant with Teddy Roosevelt's professionalization of the New York police.

Since Hearst printed more words favoring TR's style of "progress", these words have leached into the public consciousness as fact. So far as I recall, TR wasn't that enamored of trust regulation/"busting" until he needed that issue for electoral gain.

I can't help but think that (wo)men of that time still more or less believed in a Positivist/Laplacian determinism that has at least gone out of style. This led to the conceit that "if we simply do everything right, the outcome will be optimal." It is anything but clear to me that very many people understand that Determinisms are *generally* false, and that disbelief in any particular Determinism is not a nihilism.

Nick writes:

I don't believe the market is a good judge of merit (or more accurately a good indication of what people think is meritorious). Nowhere is this more apparent than in entertainment. Would most people agree that a pop signer has value more than say, compared to say a classically trained ballet dancer. I believe yes, it appeals to more people than ballet so therefore it has a greater value. I think most would agree that a ballet dancer has more merit than a pop singer because such a thing is more difficult and requires a bigger commitment, but the market does not reward these commitments equally.

Furthermore, I believe you dance around the 500lb gorilla in the room which is that merit markets reward the most is ability to game the system.

Les Cargill writes:

Nick:

"I think most would agree that a ballet dancer has more merit than a pop singer because such a thing is more difficult and requires a bigger commitment, but the market does not reward these commitments equally."

Cost is not value.

mark writes:

I would add the perspective that no person or group of persons can identify the causal factors behind any success in any market with any plausible degree of confidence. It's always a mixture of a number of things; hard work, smart decisions, initial conditions and luck all play some role. Nobody can hope to assess how much of a role each plays, with great confidence. If one accepts that, I believe, it becomes difficult to sustain a claim to assert power to systematically alter outcomes on moral grounds.

Colin K writes:

@Nick, Les

Once upon a time I'd have argued that the ballet dancer, while not so well paid, would enjoy comparable or greater social status than the trashy pop starlet. Even today, the ballerina would probably enjoy greater social status than a middle-aged man with the same net worth as Lady Gaga who achieved his fortune by building a chain of self-service car washes.

But such is the draw of celebrity these days that even those who make their fortunes in "respectable" businesses like finance, are eager to be associated with popular entertainers. Perhaps the loosening of social mores means that we no longer see entertainment as having some of the qualities of prostitution, as Adam Smith explained it.

Les Cargill writes:

Colin:

The character of Noah Cross in "Chinatown" noted "'Course I'm respectable. I'm old. Politicians, ugly buildings, and prostitutes all get respectable if they last long enough. " (He used a Bad Word for "prostitute")

Ballet's just an older sort of ... building, you know.


Ryan Vann writes:

I agree with a majority of Prof. Caplan's dissection of the argument. I however still think the basic premise of Dalmia's argument is solid. Meritocracy is not the basis for preferring market systems to others, value most certainly is. There is more mileage in making an argument from a fulfilling desires perspective than an argument from merit. At the end of the day, merit doesn't facilitate exchange.

hacs writes:

"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."

Heritability (physical, psychological, physiological and socio-economical traits) is a factor that undermine credibility of market value as merit rule. But, mainly, it is its materially based orientation for others, in detriment of value for himself/herself (good familiar relationship, friendship, psychological well-being, kindness, etc, and financial comfort also), and its intrinsic materialism (and its consequent consumerism), which make extremely difficult to accept it (at least, outside of USA, where work is not redemptive). Many times is understood as an external imposition of American values and culture on other people, generating more heat than enlightenment, stimulating populist (pseudo-socialist) discourses. Etc...

I am not claiming that it is right or wrong, but it is repulsive for many people.

Loof writes:

According to Bryan:
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.

In all markets there is some correlation between value and merit: on black markets hard work, more work, and higher-quality work are all meritorious, and they all create value. The opposite is also true: in free markets there is correlation between value and demerit: when slaves work hard and higher-quality work is meritorious creating value: and their productivity competes, like corporations in Burma do, on global free markets.

alex s. writes:

I think the argument would be more clear if the idea of "intelligence" were replaced by "hard work" (on both sides of the argument). Mainly, I think the market is more likely to reward hard work than pure intelligence. Top executives may or may not be evil, but most of them work incredibly long hours for many years. Even innovations usually require lots of iterations to perfect (Edison's "Genius in 1% inspiration, 99% perspiration" comes to mind). And there are plenty of very intelligent people toiling away on lost projects and doomed research, while other people work their way up by committing to their work.

More importantly, I think people are much more likely to think that intelligence is based on genetics (whether true or not), so market success based on that seems more luck based. You could argue that the ability to work long hours is itself a heritable characteristic, but I think that's a lot less clear.

blink writes:

When normal people see brilliant people succeed, they applaud.

I wish this were true, but I have seen too many who see a nice car and think not "I want to earn one of those," but "I want to slash its tires." An insidious ideology of vandalism is all too common.

MernaMoose writes:

Shikha Dalmia is perhaps better at coming up with bizarre ideas than anything else.

MernaMoose writes:

Hume,

What's the response to the Rawlsian argument that the ability to work hard and dedicate yourself to your endeavors is itself the product of luck?

What should anyone's response to deterministic philosophy be? And btw Rawls was hardly the first to make arguments along these lines.

Hint: the answer starts with "You're sadly mistaken......".

After all these centuries, must we prove yet again that free will actually exists? I could start laying out arguments, but entire libraries have already been written on the subject.

MernaMoose writes:

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.

Tune in next time, where we'll find that Shikha Dalmia has finally seen The Light and has become a good, dedicated socialist. Because at this point there's nothing at all holding her back.


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.

"Routinely"? A line like this could only come from someone who's either
a) already a closet socialist
b) completely out of touch with what's happening in the real world
c) not so bright after all
d) all of the above

I know lots of people who've made their own fortunes in business. Less than 1% of them qualify as "low lifes". Yes, there are corners of the market where exceptions can be found such as pop singers. And as an engineer I'm quite aware of the saying "engineers are some of the lowest paid smart people around".

But what fraction of the population are engineers? On the order of 1% to 2%. Now, can anyone tell me what fraction of the population are chart topping pop singers? At least an order of magnitude less.

This is a long, long way from "routinely". In terms of either idiots rising to the very top (by accident we must presume), or people of ability falling to the bottom. Engineers may get paid less than surgeons, but they're still a long way from the bottom of the pay scale.


Intelligence alone doesn't insure great wealth, but it's rare you'll find idiots staying on top for very long. On average, people who make lots of money also tend to work obscene hours. Or else they inhereted money to start out with.

By and large, the people I know who've gone out and made lots of money are able and willing to deal with the modern business environment. As an engineer I'm clear on the fact that I could make a lot more money running my own company. But I'd have to work like a dog (many more hours than I do), and I'd have to spend the vast majority of my time handling the business side of things, instead of being an engineer. I find this unpalatable, so I accept the lower pay and stay where I'm at.

On the other hand, I was born in a rotted out trailer surrounded by miles of corn fields in all directions. Becoming an engineer was not something I "inhereted". I was willing to both borrow money and work my ass off to get through college.

My position in life, like the vast majority of people I know, is much more a matter of choice than anything else. Sure there's a few pop stars out there who lucked out. But they are a tiny minority, to the point of statistical insignificance.

If Shikha Dalmia doesn't want to believe that free will and the power of self determination exist it's her prerogative.

But she'd be wrong at every level.

MernaMoose writes:

There's still another dimension I left out, and that's the country I was born it. I'll grant this much -- where you're born is a matter of chance.

I was able to climb up out of poverty because I was born in the US, where we have a socio-economic system that allows it.

My wife's family are immigrants from an economically stagnant third world country that's ruled by a dictator. They were unable to improve their financial lot in life until they came to the US.

Every one of them arrived here with little more than the clothes on their backs. But my wife and I are the poorest of the bunch, in her family. They're all dentists, surgeons, business owners, by now. And they were in the 30's and 40's when they got here.

By choice, and by their own effort, they became something much more than the pitiable, poverty stricken creatures they arrived here as.

This just might be the single greatest moral argument in favor of free markets -- that it enables people to exercise their own powers of free will and self determination.

Douglass Holmes writes:

In his latest EconTalk, Russ Roberts links to an article in which Robert Frank discusses how much good luck is responsible for wages. I have no problem with the idea that there is a lot of luck involved in success. What bothers me about many of the people who argue this, and Frank is very frank about it, is their belief that the government can ensure a more fair distribution of wealth. They think they can come up with a system that is more fair. I don't.

Steve Roth writes:

I argue this subject with my ex businesss partner constantly, and we constantly go around in circles, just as Bryan does here with Shikha Dalmia.

There are two arguments at play here: fairness and efficiency/utilitarianism. I'm going to skip fairness for the moment if I can pull it off.

Trying to sort it all out:

Bryan's Definition of Meritorious Behavior: creating things that others value.

Bryan's Argument for Using the Merit Argument: If people have the perception that merit is rewarded, they will engage in more meritorious behavior, and we'll all be better off. (The meritorious people especially, of course, but that's getting into the Fairness fray.)

Questions:

1. To what extent is merit rewarded in our society?

2. Is that reward-to-merit ratio different in different economic classes?

3. To what extent is the perception of merit-rewards in keeping with reality?

4. Does that perception-to-reality ratio vary depending on which economic class is doing the perceiving?

5. Does the perception-influence exerted vary depending on which economic class is being perceived?

(These last two could be represented using a two-by-two matrix, though a third dimension may be required.)

6. Given answers to the above questions, what do those answers say about the accuracy of Bryan's Argument for Using the Merit Argument?

I'm not going to try to solve that whole matrix here, but punt and give one example that might be sorted out using the above constructs.

1. Wall Street "innovators" (if you agree with Volcker) produce very little of value--they have little "merit" in Bryan's definition. But they are highly rewarded.

2. Massive reward and minimal merit results in a a ratio much higher than the ratio in lower economic classes.

3. Surmising, I suggest that most Americans perceive the ratio (and the ratio of ratios) in #2 accurately.

4. I would suggest that upper economic classes do not have the same perception-to-reality ratio as other Americans--that upper-class Americans misperceive the reality.

5. All classes will be influenced by their perception of the Wall Street reward-to-merit ratio, encouraging them to act non-meritoriously. It is unclear whether this influence will be stronger in one class than in another.

6. For this particular example, Bryan's Argument is not correct.

Nichlemn writes:

I ponder whether the complexity of markets (the main argument against central planning) also invariably makes them less meritocratic. If you believe that human preferences are extremely hard to model, then it becomes harder to defend the hypothesis that the difference between a successful and and an unsuccessful entrepreneur is merit. The creator of a fad can hardly say that he had precisely analysed the psychology of market participants and discovered its enormous potential. An ex post analysis would call the market meritocratic, but an ex ante one would not.

shikha dalmia writes:

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.”

João Teixeira writes:

Concepts like merit, knowledge, justice, and so on, have occupied generations of thinkers and, in spite of that, no agreement has been reached as to how to even define these concepts in an objective manner. That is, as Karl Popper defines, in a way such that these concepts can be used in falsifiable theories: theories that can be put to test in the court of experimental, quantitative, data collection.

On the other hand, value is defined in an objective way, up to Popper's standards, by market economy theory.

Now, how in the world can someone claim that merit is highly "correlated" with value? Correlation is a concept from statistics, and it surely requires well defined, measurable variables ("random variables", as mathematicians call them) to have any meaning. These claims about a supposed correlation between merit and value are as scientific as astrology, for they fail to objectively define one of the "correlated" terms...

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