I periodically post here about why and how markets work and their fundamental contribution to our individual lives as well as the whole of mankind. It is continually irritating to hear business leaders, politicians and supposed experts waxing eloquent on aspects of liberty and free markets which they do not understand. I listened to a well known international investment banker interviewed last night whose primary cure for what ails the U.S. banking system is the regulatory control of senior bankers’ compensation. The one undeniable, but unspoken, fact I drew from his comments is his paycheck is definitely cut from an office in an offshore office and he would not be subject to the government control of his income he so freely advocated for his competitors.
Shikha Dalmia writes about economics and markets for Forbes.com and Reason magazine. She won the 2009 Bastiat Prize, presented by P.J. O’Rourke, for online journalism along with Dan Hannan of the UK. Dalmia has written a great essay illustrating the all too often misunderstood relationship between individual merit and the value of an idea and its manifestation as product or service.
With the notable exception of Nobel laureate F.A. Hayek, market theoreticians have to a large extent employed the equivalent of the Great Man theory of history to explain what makes markets tick. According to this theory, the course of history is shaped not by the convergence of multiple, unpredictable events but by the intervention of great men. Likewise, in the conventional thinking about markets, economic progress depends not on the labors of infinite economic actors but on the select few, the brainiacs, who rise to the top and generate innovations from which ordinary mortals benefit through a kind of trickle-down effect.
The theory’s promoters are varied, prominent, wrong and occasionally acid-tongued:
English sociologist Michael Young noted in his influential 1958 fable, The Rise of the Meritocracy: “Civilization does not depend on the stolid mass, the homme moyen sensuel, but upon the creative minority, the innovator … the brilliant few … the restless elite who have made mutation a social as well as a biological fact.” Less elegantly, Ayn Rand evinced a “pyramid of ability” in capitalism under which “the man at the top contributes the most to all those below him.” What’s more, this Nietzsche of capitalism opined: “Man at the bottom who, left to himself, would starve in his hopeless ineptitude, contributes nothing to those above him, but receives the bonus of their brain.”
Charming broad, that Rand woman.
Here Dalmia begins to explain the neutrality of markets and why the immediate results do not always fit our sense of moral justice:
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. 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.
In a perfect world, a meritocratic system would function with mechanical precision delivering rewards to the smartest, hardest working people of the highest moral character. But that is emphatically not where we live no matter the relentless efforts of leftist academics, opportunistic politicians and ignorant religious leaders to forge those impossible rules upon an uncompromising and uncooperative reality:
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.
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. 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. 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.
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.
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. 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. 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.
The ultimate moral success of liberty lies allowing and trusting the rules of free markets to flourish, despite our natural misgivings about the initial or apparent unjust or unequal rewards. Herein lies the central truth about merit and value:
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.
Dalmia is a brilliant and concise thinker and writer.
This is an excellent six and one-half minute Reason TV interview with Shikha Dalmia on the movie, Slumdog Millionaire, the explosive Indian economy and what it can teach Americans about their own problems and solutions.
{ 7 comments… read them below or add one }
Lower taxes, far fewer and less burdensome regulations causes the economy to grow!?! Why who would have thought that?? It seems to work every time it is tried, but let’s not do that here because it may work and reinforce that dreaded disease CAPITALISM!
I am open to debate on this interesting article but I think she is arguing semantics.
Value is the worth that I see in someone’s good or service, what I would be willing to pay.
Merit, as I see it, is basically the same thing.
I value this product so I am willing to pay X. There is merit in my paying X for this product.
I receive a merit raise raise at work because I bring value to the company that ensures my continued employment. If I did not bring value I would not merit my continued employment.
Said another way.
I may buffalo my way into a high paying position based on the value I promise to bring to an organization, but if my results don’t merit the salary I won’t be there long.
It comes down to one’s personal interpretation of merit and value and God knows we have had many a discussion here on one’s definition of a word or phrase.
I have to disagree, Texanadian.
Value and merit are two nouns with broad application and it is clear to me Dalmia is making a distinction here within those words’ specific economic meaning.
Merit and value in several contexts can most definitely have equivalent definitions, but here I think the differences are stark and their distorted usages are damaging both by and to conservatives who are trying to convey certain principles and ultimately to citizens at large.
Within this context, I would have to say that value is indeed an economic term, but merit is morally subjective judgement.
A person works hard for their money they should be allowed to keep it is a subjective argument that implies some sort of cosmic Karma is at work. Yet, is that not the American way? People work, pay their taxes, invest in their pensions, do they not merit some sort of free treatment? Or as no longer productive contributors should the government permit their pensions to be eroded or inflation destroy their earning power because their value to the market is zip?
Two years ago we witnessed the death of capitalism, not one investment bank survived The economy now runs on the largesse of the federal government. Not because of some liberal mantra or conservative dogma but because, as a source of capital, the government has surpassed private capital in value.
And who elects this benificent government? And does the electorate make their choice based upon value or merit? There is a reason accountants don’t run the government. So if the political system is based, not upon value, but merit; does it not follow that the capital supplied by the government is directed at merit instead of market value?
Reagan knew the value of smaller government and tax cuts. JFK was even smart enough to understand the effect of tax cuts on the economy. The liberals think bigger government and more taxes are the answer to all our problems. A lot of republicans are of the same mind. Get government out of the way and lower taxes and watch what will happen to this great nation.
And those who meddle in the markets are often the ones who are clueless about them – Presidents, Senators, Representatives. Just listen to Chuck Schumer talk for two minutes.
Good piece, texpat.
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