In Praise of Market Meritocracy

            These days, one often hears people saying that wealth should be ‘distributed fairly’. By this, they usually mean that wealth should be ‘distributed’ more equally to members of society. That is, the notion of a ‘fair distribution of wealth’ is tied to the concept of egalitarianism, which holds that in terms of access to material goods at least, all members of society should receive roughly equal shares.

           

           In this post, in opposition to these ideas, I would like to defend a different conception of a ‘fair distribution’ of wealth: that of market meritocracy. Any meritocratic concept of wealth distribution must necessarily be tied to a notion of wealth that is earned versus wealth that is unearned. This is the case in the concept of market meritocracy, with the added specification that wealth that is earned must be acquired on the open, unhampered, free-market through serving the consumers or by receiving wealth as a gift from those who have acquired it this way. Any wealth that is extracted through the use of coercion, fraud, or through the acquisition of special political privileges is unearned wealth.

           

           Egalitarian conceptions of wealth distribution, because of their very nature, rely on an obliteration of the distinction between wealth that is earned and wealth that is unearned. Earning wealth implies that one has acquired the wealth through a productive effort of some kind. For egalitarians though, one is entitled to wealth merely because of one’s existence and because one allegedly has certain ‘needs’ that must be fulfilled. It would seem too great of a perversion of the word ‘earned’ to say that one has ‘earned’ wealth by being born and by needing it, so the egalitarians just don’t use the word or the idea behind it. For the egalitarian, there is only ‘entitlement’ and ‘obligation’, not ‘earned’ and ‘unearned’. People that are worse off materially or whose productive abilities are below average, for whatever reason, are ‘entitled’ to receive access to additional resources, while people that are better off materially  or whose productive abilities are above average, for whatever reason, are ‘obligated’ to relinquish access to these additional resources and make them available to the poorer people.

           

           By contrast, for proponents of market meritocracy (whom I will refer to as ‘marketists’ from now on), when one has earned the right to access resources (when one has earned money) by serving the consumers on the open market, one is entitled to dispose of those resources as one sees fit. Anyone who seeks to interfere with this entitlement seeks to take away legitimately earned resources from someone. If the taker succeeds, then these resources become his unearned resources, acquired through coercion.

            

           From this, it is clear that egalitarianism and market meritocracy are concepts that cannot be reconciled. To advance the egalitarian ideal, the earned, according to marketist criteria, resources of someone must be taken and given to someone else. Thus, every step towards coercively-imposed egalitarianism is a violation of the marketist ideal.

            

           Here, in order to further flesh out what market meritocracy entails and what its proponents believe, let us address some common objections to market meritocracy:

1. If marketists believe in meritocracy, then why do they tolerate the institution of inheritance, which allows the children of rich people access to more resources and opportunities to acquire more resources than the children of poorer people, irrespective of personal merits or demerits?

Response: Firstly, marketists don’t just believe in ‘meritocracy’, they believe in a particular kind of meritocracy where merit consists of giving the consumers of society what they ask for, in potential competition with others who are trying to do the same, and being rewarded according to how well one succeeds in this endeavour. Marketists, unlike other branches of meritocrats, do not seek to tie material rewards directly to whatever the observer considers to be ‘merits’ or ‘demerits’ of the individual. It doesn’t matter whether one has acquired one’s ability to serve the consumers well through innate personal characteristics, through the advantages (material or otherwise) conferred by one’s parents, through luck, or through pure hard work and dedication. What matters is how well, in the present and with the productive resources one possesses, one is able to give the consumers what they want.

           

           Secondly, marketists don’t focus on whether the recipient of the inheritance has earned it through their own personal merits or not, but on the right of the giver of the inheritance to give it to whomever they want. As noted above, one has a right to freely dispose of the resources one has earned through one’s productive efforts in service to the consumers, as long as in doing so, one does not interfere with the right of others to do the same. This right is merely the right of exercising one’s ownership prerogatives over resources. Someone must hold these rights over resources, and if not the person who has earned them, then who else could be entitled to such rights? It should also be noted that protecting the right of legitimate owners of wealth to transfer their earned resources to their offspring or others gives them a greater incentive to serve the consumers well than there would be in its absence. If they couldn’t give away their resources once they died, then what incentive would they have to continue accumulating wealth and capital through service to the consumers near the end of their lives? They would instead have an incentive to stop serving the consumers and to merely consume the resources they had previously amassed, something that would result in capital consumption and its associated undermining of the productive potential of the economic system.

2. What makes the demands of these ‘consumers’ you speak of the most important determinant of the relative wealth of individuals in society? Richer people enjoy more power as individual consumers than poorer people, thus making this concept undemocratic. Also, the consumers might demand evil, useless, or immoral things, so why should catering to their depravities be a mark of merit?

Response: In order to answer this series of questions, it is important to point out that ‘consumers’ signifies those that are using their resources, previously earned through productive effort in service to the consumers that existed at that time, for their own enjoyment. Thus, the concepts of ‘consumers’ sovereignty’ and of ‘earned resources’ are two sides of the same coin. If one has earned resources through production, one then has the right to consume these resources in the way that one sees fit.

Yes this process is ‘undemocratic’, if democratic is defined by the equal weighting of everyone’s opinion in a decision-making process. Under consumers’ sovereignty, each unit of money representing a certain amount of access to resources has an equal vote in determining the income of market producers, but each person does not because each person has not earned the same amount of resources in production.

Yes this process might result in high incomes going to people who produce things that an onlooker deems to be evil, useless, or immoral, provided that the consumers demand these things. But if we were to give this would-be censor the power to prevent the consumers from using their earned resources to demand certain things from the producers, we would be partially taking away the ownership rights of people who had earned resources through productive effort and giving them to the censor, who certainly did not earn them merely through expressing his disapproval of other people’s choices.

             

3. Even if we were to admit that market meritocracy is good in theory, an unhampered free-market does not produce these results. Just look at the ridiculously large incomes of businessmen and capitalists and the relatively small incomes of the workers who do the real work.

            

           Response: Firstly, we must stress that at no point in history has a totally unhampered free-market operated, and certainly not in the present. Governments and other coercive organizations have always injected violence and fraud, to a greater or lesser degree depending on the time period and geographical region, into the market order, thus partially distorting its distributive results. This must always be kept in mind when bringing up historical or present-day outcomes in theoretical discussions.

            

          Secondly, the fact is that totally free-market or not, businessmen and capitalists perform vitally important functions in the economy. As George Reisman points out, economic theory shows that businessmen and capitalists are the ones responsible for creating, coordinating, and making more efficient the societal division of labor, and they do so through investing capital and pursuing high rates of return or profits with that invested capital. Most strikingly, it is obvious that without businessmen and capitalists, there would be no wage-earning workers as we know them. Wage earners are typically paid either every two weeks or every month, but in most cases the products that they help to produce are not fully sold as final products to the final consumers for money for many years, or even decades for goods such as steel used to build automobile factories that last for 50 years. What happens is that businessmen and capitalists save up money and use it to pay the workers, thus bearing the costs of waiting for the final product to be sold and bearing the uncertainty of whether that product will in fact be sold at profitable prices or not. They are also the ones to decide what specifically to produce and what factors of production to use to produce it, in an attempt to produce a product that will bring in revenues sufficient to cover their costs of production and hopefully net them an additional profit. The better they anticipate and the shrewder they are at using factors of production efficiently, the more profit they will be able to net and the higher their incomes will be.        

           

           Thirdly, one’s productive efforts in service to the consumers are not evaluated as a class but as a marginal unit, and one is rewarded accordingly. As a class, the productive efforts of farmers are so vital to the consumers that without them the consumers couldn’t survive, and thus if they were to be evaluated as a class, might be said to be worth the entire income of consumers. According to this method of evaluation, farmers should receive a very large income, while others should receive little, if anything. But then everyone would just become a farmer and the result would be a relative overproduction of agricultural products and a drastic relative underproduction of everything else. It should be obvious that everyone would be worse off under such an arrangement.

            

           The foregoing discussion points to the vital role of ‘supply’ in determining prices, and through them, in determining producer compensation. On the market, one’s productive efforts are evaluated in marginal terms. If there are 10 000 wheat farmers, the productive efforts of one wheat farmer are evaluated as the difference in output between 9999 wheat farmers producing wheat and 10 000 wheat farmers producing wheat. They are not evaluated as a class of ‘wheat farmers’ and based on hypothetical considerations of what would happen if all the wheat farmers suddenly stopped producing wheat. It follows that if there are more wheat farmers than 10 000, the productive efforts of individual wheat farmers will be evaluated relatively less highly than if there were 10 000. This is due to the law of diminishing marginal utility, which is based on the fact that human actors always use each available unit of a good in the way that provides the most utility. The more available units, the less important (in terms of utility) uses the added (or marginal) units will be put to.

            

           There is nothing un-meritocratic about this way of evaluating productive contributions. The rarer one’s ability to give the consumers something that they want, the more, other things equal, valued will that ability be. This is why hard manual labor needing little intellectual effort is not rewarded very highly on the market. No matter how vital this work is and no matter how physically hard the manual labourers work, the fact is that the capacity to do it is relatively common and thus it is not evaluated very highly in marginal terms. To say that it is the manual laborers who are really responsible for making the product and should receive the bulk of the revenue from the sale of the product not only ignores the vital productive contributions of businessmen and capitalists but also commits the fallacy of thinking in terms of classes rather than in terms of marginal units.

4. Why must there be a stark choice between market meritocracy and egalitarianism? Can’t we just combine the two in a pragmatic way and achieve better results that way?

            

           Response: As I noted above, market meritocracy and egalitarianism are like oil and water, they simply don’t mix. Suggestions to combine the two invariably call for the decision determining how much egalitarianism to impose to be made by an official, governmental body of some sort, usually partly based on the results of periodic democratic elections. But this suggestion actually introduces a third ‘ethic’ for distributing societal wealth: that of government omnipotence. Government is allowed to determine how much of people’s wealth earned on the market to take and who to give this wealth to. They might use this power to enact a more egalitarian distribution of wealth, a less egalitarian distribution of wealth, or a similarly egalitarian distribution of wealth but with different individuals getting different amounts of wealth.

            

           Almost no one would espouse such an ethic because most people have a particular idea of what they think the distribution of societal wealth should be. If the government uses its power to bring it closer to the observer’s ideal distribution, they applaud the government’s efforts. But if the government uses its power to take it further away from the observer’s ideal distribution, the efforts of the government are denounced. Thus, unless one believes that the government is somehow always infallibly wise, or perhaps guided by supernatural forces, the wealth distribution ethic of government omnipotence doesn’t really make much sense.

           

           Having answered these common objections, our final task is to answer the important question: why believe in market meritocracy? One set of reasons are the utilitarian ones. If people are rewarded to the extent that they serve others, and are allowed to freely use their unique abilities, intelligence, and knowledge of specific circumstances in order to serve others, everyone in society is given both the incentives and the means to advance the economic well-being of that society, thus making everyone better off. Another set of reasons have to do with ‘fairness’, which the egalitarians love to emphasize. Isn’t it pre-eminently fair that to the extent that one serves others (as evidenced by the earning of money), one receives the right to be served by others (the possession of money)? Why would it be fairer to break this reciprocity of service and benefits and establish an un-reciprocal system where, regardless how much one serves others, one always receives the same right to be served by others as everyone else? Besides the immediately obvious utilitarian drawbacks of such an ethic (where are the incentives to serve others well in this ethic?), it is not clear why even apart from utilitarian considerations, such a system would be fairer than the marketist system, as egalitarians believe.

Thus, if you agree at all with what I’ve said in this post, I would ask that the next time someone proposes an egalitarian-inspired redistribution of wealth from rich to poor, you object: “Wait a minute sir, unless it is proven otherwise, we should assume that this rich man has earned his wealth by serving other members of society, and in that case, what right have you to take it from him?”