In the latest Cato Unbound, Rod Long attacks Ayn Rand’s view that actually-existing capitalism is highly meritocratic:

Rand describes a “pyramid of ability” operating within capitalism,
wherein the dull masses are carried along by the intelligent and
enterprising few. “The man at the top,” Rand assures us, “contributes
the most to all those below him,” while the “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 all of their
brains.” Rand doesn’t say that the top and the bottom always correspond
to employers and employees respectively, but she clearly takes that to
be the usual situation. And that simply does not correspond with the reality of most people’s everyday experience.

If you’ve spent any time at all in the business world, you’ve almost
certainly discovered that the reality on the ground resembles the
comic-strip Dilbert a lot more than it resembles Rand’s pyramid of
ability. In Kevin Carson’s words:
as in government, so likewise in business, the “people who regulate
what you do, in most cases, know less about what you’re doing than you
do,” and businesses generally get things done only to the extent that
“rules imposed by people not directly involved in the situation” are
treated as “an obstacle to be routed around by the people actually
doing the work.” To a considerable extent, then, in the real world we
see the people at the “bottom” carrying the people at the “top” rather
than vice versa.

I have two conflicting reactions to Rod’s observations.  I agree that the workplace often seems Dilbertian to people on the ground.  “The boss is an idiot” is one of the world’s most whispered sentences.   When Arnold tells us about the great “Suit-Geek” conflict, I believe him.

Neverthless, it is very hard to reconcile Rod’s story with basic economics, and there is tons of empirical evidence that Rand’s right about the pyramid. 

The basic economics: If managers don’t add value, why do CEOs hire them?  It’s not enough to say, “Because of government regulation.”  You’ve got to show that regulations somehow make it profitable for firms to pay large salaries to lots of workers with negative productivity.  (For my earlier criticism of Rod on this point, see here and here).  Such regulations might exist somewhere in human history, but I challenge anyone to provide big contemporary examples.

But what about the “tons of empirical evidence” that Rand’s pyramid of ability is real?  The Bell Curve is a good place to start.  Intelligence is one of the strongest – if not the strongest – predictors of income, occupation, and social status.  More to the point, simple pencil-and-paper tests of intelligence are the single best predictor of independently measured job performance and trainability.  If you want to dig deeper, check out the large literature on why income runs in families.

How then can we reconcile first-hand observation with economic theory and statistical fact?  It’s easier than it seems.  Lots of people think their bosses are stupid because:

1. The market doesn’t measure merit perfectly, so success is partly luck.  As a result, some bosses are unimpressive.  (Though almost all of them are smarter than the average rank-and-file worker).

2. There’s a big contrast effect: If you expect bosses to be in the 99th percentile of ability, but they’re only in the 90th, it’s natural to misperceive them as “stupid.”  (Similarly, if someone scores in the 99th percentile on the SAT in math, and the 80th in English, many people will perceive him as “terrible in English.”)

3. Bosses are much more visible than regular workers, so their flaws and mistakes – even if minor – are quickly noticed.  When normal people screw up, there’s usually no one paying attention.

4. Perhaps most importantly, people over-rate themselves.  We like to imagine that we’re so great that we intellectually tower over our so-called “superiors.”  Only a small percentage of us are right.

If Rod Long’s point is merely that markets would be even more meritocratic under laissez-faire, I agree.  But to deny that actually-existing capitalism is highly meriocratic is misguided.  To suggest that the pyramid of ability is actually inverted is just silly.