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.”