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Thursday, November 19, 2009

The Dangers of the Myth of Merit

In his various chapters and essays on the “mirage” of the concept “social justice,” F. A. Hayek makes a claim that is very often overlooked by those who support the market. He argues that markets generally do not reward “merit.” That is, the people who become wealthy in the marketplace do not do so, for the most part, because they are somehow “better” people than those who are not as wealthy. The wealthy are not necessarily more intelligent, more moral, or even harder-working than the rest of us. However meritorious we think those attributes are, they are not what the market rewards. The market rewards the creation of value in the form of providing goods and services that other people want. Period, end of sentence.

Frequently those who succeed in the market do so because they were lucky or simply in the right place at the right time with the right idea. They need not be especially smart or hard-working; rather they just need to be able to figure out what people want and to get it to them in a cost-efficient way. They also need to be able to adjust on the fly as conditions in the market change. Here, too, the typical notions of merit need not apply.

A critic of markets might respond with “Aha! If you’re right that entrepreneurs aren’t any better than the rest of us, why can’t we just replace them with government bureaucrats?” A fair question! The answer is that the effectiveness of markets does not rest mainly on the qualities of the individuals involved, but rather on the institutional environment in which people operate. Entrepreneurs are able to figure out what people want and how best to produce it not because they are especially intelligent, but because they act in the market, where signals such as prices and profits help them learn what others want and how to produce it.

It’s not that markets do things well because entrepreneurs are smart; rather, entrepreneurs are able to do things well because markets are “smart” in that they are able, through prices and profits, to make more knowledge available to entrepreneurs than political processes do to bureaucrats. This feature of markets is what Nobel Laureate Vernon Smith calls “ecological rationality.”

Forgetting this point and believing in the “myth of merit” poses two dangers for defenders of the market. First, it can seduce us into arguing for markets based on the personal characteristics of entrepreneurs versus bureaucrats. This is an argument we will lose. People are people, and there’s no necessary reason that people who become entrepreneurs are inherently better or smarter than bureaucrats. Many successful entrepreneurs have gone to work for government or have been elected to office and failed miserably. Of course, as Hayek recognized, expanding the political realm may tend to attract into it those who are less moral in the sense of respecting the rights of others, but that is due to the ecological irrationality of politics.

Second, believing the myth of merit can lead us to slide from being “pro-market” to “pro-business.” If one believes that businesspeople are somehow more deserving than bureaucrats, one might be tempted to support government policies that benefit business at the expense of markets, such as the bailouts. It’s not that the managers of GM are inherently smarter or more moral than members of the Obama administration. It’s that in the absence of distortion, the market provides them with knowledge that bureaucrats would not have and couldn’t use as well as entrepreneurs can even if they had it.

Bailing out firms cuts off the profit-and-loss learning process and makes those running the show less able to act efficiently, not to mention creating incentives for them to be more concerned about politics than products.

In days like ours, when the line between businessperson and bureaucrat gets ever more thin, maintaining the distinction between “pro-market” and “pro-business” is more important than ever. Accepting the “myth of merit” risks overlooking that distinction.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.