The Dangers of the Myth of Merit
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Filed Under: Headline • The Calling
Tags: Austrian Economics • business • F. A. Hayek • free markets • merit • Myths • Vernon Smith
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.
Comment by Eric Dennis on 19 November 2009:
This argument seems to be extrapolating from the obvious fact that not every successful entrepreneur is particularly smart or noble to the unwarranted conclusion that there is no general tendency in this direction.
Does anyone doubt that the average high-achieving entrepreneur is significantly smarter and harder-working than the average man, as found by objective measures (e.g. IQs and average hours worked per week)?
Suppose, for instance, we select 500 successful businesses at random, remove their CEOs, and replace them with House Reps and Senators. Is your contention that, after a sufficient introductory period, these companies would perform just as well? — or that if we do so in reverse, that the governmental departments would perform just as poorly? I.e. are you doubting the existence of a selection effect in terms of what kind of man would prefer and succeed at the task of creating wealth through trade vs. at the task of navigating government bureaucracies.
Also, were it not for the highly regulated nature of our economy, I suspect the differential would be even greater.
Comment by Greg Ransom on 19 November 2009:
When we look at Bill Gates or Angilo Mozilo, Warren Buffett or the many folks involved in the mortgage finance & securities business, what we see in part are folks who were often “lucky” in there ability to exploit the vagaries of government power — Bill Gates got government enforced exclusivity to a bit of code written by someone else — and cribbed from a third party. Buffett exploited estate ax law which forced private businesses to “sell out”. And Countrywide, Goldman Sachs, Fannie Mae, etc., etc., etc. — well, we all know that story.
The conditions of “luck” are often molded by government — and “luck” goes to those with a talent and moral character fit to exploit that environment.
Comment by Greg Ransom on 19 November 2009:
If you watch Bill Gates and Warren Buffett at an appearance before MBA students you can’t help but think that human beings are hard wired to see merit and “smarts” and other “good qualities” in those with outsized wealth, power, and success.
We see the same sort of thing all of the time with powerful rulers and mega-celebrities.
People weep when tyrants die, even when the most evil tyrants die.
Psychology experiments reveal similar outcomes — when people identify someone as wealthy, powerful, successful, etc., they ascribe outsized good qualities to them, i.e. unearned merit.
I agree with your case for the “myth of merit” — but I don’t think it’s going away any time soon.
Pingback by The Dangers of the Myth of Merit « thak’s cool links on 19 November 2009:
[...] The Freeman » The Dangers of the Myth of Merit. I couldn’t agree more. [...]
Comment by Eva Ziessler on 20 November 2009:
Wow, thanks! That needed saying almost more than anything else if people are to understand the workings of the market. I would be in favor of not only dropping the word “merit” when discussing markets but also the word “reward”. Problem is, when we talk of “rewards” we mean it in a purely descriptive and formal sense; most others, however, especially those who do not understand markets yet, will tend to load it with content–with the sorry result of for instance the campaign slogan of the Free Democrats here in Germany: “Leistung muss belohnt werden!”, i.e. “Achievement has to be rewarded”, the implication being that the party, now of the governing coalition, is capable of substituting their own criteria of “worth” for the market process and the pricing system and thus abolish markets altogether.
Comment by Steve Horwitz on 24 November 2009:
Eric,
I’m not arguing that one can easily replace entrepreneurs with the “average man.” What I AM arguing is that being a successful entrepreneur in the market doesn’t necessarily require that one is very smart or super hardworking or any of the characteristics that we think of as “meritorious” in the ethical or philosophical sense. Rather it simply requires that people see ways of creating value and have a plan for executing it.
Just because one has an IQ of 150 or whatever, does not make one a good entrepreneur, nor am I convinced that good entrepreneurs necessarily have higher IQs.
And yes, if we moved talent entrepreneurs into government, government would perform just as (maybe even more!) poorly. Could politicians and bureaucrats learn to become good entrepreneurs? Let’s put it this way: they’d have to actually face profit and loss for the first time, which would force them to learn or get out of the way (unless they are a bank or car company
). So yes, over time, some would learn how to survive in that environment. How successful they would be as a group would depend NOT on their intelligence or hardwork, but whether they could create value. Period, end of sentence.
Comment by Steve Hankin on 3 December 2009:
Steve, I found your article quite interesting. I certainly agree that
there is no reason to think that entrepreneurs are, as a group, more or less intelligent than beauracrats, but I think you fail to consider the importance of risk taking to being an entrepreneur. Before one can be in a position to read the market signals or even to benefit by being lucky, he must put himself in the game -that is, he must be willing to take the initial risk required to become an entrepreneur. Certainly, the entrepreneur is given the most opportunities for entrepreneurship in a free market setting. Steve (do you recall meeting me at FEE and exchange a few emails–the lecture by the author of that book on Keynes was as I suspected a Keynes love fest, but I did my best to rain on his. parade. Thanks for the questions.