Markets, productivity, meritocracy, fairness and efficiency

From Who Killed Horatio Alger? by Luigi Zingales.

The fundamental role of an economic system, even an extremely primitive one, is to assign responsibility and reward. In animal packs, the responsibility of leadership and the reward of mating opportunities are generally assigned to the strongest. In human societies, responsibility tends to take the form of employment, and the rewards are money and prestige. . . . Most modern societies, by contrast, try to select and reward according to merit. Indeed, surveys show that in the abstract, most people in developed countries agree with the idea that merit should be rewarded.

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. . . a system of measuring merit should be efficient and difficult to manipulate, and above all, it should be deemed fair—or at least not too unfair—by most of the people subject to it. We can now begin to understand why support for meritocracy translates so neatly into support for the market system. Markets are far harder to manipulate than, say, a list of tenure requirements that an academic committee has created, or—to take a broader example—the decisions of statist regimes determining which lucky citizens get which consumer products. The market system has the reputation, too, of producing efficient results. And it doesn’t violate the prevailing notion of fairness too much.

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Naturally, not everyone embraces the market system. Probably the reason that intellectuals tend to reject it is that it doesn’t reward what they think is meritorious: Lady Gaga makes a lot more money than Nobel laureates do. But in America, people largely accept the system—not merely because they think that it will deliver a reasonably efficient outcome, but also because they consider it mostly fair.

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But this rosy picture obscures a hard fact: meritocracy is a difficult principle to sustain in a democracy. Any system that allocates rewards on the basis of merit inevitably gives higher compensation to the few, leaving the majority potentially envious. In a democracy, the majority generally rules. Why should that majority agree to grant a minority disproportionate power and rewards?
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However, two factors help sustain a meritocratic system in the face of this challenge: a culture that considers it legitimate to reward effort with higher compensation; and benefits large enough, and spread widely enough through the system, to counter popular discontent with inequality.

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But it isn’t necessary to support big business to support free markets. Indeed, the two positions are often at odds, which is why so many Americans who love competition and freedom of choice nevertheless distrust the power that big business is gaining in our society. What we need is something that we might call a pro-market, not pro-business, agenda, one that defends the market system that has served America so well without supporting the businesses, whether they’re banks or car companies, that have grown, as the phrase has it, “too big to fail.”