Friday, August 28, 2009

Why the free market is not meritocratic

The price system does not reward ability. If you want people’s earnings to reflect their ability, therefore, you can’t have a free market.

This simple point is both obvious and universally ignored. Consider:

Bonuses for executives and traders have increased over the past 30 years - can anyone really claim that traders and executives now are actually “better” than traders and executives from 30 years ago?

(Traders and execs now have access to better tools, but surely this is an argument for paying the providers of said tools more rather than the people who use them?)

The point about the free market is that it signals demand. It does not reward past performance, but indicates what people *should* do in the future.

As the free market does not reward past performance (90 year old retired executives can’t go back to their former employers and demand more money from them now because they weren’t paid as much 30 years ago as their replacements are now) the free market cannot be a meritocracy.

The best thing about the free market is the way it matches supply to demand. It is this very thing that means it is not meritocratic.

The best social worker in the country probably earns no more than the average taxi driver.


Thomas Byrne said...

With their ability judged being what exactly? I don't think this is an argument against capitalism at all if you use the word ability.

TJ said...

It isn't an argument against capitalism. It is simply making the point that it is a mistake to confuse the *free market* with a meritocracy.

That capitalism is not a meritocracy is even more transparently obvious.

And I agree that "merit" or "ability" are not specific enough to be meaningless.

Thomas Byrne said...

Can you back this up with any social scientific research? I mean, I've seen evidence which suggests that effort is, in fact, the second largest predictor of outcomes behind IQ which seems to fit the model that capitalism approximates a meritocracy not too badly.

Capitalism having a low correlation is one thing,(If it can be proven) but it wouldn't necessarily follow that other systems do any better.