the mirage of meritocracy in a free market economy
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LSE MSc Philosophy of the Social Sciences DissertationTRANSCRIPT
The Mirage of Meritocracy in a Free Market Economy
MSc Philosophy of the Social Sciences
2011/2012
London School of Economics and Political Science
Colm O’Sullivan
1. Introduction
There is a widespread contention that a free market economy leads to a meritocracy. The belief is
that if a society operates with a free market economy, that that society will be a meritocracy - see
for example ‘Bagehot’ in The Economist (2012), Ayaan Hirsi Ali (Ali, n.d.), and Arthur Brooks
(2012). Ali argues, for example, that a free market creates a meritocracy, providing better
opportunities for those who work hard at school (Ali, n.d.). The argument is prevalent in the
American liberal tradition, with Daniel Bell being a prominent figure. Meritocracy is a term coined
by Michael Young in his 1958 satire The Rise of the Meritocracy. He defines merit to be effort +
I.Q. For our purposes I believe we can substitute ability for I.Q. Meritocracy refers to a system or
society as whole, as McNamee and Miller (2009) put it in The Meritocracy Myth “meritocracy
refers to a social system as a whole in which individuals get ahead and earn rewards in direct
proportion to their individual efforts and abilities”. Some of the key points in this description will
become apparent as we progress. The United States is widely regarded by its citizens to be a
meritocracy, (Longoria, 2009), and it is quite safe to say it operates a relatively free market
economy (in reality, no society ever has a completely free market), that is to say its economy is
largely characterised by free enterprise. We shall discuss the US throughout as it provides a lot of
empirical evidence on our topic. The ‘American Dream’ is a dream/belief characterised by
meritocracy. We shall also look at another country, namely Hungary, as its transition from socialism
to capitalism provides a very good natural experiment for the free market leading to meritocracy
thesis.
It is my contention that a free market economy does not lead to a society characterised by
meritocracy. The key question here is what is rewarded in a free market economy? We can look at
this in terms of transactions or exchanges in a free market economy and also what factors help
determine where people end up in a society with a free market economy. Firstly, when exchange
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occurs in a free market it is value that is rewarded not merit. Transactions occur on the basis of
value or usefulness to the parties to the exchange and not simply their view on the meritoriousness
of the other party. Hayek shares a similar view and throughout his writing he refers to earnings
based on value or usefulness to others. A person’s view of the meritoriousness of the other person
can have an impact, to the extent that it affects the usefulness of the good or service they are
offering. Therefore, the two may well be positively correlated, but this isn’t a necessity. Secondly,
merit is but one factor, and seemingly not even the most important one, in terms of where people
end up (McNamee & Miller, 2009). Furthermore, there are numerous contradictions in the
arguments by the proponents of a free market economy leading to a meritocracy, with a prime
example being on the issue of inheritance.
This will lead us to question whether meritocracy, often lauded as an ideal, really is so desirable.
Whilst there can be little argument with some of the outcomes the creation of a system on such a
ground would create, I contend that the negatives are over-looked. The negatives are very serious. If
people’s outcomes are to be a function solely of their individual merit then the family would have to
be abandoned in favour of state orphanages, so no child could gain an unmerited advantage from
their familial background (Young, 1994). In fact, the remorseless logic that would have to be
followed to create a true meritocracy would essentially destroy a free society.
I will put forward the case for defending a free market economy. Not because it creates a society
characterised by meritocracy, which it doesn’t, but on the grounds that it is the most efficient way of
solving the co-ordination problem of economic activity, and, more importantly, that it can help
preserve a free society.
Given the existence of society and a government, a free market will not be completely free. That is
to say it will not be a perfectly free market. This is the case as there will need to be some degree of
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regulation. However, this fact doesn’t undermine the argument about a free market economy not
enabling society to be a meritocracy.
Even though I am a defender of a free market economy, I don’t feel distribution via market
mechanisms must or should extend to all facets of our lives and society. A free market economy I
feel is appropriate to the sphere of ‘normal’ commercial activity. This is not uncontentious, how is
one to define the boundaries? Decisions on this need to be made. But if we don’t make such
distinctions then we are bound to end up with extremely unequal opportunities, just as was the case
in very rigid societies of the past. This would be the case as markets generate unequal outcomes and
these inequalities would be very much likely to be transmitted across generations as wealth has
great staying power and access to opportunity would largely be a function of the wealth of the
family one is born into. This, I contend, is extremely undesirable and would itself be a similar threat
to a free society.
2. Terminology
I want to set out some definitions for the key terms to be used. Hopefully this will make things
clear.
• Merit: merit = effort + ability. It is an individualistic concept. Meritocracy is a societal system
that solely rewards merit (McNamee & Miller, 2009). Merit can be looked at perhaps less
abstractly, say through educational qualifications. Such a view has been put forward by Bell
(1972, 1973). In this view educational qualifications serve as the basis for where one ends up in
the labour force and income received. Bell says that in such a meritocracy “both material and
symbolic benefits” are “genuinely earned, deserved rewards” (Bell, 1973). However, under this
view a market economy would still not lead to a meritocracy. Bukodi and Goldthorpe’s (2009)
work on Hungary empirically demonstrates this. In fact, no definition of merit (other than setting
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it equal to value or usefulness, which would be incorrect) would see meritocracy compatible
with a free market economy. Merit implies a sense of desert, yet as we shall see crucial factors
that affect where one ends up in a market economy are those that nobody can say are down to
merit (e.g. who you’re born to). Therefore, whatever small differences one may make to the
definition of merit, it won’t alter the argument. That being said, my definition is widely used in
the literature, for example, see Breen & Goldthorpe 2001. Hayek seems to view merit in the
sense of moral desert. He regards it as an individualistic concept (Hayek, 1960/2009). This is
essentially in line with my usage, as it is reasonable to assume that merit and the sense of moral
desert would be based on effort plus ability. Furthermore, slight alterations to the definition
would not alter the argument.
• Value: the ‘usefulness’ of the ‘item’ to the other party to an exchange. Value relates to the item
being exchanged. There may be a positive correlation between value and the degree of
meritoriousness of the person “selling”, but this isn’t a necessity and is not always the case. My
usage of this term is essentially the same as that of Hayek’s, throughout his writing, when he
discusses value or usefulness.
• Free market economy: an economic system where prices are determined by supply and demand
alone (Moffatt, n.d.). Clearly no economy is a perfect free market economy in reality, as there
always exists some amount of government regulation. A free market economy is characterised by
private ownership, so there exists private property, and free enterprise.
3. A free market economy doesn’t lead to a society characterised by meritocracy
What is rewarded in a free market economy? For a free market economy to be a meritocracy it
would have to be solely [or at least overwhelmingly] merit (Longoria, 2009). Let’s examine what is
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rewarded in a free market economy and investigate what determines where one ends up in a society
with a free market economy.
(3.1) What is rewarded in a transaction?
It is my contention that what is rewarded, in terms of what one is willing to pay, is value and not
merit. When one is a buyer in an exchange situation one only considers how meritorious the seller
is as far as it relates to the value or usefulness of the item being sold. How much one is willing to
pay in order to acquire the good or service being offered or sold is a function of its value and
usefulness, and merit will only be a factor to the extent that it affects, or contributes to, this. As
previously mentioned, merit and value can be positively correlated. If my effort and ability enables
me to produce a more valuable good or offer a more valuable service then there will be a positive
correlation. However, there are two key points to be made on this.
(i) An exchange in a market economy need not show any relationship between merit and value. If I
inherit a property from a relative, a property that I never helped pay for or construct etc., and I
decide to sell it, then this transaction and the proceeds I receive are not due to merit. The
proceeds are due to the fact that the property has value to the buyer, and that is what the buyer is
paying for. A counter-argument that my relative would have potentially acquired the property
through merit doesn’t wash; merit is not hereditary or capable of being passed on (Paine, 1976).
(ii) If there is a positive correlation between merit and value, the relationship certainly is not linear.
That is to say, that if person X earns 100 times as much in the labour market than person Y, that
person X is not 100 times more meritorious than person Y. For example, I think it would be
absurd to argue that Wayne Rooney is, say, 100 times more meritorious than an exceptional
doctor, that the difference in earning power is solely down to their respective individual merit.
There are many further factors, in addition to merit, that have an impact.
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Along these lines Hayek makes a very good point. In a free market economy one is free to choose
one’s occupation. Hayek shows that if this is to be the case then remuneration must correspond to
usefulness to other members of the society, even if this has no relation to subjective merit (Hayek,
1944 / 2010, 126).
(3.2) What determines where one ends up?
“In short, the correlation between one’s social origins and one’s outcome in life is zero in a
meritocracy” (Longoria, 2009, 4). Basically, in a meritocracy, one’s outcome in life should solely, or
at least overwhelmingly, depend on one’s individual merit, i.e. one’s effort and ability. A free market
economy would not lead to this. A free market economy is characterised by private property and
freedom for individuals to do as they please with their property. We shall discuss the factors that
determine where one ends up in a society with a free market economy and show the conflict
between meritocracy and a free market.
(i) Merit
A free market economy is not a feudal system, merit does have an impact. If I work hard, develop
my abilities and talents then there is a better chance that I will ‘get ahead’. However, this is not a
contradiction. Just because merit is a factor does, of course, not mean that it is the only factor.
Furthermore, having a better chance does not equate to having a guarantee. For society to be a
meritocracy merit must be the only factor (or at least by far the most important one). In a society
with a free market economy whilst merit is undoubtedly a factor, it is far from the only factor and it
is arguably not even the most important one (McNamee & Miller, 2009).
(ii) The Demand-Side
In economics J.M. Keynes showed the importance of the demand-side. The demand-side is no less
an important factor of where people end up in a society with a free market economy. The condition
of the labour market when one enters it has an important bearing upon where one ultimately ends up
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(Kahn, 2010). However, one does not have control over the condition of the labour market when
one enters it. It is clear to see that for those graduating from university in 2012 face a significantly
tougher labour market than, say, those who graduated in 2006. It is often assumed that once one
works hard and has ability then that is all that is required. Indeed in a meritocracy that would
probably be more accurate. Remember, exchange occurs in a free market economy, i.e. it is a two-
party affair. It is not a matter of just achieving certain criteria.
A free market economy is dynamic, not static. If a person makes the investment of higher education,
commits themselves to a period of study over a number of years and works hard to achieve a good
degree, the economy may look a lot different upon graduation than it did when someone made the
choice to study (McNamee & Miller, 2009). There may well occur a dramatic change, resulting in
the value of the skills, that one has so significantly invested in order to acquire, diminishing
significantly. These things are not so easily forecastable, far from it (McNamee & Miller, 2009).
This is a demand-side factor that seems too often overlooked.
Hayek is aware of this; he discusses remuneration being based on usefulness and not subjective
merit. “We all know the tragic plight of the highly trained man whose hard-learned skill has
suddenly lost its value because of some invention which greatly benefits the rest of
society” (Hayek, 1944/2010, 127). Although Hayek gives an example of a supply side shock (a new
invention), it is essentially the same issue as we have discussed.
These points show a tension between merit and exchange in a free market economy. Merit is in an
individualistic concept, exchange is not. One could be the most able and hard working of people,
but if there is no opportunity, if there is no one willing to exchange the this person may not succeed
in a market economy. Furthermore, this may not be down to a perception that this person’s ability is
not useful. There could simply be a significant oversupply of people with the same skill-set,
meaning some will be unfortunate.
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Take one more point on the influence of the demand-side. To get ahead one needs to have the
fortune that society values the abilities that you have during your lifetime. If it so happens to be the
case that society highly values the abilities and skills that you possess, this can largely be a non-
merit factor. Yet it is crucial in order to reach the top. Michael Sandel discusses this when
addressing Rawls’s theory of justice in his Harvard lecture series (Sandel, 2009).
To illustrate, consider Lionel Messi and Cristiano Ronaldo. Both are exceptionally talented
footballers who no doubt work and train very hard to develop their ability and perform at a very
high level. However, if the current world’s population didn’t have much interest in watching
football then Messi and Ronaldo would not be able to earn anywhere near the income that they
currently do through salaries and endorsements. One might say that the ability of the likes of Messi
and Ronaldo make football what it is. This may be partially true, but football’s popularity and
earning power is very much not solely down to the current players. There is a large non-merit
element to the rewards they receive. This is not to say that there is an injustice. It may well be
regarded as unfair that an average Premier League footballer earns a lot more than say the world’s
best squash player, but that doesn’t make it unjust. Something being unfair doesn’t automatically
make it unjust. Person X winning the national lottery may well seem unfair to the others who
bought tickets. Person X did nothing different to the rest of the lottery ticket holders, had no special
ability to forecast what numbers would be drawn etc. Yet person X winning and everybody else not
doing so is not unjust (assuming it was a fair lottery). Sandel (2009), in the aforementioned lecture,
gives a similar point, and inspiration for my lottery example, when discussing Rawls’s distinction
between moral desert and entitlement to legitimate expectations. My argument, via this example, is
somewhat similar to that of Rawls (1971, 311) when he says that “there is no tendency for
distributive shares to correspond to it [moral desert]”. Moral desert is not very different to merit.
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An objection here may well be that merit is defined in a way that is intrinsic to the person and not
conditional upon the society the person lives in. I disagree with this, merit allows for skill and
ability acquisition, say through education or training. Even if merit is defined more concretely, say
it is qualified by educational qualifications, which does account for the society one is situated in;
this still won’t lead to a meritocracy being formed in a society operating a market economy. Bukodi
and Goldthorpe (2009) demonstrate this by empirically analysing Hungary.
Bukodi and Goldthorpe review two views on meritocracy. One, ‘meritocracy as a functional
imperative’ (MFI), and two, ‘market versus meritocracy’ (MVM). MFI, derived from the American
liberal tradition, argues that meritocracy, based on education, will be an economic necessity. MVM,
which is essentially the argument I put forward, derived from the European liberal tradition, sees an
incompatibility between meritocracy of any kind and a free market economy and liberal society.
Hungary provides a natural experiment to test these opposing views. Hungary transitioned from a
socialist, centrally directed economy to a capitalist economy, via some gradualist reforms. Under
socialism a reduction in the association between class origin and education was achieved, coupled
with a strong relationship between education and class destination. Under the MFI argument these
phenomena should persist under capitalism in Hungary, but, and in line with the MVM argument,
this proved not to be the case. MVM would, if anything, predict a weakening in the linkages
between such variables (Bukodi and Goldthorpe, 2009). This research shows that whilst educational
qualifications are important in gaining access to well-paid professional work, access to that
education is not equal across classes and for those of equal education but differing class
backgrounds, those from the higher class have an advantage. In a market economy employers can
decide on what they view as merit (what I call value) and Bukodi and Goldthorpe argue that what
are generally regarded as non-merit factors, and generally acquired through class-specific processes
or socialisation, now have an important role to play.
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(iii)Social Capital and Nepotism
Social capital refers to whom you know; all of us are members of different networks (McNamee &
Miller, 2009). Many of these may well be based on non-merit factors. If I am born to an upper-
class family who live in an upper-class neighbourhood, then it is likely that I will have a high stock
of social capital to use to my advantage. This is largely a non-merit resource; I have no control over
to whom I am born. Social capital can often trump merit; everybody knows the phrase “it’s not what
you know but whom you know”. Of course in a meritocracy, whom you know would be irrelevant.
This isn’t going to be the case in a free market economy.
In reality we can see the prevalence of social capital. In the US many elite universities operate a
legacy admission policy. At Harvard, the legacy admission rate is currently about four times the
regular admission rate (Worland, 2011). Privilege in the form of social capital is clearly widespread,
yet it is a complete non-merit factor. I am confident in saying that in a market economy with
uncontrolled private education such a practice will be prevalent as universities such as Harvard
raise a huge amount of funds through alumni donations. In fact, in that same Harvard Crimson
article, it is reported that, according to a New York Times story, Jeffrey Brenzel, Yale Dean of
Undergraduate Admissions, said there is a positive correlation between alumni donations and legacy
admissions. According to Brenzel, Yale fundraising suffers when fewer legacies are accepted.
“The most blatant form of advantage through social capital is nepotism, often defined as the
undue preference for close kin or friends where open merit-based competition should prevail.
The beneficiaries of nepotism possess social capital - parents, siblings, other close kin, and
friends - that is activated on their behalf and is quite independent of their individual merit or
qualifications” (McNamee & Miller, 2009).
McNamee & Miller also point out that the more nepotism operates, the less merit operates. There
exists a fundamental contradiction.
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A free market economy with freedom to choose one’s occupation and freedom of association etc.
cannot stop nepotism or particularly social and cultural capital affecting where one ends up.
Furthermore, in a society where there is, perhaps very legitimately, a push towards widespread third
level education attainment, social and cultural capital may prove ever more important. This may be
the case as a third level education may convey less information to potential employers, the more
prevalent its possession is (Breen & Goldthorpe, 2001). Employers then may turn to other
indicators of what they believe to be merit and also adopt recruitment procedures say by relying on
more ‘particularistic’ as opposed to ‘universalistic’ procedures, for example exploiting social
networks (Breen & Goldthorpe, 2001).
(iv) Inheritance
Many of the proponents of meritocracy oppose any tax on inheritance (a death tax in their parlance).
Arthur C Brooks of the American Enterprise Institute adopts this approach. In an article criticising
Barack Obama’s initiative to tax rich people more, Brooks argues for fairness to be defined as
meritocracy and the need to work tirelessly for true equal opportunity (Brooks, 2011). In the same
article he implicitly criticises (or at the least disagrees) with high inheritance taxes for redistribution
to the poor. Clearly Brooks feels that meritocracy and inheritance can coexist. This is probably the
biggest contradiction between meritocracy and a free market economy. Given a free market
economy is characterised by private property, inheritance seems perfectly permissible. Why be able
to spend freely on things such as luxury items, and not permitted to pass on your wealth? Here is
what Milton Friedman had to say in 2001 (Mankiw, 2006):
“Spend your money on riotous living — no tax; leave your money to your children — the tax
collector gets paid first. That is the message sent by the estate tax. It is a bad message and the estate
tax is a bad tax. The basic argument against the estate tax is moral. It taxes virtue — living frugally
and accumulating wealth.”
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It is interesting to note that Friedman claims that the basic argument against such a tax is moral. It
seems to me that the basic argument for such a tax is moral. There seems to be a strong moral
argument for some level of inheritance tax, in order to limit the extent of extremely unequal initial
opportunities. One could argue that the moral arbitrariness of the lottery of birth should not be such
a large determinant of where one ends up.
There is tension between meritocracy and the family. Meritocracy is an individualistic concept, the
family is not. If we look at ‘the race to get ahead’, once we have families and freedom of bequest it
is not an individualistic race that starts afresh with each generation, rather it is an intergenerational
relay race (McNamee and Miller, 2009). And if you are born to wealthy parents you essentially start
at the finish line, based predominantly on a non-merit factor (McNamee and Miller, 2009).
If we look at the US again, it is interesting to note that a Founding Father, Thomas Jefferson, did
not favour inheritance. “Thomas Jefferson was actively opposed not only to the hereditary
distribution of political power but to the hereditary distribution of economic power as
well” (Longoria, 2009, 63). Jefferson had a plan so that wealth would not be transmitted to children
in perpetuity and so each generation would start from scratch, an abandonment of the
intergenerational relay race as such. Of course the US does not follow what Jefferson would have
liked. The data reveals this. Forbes publishes an annual list of the 400 wealthiest Americans. The
majority on the list inherited at least $50 million (Longoria, 2009).
(v) Luck
Luck plays a large role in getting ahead in a free market economy. Luck is not fully
meritoriousness. There is an argument that ‘you make your own luck’, which in a sense is partially
true. You can try to put yourself in the best position to take advantage of potential opportunities.
However, as we have seen, individuals do not have much control over the demand-side. Being in
the right place at the right time is largely non-meritorious luck. Luck is a necessary but not a
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sufficient factor in getting ahead. Bill Gates is one of the wealthiest people in the world, if you look
closely at his story you will see it isn’t all down to merit. Gates freely admits there was a large
element of luck and non-merit factors in his success (Gates, 2004).
(3.3) What motivates the claim of meritocracy?
(i) Justificatory Motive
In the past people at the top justified their place by kinship, race etc. Given we have largely moved
away from such systems, such an argument doesn’t wash any longer. Claiming that society is a
meritocracy is a means to justify one’s position, especially as everybody is supposed to have a
chance to reach the top. It is an attempt to legitimise and therefore keep social order. See McNamee
& Miller (2009).
(ii) Operation of the Market
For the market to work people need to have incentives and beliefs. Incentives and beliefs that, in the
market, they will be rewarded for hard work, contribution etc. (Hayek, 1982). However, as we now
know, this isn’t always the case and it certainly isn’t proportional. There is therefore a dilemma,
which Hayek noted: “it is therefore a real dilemma to what extent we ought to encourage in the
young the belief that when they really try they will succeed, or should rather emphasise that some
unworthy will succeed and some worthy will fail” (Hayek, 1982, 74).
4. Dangers of pursuing a meritocracy
Firstly, it must be said that movements towards a society that is to a large extent meritocratic can
generate outcomes that are widely regarded as positive. Movements away from extremely rigid
systems towards a more merit based system where getting ahead doesn’t overwhelmingly depend
on your background is, I would say, unarguably positive. It is these positives that seem to make a
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meritocracy an ideal. However, I think a meritocracy is dangerous and certainly not an ideal. To me
it seems that those who espouse meritocracy as an ideal don’t fully consider all the implications,
certainly not the negative ones.
In Michael Young’s satire The Rise of the Meritocracy we see a fictional meritocracy based on IQ
tests. IQ tests determine everything in this society. This is done through education, which filters
through into the workplace. However this system does not seem so attractive and it isn’t compatible
with a free market economy.
This system would require a state monopoly over education. Education is the crucial element of this
society. A state monopoly would be required so that everybody has an equal chance when it comes
to taking his or her examinations, with examinations being the sole test of merit. Differences would,
therefore, be down to merit. To that end it would logically require state orphanages, so children
don’t get unfair (unmerited) advantages or disadvantages from their family background (Young,
1994). That is to say that there would have to be the abandonment of family life as we know it.
Similarly there surely could be no inheritance, as that is a non-merit factor.
I want to discuss in detail the dangers of pursuing a meritocracy in terms of guaranteeing outcomes.
I realise that I have already argued meritocracy and a free market economy are incompatible, but
just because something isn’t ultimately realisable won’t necessarily stop its pursuit, especially when
there is disagreement on the incompatibility. Furthermore, we have mentioned the desirability of
merit having a large impact on where a person ends up and I am cognisant of the potential attraction
therefore of making merit the sole determinant, i.e. of attempting to create a meritocracy. Here I
want to show the grave dangers of trying to make merit the sole determinant.
According to Hayek (1982), outcomes from the market process are spontaneous and the result of
the interaction of many different agents, each of whom cannot possibly know what their
contribution will work out at. The market is a spontaneous order, which is ‘grown’ not
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‘made’ (Hayek, 1982). Outcomes from the market are not the result of a deliberate allocation by
anybody.
To aim for a meritocracy would be to guarantee outcomes to be proportional merit. To believe this
possible in a market economy is what Hayek would regard as primitive thinking. It is an error to
personify society in order to try to account for a self-ordering process (Hayek, 1982). “To believe
that there is someone behind the scene who acts secretly with good or bad intentions is, according
to Hayek, the result of a primitive state of mentality. Hayek argued that nobody is responsible for
the organisation of the society” (Ikeda, 2010, 5). This aim for outcomes to be based on merit is in
essence an aim for just outcomes, with meritocracy seen as a just system (Hayek often discusses the
motivation behind a clamour for a distributive ideal).
However, it seems incorrect to claim that outcomes from a spontaneous order, which are not the
result of deliberate allocation, can be either just or unjust. Hayek talks about this when discussing
the mirage of social justice, but it applies equally to justice in any other name where outcomes are
attempted to be guaranteed in accordance with some seemingly desirable criteria. To achieve “just”
outcomes would require the abandonment of a market economy. “We must centrally direct
economic activity if we want to make the distribution of income conform to current ideas of social
justice” (Hayek, 1944/2010, 34). Hayek continues to explain that such central direction of economic
activity would be required whatever the criteria for “justice” may be.
That being said, it seems Hayek’s argument is only partially right, as it seems to be based on an
idealised view of a market economy. Hayek is very much aware of the need for a market economy
to operate within a framework. It is undeniable that this framework and public institutions, even if
acting in a non-arbitrary manner, can have distributive consequences. Johnston cites this when
arguing against Hayek’s view on social justice. Johnston points to central bankers, legislators,
public officials being able to predict with a good degree of accuracy the distributive consequences
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of legislative and non-legislative action (Johnston, 1997a). It is rather surprising that Hayek doesn’t
consider such a point in detail, given his understanding of the need for a framework. Furthermore,
in another paper, Johnston points out that Hayek “fails to grasp the extent to which the market order
tends inherently to generate organisation” (Johnston, 1997b, 94). Hayek is very much against such
organisation. It does seem then that a market economy does need to be tempered if it is to fulfil its
desirable purposes.
However, it is not possible to preserve a market order while imposing upon it some pattern of
remuneration based on the assessment of the performance of individuals or groups by an authority
possessing the power to enforce it (Hayek, 1982, 68). Hayek demonstrates that any such pursuit will
result in a vicious cycle with the inevitable approach towards a totalitarian system. This is the
extreme danger. However, a key function of a free market economy is that it can help to preserve
individual freedom by dispersing power. In a free market economy political and economic power
are not centralised in the hands of the state (Friedman, 1962/2002). We shall return to this point.
A guarantee of outcomes based on a given principle, in our case merit, can only be achieved in a
command economy where people are directed what to do. This is not a free market economy where
one has the freedom to choose one’s occupation. I see such freedom as a basic liberty. In a market
system where individuals are able to use their own knowledge, we cannot have outcomes conform
to an agreed upon standard of justice. “Indeed, no system of rules of just individual conduct, and
therefore no free action of the individuals, could produce results satisfying any principle of
distributive justice” (Hayek, 1982, 69). Merit is a principle of distributive justice that is impossible
to satisfy in a free market economy.
Freedom would diminish if a true meritocracy were attempted to be attained. Authority would have
to tell people what to do. There can exist no rule of law in a command or centrally planned
economy. For government to guarantee everybody outcomes in relation to a certain ideal it will
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have to treat them very differently (Hayek, 1944/2010). This would essentially be arbitrary; one
could not possibly forecast all the actions that would be required. “Formal equality before the law is
in conflict, and in fact incompatible, with any activity of the government deliberately aiming at
material or substantive equality of different people” (Hayek, 1944/2010, 82). The importance of the
rule of law for the maintenance of a free society is undeniable.
Furthermore, I would argue that a meritocracy should not be attempted to be achieved at the
expense of freedom. Freedom, in the form of basic liberties, is something that should not be traded
off to achieve a distribution of income or social outcomes in line with a particular view of
distributive justice, in this case merit. We shall address this in the next section.
It seems that what can best be done to make society tend towards being meritocratic to a desirable
degree rests on its institutional structures and on what can be provided outside the market. If we
have institutional structures and a rule of law that facilitates society tending to be meritocratic to a
desirable degree this seems reasonable. The crucial difference is that no outcome is guaranteed;
merely the chances of society becoming more meritocratic are increased. How far any given society
would intend to pursue this remains to be seen, for as has been demonstrated, the logic of
meritocracy requires a 100% tax on inheritance, state orphanages etc. It does seem reasonable
however to outlaw discrimination based on things such as gender, race, religion, sexual preference,
family background etc. (i.e. to have careers open to talents), and to have some degree of inheritance
tax. Other institutional factors also have a significant impact such as having a trustworthy judicial
system, something very crucial to a market economy. In relation to certain items being provided
outside the market, government can provide a certain level of education for all its citizens (whilst
not having a monopoly), can provide a certain level of healthcare, safety nets for those who become
unemployed etc. Such actions will enhance opportunity, and will increase the extent to which a
society is meritocratic.
17
Stiglitz, in The Price of Inequality, discusses at length how markets are shaped by policy and how
this has enormous distributional effects. How a society sets up and runs its institutional structures
will significantly impact outcomes. Stiglitz discusses a variety of topics in relation to the US,
ranging from the objectives of monetary policy, the non-forgivability of student loans, government
granting of monopolies etc (Stiglitz, 2012). It is clear that the set-up, the rules of the game, can vary
enormously, with very large affects on citizens that are not randomly distributed. Such frameworks
and institutional design can be shaped in a way that will allow that society to tend to be more
meritocratic, without guaranteeing outcomes, and we have already mentioned a few such examples.
Hayek is cautious about equality of opportunity, he notes the full consequences that logically follow
(complete control of one’s environment) (Hayek, 1982). However, I don’t think that it needs to be
followed through to its logical conclusion. Furthermore, Hayek himself acknowledges “that there is
indeed a strong argument for reducing this inequality of opportunity as far as congenital differences
permit”, whilst still preserving a free society (Hayek, 1944/2010, 106).
I contend that we can move towards starting line equality of opportunity, whilst realising it can
never be fully achieved. Furthermore, starting line equality of opportunity is compatible with a
market economy as Sugden has shown (Sugden, 2004). This is the case as outcomes are not
guaranteed, i.e. ex-ante equality of opportunity is compatible with a market economy but not ex-
post.
The extent to which we, in a society, would like to see outcomes determined by merit is a debate
that would need to occur. I feel that merit should be a large determinant, but that other factors
should still be at play and we need to safeguard such things as family life and basic liberties. How
any given society would shape its framework and institutional design is essentially a social choice
exercise.
18
5. Why have a free market economy if it doesn’t lead to a meritocracy?
A free market economy is the most efficient way of solving the co-ordination problem of economic
activity. History bears out this fact. This is the economic efficiency argument for a free market.
The strength of this point owes a lot to the work of Hayek and his work on knowledge. In the past
there have been attempts to pursue “market socialism”. “The essential idea [of market socialism]
was to incorporate markets into a system of central planning” (Sugden, 2004, 218). The ambition is
to reap the benefits of markets in terms of decentralised decision-making, whilst ensuring an
egalitarian distribution of income (Sugden, 2004). However, this cannot work as an economy is
dynamic and reaches equilibrium via a process that is subject to constant fluctuation. Sugden points
out that general equilibrium theory in the form of Walras gave credibility to the notion of market
socialism, but Hayek’s critique on the basis of division of knowledge and the fact that a market is
dynamic dispelled this view.
Hayek correctly points out that the economic problem is not simply how to best distribute a given
amount of scare resources. For no one person can know all the relevant information and the
situation is dynamic. The economic problem is more than this, “it is a problem of the utilisation of
knowledge which is not given to anyone in its totality” (Hayek, 1948/1980, 78). Only a free market
economy allows people to use their own knowledge as they see fit. Entrepreneurship is not possible
in a centrally planned system. With this freedom and autonomy comes the price that rewards in a
free market economy cannot conform to any ‘ideal’ of distributive justice. However, it can be
shown that people’s economic chances are better (Sugden, 2004) and personal freedom and liberty
can be better secured.
Sugden makes two points in support of Hayek’s critique (Sugden, 2004). One that we have already
mentioned, the role of entrepreneurship, and also the fact that preferences and beliefs change. These
19
are not fixed across all periods so that a social planner can solve the economic problem using the
logic of calculus.
In general, if an economy is more efficient then everybody’s opportunities are enhanced (assuming
there is a sound institutional framework etc.). Sugden demonstrates this in his 2004 paper. He
shows by way of example that if one wants to provide ex-post equality of opportunity, or equal
reward for equal effort, as put forward by Roemer (see Roemer 1998), that this would not be
compatible with a market economy and that efficiency would be significantly impaired - reducing
opportunities for all. Sugden in effect dismisses J.S. Mill’s standard of social justice. In
Utilitarianism, Mill wrote: “we should treat all equally well who have deserved equally well of it,
that is, who have deserved equally well absolutely... This is the highest abstract standard of social
and distributive justice” (Mill, 1861).
Sugden relies on Hayek’s argument concerning knowledge. One could not provide compensation
ex-ante for outcomes that can only be known ex-post. That is because nobody can know who’s
views and beliefs will turn out to be correct. To guarantee equal reward for equal effort in such a
scenario Sugden claims there would have to be a full compulsory social insurance scheme. He
envisages problems such as moral hazard and free riding, which leads him to hypothesise that an
effort-conditional social insurance scheme would be proposed instead. However, people would have
no incentive to produce things that other people value. They would be incentivised solely to do
whatever is regarded as expending effort so as to meet their desired effort-leisure balance (Sugden,
2004). A market economy is therefore going to be a lot more productive, and provided there exists a
sound institutional framework, everybody’s opportunities would be enhanced.
That is not to say that everybody is guaranteed to do better. There are no guarantees. In essence we
agree to a system that significantly improves the chances for all to have their wants satisfied, but
with the risk of unmerited failure (Hayek, 1982). This is a fact of market outcomes. However, “if
20
we want the opportunities which markets give us, we have to live with unfairness” (Sugden, 2004,
235).
A free market economy serves another function, a function that now seems more overlooked. It can
serve to protect individual freedom by dispersing power. We touched on this in the previous section
when discussing the dangers of pursuing a meritocracy. I contend that a key argument for a free
market economy is that it can help avoid such dangers.
In a planned or centrally controlled economy both political power and economic power are
concentrated in the hands of the state. This has shown to be disastrous, with horrendous
implications for human freedom and liberty. “Our minds tell us, and history confirms, that the great
threat to freedom is the concentration of power” (Friedman, 1962/2002, 2). However, in a market
economy economic power is dispersed, which can help preserve freedom. “By removing the
organisation of economic activity from the control of the political authority, the market eliminates
this source of coercive power. It enables economic strength to be a check to political power rather
than a reinforcement (Friedman, 1962/2002, 15). However, there needs to be effective economic
freedom for this to really work. We shall discuss the implications of this in the next section.
Furthermore, there needs to be successful institutional design and a legal framework to minimise
cronyism and corruption, otherwise this dispersal won’t have the full benefit to society that it
should.
A market economy requires a well-developed rule of law and impartial judicial system; this can
only help to safe guard individual’s rights and freedoms. A command economy essentially doesn’t
require this; it is therefore arbitrary which of course doesn’t bode well for freedom and the rights of
individuals. Hayek demonstrates this very clearly. There is a fundamental contradiction that we
have been trying to demonstrate; a market economy with the rule of law is not compatible with a
society that aims to meet certain distributive ideals. “The restrictions which the rule of law imposes
21
upon government thus preclude all those measures which would be necessary to insure that
individuals will be rewarded according to another’s conception of merit or desert rather than
according to the value that their services have for their fellows” (Hayek, 1960/2009, 203). Hayek’s
argument is that the rule of law exists when there are general principles that are announced and
known to all and that nobody can transcend. The fact that this cannot be kept to if a distributive
ideal is to be attained is due to the fact that the government or the state would have to treat everyone
very differently and its actions would therefore be arbitrary and not in line with the rule of law. This
is very persuasive and adds significant weight to the argument for a free market economy. A free
market economy, with the rule of law and a sound judicial system, can therefore help protect
freedom.
It is important to note that merely acting in accordance with legislation does not necessarily
preserve the rule of law. If legislation is passed that gives the state or government power to do
anything that it so pleases then it may be legal in a judicial sense, but it seems nonsensical to say
that the rule of law is being observed (Hayek, 1944/2010).
6. A free market economy doesn’t necessitate a free market society
If we have a free market economy, it doesn’t require that everything in society be distributed via
markets. If everything is distributed via markets in society then we can term this a market society, in
line with Sandel (2012). We know already that no economy can have a perfectly free market. We
also know that the market fails with regard to certain goods, notably public goods such as defence,
policing, etc. Whilst there may be market involvement in the provision of goods such as these,
they’re not distributed by means approximating a free market. Market distribution is not always
best. It undoubtedly works well for normal commercial activity, but not for everything in society.
22
The argument here is that we need not put everything up for sale, we need not commodify
everything. If we do this then we can move towards problems that a free market should help us to
avoid.
Certain goods can and should be provided outside the market. This, sometimes, can be in addition
to having market distribution. Thus, there can be state provision of healthcare and basic education,
without the prohibition of private providers of healthcare or basic education. However, these must
be provided to a high standard.
Failure to provide certain goods such as these outside the market, i.e. to ensure their universal
provision, will result in grave consequences. There are three potential issues that I feel would arise
that I want to look at:
(i) Problems of Inequality: if every ‘good’ is to be distributed via markets then in such a scenario
inequality is going to be an enormous threat. “In a society where everything is for sale, life is
harder for those of modest means. The more money can buy, the more affluence (or lack of it)
matters” (Sandel, 2012, 8).
(ii) Corruption of Certain Goods: Sandel makes a further point that we should briefly consider;
distribution via markets can corrupt the good in question. That is to say that it can treat it
inappropriately.
(iii) Destruction of a Properly Functioning Market Economy: I see one other danger, and that is for
the market itself. If everything is to be commodified, to be bought and sold, then this, which
comes with private property, inheritance etc, will be an enormous threat to the functioning of a
market economy itself. Indeed, I contend that it would lead to its effective destruction. We would
see the concentration of power that markets should help to avoid and need to avoid in order for
them to function properly. For a market to work there needs to be effective freedom of contract
(no effective coercion). If wealth becomes extremely concentrated and we live in a market
23
society, this will essentially vanish. This problem is essentially the result of the problems of
inequality, but I feel it necessary to separate the two. Furthermore, this point closely relates to
one we have already made. When discussing Johnston’s critique of Hayek’s view on social
justice, we showed Hayek’s error in not seeing how markets tended to promote organisation
themselves. We do need to redress this by not having a market society and for providing certain
goods outside of the market economy. In effect there is a need for some further organisation, in
Hayek’s sense, in order for the market economy to function in a desirable manner and to
effectively preserve it. In the words of Johnston, Hayek “fails to see that the extent of the need
for organisations to redress market failures is related directly to the extent and vigour of the
market order” (Johnston, 1997b, 96).
I turn to develop these points in depth and discuss how they relate to the idea of meritocracy.
(i) Problems of Inequality
If we have a situation where everything is for sale, i.e. a market society, then the problems of
inequality become grave. If all the essentials in life are commodified, then being poor has much
more extreme consequences. “If the only advantage of affluence were the ability to buy yachts,
sports cars, and fancy vacations, inequalities of income and wealth would not matter very much.
But as money comes to buy more and more the distribution of income and wealth looms larger and
larger” (Sandel, 2012, 8).
This has fatal implications for the proper functioning of a market economy as we shall see when we
discuss point (iii). Furthermore, it has severe implications for the maintenance of a free and
democratic society. If at least a basic education is not universally provided then this has quite
negative consequences for the functioning of a free and democratic society. Even Milton Friedman,
one of the most high profile advocates of widespread use of markets, recognises the need for what
he terms “general education for citizenship” (Friedman, 1962/2002, 86). Essentially the public good
24
argument is made with regard to a basic education. Although Friedman wants government to have a
limited role in ensuring universal provision of such education, it is clear that even this would mean
that education would be far from a completely free market. Friedman also supports government
involvement in the area of higher education, acknowledging the imperfections of the capital
markets in this area he supports a government backed loan system. It does seem, however, that the
intuition is, at least partially, to afford everyone a good starting opportunity. To do this we must not
have a free market society, and provide a high standard of essential goods outside the market.
It isn’t my intention to make a very egalitarian argument here regarding inequality. It is not
inequality per se that I feel is the real issue, but rather the consequences in a society where
everything is commodified. My view is in line with, and influenced by, that of Hausman and
McPherson, where they argue that it is doubtful that inequality itself is intrinsically bad, but seem to
focus on what can tend to be troublesome results of some inequalities (Hausman & McPherson,
2006).
In relation to meritocracy, it should be quite obvious that if we push more towards a market society
then we move further and further away from meritocracy. If we have severe starting line inequality
then meritocracy is clearly impossible. Whilst I have made the argument previously that
meritocracy isn’t the ideal that it is often lauded as, I have argued that society should be
meritocratic to an appropriate degree. A free market society would certainly not achieve this, as
one’s background would be by far the most important factor and we would essentially be back to
the very rigid systems of the past. I certainly don’t think this is desirable. Furthermore, given a
market economy is not a meritocracy, and a factor in anybody’s earnings and success is the
maintenance of a stable and free society with the provision of public goods, we have a
responsibility to all members of society to ensure the maintenance of the society and for reasonable
25
starting line opportunities for all. As we have seen previously, starting line equality of opportunity is
compatible with a market economy.
(ii) Corruption of Certain Goods
Sandel argues, convincingly, that distributing certain ‘goods’ via markets can corrupt them (Sandel,
2012). Corrupt here doesn’t relate to bribery, but rather that if we corrupt a good in this sense we
value or treat it improperly. This argument correctly challenges the standard view that seems to be
held by the economics profession embodied in New Welfare Economics theory, that market
distribution is best (Schultz, 2012). Also the argument dismisses the contention that such
distribution doesn’t change the good in question (see Arrow, 1972 for such an argument).
Distribution via markets depends on supply and demand. If we distribute via markets there is a
strong wealth bias. This is fine and works well in normal commercial activity, but not for
everything. If honours such as Nobel Prizes etc were distributed via markets, to the highest bidder,
it is clear that the ‘good’ would be corrupted (Sandel, 2012). Equally so if places in our MSc class
at the LSE were distributed in such a fashion.
Market distribution can change the good in question. This is easily seen in the case of places at
university, or the Nobel Prize, but it is also true of other goods. Take the example of blood. Whilst
the physical properties of blood cannot be altered whether it is distributed via a voluntary system or
a market, that isn’t to say that there are no consequences to creating a market in blood (Sandel,
2012). Indeed, there are grave and fatal consequences. In the US a market for blood was created,
resulting in problems of adverse selection. People desperate for money, such as drug addicts, sold
their blood. There was an enormous problem of contamination, as many sellers had AIDs or were
HIV positive. This contaminated blood supply made its way into medical products that used blood,
fatally infecting patients who used such products. Standard economic theory, as alluded to, would
have said that creating a market in addition to having a voluntary system would solely increase
26
choice and was therefore good - this has been proved completely wrong, with ultimately fatal
human consequences. For excellent work on this see the famous book The Gift Relationship by
Richard Titmuss (Titmuss, 1970). Titmuss demonstrates how a market in blood crowds out non-
market norms. The result is adverse selection and ultimately unnecessary human fatalities.
(iii) Destruction of a Properly Functioning Market Economy
For a market economy to function properly exchange that occurs must be bilaterally voluntary and
informed. Friedman notes these conditions when discussing the possibility of co-ordination through
voluntary co-operation, i.e. no need for coercion (Friedman, 1962/2002). I want to focus on the
voluntary aspect. I contend that if we move towards having a market society and the resultant
problems of inequality that we have already discussed, then voluntary co-operation in exchange
situations will diminish. For example, if I am in absolute poverty and I can’t afford health insurance
and I get cancer, if there is no adequate public provision of healthcare for me to receive treatment
then if I take the decision to sell my kidney so that I can afford such treatment, the exchange that I
would enter into is not voluntary as such. I am not effectively free.
We have discussed at length why a free market economy should be defended, with the key reason
being that it can help protect freedom. If we move to having not just a free market economy, but
also a free market society, that vital function and benefit may well be lost. This is a very real danger.
A free market economy helps preserve freedom by dispersing economic power and by largely
separating economic power from political power. In effect, it reduces the concentration of power. If
we have a free market society we would soon lose this mechanism. Enormous inequality, with
limited effective freedom for vast swathes of the population, would lead to an enormous
concentration of power at the top. The combination of this power and the fact that money could buy
almost anything would be as big a threat to freedom as a centrally directed or command economy.
We would risk a return to the horrors of the past that we have tried to overcome. We would
27
effectively destroy freedom and also have no possibility of having a properly functioning market
economy.
By having a market economy but not a market society we can address the problems of inequality
that markets generate by focussing on goods provided outside the market, instead of trying to
control outcomes from the market. This way we can avoid the problems of severe inequality and
also create conditions whereby a market economy functions properly and advantageously.
7. Conclusion
In this paper we have shown that a free market economy does not lead to a meritocracy. Value is
what is rewarded in a free market economy, and although there may be a positive relationship
between value and merit, this will not always be the case. We examined some key factors that help
determine where one ends up in a society operating a market economy and it is clear that merit is
far from being the sole or predominant factor. The dangers of attempting to pursue a meritocracy
are very serious. Although it is desirable that society is to an extent meritocratic, the creation of a
meritocracy would necessitate an encroachment upon basic liberties, be incompatible with a free
market economy, and destroy a free society. This essentially lead us to the argument that freedom in
the form of basic liberties should not be sacrificed in order to attempt to pursue a meritocracy. We
defended a free market economy as it can help to preserve such freedom as it helps to separate
economic power from political power, and economic power is dispersed. However, we argued that a
free market society, where everything is bought and sold via markets, should not be pursued. To do
this would undermine the key benefit of a market economy, preserving freedom by the dispersal of
power, as wealth would become very concentrated and could essentially buy everything. Society
would, undesirably, be much less meritocratic. A market economy must operate within a framework
and there must be government involvement in the provision of certain goods, such as public goods,
28
education, healthcare, etc. I have argued therefore that we should set up our framework and
institutional structures in such a way that we have a society that tends to be meritocratic to a large
extent, but where basic liberties and freedoms are preserved. I believe that in such a setting the
whole of society can enjoy the benefits of a market economy without risking its destruction, and the
resultant threat to freedom, that would come if outcomes from the market were to be guaranteed in
accordance with a criterion such as merit.
29
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