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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