Monday, October 31, 2011

We have hit a wall on responsibility and reward

This is a very stimulating article in New York's City Journal, by a University of Chicago professor, Luigi Zingales, who argues that you cannot look at an economic system in isolation from "who gets what".

The fundamental role of an economic system, even an extremely primitive one, is to assign responsibility and reward. In animal packs, the responsibility of leadership and the reward of mating opportunities are generally assigned to the strongest. In human societies, responsibility tends to take the form of employment, and the rewards are money and prestige. Because physical strength has long since lost its importance, economic systems determine in various ways who receives the responsibilities and the rewards. The dominant criterion in traditional society was birth: the king’s firstborn son was the next king; the landowner’s firstborn son, the new landowner; and the son of the company’s owner, the next chief executive. Most modern societies, by contrast, try to select and reward according to merit. Indeed, surveys show that in the abstract, most people in developed countries agree with the idea that merit should be rewarded.

It isn’t easy to decide what constitutes merit, of course.

On one level, this is obvious. We argue all the time about redistribution and whether the rich should pay more taxes, or the size of the welfare state.

But in another way, it explains why our politics has got so stuck. Just as birth is no longer an acceptable justification for distributing rewards, we have more and more problems over what happens when a market system starts evolving beyond the original set of circumstances which made it work. We have an outworn system of deciding responsibilities and rewards, a constant rerun of the 20th century argument about the role and size of the state.

We are going through another enormous shift in the underlying legitimacy and nature of "who gets what". The answers for an industrial economy are no longer good enough. What if many of the things we value can be produced for a marginal cost of close to zero - and priced more like fresh air or water, rather than automobiles or bushels of wheat?

How do we reward people through employment institutions if employment itself is changing rapidly in many ways - if automation threatens to make any job which can be routinzed as much a matter of history as Summerian fertility gods?

How do we decide merit or productivity if those are intrinsically hard to observe in many knowledge worker occupations, or only one winner of a race of many thousands - such as to develop alternative energy- makes any money?

And to add to the difficulties, merit itself may be increasingly less accepted as a suitable criterion.

Zingales notes that it is often hard to sustain a meritocratic system. Majorities become envious of greater rewards going to a "meritocratic" minority. Moreover, in monopolies and governments, it almost always pays to put loyal supporters into prime positions, not the most creative or productive.

In politics, for example—a field in which value is mostly redistributed rather than created—the benefits conferred by meritocracy are relatively small compared with the benefits conferred by cronyism. If I appoint my friends to office, even when they aren’t terribly competent, I lose relatively little efficiency and gain quite a lot of power. Hence meritocracy is difficult to sustain in government.

The same is true when a firm enjoys a monopoly. Since the firm’s market position isn’t at risk, it doesn’t benefit much from hiring the best people. Instead, its executives focus on bureaucratic infighting, trying to grab an ever-larger share of the profits from one another, and once again, hiring loyal workers pays more than hiring competent ones.

In firms facing stiff competition, though, it pays to recognize merit because survival is at stake. Better a smaller slice of a growing pie than a huge share of no pie at all.

The market system works because it incentivizes efficiency rather than cronyism. and because most people believe the outcome is broadly fair.

If too many people believe that the rewards of meritocracy are not fair, the system can be undermined.

So here's the thing. We have reached an impasse about what constitutes "fairness". Many people do not believe higher levels of taxation for redistribution as entitlement spending is fair. Even if they did, the crisis of the welfare state in Europe and yawning fiscal deficits in state and local government in the US suggest it is not a sustainable idea anyway. One of the problems that Occupy Wall St protestors face is that as they sit shivering in their snow-covered tents in Zucotti Park, the federal government continues to spend vastly disproportionate resources on the elderly. The elderly have huge political power, 20-year olds with no health insurance and heavy student loans do not.

On the other side, many people do not believe that increasing inequality in society is fair. Somehow the world of work and employment and the economy in general is turning into a "winner-take-all" game.

But you still need to reward creativity and skill and merit (however defined) rather than cronyism and court politics. The great overwhelming virtue of a market system is it puts pressure on bureaucracy and status-laden hierarchy and cronyism, that kept the world mired in poverty for thousands of years.

We will never be able to change the current economic system for the better unless an alternative system of rewards is seen to be honest and reward the responsible and productive. The left cannot achieve the change it wants unless it deals with this problem. Income redistribution by the government simply does not meet that criterion. It is stale, It is done. It is over.

And as I keep arguing. you cannot get some consensus on a better alternative system of rewards unless you have a better sense of what the purpose of the economy and society and government is, what the nature of the good life may be. We have to drop the idea of the neutral state, which carries with it the idea of purely neutral allocation by the market mechanism, which liberals of both left and right (libertarians) believe in so strongly.

We cannot progress because our dominant underlying political ideology in the west, liberalism in the broad sense, cannot see there is a problem.

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