A Biased Semi-Meritocracy

A while ago I read a conservative commentator talking about the income inequality issue. He said that liberals don’t believe in meritocracy. Instead, they believe that inequality at a certain level becomes inherently unfair regardless of merit.

I don’t think that correctly describes what liberals believe. Ok, there may be some who believe that, but I think the majority of liberals actually do believe in meritocracy and their problem with the current level of inequality is a little more nuanced.

The root of the issue is that conservatives believe that capitalism is always fair, and liberals don’t. The conservative would say, “If a company pays someone that much they must deserve it.” But liberals see capitalism as more of a biased semi-meritocracy. There are meritocracy tendencies. Working harder, more often than not, will get you more money. But a lot of money gets spread around for reasons other than merit, and this problem is worst for very high earners.

There is some incredulity on the left about this issue. How could a CEO deserve a thousand times as much as an average worker? Yes, CEOs should get more than the average worker, but a thousand times more? Are they walking on water? Laying golden eggs?

I can see how the right could mis-interpret that as, “That much inequality is inherently wrong regardless of merit.” But really, that’s a different position from, “Yes, I believe in meritocracy, and I can’t imagine a situation where that much inequality would be merited.”

Response to “A fundamental truth about America”

On his “Behind The Black” blog, Robert Zimmerman discusses the fact that America has a variety of different types of rockets for launching things into space while other space-faring nations have only one or at most two types of rockets, and those rockets are pretty much “the national rocket program” of that country. The American way is more robust and adaptable. It leads to more rapid discovery of new ways of doing things. It produces a lot of benefits. You could say the American way is an ecology with lots of participants doing lots of different things, while other countries are a monoculture. Robert uses rockets as an example, but his point is that this difference in the American way applies in many areas of society. Robert identifies two factors that he believes are responsible for this difference: property rights and freedom.

I agree with a basic theme of his argument, which is that we should build a society that values, motivates, and rewards individual creativity and initiative, and great economic benefits will flow from that. But whenever I hear a libertarian making this kind of argument I cringe a little because I know that they have one particular model of society in mind that they think is the only way to value, motivate, and reward individual creativity and initiative. I think their attitude leads to a false choice. They think we can’t protect endangered species because that restricts property rights and freedom. We can’t prevent unfair business practices because that restricts property rights and freedom. We can’t have a society that values individual accomplishment but also protects individuals from being taken advantage of.

The idea that we can’t have freedom, prosperity, and fairness is a false choice. We should be working towards all of those goals. I think we can do better than the every-man-for-himself society that libertarians want.

Another problem is that libertarians overestimate the importance of the exact details of their preferred model as causal factors of the benefits. In other words, I want to say a little something about property rights. Libertarians have a very high opinion of a legal system of absolute property rights. They believe that legal ownership is the important ingredient in the recipe.

I’m sure you’ve heard the business advice that managers should try to get employees to “take ownership of their jobs.” What does this mean exactly? Does it mean that managers should give employees legal property rights in their jobs? Does it mean that the managers can no longer take those jobs away from the employees because the jobs are the empolyees’ property? No, that’s not what that phrase is trying to convey. It means that the employees should have a sense of ownership. A feeling both of empowerment, the authority to make decisions and take initiative, and responsibility, caring about the outcome and having a stake in the results whether good or bad. It is in fact this psychological sense of ownership that motivates the behaviors that produce the benefits that libertarians attribute to legal property rights.

Of course, property rights are one way to produce a sense of ownership. I’m not suggesting that we should try to trick people Dilbert-style into feeling like they have a stake when they don’t, but legal property rights are not the only way to produce a non-fraudulent sense of ownership where people believe they have control and a stake because they do. The management strategy of letting employees take ownership of their jobs is evidence of that.

Also, legal property rights don’t guarantee the creation of a psychological sense of ownership. I know it seems like a long time ago, but think way back to the Tyco and Worldcomm corporate governance scandals. The executives of those companies lined their pockets at the expense of ordinary stockholders. But the stockholders were the legal owners of the company. Why weren’t they monitoring the operations of the company and firing their irresponsible C-level employees?

The problem is that when you have a vast multitude of stockholders good corporate governance becomes a public good that is not positive sum for any individual to invest in. The check and balance of having widely distributed stockholders vote for the board of directors didn’t work any better than having widely distributed citizens vote for members of congress. None of those stockholders felt like the boss of the CEO any more than I feel like the boss of my senator and representative. Without the psychological sense of ownership they didn’t perform the behaviors that would have produced benefits despite the fact that they had legal property rights.

A legal system of absolute property rights is neither necessary nor sufficient to create the motivational benefits of the psycological condition of ownership. Legal property rights are a tool in the toolbox, but not the sine qua non.

If Only Ron Paul Were a Liberaltarian

Ron Paul is the most intelligent and ethical candidate in the republican presidential field. He understands the issues, knows what he wants to do about them, and his positions are based on principle, not on benefiting a campaign contributor. Unfortunately, most of what he wants to do is wrong because he has bought into the libertarian dogma that free markets are infallible and an every man for himself society will automatically create the best of all possible worlds.

For this post, I’m just going to respond to one of the points from his web site. Maybe this will become a series and I’ll talk about other points later. On the issue of energy, one of his plans is to:

“Eliminate the ineffective EPA. Polluters should answer directly to property owners in court for the damages they create – not to Washington.”

I once read something that I wish I could find again. It was by an epidemiologist describing the process of being an expert witness in a court battle against a polluter. There was some pollution and a cluster of cancers that are known to be caused by that kind of pollution. The cancer rate was orders of magnitude higher than the normal rate in the general population. The epidemiologist said it was a slam dunk, epidemiologically, that these cancers were caused by that pollution, but not for the law. The defense’s argument was that all of the evidence is statistical so how can you know with absolute certainty that this caused that? Basically, it is nearly impossible to draw the direct link required by tort law from action to harm when pollution is the vector of harm.

Should we expect that someone suffering from terminal cancer has the time, money, and emotional energy to fight a decades long legal battle against a giant corporation with plenty of resources to bully them? And even if they win, how can money fairly compensate them for losing their health or even their life? Think about movies like “Erin Brockovich” and “A Civil Action” for how difficult it is to sue a polluter. Now, in those movies the plaintifs did win in the end because hollywood wouldn’t make a movie out of it if they didn’t, but there are far more similar cases without a happy ending.

Sueing after the fact is an insufficient remedy to deal with third party harm from pollution.

As a corollary, why don’t we abolish the DMV? No driver’s licenses. No laws against DUI. If you kill someone with your car, well, their heirs can sue you. Would that be a good idea? No way! There are some things that have such an obvious potential for third party harm that society has a right to require reasonable preventative measures. Driving and pollution are two such cases.

This is an issue of individual rights, the rights of the third party who has no sufficient remedy after the harm occurs.

In addition, there’s another problem with letting tort law be the first, last, and only line of defense against being harmed by pollution. It would encourage frivolous law suits.

For all of the people harmed by pollution maybe 90% of them won’t even realize that their sickness is caused by pollution, and 90% of the rest won’t be able to find the link to the polluter, and 90% of the rest won’t be able to prove it in court. Maybe one in a thousand people actually harmed by pollution will be able to win a court case and get damages. That situation of a big corporation harming a little guy and getting away with it most of the time is the perfect storm for juries to award humungous punative damages. And when that happens lawyers will see dollar signs and there will be frivolous law suits. And if we change the law to prevent frivolous law suits it will make it that much harder for those actually harmed to get fair compensation, which is already a long shot.

If Ron Paul said that the EPA is overly bureaucratic and the required preventative measures aren’t reasonable and the EPA needs to be overhauled, I could agree with that. But when he says the EPA should be replaced with nothing but the right to sue he will never get my vote.

Duty to Help Revisited; the Right to Receive Help

Recently in comments on an earlier post there was a discussion about the duty to help. I had originally asserted that libertarians don’t believe in a duty to help, and the commenter said that libertarians (or at least some libertarians) do believe that there is a moral duty to help, but that people shouldn’t be forced to do it. I pointed out that libertarians believe in a duty to fulfill contracts and that it’s okay to force people to do that, and I asked what’s the difference?

The answer boiled down to this: There are two reasons to fulfill a contract. First because it is the morally right thing to do, and second because the other party to the contract has the right to expect that the contract will be fulfilled and will be unjustly harmed if it is not. However, for helping, only the first reason applies. You should help to be a good person, but the help-ee has no right to expect help.

So if you force someone to help it doesn’t accomplish the goal of making them a good person because they are not choosing to do good, they are being forced. And since that’s the only reason the duty to help exists there’s no reason to force them if it won’t fulfil that goal.

Whereas with contracts, the second reason is why people should be forced to fulfill their duty. Forcing someone won’t achieve the goal of having that person be a good person, but it will at least prevent the unjust harm to the other party.

And from this conversation I realized something. The real difference I have with libertarians on this issue is that I believe that there are situations where the help-ee has a right to expect help and it would be unjust for that person not to receive help. I think this condition can occur in two ways: emergencies, and the requirement of equal opportunity.


Last winter there was a tragic case in our town. A woman who lived alone went out to have a cigarette. She slipped on the ice, fell, hit her head, and went unconscious. She froze to death before she woke up or anyone found her. Anyone walking by could have roused her or called 911. It would have been easy to save her life. As far as I know no one did walk by in time. But if someone did she had a right to expect that they help her. It would have been unfair for her to suffer death if someone else could have easily helped but didn’t feel like it.

There is a fundamental connectedness among all human beings that gives us both benefits and responsibilities. Humans are not born into isolation free from any involuntary connections to other humans. I have a brother. I didn’t get a choice whether to have a brother. Even if I refused to have anything to do with him I would still have a brother. Having a brother is one of the best and most important things in my life. I am not shackled and chained by this involuntary connection as libertarians would have me believe. Think of how sad it is when someone is estranged from their family. That’s our natural moral sense telling us that these family ties are good. It is literally true that every human being alive is genetically my distant cousin. We are all one family and we should act that way.

Now, I do believe there are limits to the duty to help in emergencies. In particular if helping is dangerous or difficult the potential helper has a right to self preservation and autonomy that may take precedence. But if the harm that the help-ee will suffer is vastly greater than the cost of helping then the help-ee has a right to expect help.

The Requirement of Equal Opportunity

Equal opportunity is a necessary requirement before we can call our society fair. And let’s face it, we don’t have completely equal opportunity. One of the best statistical predictors of a person’s income is their parents’ income. Another good predictor is the person’s education level, but a good predictor of a person’s education level is their parents’ education level. Until there is no statistically significant difference between the children of the rich and the children of the poor we don’t have equal opportunity.

Conservatives sometimes point at a success story of someone who started out poor and made good. They say or imply that the rest of the poor could have done that too, and their fate is their own fault because they are lazy and irresponsible. The problem with this reasoning is that “possible” is not the same thing as “equally easy”, and it needs to be equally easy before we have equal opportunity. Sure, there are lazy and irresponsible kids in the slums. There are also plenty of lazy irresponsible kids in upper middle class suburbia who wind up better off because their parents and other support structures do a better job of encouraging and directing them and cushioning their mistakes. Being perfect is not a requirement for deserving equal opportunity. Until a lazy irresponsible kid from Watts gets as much help as a lazy irresponsible kid from Beverly Hills we don’t have equal opportunity.

To the extent necessary to create conditions of equal opportunity the more fortunate, who got better opportunities, have a responsibility to help the less fortunate, who got worse opportunities. The amount of required helping being proportional to the difference in opportunity. The less fortunate have a right to expect that help, and it is unfair if they don’t receive it.


Apparently, the housing crisis has spawned a new word, robo-signing, to describe the phenomenon of people signing documents without reading them.

I’ll let you in on a little secret, not everyone reads every single word of every document that they sign. Oh, you already knew that? In the comments of that article one person explains how at their closing they did read every word of every document before they signed. It took four hours, but the title company had scheduled more closings in the same room every half hour so there were people stacked up in the hall waiting for the room.

I’m shocked, SHOCKED! that not everyone takes four hours for a closing. After all, reading every single word of every single document before signing anything is what every good and responsible person always does, isn’t it? Well, that’s what libertarians say. Contracts should be absolute. You’d better read every word because if you sign something then you agree to it even if it wasn’t what you thought you were agreeing to.

Does it bother the libertarians at all that the vast majority of human beings don’t behave the way they think everyone should behave?

A mortgage company shouldn’t be allowed to dump a mountain of paperwork in your lap and then later use something against you that was written in the small print on page 247. Instead, we should design a society where people just get treated fairly without expecting them to posess a superhuman ability to defend themselves against getting taken advantage of.

The price is not always right

I read an interesting article from Fortune magazine online talking about executive compensation being tied to the price of a company’s securities. I found the following excerpt very interesting:

“As investigators comb through the wreckage of the financial meltdown, one fact remains clear and startling: Credit default swaps and collateralized debt obligations, as well as debt and equity from large financial firms were useless as indicators of fiscal health. One of the biggest revelations has been the utter failure of markets to capture the relevant information required to set accurate prices on securities.” (emphasis mine)

And this is from Fortune magazine, not some leftist socialist newspaper.

The price is not always right.

Brother, can you spare 10 billion?

From a story at money.cnn.com


“the 25 top-earning hedge fund managers made a record $25.3 billion last year … [this] marked a dramatic comeback from the beating managers took during the financial crisis … Income for top hedge fund bosses plummeted nearly 50% in 2008 to $11.6 billion” (emphasis mine)

Oh, those poor guys. Only 11.6 billion. They really took a beating.

It’s hard to take seriously claims that financial superstars need to be paid obscene amounts to make them perform well when they make only slightly less obscene amounts when they do terribly.

Liquidity Crisis vs. Solvency Crisis

In the comments on a different site I saw someone give this analogy for our current financial problems:

“A tourist stops at a motel and gives the manager a $100 cash deposit while he looks at the rooms. The manger runs and pays off his $100 debt to the butcher. The butcher runs and pays off his $100 debt to the farmer. The farmer pays off his debt to the feed store, and then the feed store owner pays off his debt to the motel owner. The motel owner then gives the $100 depost back to the tourist.”

That’s called a liquidity crisis. Everyone’s net worth is above zero. Everyone has debts and credits, but no one can pay their debts because they can’t collect their credits. All you need to solve this problem is a little liquidity. Temporary use of some money that can be later returned. Low interest small business loans would work nicely.

But there’s a different kind of financial problem called a solvency crisis. Imagine instead that a restaurant owner takes out a small business loan to stock his wine cellar. The next day Bernie Madoff comes in and drinks $1000 of wine, paying with cash. The restaurant owner turns around and invests that cash in Madoff’s hedge fund. The next day Madoff comes back and drinks another $1000 of wine, paying with cash (the same $1000 bill he used yesterday), and the restaurant owner turns around and invests that money with Madoff too. This continues ten times. Madoff has drunk $10,000 of wine, and has a $10,000 debt (the investment he is supposed to eventually return to the restaurant owner), but he only has $1000 of cash to repay that debt. Madoff has a solvency problem. His net worth is less than zero. Temporary use of some cash, to be paid back later, would not solve this problem. This situation is different because value was actually destroyed. The $1000 of cash still exists, but $10,000 of wine disappeared into Madoff’s stomach, and Madoff didn’t produce anything of equal value he could use to pay for the wine.

If the restaurant owner was counting on his Madoff investment to pay off his small business loan he’s got a problem too. He may think he has a liquidity problem (as soon as Madoff pays me I can pay my debts), but really Madoff is never going to pay. Madoff’s solvency problem creates a solvency problem for the restaurant owner too.

Our current financial situation is a giant artificial solvency crisis. Lots of people can’t make their mortgage payments because they lost their jobs, and they can’t sell their houses because they are underwater because of recent steep price declines. It appears they have a net worth less than zero. This solvency crisis is somewhat artificial because it has been created by a liquidity crisis which is causing all the job losses and the lack of house buyers causing the price declines. But the liquidity crisis was caused by a real underlying solvency crisis. People funded unaffordable consumption with either deficit spending (home equity loans and credit cards) or fictitious investment profits (selling stocks or real-estate at bubble prices). Whoever made those loans or bought at bubble prices now has a solvency problem, and that solvency problem can propagate to whoever they owe money to.

It’s important to think about this in terms of stability. Airplane manufacturers think a lot about stability. When a gust of wind tips an airplane a little to the side does it naturally come back to center, or spin out of control? Having stability is a good thing, but stability can be sacrificed for performance. Acrobatic airplanes can do those amazing flips and spins because they are much less stable than a jumbo jet. But there’s a reason airlines don’t fly passengers from New York to LA every day in high performance acrobatic airplanes.

One of the fundamental root causes of our current financial crisis is that our financial system was unstable. A small solvency crisis created a bigger liquidity crisis, which created an even bigger solvency crisis. A small gust of wind tipped our wing a little and we spun out of control.

During the bubble, financial firms thought that exotic financial instruments and high leverage were great because they increased financial performance. But they were ignoring stability. We managed to build our economy into a high performance acrobatic plane instead of a reliable jumbo jet. Individuals should be held responsible for a personal solvency crisis caused by unaffordable consumption, but society should design the financial system to be stable so that those individual solvency problems don’t propagate and amplify. That is achieved with boring financial regulations like margin requirements on banks, and loan-to-value requirements on mortgages.

You Don’t Get What You Deserve

you get what you negotiate.

That’s the tagline for Karrass negotiation training. You may have seen the ad on the back cover of an airline in-flight magazine. There’s a distinguished looking gentleman letting you know that:

“You don’t get what you deserve, you get what you negotiate.”

It’s supposed to make you think you need to take his class to become a really good negotiator. When I saw that my first thought was, capitalism is broken.

I mean, shouldn’t people get what they deserve? If there were one socioeconomic system that gives people what they deserve and another that doesn’t, wouldn’t we prefer the one that does?

Instead, if someone said, “You don’t get what you deserve, you get what you can steal.” We would think this person had their values screwed up. This would be someone whom good people should be protected from. It wouldn’t make you want to take a class to become a really good thief.

What is the Purpose of Government

I think government has two legitimate purposes.

1) Force people to fulfill their moral obligations when they might not do so under the honor system. People have moral obligations, whether these are negative obligations like not committing crimes or positive obligations like doing what you agreed to in a contract. Society should make sure these obligations are fulfilled. If we can do so without government that’s great, but if not it is legitamate to use coercive, statist government to make sure these things get done.

One refrain I have heard from libertarians is, “Government cannot give anything to anybody that it doesn’t first take from somebody else.” The idea being that government is nothing more than a common theif. I have a more expansive idea than libertarians of what positive moral obligations people have. When people work just as hard and take the same risks but get different results due to forces outside their control they have a duty to even out those effects of undeserved luck. Government taking money from someone to give it to someone else can be a legitimate act of forcing someone to fulfil their obligations. Libertarians complain that this doesn’t create wealth, but creating wealth isn’t the purpose of it. The purpose is ensuring fairness by making people live up to their obligations.

Not every case of government transferring money from one person to another falls under this legitamate purpose. There are a lot of instances where government programs are just unfair boondoggles for some special interest.

2) The second purpose of government is to create value in a small number of cases where the private sector has trouble. For this I’m thinking of things like the interstate highway system, a local water utility, or fundamental science research. There are goods where fundamental features of the good make it hard for the market to supply it efficiently. These cases are rare, but they exist. Libertarians are right that society could get along without the government doing this, but less value would be created. We need to carefully consider cases when the inefficiency of government is better than the inefficiency of a non-governmental solution or not having the good at all.