Spectrum Four: Equality vs. Merit



Summary

In an unrestricted meritocracy, the strongest keep accumulating power until the weak are eliminated. In an equal society, the equal distribution of rewards causes excellence to fall, because there is no reward for trying harder. The compromise between these two extremes is a moderated meritocracy, where the most talented continue to be the most rewarded, but a percentage of their resources is redistributed back to the middle class, to keep them competitive and in the game. This keeps the talent pool as healthy as possible, from which even greater talent is drawn. It also unlocks the fullest potential of society.



Argument

One of the longest running debates in human history is that of merit vs. equality. Which one a society values most will determine which kind of social structure it adopts. A meritocracy is a system which gives the greatest rewards to those with the most merit or success; to achieve this type of society, the rules must be relaxed or even eliminated. An egalitarian society is a system which rewards people equally, regardless of their performance; to achieve this sort of society, the number of rules must be increased.

For our purposes, it is actually more useful to divide societies into three types: unrestricted meritocracies, moderated meritocracies, and egalitarian societies.

An unrestricted meritocracy is like a knife fight. There are no rules, and the stronger fighter will kill the weaker. If the two fighters start out equally talented, then the fight may stay equal for awhile, but the first one to inflict serious injury will get the advantage. After that, he will find it easier and easier to gain yet more advantages, and at an ever increasing pace. The killing blow, when it comes, will come suddenly. Despite the widening difference in superiority between the two fighters, this difference will most likely be only relative. At best, the winner will remain unhurt; at worst, he could be mortally wounded himself. What little good the winner achieves (in experience, reputation, etc.) will be lost in subsequent fights as cumulative injuries, bad luck and varying opponent strengths take their toll.

A moderated meritocracy is like a friendly sparring bout. Two trainees will put on boxing gloves, and their coach will impose a few restrictions: "Pull your punches, guys, and no head shots." No one gets hurt, although one sparring partner may do better than the other and receive the coach's praise, thus providing him with further incentive to improve. Both will have learned from the experience, and both will come away better boxers. (Notice that as boxing moves to a more unregulated meritocracy -- for example, allowing head shots and full force punching in an actual title fight -- the more injuries, brain damage and cumulative harm is done to the fighters.)

Finally, an equal society is like a training camp where the boxers don't spar each other at all, but perhaps train on punching bags, each one receiving exactly the same praise from the coach regardless of performance. This might inspire some incentive in the least talented boxers, but it inspires none in the most talented. And without the better boxers competing against each other, each compelling the other to do his best, the general level of skill will remain much lower than otherwise.

These analogies apply almost perfectly to the economy. In an unregulated economy, inequality grows between the rich and the poor. Wealth and power concentrate in the hands of fewer and fewer individuals, as rivals go bankrupt in the heightened competition. Quite often the result is a monopoly or oligopoly of power. (There are counter-forces which prevent the centralization of power from ever becoming complete, starting with the fact that no meritocracy is truly 100 percent unrestricted. Also, the more leaders control in territory, market share or organization, the less direct control they have over everything, which allows others to subvert them. Still, the more regulations are reduced, the more the equilibrium of power concentrates in fewer hands.) The advantages gained in an unrestricted meritocracy are relative: the competition often turns mutually destructive. An example is the deregulation of the trucking industry in the 1980s. Trucking companies fought so tenaciously to keep their prices low that they ran their trucks without maintenance until they became road hazards. And once monopolies acquire power, they become fat and lazy, overcharging their customers for inferior goods and services.

In a regulated economy, there are rules to keep healthy competition from turning keen and destructive. Regulation and taxation form the opposite sides of this same coin. To counter the natural tendency for wealth to accumulate in the hands of fewer and fewer people, progressive taxation redistributes a share of their income back to the middle and lower classes, which keeps them healthy and in the game. And there is broad empirical evidence that societies with a moderate level of inequality do better -- by many measures -- than highly unequal ones. Economists Torsten Persson and Guido Tabellini conducted a thorough statistical analysis of historical inequality and growth among modern nations, and found that those with more equal incomes generally experience faster productive growth. Numerous other studies have also confirmed their findings. (1) We'll look at specific examples below.

No nation has ever accomplished true equality, but perhaps the Soviet Union came closest. The Soviet experiment failed for many reasons, the most important being that it was a dictatorship, not a democracy. But running a close second was the fact that workers lacked any incentive to work harder. Both jobs and pay were guaranteed, no matter what a worker's job performance. Workers could not get fired even for showing up drunk to work. Nor could a diligent worker be rewarded for going the extra mile. Nearly everyone got the same guarantees, so self-interest compelled them to relax their work habits.

These observations are supported by vast historical evidence. In fact, the challenge to conservatives and libertarians is to find any counter-evidence that more unrestricted meritocracies result in greater equality, faster growth, or any other major benefit.

The Historical Evidence

In the U.S., there have been three periods where the nation moved towards a more unrestricted meritocracy: the Gilded Age, the Roaring 20s, and the Reagan Years. In all three, regulations and taxes were slashed, and the rich got richer as the poor got poorer.

In the Gilded Age (the late 19th century), income taxes from the Civil War were abolished, and the Civil War taxes were effectively removed in favor of tariffs. This was the height of laissez-faire ("leave it alone"), which advocated the government's noninterference in the economy. There was a large increase in the number of millionaires, with the top 1 percent increasing their share of the national income by 3 to 5 percent. This was also the age of the "Robber Barons," ruthless billionaires like J.D. Rockefeller and J.P. Morgan who were obsessed with building their empires at all costs. Morgan, for example, built his railroad empire on the backs and blood of severely underpaid immigrant labor (like Chinese coolies). Rockefeller's father once boasted: "I cheat my boys every chance I get, I want to make 'em sharp..." Meanwhile, there were widespread strikes and labor violence, like the Pullman Strike, which were often crushed by the U.S. Army. The period also saw unusually difficult times for agriculture and mining. (2)

In the Roaring 20s, the top tax rate was cut from 73 to 25 percent between 1920 and 1925. Laissez-faire again dominated the era. Between 1920 and 1928, a period of almost no inflation, the number of Americans reporting $1 million incomes skyrocketed from 33 to 511, a 1,448 percent increase, one of the highest in history. (3) The richest 1 percent also came to own 40 percent of the nation's wealth, a 20th century record. But between 1923 and 1929, the lower 93 percent of the nonfarm population actually experienced a 4 percent drop in real disposable per capita income. (4) Farmers suffered an even worse decline. In 1927 alone, the number of Americans making a middle class income (between $2,000 and $5,000) declined from 2.17 million to 2.09 million -- almost all of the loss to the lower class. (5) This was not because Americans were less productive; no, individual worker productivity grew an astonishing 43 percent over the decade. (6) It was just that the wealth they were producing was concentrating with a vengeance: 1,200 mergers swallowed up 6,000 previously independent companies, and by 1929, only 200 companies controlled almost half of American industry. (7)

The Reagan Years saw taxes slashed from 70 to 28 percent. Cutting government regulation became one of Reagan's most sacred missions. The Federal Register is where all of America's proposed and adopted regulations are found, and in 1980 it ran 87,012 pages. By 1986, Reagan had cut this almost in half: to 47,418 pages. (8) Income inequality soared over the decade, rising from .365 to .401 on the Gini Index. (That may not seem like much, but it is; on the Gini Index, 0.0 means perfect equality, and 1.0 means one person earns all the income.) (9) The richest 1 percent again came to own 40 percent of the nation's wealth, tying the record for the Roaring 20s. Meanwhile, average hourly wages fell from $7.78 to $7.52 between 1980 and 1990. (10) The business failure rate nearly tripled, rising from 42 to 120 per 10,000 business concerns between 1980 and 1986, the highest since the Great Depression. (11) Once again, corporations underwent a frenzy of mergers, concentrating industry in fewer hands. In 1988, Federal Trade Commissioner Andrew Strenio remarked: "Since Fiscal Year 1980, there has been a drop of more than 40 percent in the work years allocated to antitrust enforcement. In the same period, merger filings skyrocketed to more than 320 percent of their Fiscal Year 1980 level." (12)

By contrast, America's greatest period of equality coincided with its greatest period of government regulation: the New Deal era (1933-1980). Franklin Roosevelt ushered in an era of sweeping new taxes and regulation in 1933 that lasted until the Reagan Revolution. The top tax rate soared from 25 percent to 91 percent by the end of World War II. This was reduced to 70 percent in 1964, where it stayed until 1981. This period also saw tremendous growth in government agencies that regulated almost every aspect of the market. And during this time, the Gini index of income inequality fell from .376 to an all-time low of .348 between 1947 and 1968. (13) The following chart makes this point another way. It shows that the incomes of all groups, despite their original differences, grew together at the same pace, even converging slightly, during the New Deal. By contrast, they diverged during the Reagan Years:

Similar examples can be culled from every period in history. One is feudal Europe. During this era, kings and popes lost their ability to enforce their rule over much of Europe, and effective anarchy fell over the land. Historian James Alexander writes:

"By about the 4th century… the centralized authority of Rome and its great commercial empire had become largely extinct. All over Europe the economy had reverted primarily to subsistence farming. The chaotic political and economic conditions of this period (sometimes called the Dark Ages) led to the subjection of the weak by the strong. Small farmers found themselves increasingly forced to seek the protection of more powerful neighbors. In return for this protection, they gave up certain rights and a portion of their income. As a result, the farmers became more firmly tied to the land with the evolution of a formalized manorial system of landlord and tenant, of lord and peasant." (15)

"As manorialism grew and prospered, the tendency was for the size of manors to increase; the result was that more and more of a country's landed wealth lay in fewer and fewer hands. Monarchs began to amass vast manors, as did the church. In England, for example, when Henry VIII dissolved the monasteries in 1536, they held about one-fifth of the country's landed wealth." (16)

• Higher rates of homicide.
• Higher rates of violent crime.
• Higher costs per person for police protection.
• Higher rates of incarceration.
• Higher rates of unemployment.
• A higher percentage of people receiving income assistance and food stamps.
• More high-school dropouts.
• Less state funds spent per person on education.
• Fewer books per person in the schools.
• Poorer educational performance, including worse reading skills, worse math skills.
• Higher infant mortality rates.
• Higher death rates for all age groups.
• Higher heart disease.
• Higher cancer rates.
• A greater percentage of people without medical insurance.
• A greater proportion of babies born with low birth weight.
• A greater proportion of the population unable to work because of disabilities.
• A higher proportion of the population using tobacco.
• A higher proportion of the population being sedentary (inactive).
• Higher costs per-person for medical care.

But other nations are enjoying faster growing economies than the U.S.:

Some may protest that the U.S. still has the highest level of productivity in the world, which is true, thanks to the enormous head start it enjoyed after World War II. (The U.S. emerged from the war with a supercharged economy; the other nations lay destroyed.) But the other nations are gradually overtaking us.

America also has the worst health statistics:

Infant Mortality Rate (per 1,000 live births, 1991) (22)

Country	Rate
United States	10.4%
United Kingdom	9.4
Germany	8.5
Denmark	8.1
Canada	7.9
Norway	7.9
Netherlands	7.8
Switzerland	6.8
Finland	5.9
Sweden	5.9
Japan	5.0

The reason why these countries have more equal incomes is because of social policies that redistribute runaway profits of the rich back to the middle class. These other countries have higher overall taxes:

And they spend more on social programs:

And they have the least poverty:

Children under the poverty level (1991) (26)

Country	Rate
United States	22.4%
Canada	15.5
United Kingdom	9.3
Switzerland	7.8
Sweden	5.0
Germany	4.9
Norway	4.8

As mentioned above, a detailed study by economic historians has found that the greatest growth is seen in more equal countries. Perhaps a clue to the reason why can be found in another study of income inequality at the factory level. In a study of over 100 businesses (producing everything from kitchen appliances to truck axles), researchers found that the greater the wage gap between managers and workers, the lower their product's quality. (27) Businesses with the greatest inequality were plagued with a high employee turnover rate. Study author David Levine said: "These organizations weren't able to sustain a workplace of people with shared goals." (28)

There are many reasons why moderated meritocracies are more preferable. The most important -- by far -- is that they enlarge the size of the middle class. The 1950s was undeniably the golden era of the middle class: a family could afford its own house, car and array of appliances on a single paycheck, and it could look forward to rising incomes every year. However, the 1980s was an era of middle class decline. Most families saw stagnating or falling incomes. As measured by income (those making between $20,000 and $50,000 in 1989 dollars), the middle class shrank from 39 to 35 percent between 1980 and 1989. (29)

Why the middle class matters

The middle class matters for two reasons. First, it is the talent pool from which our nation's best and brightest are drawn. The healthier the talent pool, the better our scientists, leaders, entrepreneurs, athletes, entertainers, etc.

Second, the middle class performs a unique and vital role in our society, to be distinguished from the management of the upper class and the menial labor of the lower class. The middle class consists of what we might call "blue-collar experts": teachers, police, health care aides, journalists, technicians, engineers, etc. Impoverishing this class of expert labor has dire consequences for the health of society, one that cannot be fixed by funneling yet more money up to the richest 1 percent. It's much like an army that has sick troops; even if the commanding general were a genius, he could not win a war with such an army.

Empires at their zenith have always had unusually broad and thriving middle classes; this was true of the Spanish, Dutch and British empires. In fact, historians consider the decline of the middle class to be one of the historical symptoms of an empire in decline. And this appears to be true of the U.S. as well; during the 50s, at the height of American economic and military power, the nation had the largest and strongest middle class in its history -- both before and since. (30)

On the other hand, history has not been kind to polarized economies. It is well-known that slave economies are not as productive as middle-class economies. The productivity of Stalin's gulags were only a fraction of similar civilian factories. Under European serfdom, 99 percent of the population slaved as peasants to enrich the aristocratic 1 percent with fantastic wealth and prosperity. However, it is easy to see that all these systems fail to unlock the full potential of their societies, and their lords might have been even richer had they allowed the entire economy to thrive.

The moral arguments of meritocrats

Defenders of unrestricted meritocracies often frame their arguments in terms of morality and freedom. Government regulations are a violation of their freedom, they claim; free markets were what made the West so much more prosperous than communist countries. The latter comparison, however, is a strawman. Few liberals advocate the strict egalitarianism attempted by the Soviet Union; almost all liberals advocate a moderated meritocracy.

The conservative's moral argument can be addressed by the following analogy. Suppose you and a friend wish to enter into competition with each other, and you suggest a game of Monopoly. Of course, Monopoly is a game of rules: you have to move according to the dice, obey whatever cards you draw, and pay whatever rents you land on.

But, surprisingly, your friend objects that these rules are an infringement on his freedom. He would like a competition with no rules at all. Suppose you agree to his terms, whereupon he pulls out a knife and tries to stab you to death. When you protest that this is not a desirable form of competition, he counter-argues that you have no right to violate his freedom by imposing rules on him.

Of course, he doesn't have a right to kill you either. But when the weapon is not an obvious one like a knife, but a quiet killer like poverty, the connection between weapon and crime is not an obvious one in the public mind. On the other hand, imposing a minimum wage law on a business owner is an obvious curtailment of freedom, and therefore the public is much more sensitive to it. Be that as it may, freedom on the market should never mean the freedom to kill or cause harm. Moderated meritocracies therefore have a moral, economic and historical justification.

Return to Overview

Endnotes:

1. Torsten Persson and Guido Tabellini, "Is Inequality Harmful for Growth?" American Economic Review 84, June 1994, pp. 600-21. Roberto Chang, "Income Inequality and Economic Growth," Economic Review (Federal Reserve Bank of Atlanta) 79, July/August 1994, pp. 1-10; George Clarke, "More evidence on Income Distribution and Growth," Journal of Developmental Economics 47, 1995, pp. 403-27; Peter Lindert, "The Rise of Social Spending," Explorations in Economic History 31, 1994, pp. 1-37; Lars Osberg, Economic Inequality in the United States (Armonk, N.Y.: M.E. Sharpe, 1984); Edward Wolff, p. 64.

2. Kevin Phillips, Politics of Rich and Poor (New York: Random House, 1990), pp. 56-58.

3. Internal Revenue Service Figures cited in Barlett and Steele, America: Who Really Pays the Taxes (New York: Simon & Schuster, 1994) pp. 66-67.

4. Charles F. Holt, "Who Benefited from the Prosperity of the Twenties?" Explorations in Economic History, 14, July 1977, pp.277-89.

5. Geoffrey Perritt, America in the Twenties (New York: Touchstone Books, 1982), pp. 321-22.

6. T.H. Watkins, The Great Depression, (New York: Little, Brown & Company, 1993), p. 45.

7. Watkins, p. 46.

8. "Rolling Back Regulation," Time, July 6, 1987, p. 51.

9. U.S. Bureau of the Census, Current Population Reports, Series P60.

10. U.S. Bureau of Labor Statistics, Series ID: eeu00500049.

11. Dun & Bradstreet Corporation, New York, NY, Monthly Failure Report.

12. "Wave of Mergers, Takeovers Is Part of Reagan Legacy," Washington Post, October 30, 1988.

13. U.S. Bureau of the Census, Current Population Reports, Series P60.

14. U.S. Bureau of the Census, Current Population Survey.

15. James Alexander, "Manorialism," The 1995 Grolier Encyclopedia.

16. Ibid.

17. Bureau of Economic Analysis, National Income and Product Accounts.

18. George A. Kaplan and others, "Inequality in income and mortality in the United States: analysis of mortality and potential pathways," British Medical Journal Vol. 312 (April 20, 1996), pp. 999-1003. Bruce P. Kennedy and others, "Income distribution and mortality: cross sectional ecological study of the Robin Hood index in the United States," British Medical Journal Vol. 312 (April 20, 1996), pp. 1004-1007.

19. Where We Stand, by Michael Wolff, Peter Rutten, Albert Bayers III, and the World Rank Research Team (New York: Bantam Books, 1992), p. 23.

20. Gary Burtless, "Public Spending on the Poor: Historical Trends and Economic Limits," p. 81 in Sheldon Danziger, Gary
Sandefur and Daniel Weinberg (eds.), Confronting Poverty: Prescriptions for Change (New York: Harvard University Press, 1994), citing data from the U.S. Department of Labor and Bureau of Labor Statistics.

21. Where We Stand, p. 113.

22. Ibid., p. 115.

23. Organization for Economic Cooperation and Development, Revenue Statistics of Member Countries.

24. Howard Oxley and John Martin, "Controlling Government Spending and Deficits: Trends in the 1980s and Prospects for the 1990s," OECD Economic Studies 17 (Autumn, 1991), pp. 158-60. Social Security and other transfers include government outlays on public pensions, health insurance and other income maintenance.

25. Where We Stand, p. 23.

26. Ibid.

27. Douglas Cowherd and David Levine, "Product Quality and Pay Equity," Administrative Science Quarterly 37 (June 1992), pp. 302-30.

28. Quoted in John Byrne, "How high can CEO pay go?" Business Week, April 22, 1996.

29. Data from Internal Revenue Service cited by Donald Barlett and James Steele, America: What Went Wrong? (Kansas City: Andrews and McMeel, 1992), p. 4.

30. For historical arguments on empires and their middle classes, see Kevin Phillips, Boiling Point (New York: HarperCollins, 1993), chapter 8, pp. 193-222.