5. Myth of Meritocracy – Inequality Book Reviews–scroll to index for reviews

28. Success and Luck (claims for meritocracy debunked mathematically)

heggef — Sat, 21 Aug 2021 21:36:47 +0000

Success and Luck: Good Fortune and the Myth of Meritocracy. Robert H. Frank

World War II was followed by thirty years of strong economic growth with no increase in economic inequality. This has been followed by forty years of slower growth with rapidly increasing inequality. Compelling evidence suggests that this sequence is counterproductive, not just for the poor and middle class, but for the wealthy themselves. Nevertheless, economic elites advance whatever arguments they can to justify their privileged status. One of these arguments is meritocracy, which is the claim that some combination of innate superiority, ability, and hard work justifies the enormous differences between their wealth and incomes and everyone else’s. In Success and Luck, Cornell economics professor Robert H. Frank examines this claim.

Conservatives correctly observe that people who amass great fortunes are almost always extremely talented and hardworking. Liberals also correctly note that countless others have those same qualities yet never earn much. In recent years, social scientists have discovered that chance events play a much larger role in this difference than once imagined. Nevertheless, it is human nature to underestimate and rationalize fortune’s role in one’s own success, while embracing bad luck as an explanation for failure. The dark side of this delusion is that those who are oblivious to their own advantages are often similarly oblivious to other people’s disadvantages and reluctant to pay the taxes required to support the investments for a good environment for everybody and to help the less fortunate.

Obviously, large numbers of elites who inherited their wealth and opportunity have no claim to meritocracy. In addition, all children of high income parents have greatly enhanced prospects for success, regardless of actual inherited wealth. Children with low test scores and high income parents are more likely to achieve college bachelor’s degrees (30%) than children with high test scores and low income parents (29%) (see fig. 8.2). Nevertheless, elites who made their own fortunes generally are extremely talented and hard-working. Still, it’s one thing to say that 1% more talent or hard work merits 1% more income, but it’s quite another to say that magnification of these small personal performance differences by chance to thousands-fold differences in earnings is merited.

In today’s winner-take-all markets technology enormously extends the reach of one or a few winners from a large pool of similarly talented, hard-working competitors, where luck often plays a pivotal role, so they can take all the gains. For instance, in the recording industry, 15% of sales are accounted for by the top one-thousandth of 1% of titles, and sales are less than 100 each for 94% of titles. Luck plays an important role in this process when critics with highly variable tastes eventually decide which titles will get air-time and the chance for success.

Professor Frank illustrates this situation with a numerical simulation showing that when luck counts for only a tiny fraction of total performance, the winner of a large contest will seldom be the most skillful contestant, but will usually be one of the luckiest. Two factors are involved: 1) The inherent randomness of luck means the most skilled contestant is no more likely to be lucky than anyone else. 2) With a large number of contestants, there are bound to be many with close to the maximum skill level, and among those at least some will also happen to be very lucky. For instance, with 100,000 contestants where luck counts for only 2% and ability and effort count for 98%, 78% of winners do not have the highest score for ability and effort. The math and results of various combinations of luck with hard work and ability are shown in an appendix (see Fig A1.2).

Examples are provided for small differences related to luck that influence outcomes. In professional hockey, 40% of players were born in the first three months and 10% were born in the last three months of the year, presumably because the traditional January 1 cut-off date for youth hockey gave the older players a better chance to be chosen for elite squads. Children born in summer months are the youngest in their classes and less likely to hold the high school leadership positions that are associated with higher wages later in life and better chances to become large company CEOs. Assistant professors of economics in top schools are more likely to be awarded tenure the earlier the first letter of their names appears in the alphabet, possibly because co-authors in economics publications are listed alphabetically. For eight representative track and field world records, seven were set with a tail wind (less than 2 m/ sec), one with no wind, and none with a head wind. Examples are also provided for the importance of chance in individual success of very talented and hard-working people like Bill Gates.

The remainder of this small book (149 pages) discusses reasons for persistence of false beliefs about luck and talent and the consequences of those false beliefs, particularly with respect to increasing inequality and the lack of support for government programs and infrastructure. In the last part of the book, the author presents his case for replacing the progressive income tax with a progressive consumption tax that he thinks would better address these problems, although relevance to the rest of the book is weak.

29. The Anatomy of Inequality (claims for meritocracy debunked by game theory)

heggef — Sat, 21 Aug 2021 21:34:38 +0000

The Anatomy of Inequality: Its Social and Economic Origins and Solutions. Per Molander. 2014.

The author, Per Molander, was a consultant to the Swedish government, the World Bank, the OECD, the UNDP, and the European Commission. His book begins with a simple observation: virtually all human societies are marked by inequality at a level that surpasses what could be expected from normal differences in individuals’ capabilities alone. The book addresses three questions: 1) Why are all societies unequal. 2) Can inequality be influenced? 3) How do the classical ideologies of liberalism, conservatism, and social democracy relate to inequality as a phenomenon?

The evolution of inequality is presented from primates to prehistorical humans to the present. Chimpanzees already manifest some inequality in association with dominance drive and aggression that leads to formation of hierarchies and coalitions. Present day hunter-gatherers have very limited inequality due to nomadic existence and lack of surplus. Early farmers (18,000 to 10,000 BCE) developed storage, settlements, and increasing hierarchy that led to surplus wealth that could be unequally accumulated and transmitted across generations. Emerging states added to these tendencies with increasing division of labor, control of key resources, and a monopoly on organized violence. The transition to the Middle Ages included 1000 years of absent population and economic growth during which poverty and inequality increased. In modern times rapid population and economic growth occurred, but inequality continued to increase, except during the mid-Twentieth Century from the World Wars and the Great Depression

When certain individuals or groups get the upper hand in the fight for power, there is no natural force that can return a society to its previous equilibrium. Consequently, inequality has been rising throughout history along with the rise of surplus production that can be concentrated in the hands of ruling elites. Absent regulation, the only constraint on this process is the need for ruling elites to leave enough resources for their subjects to remain alive and reasonably fit to work. This is illustrated graphically by the extraction ratio, which defines the efficiency of a ruling group to extract the surplus from the rest of the population. As the size of the surplus increased from hunter-gatherers to the present, so did the level of inequality. Still, in modern OECD countries the level of inequality varies considerably according to the level of ambition for redistribution, with inequality highest in the US, Portugal, Israel, and the UK and lowest in the Scandinavian countries, the Netherlands, and Slovenia (Table 3.1).

With respect to the cause of ubiquitous inequality, the author utterly rejects the common explanation that people differ with respect to capability and effort. He points out that in 2015, the richest eighty persons in the world owned as much as the poorest 3.5 billion. That this gap by a factor or 10 to 100 million can be explained by differences in productivity and effort is a physical impossibility. Economist Branko Milanovik calculated that a person’s real income was 80% dependent on circumstances beyond her control, mainly country of birth and family background, and 20% dependent on other factors, including chance and effort. The author then points to the role of chance in the dynamics of the many negotiations that take place at all levels of the economy and the role of inheritance in amplifying these advantages. He uses game theory as developed by John Nash, a Nobel laureate in economics, to show that this process is inherently unstable and leads away from equilibrium.

In negotiation, the promise of gain is balanced by the risk of losing. Accordingly, two negotiators with equal abilities and equal assets can be expected to arrive at an equal division of the contested asset. However, any advantage in assets for one of the negotiators results in increased tolerance for risk, a stronger negotiating position, and correspondingly increased prospects for a bigger piece of the pie. In the next round of negotiations, this results in an even stronger position with better results, and so on in a positive feedback loop with an ever-increasing rate. In this sequence, if one player starts with only 1% greater assets, after 70 or 80 rounds, the weaker player’s assets are depleted (Diagram 4.3). In actual negotiations, even if players are identical, minor disruptions in circumstances through no fault of anyone are likely to favor outcomes for one or the other. These minor differences will then be intensified in subsequent rounds and further intensified across generations with inheritance until inequality is entrenched.

Consequently, an unstable pattern of asymmetrical negotiations becomes established in favor of the class of ruling economic elites. This cycle leads to continually increasing inequality as those at the top with sufficient assets to tolerate considerable risk, such as factory owners, negotiate with those who have far fewer assets, such as their workers. This negotiating process is a power relationship. Hence, the power of government is the main force that can alter it by redistribution and regulation. Not surprisingly, reducing the size of government to prevent this is a cornerstone of the neo-liberal ideology that favors economic elites. Of course, these elites also use their great advantage in assets in attempts to control government and direct its activities in their favor.

The author does not advocate unrealistic plans to eliminate inequality but rather advocates managing it to obtain an equilibrium at some desired level to prevent numerous possible bad outcomes. Those on the right have tried to strike equality from the political agenda, but most others take it seriously. Consequently, the three main Western ideological currents of liberalism, conservatism, and socialism are examined to see how they relate to the problem of inequality. The term “liberalism” appears to have a European slant so that it refers to market liberalism, with divisions of left liberals who accept some government redistribution and right liberals who do not. In the US, these divisions would more closely match terms used for liberals and conservatives or Democrats and Republicans.

In any event, liberalism is characterized as having an individualistic perspective, a scientific world view, and interest in contracts according to a constitution. Liberalism is said to mostly promote fairly equal opportunities but not market interference for differences in outcomes. (In the US, this would be more representative of right liberalism, called conservatism, than left liberalism.) Conservatism is characterized as emphasizing knowledge skepticism (possible unintended consequences) to justify the status quo on the basis of tradition, local customs, property rights, and religion, including Hinduism, Islam, and Christianity. Conservatism is more likely to accept inequality that others would reject on moral grounds, such as with sexism, racism, and slavery. Problems with both liberalism and conservatism include ever-growing inequality from the unrestricted bargaining game and lack of legitimacy for a system mostly determined by history and luck.

Social democracy accepts that there is no stable, egalitarian equilibrium in the bargaining game to prevent escalating inequality. Consequently, a wide spectrum of measures is employed to level both opportunities and outcomes. These measures include progressive taxation and transfer policies, a well-developed social security system, strong trade unions, and an active education policy. Without an active distribution policy such as this, society moves relentlessly toward increasing inequality until the extraction limit is reached. These successful programs do have costs, but so does inequality. The problem for social democracies is finding the right balance and keeping the right balance.