Socialist calculation debate

The socialist calculation debate, sometimes known as the economic calculation debate, was a discourse on the subject of how a socialist economy would perform economic calculation given the absence of the law of value, money, financial prices for capital goods and private ownership of the means of production. More specifically, the debate was centered on the application of economic planning for the allocation of the means of production as a substitute for capital markets and whether or not such an arrangement would be superior to capitalism in terms of efficiency and productivity.

The historical debate was cast between the Austrian School represented by Ludwig von Mises and Friedrich Hayek, who argued against the feasibility of socialism; and between neoclassical and Marxian economists, most notably Cläre Tisch (as a forerunner), Oskar R. Lange, Abba P. Lerner, Fred M. Taylor, Henry Douglas Dickinson and Maurice Dobb, who took the position that socialism was both feasible and superior to capitalism. A central aspect of the debate concerned the role and scope of the law of value in a socialist economy. Although contributions to the question of economic coordination and calculation under socialism existed within the socialist movement prior to the 20th century, the phrase socialist calculation debate emerged in the 1920s beginning with Mises' critique of socialism.

While the debate was popularly viewed as a debate between proponents of capitalism and proponents of socialism, in reality a significant portion of the debate was between socialists who held differing views regarding the utilization of markets and money in a socialist system and to what degree the law of value would continue to operate in a hypothetical socialist economy. Socialists generally held one of three major positions regarding the unit of calculation, including the view that money would continue to be the unit of calculation under socialism; that labor time would be a unit of calculation; or that socialism would be based on calculation in natura or calculation performed in-kind.

Debate among socialists has existed since the emergence of the broader socialist movement between those advocating market socialism, centrally planned economies and decentralized planning. Recent contributions to the debate in the late 20th century and early 21st century involve proposals for market socialism and the use of information technology and distributed networking as a basis for decentralized economic planning.

Foundations and early contributions

Karl Marx and Friedrich Engels held a broad characterization of socialism, characterized by some form of public or common ownership of the means of production and workers' self-management within economic enterprises and where production of economic value for profit would be replaced by an ex ante production directly for use which implied some form of economic planning and planned growth in place of the dynamic of capital accumulation and therefore the substitution of commodity-based production and market-based allocation of the factors of production with conscious planning.

Although Marx and Engels never elaborated on the specific institutions that would exist in socialism or on processes for conducting planning in a socialist system, their broad characterizations laid the foundation for the general conception of socialism as an economic system devoid of the law of value and law of accumulation and principally where the category of value was replaced by calculation in terms of natural or physical units so that resource allocation, production and distribution would be considered technical affairs to be undertaken by engineers and technical specialists.

An alternative view of socialism prefiguring the neoclassical models of market socialism consisted of conceptions of market socialism based on classical economic theory and Ricardian socialism, where markets were utilized to allocate capital goods among worker-owned cooperatives in a free-market economy. The key characteristics of this system involved direct worker ownership of the means of production through producer and consumer cooperatives and the achievement of genuinely free markets by removing the distorting effects of private property, inequality arising from private appropriation of profits and interest to a rentier class, regulatory capture, and economic exploitation. This view was expounded by mutualism and was severely criticized by Marxists for failing to address the fundamental issues of capitalism involving instability arising from the operation of the law of value, crises caused by overaccumulation of capital and lack of conscious control over the surplus product. This perspective played little to no role during the socialist calculation debate in the early 20th century.

Early arguments against the utilization of central economic planning for a socialist economy were brought up by proponents of decentralized economic planning or market socialism, including Pierre-Joseph Proudhon, Peter Kropotkin and Leon Trotsky. In general, it was argued that centralized forms of economic planning that excluded participation by the workers involved in the industries would not be sufficient at capturing adequate amounts of information to coordinate an economy effectively while also undermining socialism and the concept of workers' self-management and democratic decision-making central to socialism. However, no detailed outlines for decentralized economic planning were proposed by these thinkers at this time. Socialist market abolitionists in favour of decentralized planning also argue that whilst advocates of capitalism and the Austrian School in particular recognize equilibrium prices do not exist, they nonetheless claim that these prices can be used as a rational basis when this is not the case, hence markets are not efficient. Other market abolitionist socialists such as Robin Cox of the Socialist Party of Great Britain argue that decentralized planning allows for a spontaneously self-regulating system of stock control (relying solely on calculation in kind) to come about and that in turn decisively overcomes the objections raised by the economic calculation argument that any large scale economy must necessarily resort to a system of market prices.

Early neoclassical contributions

In the early 20th century, Enrico Barone provided a comprehensive theoretical framework for a planned socialist economy. In his model, assuming perfect computation techniques, simultaneous equations relating inputs and outputs to ratios of equivalence would provide appropriate valuations in order to balance supply and demand.

Proposed units for accounting and calculation

Calculation in kind

Main article: Calculation in kind

Calculation in kind, or calculation in-natura, was often assumed to be the standard form of accounting that would take place in a socialist system where the economy was mobilized in terms of physical or natural units instead of money and financial calculation.

Otto Neurath was adamant that a socialist economy must be moneyless because measures of money failed to capture adequate information regarding material well-being of consumers or failed to factor in all costs and benefits from performing a particular action. He argued that relying on any single unit, whether they be labor-hours or kilowatt-hours, would be inadequate and that demand and calculations be performed by the relevant disaggregated natural units, i.e. kilowatts, tons, meters and so on.

In the 1930s, Soviet mathematician Leonid Kantorovich demonstrated how an economy in purely physical terms could use determinate mathematical procedure to determine which combination of techniques could be used to achieve certain output or plan targets.

Debate on the use of money

In contrast to Neurath, Karl Kautsky argued that money would have to be utilized in a socialist economy. Kautsky states the fundamental difference between socialism and capitalism is not the absence of money in the former; rather, the important difference is in the ability for money to become capital under capitalism. In a socialist economy, there would be no incentive to use money as financial capital, therefore money would have a slightly different role in socialism.

Labor-time calculation

Main article: Labor-time calculation

Jan Appel drafted a contribution to the socialist calculation debate which then went through a discussion process before being published as Foundations of Communist Production and Distribution by the General Workers' Union of Germany in 1930. An English translation by Mike Baker was published in 1990.

Interwar debate

Economic calculation problem

Main article: Economic calculation problem

Ludwig von Mises believed that private ownership of the means of production was essential for a functional economy, arguing:

Every step that takes us away from private ownership of the means of production and from the use of money also takes us away from rational economics.

— Ludwig von Mises, Economic Calculation in the Socialist Commonwealth

His argument against socialism was in response to Otto Neurath arguing for the feasibility of central planning. Mises argued that money and market-determined prices for the means of production were essential in order to make rational decisions regarding their allocation and use.

Criticism of the calculation problem

Bryan Caplan, a libertarian economist, has criticized the version of the calculation problem advanced by Mises arguing that the lack of economic calculation makes socialism impossible and not merely inefficient. Caplan argues that socialism makes economic calculation impossible, yet that problem may not be severe enough to make socialism impossible "beyond the realm of possibility". Caplan points out that the fall of the Soviet Union does not prove that calculation was the main issue there. He suggests that more likely the problems resulted from bad incentives arising out of the one-party political system and degree of power granted to the party elite.

Knowledge problem

Proponents of decentralized economic planning have also criticized central economic planning. Leon Trotsky believed that central planners, regardless of their intellectual capacity, operated without the input and participation of the millions of people who participate in the economy and so they would be unable to respond to local conditions quickly enough to effectively coordinate all economic activity. Trotsky argued:

If a universal mind existed, of the kind that projected itself into the scientific fancy of Laplace – a mind that could register simultaneously all the processes of nature and society, that could measure the dynamics of their motion, that could forecast the results of their inter-reactions – such a mind, of course, could a priori draw up a faultless and exhaustive economic plan, beginning with the number of acres of wheat down to the last button for a vest. The bureaucracy often imagines that just such a mind is at its disposal; that is why it so easily frees itself from the control of the market and of Soviet democracy. But, in reality, the bureaucracy errs frightfully in its estimate of its spiritual resources. [...] The innumerable living participants in the economy, state and private, collective and individual, must serve notice of their needs and of their relative strength not only through the statistical determinations of plan commissions but by the direct pressure of supply and demand.

— Leon Trotsky, The Soviet Economy in Danger

Lange model

Oskar Lange responded to Mises' assertion that socialism and social ownership of the means of production implied that rational calculation was impossible by outlining a model of socialism based on neoclassical economics. Lange conceded that calculations would have to be done in value terms rather than using purely natural or engineering criteria, but he asserted that these values could be attained without capital markets and private ownership of the means of production. In Lange's view, this model qualified as socialist because the means of production would be publicly owned with returns to the public enterprises accruing to society as a whole in a social dividend while workers' self-management could be introduced in the public enterprises.

This model came to be referred to as the Lange model. In this model, a Central Planning Board (CPB) would be responsible for setting prices through a trial-and-error approach to establish equilibrium prices, effectively running a Walrasian auction. Managers of the state-owned firms would be instructed to set prices to equal marginal cost (P=MC) so that economic equilibrium and Pareto efficiency would be achieved. The Lange model was expanded upon by Abba Lerner and became known as the Lange–Lerner theorem.

Paul Auerbach and Dimitris Sotiropoulos have criticized the Lange model for degrading the definition of socialism to a form of "capitalism without capital markets" attempting to replicate capitalism's efficiency achievements through economic planning. Auerbach and Sotiropoulos argue that Friedrich Hayek provided an analysis of the dynamics of capitalism that is more consistent with Marxian economics' analysis because Hayek viewed finance as a fundamental aspect of capitalism and any move through collective ownership or policy reform to undermine the role of capital markets would threaten the integrity of the capitalist system. According to Auerbach and Sotiropoulos, Hayek gave an unexpected endorsement to socialism that is more sophisticated than Lange's superficial defense of socialism.

Contemporary contributions

Networked digital feedback

Peter Joseph argues for a transition from fragmented economic data relay to fully integrated, sensor-based digital systems, or an Internet of things. Using an internet of sensory instruments to measure, track and feed back information, this can unify numerous disparate elements and systems, greatly advancing awareness and efficiency potentials.

In an economic context, this approach could relay and connect data regarding how best to manage resources, production processes, distribution, consumption, recycling, waste disposal behavior, consumer demand and so on. Such a process of networked economic feedback would work on the same principle as modern systems of inventory and distribution found in major commercial warehouses. Many companies today use a range of sensors and sophisticated tracking means to understand rates of demands, exactly what they have, where it is or where it may be moving and when it is gone. It is ultimately an issue of detail and scalability to extend this kind of awareness to all sectors of the economy, macro and micro.

Not only is price no longer needed to gain critical economic feedback, but the information price communicates is long delayed and incomplete in terms of economic measures required to dramatically increase efficiency. Mechanisms related networked digital feedback systems make it possible to efficiently monitor shifting consumer preference, demand, supply and labor value, virtually in real time. Moreover, it can also be used to observe other technical processes price cannot, such as shifts in production protocols, allocation, recycling means, and so on. As of February 2018, it is now possible to track trillions of economic interactions related to the supply chain and consumer behavior by way of sensors and digital relay as seen with the advent of Amazon Go.

Cybernetic coordination

Paul Cockshott, Allin Cottrell, and Andy Pollack have proposed new forms of coordination based on modern information technology for non-market socialism. They argue that economic planning in terms of physical units without any reference to money or prices is computationally tractable given the high-performance computers available for particle physics and weather forecasting. Cybernetic planning would involve an a priori simulation of the equilibration process that idealized markets are intended to achieve.

Participatory economics

Proposals for decentralized economic planning emerged in the late 20th century in the form of participatory economics and negotiated coordination.

Decentralized pricing without markets

David McMullen argues that social ownership of the means of production and the absence of markets for them is fully compatible with a decentralized price system. In a post-capitalist society, transactions between enterprises would entail transfers of social property between custodians rather than an exchange of ownership. Individuals would be motivated by the satisfaction from work and the desire to contribute to good economic outcomes rather than material reward. Bids and offer prices would aim to minimize costs and ensure that output is guided by expected final demand for private and collective consumption. Enterprises and startups would receive their investment funding from project assessment agencies. The required change in human behavior would take a number generations and would have to overcome considerable resistance. However, McMullen believes that economic and cultural development increasingly favors the transition.

Market socialism

James Yunker argues that public ownership of the means of production can be achieved the same way private ownership is achieved in modern capitalism through the shareholder system that separates management from ownership. Yunker posits that social ownership can be achieved by having a public body, designated the Bureau of Public Ownership (BPO), owning the shares of publicly-listed firms without affecting market-based allocation of capital inputs. Yunker termed this model pragmatic market socialism and argued that it would be at least as efficient as modern-day capitalism while providing superior social outcomes as public ownership of large and established enterprises would enable profits to be distributed among the entire population rather than going largely to a class of inheriting rentiers.

Mechanism design

Beginning in the 1970s, new insights into the socialist calculation debate emerged from mechanism design theory. According to mechanism design theorists, the debate between Hayek and Lange became a stalemate that lasted for forty years because neither side was speaking the same language as the other, partially because the appropriate language for discussing socialist calculation had not yet been invented. According to these theorists, what was needed was a better understanding of the informational problems that prevent coordination between people. By fusing game theory with information economics, mechanism design provided the language and framework in which both socialists and advocates of capitalism could compare the merits of their arguments. As Palda (2013) writes in his summary of the contributions of mechanism design to the socialist calculation debate, "[i]t seemed that socialism and capitalism were good at different things. Socialism suffered from cheating, or 'moral hazard', more than capitalism because it did not allow company managers to own shares in their own companies. [...] The flip side of the cheating problem in socialism is the lying or 'adverse selection' problem in capitalism. If potential firm managers are either good or bad, but telling them apart is difficult, bad prospects will lie to become a part of the firm".

Relation to neoclassical economics

In his book Whither Socialism?, Joseph Stiglitz criticized models of market socialism from the era of the socialist calculation debate in the 1930s as part of a more general criticism of neoclassical general equilibrium theory, proposing that market models be augmented with insights from information economics. Alec Nove and János Kornai held similar positions regarding economic equilibrium. Both Nove and Kornai argued that because perfect equilibrium does not exist, a comprehensive economic plan for production cannot be formulated, making planning ineffective just as real-world market economies do not conform to the hypothetical state of perfect competition. In his book The Economics of Feasible Socialism, Nove also outlined a solution involving a socialist economy consisting of a mixture of macro-economic planning with market-based coordination for enterprises where large industries would be publicly owned and small- to medium-sized concerns would be organized as cooperatively-owned enterprises.

 

Economic calculation problem

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Economic_calculation_problem 

The economic calculation problem is a criticism of using economic planning as a substitute for market-based allocation of the factors of production. It was first proposed by Ludwig von Mises in his 1920 article "Economic Calculation in the Socialist Commonwealth" and later expanded upon by Friedrich Hayek.

In his first article, Mises described the nature of the price system under capitalism and described how individual subjective values are translated into the objective information necessary for rational allocation of resources in society. He argued that economy planning necessarily leads to an irrational and inefficient allocation of resources. In market exchanges, prices reflect the supply and demand of resources, labor and products. In the article, Mises focused his criticism on the deficiencies of the socialisation of capital goods, but he later went on to elaborate on various different forms of socialism in his book Socialism. He briefly mentioned the problem in the 3rd book of Human Action: a Treatise on Economics, where he also elaborated on the different types of socialism, namely the "Hindenburg" and "Lenin" models, which are uniquely different, and showing why, in his view, market socialism still falls prey to the problems that are tied to socialism.

Mises and Hayek argued that economic calculation is only possible by information provided through market prices and that bureaucratic or technocratic methods of allocation lack methods to rationally allocate resources. Mises's analysis centered on price theory while Hayek went with a more feathered analysis of information and entrepreneurship. The debate raged in the 1920s and 1930s and that specific period of the debate has come to be known by economic historians as the socialist calculation debate. Mises' initial criticism received multiple reactions and led to the conception of trial-and-error market socialism, most notably the Lange–Lerner theorem.

In the 1920 paper, Mises argued that the pricing systems in socialist economies were necessarily deficient because if a public entity owned all the means of production, no rational prices could be obtained for capital goods as they were merely internal transfers of goods and not "objects of exchange", unlike final goods. Therefore, they were unpriced and hence the system would be necessarily irrational as the central planners would not know how to allocate the available resources efficiently. He wrote that "rational economic activity is impossible in a socialist commonwealth". Mises developed his critique of socialism more completely in his 1922 book Socialism, arguing that the market price system is an expression of praxeology and can not be replicated by any form of bureaucracy.

Notable critics of both Mises's original argument and Hayek's newer proposition include Anarcho-Capitalist economist Bryan Caplan, computer programmer and Marxist Paul Cockshott, as well as other communists.

Theory

Comparing heterogeneous goods

Since capital goods and labor are highly heterogeneous (i.e. they have different characteristics that pertain to physical productivity), economic calculation requires a common basis for comparison for all forms of capital and labour.

As a means of exchange, money enables buyers to compare the costs of goods without having knowledge of their underlying factors; the consumer can simply focus on his personal cost-benefit decision. Therefore, the price system is said to promote economically efficient use of resources by agents who may not have explicit knowledge of all of the conditions of production or supply. This is called the signalling function of prices as well as the rationing function which prevents over-use of any resource.

Without the market process to fulfill such comparisons, critics of non-market socialism say that it lacks any way to compare different goods and services and would have to rely on calculation in kind. The resulting decisions, it is claimed, would therefore be made without sufficient knowledge to be considered rational.

Relating utility to capital and consumption goods

The common basis for comparison of capital goods must also be connected to consumer welfare. It must also be able to compare the desired trade-off between present consumption and delayed consumption (for greater returns later on) via investment in capital goods. The use of money as a medium of exchange and unit of account is necessary to solve the first two problems of economic calculation. Mises (1912) applied the marginal utility theory developed by Carl Menger to money.

Marginal consumer expenditures represent the marginal utility or additional consumer satisfaction expected by consumers as they spend money. This is similar to the equi-marginal principle developed by Alfred Marshall. Consumers equalize the marginal utility (amount of satisfaction) of the last dollar spent on each good. Thus, the exchange of consumer goods establishes prices that represent the marginal utility of consumers and money is representative of consumer satisfaction.

If money is also spent on capital goods and labor, then it is possible to make comparisons between capital goods and consumer goods. The exchange of consumer and capital/labor goods does not imply that capital goods are valued accurately, only that it is possible for the valuations of capital goods to be made. These first elements of the calculation critique of socialism are the most basic element, namely economic calculation requires the use of money across all goods. This is a necessary, but not a sufficient condition for successful economic calculation. Without a price mechanism, Mises argues, socialism lacks the means to relate consumer satisfaction to economic activity. The incentive function of prices allows diffuse interests, like the interests of every household in cheap, high quality shoes to compete with the concentrated interests of the cobblers in expensive, poor quality shoes. Without it, a panel of experts set up to "rationalise production", likely closely linked to the cobblers for expertise, would tend to support the cobblers interests in a "conspiracy against the public". However, if this happens to all industries, everyone would be worse off than if they had been subject to the rigours of market competition.

The Mises theory of money and calculation conflicts directly with Marxist labour theory of value. Marxist theory allows for the possibility that labour content can serve as a common means of valuing capital goods, a position now out of favour with economists following the success of the theory of marginal utility.

Entrepreneurship

The third condition for economic calculation is the existence of genuine entrepreneurship and market rivalry.

According to Israel Kirzner (1973) and Don Lavoie (1985), entrepreneurs reap profits by supplying unfulfilled needs in all markets. Thus, entrepreneurship brings prices closer to marginal costs. The adjustment of prices in markets towards equilibrium (where supply and demand equal) gives them greater utilitarian significance. The activities of entrepreneurs make prices more accurate in terms of how they represent the marginal utility of consumers. Prices act as guides to the planning of production. Those who plan production use prices to decide which lines of production should be expanded or curtailed.

Entrepreneurs lack the profit motive to take risks under socialism and so are far less likely to attempt to supply consumer demands. Without the price system to match consumer utility to incentives for production, or even indicate those utilities "without providing incentives", state planners are much less likely to invest in new ideas to satisfy consumers' desires.

Coherent planning

The fourth condition for successful economic calculation is plan coordination among those who plan production. The problem of planning production is the knowledge problem explained by Hayek (1937, 1945), but first mentioned and illustrated by his mentor Mises in Socialism (1922), not to be mistaken with Socialism: An Economic and Sociological Analysis (1951). The planning could either be done in a decentralised fashion, requiring some mechanism to make the individual plans coherent, or centrally, requiring a lot of information.

Within capitalism, the overall plan for production is composed of individual plans from capitalists in large and small enterprises. Since capitalists purchase labour and capital out of the same common pool of available yet scarce labor and capital, it is essential that their plans fit together in at least a semi-coherent fashion. Hayek (1937) defined an efficient planning process as one where all decision makers form plans that contain relevant data from the plans from others. Entrepreneurs acquire data on the plans from others through the price system. The price system is an indispensable communications network for plan coordination among entrepreneurs. Increases and decreases in prices inform entrepreneurs about the general economic situation, to which they must adjust their own plans.

As for socialism, Mises (1944) and Hayek (1937) insisted that bureaucrats in individual ministries could not coordinate their plans without a price system. If decentralized socialism cannot work, central authorities must plan production. However, central planners face the local knowledge problem in forming a comprehensive plan for production. Mises and Hayek saw centralization as inevitable in socialism. Opponents argued that in principle an economy can be seen as a set of equations. Thus, there should be no need for prices. Using information about available resources and the preferences of people, it should be possible to calculate an optimal solution for resource allocation. Friedrich von Hayek responded that the system of equations required too much information that would not be easily available and the ensuing calculations would be too difficult. This is partly because individuals possess useful knowledge but do not realise its importance, may have no incentive to transmit the information, or may have incentive to transmit false information about their preferences. He contended that the only rational solution is to utilize all the dispersed knowledge in the market place through the use of price signals. The early debates were made before the much greater calculating powers of modern computers became available but also before research on chaos theory. In the 1980s, Alexander Nove argued that the calculations would take millions of years even with the best computers. It may be impossible to make long-term predictions for a highly complex system such as an economy.

Hayek (1935, 1937, 1940, 1945) stressed the knowledge problem of central planning, partly because decentralized socialism seemed indefensible. Part of the reason that Hayek stressed the knowledge problem was also because he was mainly concerned with debating the proposal for market socialism and the Lange model by Oskar R. Lange (1938) and Hayek's student Abba Lerner (1934, 1937, 1938) which was developed in response to the calculation argument. Lange and Lerner conceded that prices were necessary in socialism. Lange and Lerner thought that socialist officials could simulate some markets (mainly spot markets) and the simulation of spot markets was enough to make socialism reasonably efficient. Lange argued that prices can be seen merely as an accounting practice. In principle, claim market socialists, socialist managers of state enterprises could use a price system, as an accounting system, in order to minimize costs and convey information to other managers. However, while this can deal with existing stocks of goods, providing a basis for values can be ascertained, it does not deal with the investment in new capital stocks. Hayek responded by arguing that the simulation of markets in socialism would fail due to a lack of genuine competition and entrepreneurship. Central planners would still have to plan production without the aid of economically meaningful prices. Lange and Lerner also admitted that socialism would lack any simulation of financial markets, and that this would cause problems in planning capital investment.

However, Hayek's argumentation is not only regarding computational complexity for the central planners. He further argues that much of the information individuals have cannot be collected or used by others. First, individuals may have no or little incentive to share their information with central or even local planners. Second, the individual may not be aware that he has valuable information; and when he becomes aware, it is only useful for a limited time, too short for it to be communicated to the central or local planners. Third, the information is useless to other individuals if it is not in a form that allows for meaningful comparisons of value (i.e. money prices as a common basis for comparison). Therefore, Hayek argues, individuals must acquire data through prices in real markets.

Financial markets

The fifth condition for successful economic calculation is the existence of well functioning financial markets. Economic efficiency depends heavily upon avoiding errors in capital investment. The costs of reversing errors in capital investment are potentially large. This is not just a matter of rearranging or converting capital goods that are found to be of little use. The time spent reconfiguring the structure of production is time lost in the production of consumer goods. Those who plan capital investment must anticipate future trends in consumer demand if they are to avoid investing too much in some lines of production and too little in other lines of production.

Capitalists plan production for profit. Capitalists use prices to form expectations that determine the composition of capital accumulation, the pattern of investment across industry. Those who invest in accordance with consumers' desires are rewarded with profits, those who do not are forced to become more efficient or go out of business.

Prices in futures markets play a special role in economic calculation. Futures markets develop prices for commodities in future time periods. It is in futures markets that entrepreneurs sort out plans for production based on their expectations. Futures markets are a link between entrepreneurial investment decisions and household consumer decisions. Since most goods are not explicitly traded in futures markets, substitute markets are needed. The stock market serves as a ‘continuous futures market’ that evaluates entrepreneurial plans for production (Lachmann 1978). Generally speaking, the problem of economic calculation is solved in financial markets as Mises argued:

The problem of economic calculation arises in an economy which is perpetually subject to change [...]. In order to solve such problems it is above all necessary that capital be withdrawn from particular undertakings and applied in other lines of production [...]. [This] is essentially a matter of the capitalists who buy and sell stocks and shares, who make loans and recover them, who speculate in all kinds of commodities.

The existence of financial markets is a necessary condition for economic calculation. The existence of financial markets itself does not automatically imply that entrepreneurial speculation will tend towards efficiency. Mises argued that speculation in financial markets tends towards efficiency because of a "trial and error" process. Entrepreneurs who commit relatively large errors in investment waste their funds over expanding some lines of production at the cost of other more profitable ventures where consumer demand is higher. The entrepreneurs who commit the worst errors by forming the least accurate expectations of future consumer demands incur financial losses. Financial losses remove these inept entrepreneurs from positions of authority in industry.

Entrepreneurs who commit smaller errors by anticipating consumer demand more correctly attain greater financial success. The entrepreneurs who form the most accurate opinions regarding the future state of markets (i.e. new trends in consumer demands) earn the highest profits and gain greater control of industry. Those entrepreneurs who anticipate future market trends therefore waste the least amount of real capital and find the most favorable terms for finance on markets for financial capital. Minimal waste of real capital goods implies the minimization of the opportunity costs of capital's economic calculation. The value of capital goods is brought into line with the value of future consumer goods through competition in financial markets, because competition for profits among capitalist financiers rewards entrepreneurs who value capital more correctly (i.e. anticipating future prices more correctly) and eliminates capitalists who value capital least correctly. To sum things up, the use of money in trading all goods (capital/labor and consumer) in all markets (spot and financial) combined with profit driven entrepreneurship and Darwinian natural selection in financial markets all combine to make rational economic calculation and allocation the outcome of the capitalist process.

Mises insisted that socialist calculation is impossible because socialism precludes the exchange of capital goods in terms of a generally accepted medium of exchange, or money. Investment in financial markets determines the capital structure of modern industry with some degree of efficiency. The egalitarian nature of socialism prohibits speculation in financial markets. Therefore, Mises concluded that socialism lacks any clear tendency towards improvement in the capital structure of industry.

Example

Mises gave the example of choosing between producing wine or oil, making the following point:

It will be evident, even in the socialist society, that 1,000 hectolitres of wine are better than 800, and it is not difficult to decide whether it desires 1,000 hectolitres of wine rather than 500 of oil. There is no need for any system of calculation to establish this fact: the deciding element is the will of the economic subjects involved. But once this decision has been taken, the real task of rational economic direction only commences, i.e., economically, to place the means at the service of the end. That can only be done with some kind of economic calculation. The human mind cannot orient itself properly among the bewildering mass of intermediate products and potentialities of production without such aid. It would simply stand perplexed before the problems of management and location.

Such intermediate products would include land, warehouse storage, bottles, barrels, oil, transport, etc. Not only would these things have to be assembled, but they would have to compete with the attainment of other economic goals. Without pricing for capital goods, essentially, Mises is arguing, it is impossible to know what their rational/most efficient use is. Investment is particularly impossible as the potential future outputs cannot be measured by any current standard, let alone a monetary one required for economic calculation. The value consumers have for current consumption over future consumption cannot be expressed, quantified or implemented as investment is independent from savings.

Analysis

Efficiency of markets

Some academics and economists argue that the claim a free market is efficient, or even the most efficient, method of resource allocation is incorrect. Alexander Nove argued that Mises "tends to spoil his case by the implicit assumption that capitalism and optimum resource allocation go together" in Mises' "Economic Calculation in the Socialist Commonwealth". Joan Robinson argued that many prices in modern capitalism are effectively "administered prices" created by "quasi monopolies", thus challenging the connection between capital markets and rational resource allocation. Robin Hahnel argued that free markets are in fact systematically inefficient because externalities are pervasive and because real-world markets are rarely truly competitive or in equilibrium. Socialist market abolitionists argue that whilst advocates of capitalism and the Austrian School in particular recognize equilibrium prices do not exist, they nonetheless claim that these prices can be used as a rational basis when this is not the case, hence markets are not efficient.

Joseph Schumpeter argued that large firms generally drive economic advancement through innovation and investment and so their proliferation is not necessarily bad. In countries with protectionist policies, foreign competition cannot fulfill this role, but the threat of potential competition, namely that as companies abuse their position new rivals could emerge and gain customers dissatisfied with the old companies, can still reduce the inefficiencies. Milton Friedman agreed that markets with monopolistic competition are not efficient, but he argued that in countries with free trade the pressure from foreign competition would make monopolies behave in a competitive manner.

Economic liberals and libertarian capitalists adamantly oppose any distortion of market structure by the introduction of government influence, asserting that such interference would be a form of central planning or state capitalism, insofar as it would redirect decision making from the private to the public sector. These libertarian capitalist analysts argue that monopolies and big business are not generally the result of a free market, or that they never arise from a free market; rather, they say that such concentration is enabled by governmental grants of franchises or privileges.

Equilibrium

Allin Cottrell, Paul Cockshott and Greg Michaelson argued that the contention that finding a true economic equilibrium is not just hard but impossible for a central planner applies equally well to a market system. As any universal Turing machine can do what any other Turing machine can, a central calculator in principle has no advantage over a system of dispersed calculators, i.e. a market, or vice versa.

In some economic models, finding an equilibrium is hard, and finding an Arrow–Debreu equilibrium is PPAD-complete. If the market can find an equilibrium in polynomial time, then the equivalence above can be used to prove that P=PPAD. This line of argument thus attempts to show that any claim to impossibility must necessarily involve a local knowledge problem, because the planning system is no less capable than the market if given full information.

Don Lavoie makes a local knowledge argument by taking this implication in reverse. The market socialists pointed out the formal similarity between the neoclassical model of Walrasian general equilibrium and that of market socialism which simply replace the Walrasian auctioneer with a planning board. According to Lavoie, this emphasizes the shortcomings of the model. By relying on this formal similarity, the market socialists must adopt the simplifying assumptions of the model. The model assumes that various sorts of information are given to the auctioneer or planning board. However, if not coordinated by a capital market, this information exists in a fundamentally distributed form, unavailable to the planners. If the planners somehow captured this information, it would immediately become stale and relatively useless, unless reality somehow imitated the changeless monotony of the equilibrium model. The existence and usability of this information depends on its creation and situation within a distributed discovery procedure.

Scale of problem

One criticism is that proponents of the theory overstate the strength of their case by describing socialism as impossible rather than inefficient. In explaining why he is not an Austrian School economist, anarcho-capitalist economist Bryan Caplan argues that while the economic calculation problem is a problem for socialism, he denies that Mises has shown it to be fatal or that it is this particular problem that led to the collapse of authoritarian socialist states. Caplan also states the exaggeration of the problem; in his view, Mises did not manage to prove why economic calculation made the socialist economy 'impossible', and even if there were serious doubts about the efficiency of cost benefit analysis, other arguments are plentiful (Caplan gives the example of the incentive problem).

Steady-state economy

Joan Robinson argued that in a steady-state economy there would be an effective abundance of means of production and so markets would not be needed. Mises acknowledged such a theoretical possibility in his original tract when he said the following: "The static state can dispense with economic calculation. For here the same events in economic life are ever recurring; and if we assume that the first disposition of the static socialist economy follows on the basis of the final state of the competitive economy, we might at all events conceive of a socialist production system which is rationally controlled from an economic point of view." However, he contended that stationary conditions never prevail in the real world. Changes in economic conditions are inevitable; and even if they were not, the transition to socialism would be so chaotic as to preclude the existence of such a steady-state from the start.

The purpose of the price mechanism is to allow individuals to recognise the opportunity cost of decisions. In a state of abundance, there is no such cost, which is to say that in situations where one need not economize, economics does not apply, e.g. areas with abundant fresh air and water. Otto Neurath and Hillel Ticktin argued that with detailed use of real unit accounting and demand surveys a planned economy could operate without a capital market in a situation of abundance.

Use of technology

In Towards a New Socialism's "Information and Economics: A Critique of Hayek" and "Against Mises", Paul Cockshott and Allin Cottrell argued that the use of computational technology now simplifies economic calculation and allows central planning to be implemented and sustained. Len Brewster replied to this by arguing that Towards a New Socialism establishes what is essentially another form of a market economy, making the following point:

[A]n examination of C&C's New Socialism confirms Mises's conclusion that rational socialist planning is impossible. It appears that in order for economic planners to have any useful data by which they might be guided, a market must be hauled in, and with it analogues of private property, inequality and exploitation.

In response, Cockshott argued that the economic system is sufficiently far removed from a capitalist free-market economy to not count as one, saying:

Those that Hayek was arguing against like Lange and Dickinson allowed for markets in consumer goods, this did not lead Hayek to say : Oh you are not really arguing for socialism since you have conceded a market in consumer goods, he did not, because there remained huge policy differences between him and Lange even if Lange accepted consumer goods markets. It is thus a very weak argument by Brewster to say that what we advocate is not really socialist calculation because it is contaminated in some way by market influences.

Cosma Shalizi articulated the problems that come with central planning using supercomputers in a 2012 essay. He cited the sheer complexity of the problem as well as the difficulty of negotiating between preferences as being the central problems with such a system.

Leigh Phillips and Michal Rozworski released a book in 2019 that argues that multinational corporations like Walmart and Amazon already operate centrally planned economies larger than the Soviet Union, proving that the economic calculation problem is surmountable.

 

Meritocracy

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Meritocracy 

Meritocracy (merit, from Latin mereō, and -cracy, from Ancient Greek κράτος kratos 'strength, power') is a political system in which economic goods and/or political power are vested in individual people on the basis of talent, effort, and achievement, rather than wealth or social class. Advancement in such a system is based on performance, as measured through examination or demonstrated achievement. Although the concept of meritocracy has existed for centuries, the term itself was coined in 1958 by the sociologist Michael Dunlop Young in his dystopian political and satirical book The Rise of the Meritocracy.

Definitions

Early definitions

Meritocracy was most famously argued by Plato, in his book The Republic and stood to become one of the foundations of politics in the Western world. The "most common definition of meritocracy conceptualizes merit in terms of tested competency and ability, and most likely, as measured by IQ or standardized achievement tests." In government and other administrative systems, "meritocracy" refers to a system under which advancement within the system turns on "merits", like performance, intelligence, credentials, and education. These are often determined through evaluations or examinations.

In a more general sense, meritocracy can refer to any form of evaluation based on achievement. Like "utilitarian" and "pragmatic", the word "meritocratic" has also developed a broader connotation, and is sometimes used to refer to any government run by "a ruling or influential class of educated or able people".

This is in contrast to the original, condemnatory use of the term in 1958 by Michael Dunlop Young in his work "The Rise of the Meritocracy", who was satirizing the ostensibly merit-based Tripartite System of education practiced in the United Kingdom at the time; he claimed that, in the Tripartite System, "merit is equated with intelligence-plus-effort, its possessors are identified at an early age and selected for appropriate intensive education, and there is an obsession with quantification, test-scoring, and qualifications."

Meritocracy in its wider sense, may be any general act of judgment upon the basis of various demonstrated merits; such acts frequently are described in sociology and psychology.

In rhetoric, the demonstration of one's merit regarding mastery of a particular subject is an essential task most directly related to the Aristotelian term Ethos. The equivalent Aristotelian conception of meritocracy is based upon aristocratic or oligarchic structures, rather than in the context of the modern state

More recent definitions

In the United States, the assassination of President James A. Garfield in 1881 prompted the replacement of the American Spoils System with a meritocracy. In 1883, The Pendleton Civil Service Reform Act was passed, stipulating government jobs should be awarded on the basis of merit through competitive exams, rather than ties to politicians or political affiliation.

The most common form of meritocratic screening found today is the college degree. Higher education is an imperfect meritocratic screening system for various reasons, such as lack of uniform standards worldwide,lack of scope (not all occupations and processes are included), and lack of access (some talented people never have an opportunity to participate because of the expense, most especially in developing countries). Nonetheless, academic degrees serve some amount of meritocratic screening purpose in the absence of a more refined methodology. Education alone, however, does not constitute a complete system, as meritocracy must automatically confer power and authority, which a degree does not accomplish independently.

Etymology

Although the concept has existed for centuries, the term "meritocracy" is relatively new. It was used pejoratively by British politician and sociologist Michael Dunlop Young in his 1958 satirical essay. The Rise of the Meritocracy, which pictured the United Kingdom under the rule of a government favouring intelligence and aptitude (merit) above all else, being the combination of the root of Latin origin "merit" (from "mereō" meaning "earn") and the Ancient Greek suffix "-cracy" (meaning "power", "rule"). [The purely Greek word is axiocracy (αξιοκρατία), from axios (αξιος, worthy) + "-cracy" (-κρατία, power).] In this book the term had distinctly negative connotations as Young questioned both the legitimacy of the selection process used to become a member of this elite and the outcomes of being ruled by such a narrowly defined group. The essay, written in the first person by a fictional historical narrator in 2034, interweaves history from the politics of pre- and post-war Britain with those of fictional future events in the short (1960 onward) and long term (2020 onward).

The essay was based upon the tendency of the then-current governments, in their striving toward intelligence, to ignore shortcomings and upon the failure of education systems to utilize correctly the gifted and talented members within their societies.

Young's fictional narrator explains that, on the one hand, the greatest contributor to society is not the "stolid mass" or majority, but the "creative minority" or members of the "restless elite". On the other hand, he claims that there are casualties of progress whose influence is underestimated and that, from such stolid adherence to natural science and intelligence, arises arrogance and complacency. This problem is encapsulated in the phrase "Every selection of one is a rejection of many".

It was also used by Hannah Arendt in her essay "Crisis in Education", which was written in 1958 and refers to the use of meritocracy in the English educational system. She too uses the term pejoratively. It was not until 1972 that Daniel Bell used the term positively. M. Young's formula to describe meritocracy is: m = IQ + E. The formula of L. Ieva instead is: m = f (IQ, Cut, ex) + E. That is, for Young, meritocracy is the sum of intelligence and energy; while, for Ieva it is represented by the function between intelligence, culture and experience, to which energy is then added.

History

Ancient times: China

Further information: Chinese Legalism

Some of the earliest example of an administrative meritocracy, based on civil service examinations, dates back to Ancient China. The concept originates, at least by the sixth century BC, when it was advocated by the Chinese philosopher Confucius, who "invented the notion that those who govern should do so because of merit, not of inherited status. This sets in motion the creation of the imperial examinations and bureaucracies open only to those who passed tests."

As the Qin and Han dynasties developed a meritocratic system in order to maintain power over a large, sprawling empire, it became necessary for the government to maintain a complex network of officials. Prospective officials could come from a rural background and government positions were not restricted to the nobility. Rank was determined by merit, through the civil service examinations, and education became the key for social mobility. After the fall of the Han Dynasty, the nine-rank system was established during the Three Kingdoms period.

According to the Princeton Encyclopedia of American History:

One of the oldest examples of a merit-based civil service system existed in the imperial bureaucracy of China. Tracing back to 200 B.C., the Han Dynasty adopted Confucianism as the basis of its political philosophy and structure, which included the revolutionary idea of replacing nobility of blood with one of virtue and honesty, and thereby calling for administrative appointments to be based solely on merit. This system allowed anyone who passed an examination to become a government officer, a position that would bring wealth and honor to the whole family. In part due to Chinese influence, the first European civil service did not originate in Europe, but rather in India by the British-run East India Company... company managers hired and promoted employees based on competitive examinations in order to prevent corruption and favoritism.

17th century

The concept of meritocracy spread from China to British India during the seventeenth century.

The first European power to implement a successful meritocratic civil service was the British Empire, in their administration of India: "company managers hired and promoted employees based on competitive examinations in order to prevent corruption and favoritism." British colonial administrators advocated the spread of the system to the rest of the Commonwealth, the most "persistent" of which was Thomas Taylor Meadows, Britain's consul in Guangzhou, China. Meadows successfully argued in his Desultory Notes on the Government and People of China, published in 1847, that "the long duration of the Chinese empire is solely and altogether owing to the good government which consists in the advancement of men of talent and merit only," and that the British must reform their civil service by making the institution meritocratic. This practice later was adopted in the late nineteenth century by the British mainland, inspired by the "Chinese mandarin system".

The British philosopher and polymath John Stuart Mill advocated meritocracy in his book, Considerations on Representative Government. His model was to give more votes to the more educated voter. His views are explained in Estlund (2003:57–58):

Mill's proposal of plural voting has two motives. One is to prevent one group or class of people from being able to control the political process even without having to give reasons in order to gain sufficient support. He calls this the problem of class legislation. Since the most numerous class is also at a lower level of education and social rank, this could be partly remedied by giving those at the higher ranks plural votes. A second, and equally prominent motive for plural voting is to avoid giving equal influence to each person without regard to their merit, intelligence, etc. He thinks that it is fundamentally important that political institutions embody, in their spirit, the recognition that some opinions are worth more than others. He does not say that this is a route to producing better political decisions, but it is hard to understand his argument, based on this second motive, in any other way.

So, if Aristotle is right that the deliberation is best if participants are numerous (and assuming for simplicity that the voters are the deliberators) then this is a reason for giving all or many citizens a vote, but this does not yet show that the wiser subset should not have, say, two or three; in that way something would be given both to the value of the diverse perspectives, and to the value of the greater wisdom of the few. This combination of the Platonic and Aristotelian points is part of what I think is so formidable about Mill's proposal of plural voting. It is also an advantage of his view that he proposes to privilege not the wise, but the educated. Even if we agreed that the wise should rule, there is a serious problem about how to identify them. This becomes especially important if a successful political justification must be generally acceptable to the ruled. In that case, privileging the wise would require not only their being so wise as to be better rulers, but also, and more demandingly, that their wisdom be something that can be agreed to by all reasonable citizens. I turn to this conception of justification below.

Mill's position has great plausibility: good education promotes the ability of citizens to rule more wisely. So, how can we deny that the educated subset would rule more wisely than others? But then why shouldn't they have more votes?

Estlund goes on to criticize Mill's education-based meritocracy on various grounds.

18th century; West Africa

The Ashanti King Osei Kwadwo who ruled from c. 1764 to 1777, began the meritocratic system of appointing central officials according to their ability, rather than their birth.

19th century

In the United States, the federal bureaucracy used the Spoils System from 1828 until the assassination of United States President James A. Garfield by a disappointed office seeker in 1881 proved its dangers. Two years later in 1883, the system of appointments to the United States Federal Bureaucracy was revamped by the Pendleton Civil Service Reform Act, partially based on the British meritocratic civil service that had been established years earlier. The act stipulated that government jobs should be awarded on the basis of merit, through competitive exams, rather than ties to politicians or political affiliation. It also made it illegal to fire or demote government employees for political reasons.

To enforce the merit system and the judicial system, the law also created the United States Civil Service Commission. In the modern American meritocracy, the president may hand out only a certain number of jobs, which must be approved by the United States Senate.

Australia began establishing public universities in the 1850s with the goal of promoting meritocracy by providing advanced training and credentials. The educational system was set up to service urban males of middle-class background, but of diverse social and religious origins. It was increasingly extended to all graduates of the public school system, those of rural and regional background, and then to women and finally to ethnic minorities. Both the middle classes and the working classes have promoted the ideal of meritocracy within a strong commitment to "mate-ship" and political equality.

20th century to today

Singapore describes meritocracy as one of its official guiding principles for domestic public policy formulation, placing emphasis on academic credentials as objective measures of merit.

There is criticism that, under this system, Singaporean society is being increasingly stratified and that an elite class is being created from a narrow segment of the population. Singapore has a growing level of tutoring for children, and top tutors are often paid better than school teachers of this system recall the ancient Chinese proverb "Wealth does not pass beyond three generations" (Chinese: 富不过三代), suggesting that the nepotism or cronyism of elitists eventually will be, and often are, replaced by those lower down the hierarchy.

Singaporean academics are continuously re-examining the application of meritocracy as an ideological tool and how it's stretched to encompass the ruling party's objectives. Professor Kenneth Paul Tan at the Lee Kuan Yew School of Public Policy asserts that "Meritocracy, in trying to 'isolate' merit by treating people with fundamentally unequal backgrounds as superficially the same, can be a practice that ignores and even conceals the real advantages and disadvantages that are unevenly distributed to different segments of an inherently unequal society, a practice that in fact perpetuates this fundamental inequality. In this way, those who are picked by meritocracy as having merit may already have enjoyed unfair advantages from the very beginning, ignored according to the principle of nondiscrimination."

How meritocracy in the Singaporean context relates to the application of pragmatism as an ideological device, which combines strict adherence to market principles without any aversion to social engineering and little propensity for classical social welfarism, is further illustrated by Kenneth Paul Tan in subsequent articles:

There is a strong ideological quality in Singapore's pragmatism, and a strongly pragmatic quality in ideological negotiations within the dynamics of hegemony. In this complex relationship, the combination of ideological and pragmatic maneuvering over the decades has resulted in the historical dominance of government by the PAP in partnership with global capital whose interests have been advanced without much reservation.

Within the Ecuadorian Ministry of Labor, the Ecuadorian Meritocracy Institute was created under the technical advice of the Singaporean government.

With similar objections, John Rawls rejects the ideal of meritocracy as well.

The Meritocracy Trap

The "meritocracy trap", a concept introduced by Daniel Markovits in his eponymous book, criticizes the aspirational view of meritocracy as being the cause of all problems associated with this matter: it is meritocracy itself that creates radical inequality and causes so many people in society, including those who are supposed to benefit from the situation, to be worse off. The accelerating inequality has been evolving under meritocracy’s own conditions. However, the author does not reject the whole idea of meritocracy; he tries to look for different and more suitable approaches to the matter. While many critics support the idea that the inequality that has been increasing since the middle of twentieth century is actually a result of inadequate meritocracy, based on the analysis of its indicators Markovits finds that increasing inequality is actually a result of meritocracy itself.

The author points out the shift from the last five, six, seven decades, when the elite “leisure class” worked only rarely and spent days enjoying their fortune, while hard working people stayed poor for their whole lives. But lately, an important change occurred: according to a Harvard Business survey, members of the elite social circles are working more and harder than ever before. More than 60% of individuals with high income work circa 50 hours per week, around 30% of them work more than 60 hours per week and the last 10% spend over 80 hours per week occupied with their work responsibilities. Also, by having access to the best possible education available since starting school, members from the top 1% of households prevail in the world leading universities around the world. The interaction of these elements creates unusual and never-seen-before living situation for members of the elite circles: by hard work, higher amount of hours spent at work and performing with higher skills obtained from the best universities, they gain respect and position of the “superordinate” working class while losing their unflattering label of "leisure class". As the author implies in his calculations, the income of a typical elite household is now from three quarters made up of earnings from labor instead of ancestors' heritage.

Secondly, Markovits introduces the idea of "snowball inequality", which is basically an ongoing cycle of widening gap between elite workers and members of the middle class. While the high-profile individuals obtain exclusive positions thanks to higher level of their skills, they occupy jobs and oust middle class workers from the core of economic events. After that, the elites take advantage of their high earnings by securing the best education for their own offspring so that they obtain the highest qualification and are desired by the market for their great skills. Hence the gap between elite and middle class members is widening with every generation, inequality extensively triumphing over social mobility and forming a "time divide" – with long hours working high-profile individuals on one side, and substantially inactive middle class workers that are less and less required on the other side.

One side of the coin is in this case a clear loser: the middle class, which is unwillingly being excluded from economic prosperity, social benefit and the long desired ideal of American Dream. While it is impossible to measure the exact effects on the middle class, the side effects are more obvious: opioid epidemic, dramatic raise in "deaths of despair" (suicides, mental health and alcoholism), and lowering level of life expectancy in these societies are just some of them. Quite surprisingly however, the high-profile member of society is being harmed by meritocracy as well: they have to pay a significant price for their hectic working life. Many of them admit suffering from physical and mental health issues, inability to sustain a good quality personal life and lack of time spent with their families. What is of even higher importance is that meritocracy causes a continuous "competitive trap" within the elite social circles as its members are from a very early age basically contestants of a meritocratic marathon that starts in their exclusive preschools, continues at colleges and universities and finally moves its second half to the work environment. They are truly trapped in this vicious race where they are compelled to constantly compete with others and, most importantly, with themselves. In this matter, the author encounters the basic weakness of the aspirational lifestyle, which promotes the idea of meritocracy as a means for fair evaluation of the most skilled, gifted and hard-working.

Markovits proposes a different approach to meritocracy, one where socioeconomic life conveniences are freely distributed to the people who are sufficiently successful at the things they are doing rather than creating an environment of ongoing competition. He promotes the idea that striving for being the best and brightest is a road to personal destruction and we should be more open to the idea of just being good enough. Restructuring of economic roles, organizations and institutions is desirable in order to include a wider population and hence narrow the increasing inequality gap by questioning the social hegemony of high-profile workers, and intervening with redistribution of earnings, working hours and social identity on behalf of middle class workers.

Criticism

See also: Myth of meritocracy and Just-world hypothesis

The term "meritocracy" was originally intended as a negative concept. One of the primary concerns with meritocracy is the unclear definition of "merit". What is considered as meritorious can differ with opinions as on which qualities are considered the most worthy, raising the question of which "merit" is the highest—or, in other words, which standard is the "best" standard. As the supposed effectiveness of a meritocracy is based on the supposed competence of its officials, this standard of merit cannot be arbitrary and has to also reflect the competencies required for their roles.

The reliability of the authority and system that assesses each individual's merit is another point of concern. As a meritocratic system relies on a standard of merit to measure and compare people against, the system by which this is done has to be reliable to ensure that their assessed merit accurately reflects their potential capabilities. Standardized testing, which reflects the meritocratic sorting process, has come under criticism for being rigid and unable to accurately assess many valuable qualities and potentials of students. Education theorist Bill Ayers, commenting on the limitations of standardized testing, writes that "Standardized tests can't measure initiative, creativity, imagination, conceptual thinking, curiosity, effort, irony, judgment, commitment, nuance, good will, ethical reflection, or a host of other valuable dispositions and attributes. What they can measure and count are isolated skills, specific facts and function, content knowledge, the least interesting and least significant aspects of learning." Merit determined through the opinionated evaluations of teachers, while being able to assess the valuable qualities that cannot be assessed by standardized testing, are unreliable as the opinions, insights, biases, and standards of the teachers vary greatly. If the system of evaluation is corrupt, non-transparent, opinionated or misguided, decisions regarding who has the highest merit can be highly fallible.

The level of education required in order to become competitive in a meritocracy may also be costly, effectively limiting candidacy for a position of power to those with the means necessary to become educated. An example of this was Chinese student self-declared messiah, Hong Xiuquan, who despite ranking first in a preliminary, nationwide imperial examination, was unable to afford further education. As such, although he did try to study in private, Hong was ultimately noncompetitive in later examinations and unable to become a bureaucrat. This economic aspect of meritocracies has been said to continue nowadays in countries without free educations, with the Supreme Court of the United States, for example, consisting only of justices who attended Harvard or Yale and generally only considering clerkship candidates who attended a top-five university, while in the 1950s the two universities only accounted for around one fifth of the justices. Even if free education were provided, the resources that the parents of a student are able to provide outside of the curriculum, such as tutoring, exam preparation, and financial support for living costs during higher education will influence the education the student attains and the student's social position in a meritocratic society. This limits the fairness and justness of any meritocratic system. Similarly, feminist critics have noted that many hierarchical organisations actually favour individuals who have received disproportionate support of an informal kind (e.g. mentorship, word-of-mouth opportunities, and so on), such that only those who benefit from such supports are likely to understand these organisations as meritocratic.

Another concern regards the principle of incompetence, or the "Peter Principle". As people rise in a meritocratic society through the social hierarchy through their demonstrated merit, they eventually reach, and become stuck, at a level too difficult for them to perform effectively; they are promoted to incompetence. This reduces the effectiveness of a meritocratic system, the supposed main practical benefit of which is the competence of those who run the society.

In his book Meritocratic Education and Social Worthlessness (Palgrave, 2012), the philosopher Khen Lampert argued that educational meritocracy is nothing but a post-modern version of Social Darwinism. Its proponents argue that the theory justifies social inequality as being meritocratic. This social theory holds that Darwin's theory of evolution by natural selection is a model, not only for the development of biological traits in a population, but also as an application for human social institutions—the existing social institutions being implicitly declared as normative. Social Darwinism shares its roots with early progressivism, and was most popular from the late nineteenth century to the end of World War II. Darwin only ventured to propound his theories in a biological sense, and it is other thinkers and theorists who have applied Darwin's model normatively to unequal endowments of human ambitions.

Harvard philosopher Michael Sandel in his latest book makes a case against meritocracy, calling it a "tyranny". Ongoing stalled social mobility and increasing inequality are laying bare the crass delusion of the American Dream, and the promise "you can make it if you want and try". The latter, according to Sandel, is the main culprit of the anger and frustration which brought some Western countries towards populism.

Cornell University economist Robert H. Frank rejects meritocracy in his book Success and Luck: Good Fortune and the Myth of Meritocracy. He describes how chance plays a significant role in deciding who gets what that is not objectively based on merit. He does not discount the importance of hard work, but, using psychological studies, mathematical formulae, and examples, demonstrates that among groups of people performing at a high level, chance (luck) plays an enormous role in an individual's success.