Most market advocates believe that what's good about the marekts is that they reward merit. But I argue in my latest Forbest column that markets don't reward merit, they reward value. And the failure to make this distinction might have prevented us from making a case for markets that, as it were, is more marketable.
This point was first made by the brilliant Austrian economist and Nobel laureate F. A. Hayek who pointed out that the beauty of the market is that it allows people to use knowledge of their particular circumstances to generate something valuable for others.
And circumstances, he emphasized, are a matter of chance--not of gift. Furthermore, since no two people's circumstances are ever identical, every producer potentially has something--some information, some skill or some resource--that no one else does, giving him a unique market edge. "[T]he shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others," noted Hayek.
In a functioning market, Hayek insisted, financial compensation depends not on someone's innate gifts or moral character. Nor even on the originality or technological brilliance of their products. Nor, for that matter, on the effort that goes into producing them. The sole and only issue is a product's value to others. Compare an innovation as incredibly mundane as a new plastic lid for paint cans with a whiz-bang, new computer chip. The painter could become just as rich as the computer whiz so long as the savings from spills that the lid offers are as great as the productivity gains from the chip. It matters not a whit that the lid maker is a drunk, wife-beating, out-of-work painter who stumbled upon this idea through pure serendipity when he tripped over a can of paint. Or that the computer whiz is a morally stellar Ph.D. who spent years perfecting his chip....
The need for embedding this Hayekian understanding of markets in the public consciousness cannot be overstated. And the first step in doing so might be purging the word "merit" from the vocabulary of markets and replacing it with "value." This would make it much easier to explain how no functioning industry, absent access to taxpayers' pockets, can afford forever to pay its executives obscene salaries beyond the value they are generating. At once, then, it would be possible to oppose both the recent government bailouts and government regulations such as Sarkozy-style caps on executive salaries.
More importantly, it would become possible to counter the popular perception--the source of so much hostility against markets--that there is some body of super-elites, masters of the universe, who can sit in their plush offices on Wall Street and Silicon Valley and reign supreme through their sheer brain power. If value, not brain power, is the engine that drives markets, then the market's inherent nature militates against elite control.
Markets are a fundamentally antielitist social force. If this is not generally recognized, it is not so much because of what the enemies of markets say to attack them--but what their friends have said to defend them. To rescue markets, then, one has to rescue them from their friends first.
Whole thing here.