The uncoupling of merit and economic performance in a depression

One of the most compelling arguments for capitalism, I think, is the idea that it is meritocratic: successful businesses are the ones that create products and services that people truly desire, and businesses that fail to create desirable enough products eventually go under. People who live beyond their means eventually fall into debt and go bankrupt; people who are careful with their money invest it and see their wealth multiply. If you work hard, you get something in return; if you don't work, you get nothing. And there's no such thing as a free lunch.

Of course, that's the Platonic ideal--in reality, even the most ardent capitalism-booster admits several points at which the meritocracy of capitalism breaks down. Not all wealth is earned through hard work--much of it is inherited. Many jobs are awarded based on personal connections and loyalties rather than skill. There are systemic injustices in our society: women and minorities see fewer opportunities to get ahead, and are paid less; children in poorer families receive a worse education than children in wealthier families; rich and powerful industries lobby Congress to give them unfair advantages, like subsidies or unwarranted deregulation (which most of the time is tantamount to subsidy, since the societal costs of the industry's activities end up being socialized); companies routinely violate labor laws that prevent workers from unionizing and negotiating better wages; etc. And, of course, there is the most powerful and arbitrary force of all: sheer dumb luck.

There are a lot of imperfections.

But even so, the capitalist will argue that, despite these difficulties, by and large capitalism is still meritocratic enough, still better than any other economic system yet devised, and so worth preserving and improving upon. And America--being a nation of mostly capitalists--have bought into this idea, and the idea is so ingrained and familiar that it becomes something like an axiom that markets are meritocratic. This belief in the meritocracy of capitalism is so certain, in fact, that we often use economic performance as a procedural criterion to determine the worthiness of a product, the acumen of a businessman, the work ethic of a laborer. The very fact that Google is the most successful search engine means that it is also the best search engine; the very fact that some company is successful means that the executives are doing something right; the very fact that this man started with nothing and rose to the position he's in today means that he's a resourceful, hardworking fellow. And, the converse: the fact that Yahoo has gone down in marketshare means that its search engine is inferior; the fact that this company has gone out of business means that the executives were incompetent; the fact that this man started with everything and is now penniless means that he's lazy, irresponsible. Because of the iron-clad assumption that economic performance is meritocratic, economic performance becomes a measuring stick for merit.

In normal times, and in a not-completely-dysfunctional free market economy, you can get away with this sort of thinking in a rough-and-ready sort of way: I think it would be reasonable for a person to presume, for example, that Google's search engine is superior even if that person has never used a search engine before in his or her life; it would be reasonable to presume that a fellow that has squandered a small fortune has some serious character flaws or other life problems; etc. Of course, there are always exceptions and mitigating circumstances and things like that, and so you have to judge people on the merits, and take into account all of the evidence in each case, and so on. But often in life you don't always have the time or energy to delve into each case and give your full consideration--lots of times we navigate the vast world of people, situations, and products on the fly, trying our best to size things up with a cursory glance. Thus, we perhaps avoid a restaurant that is nearly empty during peak dinner hour; we are attracted to the person at the party who is successful (and I don't mean money, per se, but professional success--maybe a successful comedian or writer, or big-time lawyer, or famous professor). In other words, we let economic success be a yardstick for actual merit--and most of the time, it works out okay.

That's normal times. But the times we find ourselves in now are anything but normal--on the contrary, we find ourselves in the midst of a depression. And the interesting thing about depressions is that they take the meritocracy of capitalism and flip it upsidedown: normally, when times get tough the right thing to do is cut back your spending and save your money; in a depression, though, cutting back your spending is precisely what is contributing to the downward economic spiral that is making you poorer (a phenomenon known as "the paradox of thrift"). Normally, when a company goes out of business for lack of demand for its products, we can safely blame the poor quality of the product for the lack of demand; in a depression, however, the lack of demand for a product has nothing to do with the quality of the product, because there is a lack of aggregate demand--general demand for everything is going down (that is to say, it's not as if the money not being spent on the product is being spent on superior competing products--it just isn't being spent at all). Normally, when someone loses their job, we can infer that--for whatever reason--they didn't have what it takes to compete with other employees for the job; in a depression, though, people who are excellent, productive employees lose their job through no fault of their own (they aren't losing their jobs to superior competing laborers--the jobs are just disappearing altogether).

The problem these days is that everyone is still wired to assume that because the nation's economic performance is so bad, we must somehow deserve it. Economic performance is still being used as a measuring stick for merit. And so you get a lot of people who think that the economic crisis was brought about because we as a nation lived beyond our means; or that all of this was the inevitable result of greed on the part of someone, somewhere. You have people who believe that the system is purging itself of waste, that this is an "adjustment" that is painful, but ultimately healthy. You have people who believe that we must all "tighten our belts"--government included--and stop the profligate spending and consumerism in favor of good old-fashioned saving. You have people who look at the disproportionate wealth of the United States and think to themselves "the party's over; here comes the great reckoning". The tendency is to frame the whole sequence of events as a morality play: in Act 1 some character flaw leads to sinful behavior, in Act 2 the bad behavior finally catches up with us, and in Act 3 we make the painful sacrifices and hard decisions and, finally, atone for our sins. There's no easy answers, no free lunch. It is a world that is basically intuitive and fair, where good behavior is rewarded and bad behavior is punished--it is a world, in other words, where economic performance is meritocratic.

But this way of thinking obscures a more helpful way of thinking of the economy, which is that it is a big, complex mechanism capable of breaking down and, hopefully, being fixed--that the reasons for its breakdown are not necessarily attributable to some great human foible, and that the fix does not necessarily require some kind of painful, character-building sacrifice. Of course, in order to think of the economy in this dispassionate way, you have to spend a great amount of effort trying to understand how it works--an effort that many pundits, reporters, and members of Congress either cannot or will not undertake. So these folks rely on their intuitive, meritocratic notion of capitalism and sense of cosmic justice and end up advocating precisely the opposite of what ought to be done--that we should cut spending rather than increase it, that we should let companies die off (remember how people cheered the demise of Lehman Brothers out of concerns about "moral hazard"? How about GM and Chrysler?) because they aren't competitive, etc.

Of course, not everyone who opposes a large stimulus package is necessarily someone who is relying on an faulty, intuitive understanding of economics. There are some very capable economists who are skeptical, on empirical grounds, that such a stimulus would work. But there are too many people in positions of authority that do not appear to have even a basic understanding of the economic crisis, and who therefore reject the idea of stimulus with the air of someone who is told that the solution to their obesity problem brought about by eating too much candy is to start eating even more candy.