Merit Pay

Brad DeLong is usually as pithy as he is erudite, but I really can’t follow his analysis of a bit of “Crunch” here:

Let me join Alan Viard in beating up on Jared Bernstein for the undefined term "merit" in his first basic principle:

TPMCafe Talking Points Memo Let's Talk "Crunch": Economic outcomes are generally thought to be fair, in the sense that market forces dole out rewards to those who merit them. But that’s not always the case. Power, whether it’s based on political clout, wealth, class, race, or gender, is also a key determinant of who gets what.

"Merit" can, I think, mean three things:
1. Marginal productivity--the amount by which, given who you are where you are with the resources you happen to own, total collective product would be reduced if you and your resources were to suddenly vanish from the scene.

2. Optimal incentives--because we want people to take local actions that advance our global goals, we have set up a system that provides people in the right place at the right time with the right skills with incentives that give them a better life--or at least more stuff--if they take actions that we regard as adding to the total pie.

3. From each according to his or her ability--what each would be able to add to the collective pie if he or she had and is the resources to fully realize his or her potential to the extent that that freedom for the one is compatible with that freedom for others.

4. To each according to his or her need--what each of us needs, understanding "need" to include not just bare necessities but also conveniences and luxuries, to the extent that provision of what we need to one is compatible with the provision of what they need to others.

Let me just first mention that I’m afraid I’ve been a physics student too long – when I hear impersonal forces mentioned, like, say “market forces,” I want to see a Lagrangian. Especially if they start to “dole out rewards.” My impression was that markets were locations or occasions for trading – places where individuals or agents could exchange stuff.

So what about Brad’s “three” candidate definitions for merit? My first impression was that only the first even looked like a definition. I was puzzled enough that I consulted the The Online Dictionary of Etymology The origin of the word, which goes back to proto Indo European, is in a word meaning allotment or share. A Latin ancestral word means “that for which money is paid.” Etymologically speaking, Jared Bernstein’s usage looks impeccable.

Nonetheless, I am skeptical that markets, or their forces, are in the business of allocating rewards. Individuals compete with each other for survival and for stuff. Markets do allow individuals or their agents to trade, and those with more desirable stuff to trade, or shrewder trading techniques, tend to accumulate more stuff. Of course those who set up markets, or regulate them, are providing a service, and they take their cut.

Allocation of rewards, though, is not a market function, nor, I think, a function of market forces, whatever they may be. Circumstance, luck, and society all have a lot to do with the allocation of rewards – markets not so much. It is through society that political power does its allocation. Society, not a market or market force, defines and protects property, levies taxes, and supplies services, including market regulation, and society has a lot to say about how rewards are allocated.