Exponential Mindset Blog

Those who know me best know that I have been spending quite a bit of time lately pondering the issue of wealth and income inequality in society. There have been a lot of recent articles pointing out to the involvement of Central banks in asset purchases which have disproportionally benefited the rich. This theme has been hashed over and over again in its various forms, not the least of which by our esteemed finance critique Pierre Poilievre who held the head of BOC Tiff Macklem to task on widening the inequalities in society through QE and other programs.

However, based on my rudimentary understanding of economics this is far too simplistic. The issue of inequality is far too complicated to simply be blamed on QE and money printing. For one thing, money is a conduit of exchange. It it simply an intermediary that floats around the system. So even if some money were temporarily allocated to one sector, the natural flow of the economy would correct this allocation. To me, what is likely causing inequality is far more systematic and fundamental to productivity than can simply be explained by a temporary misallocation claimed by our finance critique.

In comes Mr. Daniel Markovitz’s book The Meritocracy Trap. Markovitz challenges the basic idea that the current meritocratic system is fair and equitable to all. Here are his basic arguments:

  1. That we have shifted from a system of aristocracy whereby privilege is conferred through familial dynastic succession to one where privilege is earned through merit.
  2. Merit is earned, not given. And it is earned in a way that seems fair on the surface. Those who are more capable and productive should receive more merit and thus justifying the outsized rewards that they receive in the economy. This fits in especially well with the American ideal that hard work should be rewarded.
  3. But because merit is now the goal of meritocracy, it has ignited an arms race whereby the weapons are human capital. Because merit can only be earned through elite training, the arms race rests on the training of the elite producers in the society.
  4. Essentially, from childhood, elite producers undergo rigorous training at elite education facilities such as prep schools. Their goal, to graduate top of their class and enter the temples of meritocrat training: Top colleges. There, they undergo more training fit for a Jedi and come out the other end with massive amounts of human capital now suited to dominate the work place (we all know how well an average storm trooper does against a Jedi master in star wars). Their productive capacity is far greater than an average person, hence they gain the outsized rewards in the work place.
  5. This cycle continues through their children. In addition, because such a super class of elite workers exist, the economy naturally shifts to utilize their talents. Capitalist systems do what it does best, make efficient use of the most critical resources, in this case, the talent of these elite producers.
  6. Because merit is now the currency of the system, these elite producers undergo increasingly higher training as they cycle through their life and compete for merit amongst each other. They also pass this training to their heirs through selective mating and constant reinvestment in education.
  7. This training not only makes them more powerful in the work place, but it also devalues the training of all others. The star wars analogy comes in handy again. Imagine if the Jedi’s were ten times more powerful, this naturally devalues the power of the average storm trooper.
  8. The presence of these elite producers thus tilts the economic system toward one of merit inequality. Not only that, the cycle of the meritocratic arms race means that over time, this inequality will widen rather than close.
  9. Now we can tie this back to financials. Because we have built the system to reward merit using monetary means, this naturally leads to a system of income and wealth inequality. For the same reason, as this meritocratic divide widens, financial inequality are sure to follow.

I have to say, this model of how inequality is created sounds far more credible to me than the simple idea of money printing and QE being the root cause. The idea of meritocratic inequality would explain why solving the problem is so complicated. In addition, it would also show that the economic system naturally tilts the playing field toward these elite producers. So as money cycles through this black box, more and more of it will naturally gravitate toward them during each cycle. This natural tendency toward elite production would explain why the state of equilibrium appears to be very unequal.

Unfortunately, the books spent 270 odd pages on the issues and only about 10 pages on the solution. So, it left me wanting more in terms of the solution. But because meritocracy is such a central idea of how our society functions, it is hard for it to be challenged head on. Thus, if Markovitz is right, tackling inequality is far harder than simply telling Central Banks to stop running QE.

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