Saturday, September 26, 2009

The Myth of the Talented Few

Recently published an article discussing economic inequality in developing countries. Predictably, anything related to reducing inequality brings out the crackpot theories in people. I reproduce below a coherent comment. I think to a certain extent this sentiment is believed in by some educated people in India. Therefore, this post is simply a rebuttal of such opinions.

Comment below
This is what the comment says:
There is a huge demand and effort to achieve "equality" among our planners, politicians and economists. They would like nothing more than to greatly reduce the wealth disparities that exist in society.

Though it would be a noble goal or objective, these people are living in a fools paradise.

God has not designed all people to achieve equally in all fields. Creating wealth is also one of them.

The only way a society can create wealth is to allow the talented few among the population to pursue their goals in a legal manner. This created wealth then dissipates into the economy following sound economic principles.

This way, the entire population gets benefited, not just those select people.

The moment you start interfering with this formula and cast a jealous eye on the wealth creators who end up with huge fortunes(at least in the beginning), under the mistaken objective of creating equality and egalitarianism, you choke the development of that society. The economy goes into decline. You can then spread poverty equally !

So, wake up. If we have still not understood this very basic economic principle, then we have no hope for the future.

Let the Ambanis, Mittals and Murthys earn their wealth. It is bound to come back into the economy in time. Till then wait patiently and dont complain.

Economics and Personality Cults
There are several things wrong with the opinion above, but the main one is this: "talented few creating wealth" is not an economic principle. Economics does not talk about talent or the absence of it. The above is simply a variation of Ayn Rand's "objectivist" philosophy as explained in her "FountainHead" and "Atlas Shrugged" Ayn Rand was a cult leader and a classic analysis of her cult is here.
I will come back to Ayn Rand later, but what the above opinion does is, it takes a personality cult of the "talented few" and tries to push it off as an economic theory.
It is informative that in the above list the commenter includes the Ambanis. He would probably include the Tatas. But the current members of the Ambani clan or the Tatas have INHERITED their wealth. What is their talent other than being BORN to rich fathers?
Talent or the lack of it only plays a very slight role in being rich in India (or as the author puts it, "creating wealth"). India is anything but a meritocracy where the "talented few" and the untalented compete in a fair playing field and the winner wins a fair fight. The myth of India as a meritocracy is dangerous - because it ignores the most fundamental reasons why we have so many people in poverty. But I will come back to this.
The closest in economic theory in the above comment is the idea of "trickle-down" economics. But as any economist will tell you, they don't teach that in economics courses because, again, it has no theoretical foundation.
Also, the commenter above is not clear on how long we should all wait sitting on our butts while "the talented few" go out there and "create wealth". I would like a timeframe.

Economics and "Equality"
When economists talk about "equality" they are not, as the commenter above thinks, talking about suppressing "talent". Neither are they talking about "egalitarianism". They are simply talking about creating a system where every economic actor has a choice and role in making rational decisions about their investments and labor. Such an economic system is ideal, because it enables efficiency, growth and trade. It so HAPPENS that such an economic system only exists in politically free societies with a strong, fair legal administration; and where income disparities are minimized.
This is why economists focus on reducing disparity - it is the only way an ideal economic system can be created.
Let us take the top 10 countries in the Human Development Index list in the UN. I have written about this previously here. Sweden, Norway, Australia, Canada, New Zealand all figure in the top 10. All of these countries have minimum income disparity.
Thus, empirically, the world's most livable countries have minimum economic inequality. How did they get this way? Not by accident. From the early 20th century policies were explicitly designed to reduce economic inequality.
If they had sat around spewed forth about the "talented few" as an economic theory they would not be in this position today.
If a country has wide economic differences, as India does, you cannot explain it away saying the talented few are kicking butt. That is not science. That is simply a personal opinion. When an economist looks at a country like India, they talk about equality because only equality inducing policies can result in our development to a livable nation.
That is, the above commenter is putting the horse before the cart. There is no simple "economic principle" that claims that you have to allow inequality for development to occur. It is the other way round - the lesser the inequality, the more a country develops.
This is why economists focus on property rights and land reform. Most land in India is held by very few people. Did they acquire this land because they were talented? No, most of them inherited this from a colonial and feudal past where they could take over whatever they wanted by force. Land reform and redistribution in India is a focus not out of emotion or charitable reasons. That is the only way a middle class with proper legal rights over their property can be created. That is the only way an economy can become efficient.
If Tata or Ambanis can just take over private property whenever they want to with the collusion of the government, then you have a deeply flawed economic system. Such a system cannot grow.
What we call redistributive policies, such as Social Security or Universal Health Care are the MEANS to India's development. They are not discussed because of jealousy.

Is India a Meritocracy?
Fundamental to the commenter's above arguments is the idea that India is a country in which the meritorious succeed and those who succeed are meritorious. This is patently not true - our colleges or schools are not designed to tease out merit. They are mostly designed to make us pass exams. Secondly even primary education is not universally available, 60 years after independence. Most importantly lower middle classes and the poor are unable to trade freely in their labor, capital or land. They get no credit line. The rural poor are worse off - with no access to even electricity or running water.
May be all this is because the poor are untalented. May be they should have been born to the Tatas.
May we should also forget that there is this little thing caled the caste system.
Here we have running dynasties in politics and industry, yet people have no shame talking about merit.
As long as India is not a meritocracy, the very little that is done to improve economic inequality is completely justified.

The Personality Cult of Objectivism
For those of who are unfamiliar with Ayn Rand and her books:
Ayn Rand was a Russian immigrant to the United States who founded the philosophy of objectivism. She expounded on this in the very popular books, "The FountainHead" and "Atlas Shrugged". Usually people read these in college and it makes a heavy impression. Then you grow mature and realize that this whole "philosophy" is a personality cult. Ayn Rand herself was a cult leader (she also believed that a woman should always be subservient to her ideal man).
In "The FountainHead" Rand writes about the idea that society has a talented few who "innovate". Everyone else is a parasite who lives off of the talented. The whole book has erotic fantasies of submission and is just a complete rant.
By no means should these books be taken seriously by an adult. More dangerous is trying to fit these ideas into economics.

To a large extent the reason some people like Ayn Rand and talk about the talented few is because they think they are one of the talented few. This is basically a syndrome where you become oblivious to class differences and support the super rich for no reason than that you think you would become super-rich one day. This idea is pushed through by the media powerfully. In the process you tend to forget that you are also harmed by inequality.

What I am afraid of is that the above is not an isolated opinion. I have come across it repeatedly in discussions. One of the fundamental indications is that entrepreneurs (company founders) are glorified beyond reason in our media. The owner of a company such as Narayana Murthy or Ramalinga Raju are given incredible glory, and all success of their company is singularly attributed to them. Everyone who works in that company is discounted before the original "entrepreneurial" vision of Raju or Murthy - even though, Infosys or Satyam were neither pioneers in their field nor do they follow a unique business model. This glorification of company founders and businessmen is also a personality cult more than anything linked with actual economics.