Hayek 5: Merit vs. value

May 22, 2006

In Chapter 6, “Equality, Value and Merit”, Hayek discussed these 3 topics one by one. On equality, the reference obviously is on “equality before the law”, the “equal treatment of the law to unequal people”, and not equality of situation and condition of people, not unequal application of the law to equalize people. The following paragraphs and sentences emphasize this point:

“The great aim of the struggle for liberty has been equality before the law… Equality of the general rules of law and conduct, however, is the only kind of equality conducive to liberty and the only equality which we can secure without destroying liberty… (which) is bound to produce inequality in many respects… If the result of individual liberty did not demonstrate that some manners of living are more successful than others, much of the case for it would vanish.

“Individual differences provide no justification for governments to treat them differently… It is of the essence of the demand for equality before the law that people should be treated alike in spite of the fact that they are different.

“People are different; if we treat them equally, the result must be inequality in their actual position, and the only way to place them in an equal position would be to treat them differently. Equality before the law and material equality are not only different but are in conflict with each other; and we can achieve either the one of the other, but not both at the same time. The equality before the law which freedom requires leads to material inequality.”

Here, I would reiterate my position that the so-called “progressive taxation”, of slapping the richer and hard-working people with higher tax rates than the poorer and less-performing people, is wrong. It is creating laws that penalize performance while rewarding underperformance with lower tax rates, if not outright tax exemption. This policy is further distorted by exempting from income taxes professionals an personnel employed by foreign aid and multilateral institutions, even when the latter are definitely earning much larger than ordinary employees in the private sector. “Equal treatment of the law to unequal people” means that whether rich or poor, whether personnel of private enterprises or government and foreign aid institutions, everyone should be taxed at one single rate. And if some sectors would insist on tax exemption and it is granted, then everyone should be exempted, implying the abolition of personal income tax.

Dr. Hayek extended his discussion of equality to the issues of (a) the danger when people would entrust their fate to other men, and of (b) inheritance and bequest by parents to their children. He wrote,

“Our two basic propositions: First, no man or group of men possesses the capacity to determine conclusively the potentialities of other human beings and that we should certainly never trust anyone invariably to exercise such a capacity. Second, the acquisition by member of the community additional capacities to do things which may be valuable must always be regarded as a gain for that community.

“Parents can do more to prepare their children for a satisfactory life than anyone else… Many people who agree that the family is desirable as an instrument for the transmission of morals, tastes and knowledge still question the desirability of the transmission of material property… If we wish to make the best use of the natural partiality of parents for their children, we ought not to preclude the transmission of property. Without this outlet of bequest of fortune, men would look for other ways of providing for their children, such as placing them in positions which might bring them the income and prestige that a fortune would have done; and this would cause waste of resources.”

Point (a) above is quite clear as this has been explained in earlier chapters and also discussed in this blog. Point (b) is related to the next paragraph, why bequests of material wealth and fortune from parents to children should be freely allowed and not taxed and hindered. Many parents work really hard and later on became rich, mainly because they are thinking of their children’s future. Hence, the very presence of their kids are enough inspiration for parents to produce useful goods and services to society, and society pay back in the form of accumulated profits and material wealth, which the parents would later pass on to their children. If such transfer of material wealth is heavily taxed if not outrightly hindered and prohibited, this will discourage many parents from being performance-oriented, and they will just wait for what the government will give to them and their children, money and wealth that government has confiscated from the pockets and pay cheques of other hard-working people.

On Value and Merit, Hayek wrote these things: "Merit... (are) the attributes of conduct that make it deserving of praise, that is, the moral character of the action and not the value of the achievement... The attempt to achieve a valuable result may be highly meritorious but a complete failure, and full success may be entirely the result of accident and thus without merit.

"It is because we want people to use knowledge which we do not possess that we let them decide for themselves. But in so far as we want them to be free to use capacities and knowldge of facts which we do not have, we are not in a position to judge the merit of their achievements.

"We do not wish people to earn a maximum of merit but to achieve a maximum of usefullness at a minimum of pain and sacrifice and therefore a minimum of merit. Not only would it be impossible for us to reward all merit justly, but it would not even be desirable that people should aim chiefly at earning a maximum of merit... the same prizes will go to all those who produce the same result, regardless of effort."

These discourses are another "eye-opener" for me. We've been raised and educated, both formally and informally, to earn merit for our actions. Interchanging usefullness or value, for merit, has negative implications, both philosophically and economically. If a person tried hard, very hard, to grow rice and vegetables in a desert-like environment because he wants to feed the hungry and help reduce the country's food imports, and yet harvested nothing later on, he deserves merit and praise for his effort, but he deserves no food or income, he deserves no subsidy from confiscated income (aka taxes) by the state, for the same effort.

Whereas a person who was plowing and digging lands in search of hidden treasures below, and unintentionally allowed high-value crops to grow well in his plowed and dugged soil, later on harvested and sold the crops at a good profit, such attitude may have little merit because planting those crops was never his original intention. The result was accidental but it was useful to society, and so such "accident" has value to society, though the person will earn little praise and merit.

Hayek elaborated further:

"A society in which the position of the individual was made to correspod to human ideas of moral merit would therefore be the exact opposite of a free society. It would be a society in which people were rewarded for duty performed instead of for success... In our individual conduct we generally act on the assumption that it is the value of a person's performance and not his merit that determines our obligation to him... we do not feel that, because a man has rendered us a service at a great sacrifice, our debt to him is determined by this, so long as we could have had the same service provided with ease by somebody else."

Consider yourself travelling from one point to another that is 10 kilometers away. Person A can take you there with his bicycle-drawn sidecar; person B can take you there with his cab. If we reward people based on merit, then you should take the bicycle-drawn sidecar because the man has taken great effort, great pain and sacrifice, to take you there; therfore, you pay him high. But if we reward people based on results, based on the value of their performance, then you take the cab and pay the cab driver high because he took you to your destination at a much shorter time and much comfortable ride.

Extending this logic to international trade, we shall realize that trade protectionism is an embodiment of society rewarding merit and not value. Local producers (from farmers to manufacturers to service providers) are rewarded with tariff protection so that cheaper foreign-produced goods and services become expensive when sold domestically, for the reason that the effort and pain of local producers should be rewarded regardless of the higher price, regardless of the inferior quality, of their output. Thus, the state makes local consumers pay the price of such protectionism in the form of (a) higher prices they pay to local producers, (b) higher taxes they surrender to the bureaucracy, and very often, (c) lower quality they endure from bearing the output of protected firms and industries.

In closing the chapter, Hayek discussed the issue of state welfare in relation to the discussion on equality. He wrote,

"In a wealthy community, the only justification its members can have for insisting on further advantages is that there is much private wealth that the government can confiscate and redistribute...

"Rather than admit people to the advantages that living in their country offers, a nation will prefer to keep them out altogether; for once admitted, they will soon claim as a right a particular share in its wealth. The conception that citizenship or even residence in a country confers a claim to a particular standard of living is becoming a serious source of international friction."

The debate on immigration (how liberal a country should admit new migrants and legalize illegal immigrants inside its border) is related to state welfarism. And the people who are most likely to oppose further liberalization of immigration laws are those who live off on welfare and taxes, who live off on protectionism and state-mandated high minimum wages. Why? Because the people from other countries who are coming in would care less about the welfare that they can get from the state; they would care more about the competitiveness of their labor and services that they can offer.

In short, more inequality in society can actually give more equality in opportunity to those below and those from the outside or foreign country, but are ambitious and self-driven enough to work their way up.