Capitalisn’t: The Cost of Meritocracy

Michael Sandel: My argument is simply that we make more explicit and more democratic the judgments that societies inevitably make about what counts as a valuable contribution to the common good and how generously it should be rewarded.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Luigi: Last episode, we discussed with Adrian Wooldridge the benefits of meritocracy. But, of course, meritocracy has lots of costs, too. As we discussed, the very book that invented the term “meritocracy” was pointing out some of the problems with meritocracy.

We thought we would bring in an expert on the dark side of meritocracy. There is nobody better than Michael Sandel, who is a professor of political philosophy at Harvard University, and who wrote a book last year called The Tyranny of Merit.

Make sure to stick around until the end of the episode, where we have a surprise for you.

Bethany: Michael, many people blame meritocracy for its shortcomings. Your criticism is a little bit different. If I read your book correctly, the problem you see in meritocracy is not so much the failure to live up to the ideal, but the idea itself. Can you explain?

Michael Sandel: Yes. Merit in general is a good thing. If I need surgery, I want a well-qualified surgeon to perform it. But meritocracy as a system has a dark side. The dark side is that it rationalizes inequality. It rationalizes unjustified inequalities, and it’s corrosive of the common good. It leads the successful to believe that their success is their own doing, and that they therefore deserve the bounty the market bestows upon them. By implication, those who struggle, those left behind, must deserve their fate as well.

Luigi: Michael, you are a philosopher, and you think about what is just. I am an economist, and I tend to think about what is efficient. In your book, which emphasizes the justice part, there’s not a lot about the efficiency part. In fact, there is a quote from Hayek that I thought was interesting. Hayek did not try to justify the system morally, but he tried to justify it based on efficiency. What is your view on efficiency grounds?

If we have a good distribution system ex post, don’t you want to have a system that produces the maximum amount, and then we distribute it, rather than a system that produces much less?

Michael Sandel: Well, it depends, Luigi. It depends on the maximum amount of what. Efficiency, as you well know, is a stand-in for making stuff, productivity, GDP. A lot of what counts as GDP, as productive, is worthwhile and important, like that surgeon’s services. But a lot of it is not so important, morally speaking. There are people who make lots of money as hedge-fund managers engaging in speculative activities that have very little to do with improving the productive capacity of the economy. There are people who make lots of money figuring out how to sell sugary sodas in copious amounts to consumers.

That shows up as productivity, as efficiency. But morally and socially, it’s not so important. As far as hiring people who are well-qualified for important jobs, yes, that’s a good thing, but that doesn’t add up to a justification of meritocracy.

It’s interesting, as you mentioned, Luigi, Hayek was against meritocracy. He said it was a confusion politically and morally to assume that the value people contribute to the economy is the measure of their merit or virtue or worth. He pointed out that markets reward all sorts of morally contingent attributes: happening to have this or that skill, the fact that it may be scarce or plentiful in the labor market. This is no doing of the person whose skill or talented happens to be. On these grounds, and here I agree with Hayek, he thought it was a mistake. He actually was concerned, I think, more with liberty than productivity, but that’s perhaps a further discussion.

Luigi: Help me out here, because the way I tend to interpret what you’re saying—I might be completely wrong, so feel free to say so—but the way I interpret it is, look, you are not against rewarding people that do better or are more talented, because we need to attract them to places where they are more productive. What you are against is superimposing moral value on that—the fact that not only do they make more money, but also, they are more respected.

I grew up in a small university town in northern Italy where my father was a professor, and in Italy, professors are not particularly well paid. I grew up with the idea that what you make is not necessarily an indication of how much you’re worth or your value. I’m very sympathetic to the separation of the two. But is that all you’re saying, or is there more? Do you really want to undermine the allocation system, or do you simply want to not empower it with the sense of arrogance that has prevailed in the last few years?

Michael Sandel: I certainly want to disempower the arrogance that has come to be associated with the system of reward in recent decades. I call it meritocratic hubris. This is the tendency of the successful to inhale too deeply of their own success, to forget the luck and good fortune that helped them on their way, and also to lose sight of their indebtedness for their achievements and for their rewards to those who made it possible. I certainly want to do that. But I think that points to a different kind of politics, a different kind of debate, a different attitude toward markets.

I like the scenario that you just mentioned, Luigi, about growing up in Italy and the way in which the amount one made didn’t translate into a sense of one’s worth. I think you would probably agree that we’re quite far from that sensibility today. In principle, Luigi, you want to detach, and I also want to detach, the money people make from judgments of worth and of social esteem. But to do that is quite an ambitious political undertaking.

It requires a moral and more robust kind of public discourse and political debate about tax policy, about distribution, about production, about directing technology to affirm the dignity of worth rather than undermine it. That’s the kind of project that my book proposes or at least tries to suggest.

Luigi: In your book, you actually seem to reserve some of the harshest criticisms for the center-left leaders. As you point out in your book, even Obama in his speeches, he uses the meritocratic rhetoric all the time. You even said the defeat of Hillary Clinton in 2016 was due to the meritocratic hubris of calling the ones who are the unlucky ones “deplorables.” Am I reading that correctly?

Michael Sandel: Yes, exactly, Luigi. I think one of the most potent sources of the populist backlash against elites that we saw in 2016 with the election of Trump, that we saw with Brexit in Britain, is the sense among many working people that credentialed, well-educated elites look down on them. This is connected to the train of political rhetoric that you just mentioned.

When Tony Blair and Bill Clinton in the 1990s came onto the political scene, succeeding Ronald Reagan and Margaret Thatcher, free-market advocates, Clinton and Blair accepted the basic premise of the market faith. They softened it, they moderated its harsh edges, but they connected the inequality that was rising and would continue to rise into the 2000s by saying meritocracy is the answer: individual upward mobility through higher education. If you want to compete and win in the global economy, go to college. “What you earn will depend on what you learn.” That was Bill Clinton’s slogan. “You can make it if you try.” That was Barack Obama.

What they missed was the insult implicit in that seemingly uplifting advice. If you did not go to college and if you’re not flourishing in the new economy, your failure is your fault. It became politically quite consequential when one remembers that most Americans don’t have a four-year college degree. Nearly two-thirds don’t. It’s folly to create an economy that sets as a necessary condition for dignified work and a decent life a four-year college degree that most people don’t have. Combined with the attitudes we’ve been discussing as hubris, it’s a recipe for resentment, for anger, and political backlash. And that’s exactly what we saw.

Bethany: How did it happen that those people who were supposed to be the defenders of the downtrodden—or at least who portrayed themselves as the defenders of the downtrodden—actually became the ones who justified this system to the greatest extent?

Michael Sandel: It’s a fascinating question. The way it happened was, by 2016, when Donald Trump was elected, the Democratic Party was more attuned to the interests and values and outlook of the professional classes, the well-educated, well-credentialed classes, than to blue-collar voters. What’s interesting is that the same thing happened to the Labour Party in Britain. The same thing happened to the socialist parties in France, to the SPD in Germany, to the Democratic Party in Italy.

This, I think, accounts for the populist backlash, which has mainly been in the name of a kind of right-wing, authoritarian, hypernationalist populism. The success of right-wing populism is usually a symptom of the failure of progressive politics. It’s important to remember that it was the Democratic Party, along with Republicans, that deregulated the financial industry in the 1990s, that decided not to regulate derivatives.

And it was the Democratic Party, along with the Republican Party, that oversaw the bailout after the financial crisis of 2008, a bailout that spent hundreds of billions of dollars helping the banks, leaving most ordinary homeowners to fend for themselves. These parties then began to receive campaign contributions from these industries. Barack Obama was the first Democratic presidential candidate to receive more in campaign contributions from Wall Street than his Republican opponent.

The Democratic Party, progressive parties, center-left parties made their peace with concentrated power. That’s the broader point. Traditionally, their role was to make government a counterweight to concentrated power. They gave up that role.

Bethany: I want to pause for a moment on the global financial crisis. At the risk of making this personal, it was the moment for me where I rethought everything I had believed up to that point. I had previously seen malfunctions in our market system, in our business world, as aberrations. With the global financial crisis, for the first time I saw it as systemic, in the sense that the people in charge really weren’t worthy of being in charge. They didn’t actually know what they were doing.

We talked to Martin Gurri recently about his book The Failure of the Elites, and I’ve been thinking more and more that the global financial crisis really was a rupture in the social fabric, almost more so than it was in the financial fabric of the world. Because we fixed in some ways the ruptures in the financial fabric, but what you can’t fix is the rupture in the social fabric.

The idea now that there is this giant event that not only did the elites who ran the system come out of OK, but that also offered proof that those who supposedly were being paid for their skill and their ability to run these complex financial institutions actually weren’t worthy of that.

Michael Sandel: Yes. Yes. If I could just add, Bethany, another amplification of your observation, in The Tyranny of Merit, I emphasize moral argument against meritocracy and try to explain how it rationalizes unjustified rewards. But there’s also a practical critique to be made against the meritocratic elites who have governed during this period of neoliberal globalization. If you think about it, these meritocratic elites have actually governed very poorly.

They brought us four decades of stagnant wages for most workers, inequalities of income and wealth not seen since the 1920s, the Iraq War, a 20-year inconclusive war in Afghanistan. They brought us financial deregulation, the financial crisis of 2008, a decaying infrastructure, the highest incarceration rate in the world, and a system of campaign finance that makes a mockery of democracy. Even from the standpoint of the claims of elites to be well-qualified to govern the financial industry and the economy, they haven’t done very well.

Luigi: Let’s try to think about what the alternative is, because an idea is beaten only by another idea. How would you replace meritocracy? My inclination would be that you still allocate things based on merit, but you temper that with some social, if not economic, reward to other people. After all, I always thought that social rewards were a compensation for lack of economic reward. When you admire a military hero, the military hero did something for the common good, but he did not get paid very much, and he gets paid in social reward.

Why does society today fail to recognize the socially worthy, at least socially? I’m not saying that this is in place of economic reward, but at least it’s the beginning.

Michael Sandel: We saw some of this during the pandemic, especially the early months of the pandemic. You remember when, in the evening, people would go onto their balconies, especially in Europe and in Italy, and clap, applaud, for essential workers and for the medical workers. One could say this is like pinning a medal of recognition, of honor, on a successful general, a kind of social reward that compensates, that’s compensatory, for the lack of an economic reward. But I think that’s not enough for two reasons.

First, people who make valuable contributions to the economy and the common good should be rewarded economically for the contributions they make. Secondly, it’s not so easy to separate money from recognition, especially in a society like ours. When there are contract disputes of star athletes, the local journalists will say, “You’re already making millions. How can you be holding out for millions more?” What does the athlete say? The athlete invariably says, “It’s not about the money. It’s about respect.” What would be the alternative?

I think that we should debate public policy, including tax policy, not only from the standpoint of fairness, but also from the standpoint of social recognition and esteem. For example, we should have a public debate about why we tax earnings from labor at a higher rate than we tax earnings from dividends and capital gains. If we really believe in the dignity of work, wouldn’t that lead us to call that different tax treatment into question?

Now, there are lots of debates about taxing capital gains less than earned income that have to do with efficiency or that have to do with job creation. Those are important. But I think we should also debate this question from the standpoint of what we value, what we want to encourage, what we want to recognize. And that provides a powerful argument not to tax earnings from labor at a higher rate than earnings from dividends and capital gains. We could also debate whether to have a financial-transactions tax and to use the proceeds to lower perhaps the payroll tax, which is a tax on labor.

Now, one argument for that would be redistributive, but another argument for that proposal would be to question the excessive value that the market places on financial speculation by comparison with the value that the market places on the money people make by providing useful goods and services for other people. What I’m trying to encourage is a broader public debate about what contributions to the economy we should value, not only by clapping for essential workers, by also by rewarding them in a way that better aligns with the importance of their contribution.

Bethany: That’s a practical way of answering Luigi’s question as to what the alternatives are, but what about the larger philosophical or moral grounding of those alternatives? In other words, if we’re going to say that the market doesn’t work, that meritocracy doesn’t work, that a system in which people compete based on talents they were just lucky enough to be born with results in unfair outcomes, is the only alternative that we want to guarantee equal outcomes rather than just equality of opportunity?

I’m searching for a broader philosophical underpinning for a system in the absence of a market-driven one, a market-driven meritocracy.

Michael Sandel: Great question. I do think we need a principle that goes beyond equality of opportunity. Even if we could achieve true equality of opportunity, we would still fall short of having a just society or a good society. And the reason is this: Equality of opportunity is a remedial principle. No one should be held back due to unfair disadvantages or to prejudice. But we also need to figure out how to cultivate a common life if we really believe in democracy.

It’s not enough simply to think ourselves as consumers. We also have to make it possible to think of ourselves as citizens. And that means creating common spaces and public spaces that gather people together in the ordinary course of their lives. In recent decades, as the market-driven meritocracy has heightened inequality, the affluent have largely seceded from public places and common spaces. There are fewer and fewer class-mixing institutions. This is partly what has encased us in polarized, insulated communities. Beyond equality of opportunity, I think we need to aim at a broad democratic equality of condition. This is not the same, Bethany, as equality of result, where everyone must have the same income.

A broad democratic equality of condition is a way of life in which people send their kids to the same schools from different class backgrounds, different racial and ethnic backgrounds. It’s a way of life in which we encounter one another and bump up against one another in the course of our everyday lives, in municipal centers, parks, public transportation, where the differences in income and wealth loom less large. Because this is how we come to negotiate and to abide our differences and this is how we come to care for the common good.

We need to aim for a broad democratic equality of condition that enables every person to hold their head up high, to enjoy social recognition and esteem for the contributions they make to the society, whether or not they are well-credentialed, whether or not they have a university degree, to be recognized and esteemed as citizens capable of sharing in deliberation about common purposes and ends. That’s what I mean by broad democratic equality of condition.

Luigi: I would like to bring the topic to liberty. You mentioned liberty before. When you start saying that we should tax some stuff and redistribute based on a sense of justice, it actually, unfortunately, reminds me a bit of—and I know this is extreme—the Soviet Union. When my father traveled to the Soviet Union back in the ’60s, a pen was more expensive than a calculating ruler. Why? Because the powers that be decided that a normal ballpoint pen was not necessary. You had the fountain pen, but calculating rulers were very important for people to actually do calculations.

They subverted all the price systems, and some things were very cheap. Books were super cheap, but any kind of “luxury good” was super expensive. In a sense, there was a small group of people imposing their values on everybody else. How do you prevent this from happening if you go down that path?

Michael Sandel: Well, the first way of preventing it happening is to recognize that the rules of the game shape market results. For example, if we look at CEO pay in the US, CEO pay, the ratio to that of the median worker is roughly 300 to 1. Whereas a few decades ago, it was more like 30 or 40 to 1. Is it the market that delivered the news or the verdict that CEOs today are eight or 10 times more talented than they were back in the 1970s? I don’t think so. It’s that the rules of the game were changed in ways that inflated CEO pay.

For example, so-called pay for performance tied to a stock price along with a system that allows managers to do stock buybacks. The only way to approach a system of fair reward, reward in line with what people contribute to the common good, is to discuss what the political arrangements should be. You’re right, of course, that any time we debate politically, what really counts is a valuable contribution to the common good. Because where the labor market is concerned, that’s what we’re discussing.

When we’re discussing the rules that shape the labor market and the rewards associated with this or that job, we are making decisions, whether we recognize it or not, about what contributions should be valued and to what extent.

My reply, Luigi, is we make political judgments all the time when we design the rules of the game—about stock buybacks, for example, about who should be rewarded to what extent. My argument is simply that we make more explicit and more democratic the judgments that societies inevitably make about what counts as a valuable contribution to the common good and how generously it should be rewarded.

Bethany: I could keep going forever, but I think we are out of time. Thank you so much for agreeing to come on our podcast. This was really helpful and thoughtful and interesting.

Michael Sandel: Thank you so much. I’ve really enjoyed it.

Bethany: I think my favorite of Sandel’s work or thoughts is that he stresses the role of luck in life. If you accept that luck plays a role, then I think you have to have humility. Humility is at least part of the solve for one of the worst problems of today’s supposed meritocracy. Because, in my view, one of the worst problems is that those who make the most think that they do so because they deserve it.

Luigi, what do you think?

Luigi: I’m strongly in favor of humility. I think that that’s a virtue that we should all have. Unfortunately, I don’t think that, at least in the academic world, we do so well, and the political world, either.

Bethany: We don’t do so well in the journalistic world, either. Believe me.

Luigi: I’m the last one to say we shouldn’t try to be more humble. But I dislike trying to find psychological answers or moral answers to economic questions. Not that there is not one, but I dislike starting with those. I think there is an interesting economic reason why meritocracy has now become so popular and why—

Bethany: Before we get to that, can we pause on that? Because that’s such an interesting framing that you see it as moral answers to an economic question, whereas I see it as a moral question and a philosophical question, and maybe the answers are economic. But it’s interesting that you see it the flip of the way that I do.

Luigi: Yeah, I think I am distorted by my profession, so I look at everything in economic terms. That doesn’t mean that your answer is wrong in any sense of the word. But before I resort to things outside of my profession, I want to see inside if there is a justification, and then move outside and see which one is better.

Bethany: As long as you admit that you’re distorted by your profession, then we can move forward from there.

Luigi: I was wondering why meritocracy is such a big matter everywhere today. I think that the answer is quite simple: Because income inequality has gone up, the challenge to that inequality has increased, and the need to establish that this inequality is justified on some moral ground has also increased. The pressure to say, “I make more money because I deserve to make more money,” is this desire to say, “Don’t touch me, because I deserve it.”

Bethany: It’s all about the money. I’m actually going to grant you that. I think that the question of meritocracy is a philosophical and a moral one, but I think it is manifesting today because of the economics. I’m actually going to side with you, and we can make this an economic discussion.

Luigi: But that is not to say that humility is not at least a good virtue to have to temper this. But I would like to distinguish meritocracy in two different areas, in broadly interpreted bureaucracy and in the marketplace. Let’s start with the bureaucracy, and I would like to start with the example of an army. Who should lead an army? We all agree that it should be the most talented person. Now, there’s not necessarily a meritocracy. It’s a talentocracy. I didn’t say we want the more meritorious to lead an army. We want the best.

You might be an SOB that cuts corners, et cetera. But if you are the best leader, I want you to lead my army in war and not the goody-two-shoes that has maybe 10 medals of honor but not the ability to run things well. The army itself—this is what I found interesting—the army itself divides between meritorious and promotion. The two are correlated. If you have a lot of medals, you’re more likely to be promoted. But it’s not one to one. I can have a lot of medals and still be a lieutenant, and you can have no medals but be a three-star general, four-star general. While having a medal of honor helps you in a promotion, it’s not the only criterion.

We don’t put the guy who’s most decorated at the top of the military. Why? Because we make a distinction between being meritorious—you command my admiration because you did something remarkable—versus you are the best leader in this moment at war. In the word merit, and maybe you can correct me if my English is wrong, but this is a Latin word, so I have a comparative advantage. But in the word merit, there is an element of “deserve,” while in the word talent, there is not that at all. I receive some talents from God. Do I deserve those talents? Not obvious.

Even in the Gospel, it is not obvious that the guy who received five talents deserves more than the guy who received one. If I am the son of a four-star general and I grew up in the military world, et cetera, and I end up being a little bit better than you at running an army, and you come from nowhere, et cetera, you are much more meritorious in any sense of the term. Still, if we are running a war, I want the most talented, not the most meritorious, to run it. From an efficiency point of view, it’s the talent that we appreciate, it’s not the merit.

Even Michael Sandel himself said, if you have a surgery, you want the more talented doctor. There is no affirmative action. There is no “deserve.” Some doctors might be very meritorious because they come from a poor family. They overcome discrimination. They do all the things. But if you have surgery, you want the more talented, not the most meritorious.

Bethany: I’m going to go with your distinction, because I’m not going to challenge your knowledge of Latin, because I have no knowledge of Latin whatsoever. I think embedded in that concept of “deserve” is something interesting, because you took it to a different place than I thought you were going to, because I was thinking of “deserve” as a bad thing. Whereas in your example of “deserve,” the person who comes from the background where they didn’t have all the advantages deserves to be given some marks for that.

I’m not sure that your distinction does that much for us, even if I agree with it, because that works in a bureaucracy precisely because the economic rewards are not that different. If somebody gets to run this thing versus being a four-star general, the pay gap is not that dramatic. It is in other areas, and I think that’s more the distinction than a bureaucracy and a market system, because where would you place the doctor? Is the doctor part of the bureaucracy, or is the doctor part of the market?

We all agree, we want the best doctor possible to operate on us. The doctor is not really part of the bureaucracy, so where does that profession fall?

Luigi: No, no. I completely agree, but hold on with me. I arrived at the doctor. It’s my fault that I brought it up, but Michael brought it up, so I think it was useful. Let’s stick with the bureaucracy. Now, the problem is, in a bureaucracy, how do you measure talent? Clearly, in the army, if you are at war, you see the guy winning the battles. Hopefully we’re not at war that often, so you have to measure outside of that environment.

This is where the ecosystem of the creation of merit comes about, and this is where, in my view, the historical narrative of Wooldridge is fascinating, how the Chinese invented merit, it was to memorize Confucius, which was great for the second century AD, but a bit behind in the 19th century. I think that bureaucracy has a need to find an objective measure of merit, and that is where some of the major problems arise, because this objective measure, first of all, does not really measure merit, measure talent. In that sense, it’s against the grain of the spirit of the people.

And two, talent is multidimensional. In order to rank people, you need to go unidimensional most of the time. Inevitably, this is a very fraught and contentious measurement problem, which shouldn’t lead us to say we don’t measure at all and we randomly pick.

Bethany: I think you’re making two really good points, and one is that we do want the most talented person to run certain things or be in charge of certain things. But I think the second point that you’re making is a really interesting one, which is, is there really any objective measurement of talent? At least in the profession of journalism, I’ve always felt that that wasn’t entirely the case, in the sense that I could give a draft of an article to two different editors and get two completely different sets of feedback.

When I think—and I’d be curious to hear your view—of economics, who gets jobs, who gets promoted, are we comfortable that the most talented person rises to the top in most of our world, or do we think that that’s not the way it works?

Luigi: I think that it clearly is correlated. The correlation is way below one. I can tell you that even in a field that is fairly math-oriented such as economics, there is not a correlation one to one between being a good mathematician and succeeding in economics, which some people might find reassuring, some people might find disappointing. I leave it to others to make that judgment. But every attempt to say we should have an objective criterion tends to be very much compressing and creating one order.

I fear that we as educators tend to force that. There is a curve ranking in grades. Everything is ranked, and everything is ranked unidimensionally, where I can say, for creativity, you are great, but solving differential equations, you’re terrible. And making deadlines, you’re even worse. Those are three dimensions. In some jobs, you need to be more creative. In some jobs, you need to be better at solving differential equations. In others, you actually need to be on time, and that’s more important than being very creative. Having this idea that there is only one measure of talent, I think that’s a very dangerous perspective.

It’s interesting, because you don’t see people complaining that much about the income inequality with athletes. I don’t think that people are in the streets complaining. In fact, they contributed to that by buying their products, by revering them, by doing everything that creates an ecosystem that allows them to become super-millionaires, if not . . . no, not billionaires, but sort of hundred-millionaires. I suspect it’s because they can see the talent in action, and they recognize it.

Whether they deserve it because they work hard or they are talented or a combination of the two . . . because I don’t think you become Michael Jordan without being incredibly talented. At the very minimum, tall. Because if you are four feet tall, you can be the most talented guy and there is no chance. But anyway, also there is no doubt that those guys work their butts off. You don’t go there without effort.

Bethany: That is so interesting, and I think you are absolutely right to highlight it. We don’t resent them, even though there is some element of luck in who they are. I mean, you could say there is just luck in being born six-foot-five versus five feet tall. But to Sandel’s point, there’s also luck in just being born with talents. But because we can all see it so clearly, it’s just sheer talent on display, we don’t resent it.

Circling back to where we started this, would you call professional athletics a talentocracy or meritocracy?

Luigi: I think it’s definitely a talentocracy. But again, that’s because it’s easy to measure the talent. When it’s not easy to measure, there’s a lot of preconceptions going into place.

Bethany: Yeah, that’s really interesting and a really interesting contrast. I think we all agree, and I think we agreed with Sandel—and you tell me if you didn’t—that the market-based system in many fields for rewarding people is broken and is out of whack. In other words, I don’t think anyone thinks that a hedge fund manager deserves to make a billion dollars, whereas a surgeon who’s saving people’s lives or a neonatologist who’s saving babies deserves to make $300,000.

I think we agree, at least I agree, there’s something out of whack about that. Where I thought Sandel, his argument broke down, is what we do about it.

Luigi: No, I agree on the what we do about it, but let me actually disagree a bit with the first part, which is there is no doubt that it’s broken in some dimension, but I would like to distinguish. Because Sandel in his book is very honest and recognizes that people like Hayek never said that the market pays the people that deserve the most. The market is designed to allocate resources.

A friend of mine bought a house outside of New York in the countryside before the pandemic and made a fortune because of the pandemic. Did he deserve to make a fortune? Absolutely not. It was sheer luck. But demand went up, supply is constant, more or less, prices went up. It’s not because there’s any sense of deservedness or merit, it’s simply for a need of allocation of resources. In that sense, I think we should separate and don’t even think that the market rewards the most deserving ones. This is not that the market is broken. The market is not even trying to do what you would like it to do.

Now, the second point, which is different, is, are we sure that the market—and this is what the market should be doing and I’m not so sure it’s doing—is allocating the talents in the most efficient way? Is it attracting the right people to go into fighting cancer and the right people into doing finance?

But—and this is the real problem of the market—there is a difference between creation of value and appropriation of value. The market leads talents to go where the product of the value you create multiplied by the value you appropriate is largest, not necessarily where the value you create is largest.

Bethany: I really love that notion of value created versus value appropriated. I think, however the value is being appropriated, it is not how we as a society would like to see it being appropriated. In other words, I would rather see more economic incentives for people to become teachers, to work on saving the world, to be developing vaccines, than to be hedge-fund managers. For whatever reason, the system has developed, and that gap has widened with the growing financialization. Maybe it just all comes back to our problems with the financialization of our world.

I remember a friend of mine who worked at Goldman Sachs back in the ’80s and ’90s saying, “It used to be that you could make a million dollars as a Goldman Sachs partner.” And that was a lot of money. In New York City, it wasn’t $40 million. It wasn’t the difference that it is today. I think that’s a problem.

Luigi: Yeah, because the problem is that once the difference is so large, it’s difficult to have some other social value. Think about the Nobel Prize. The Nobel Prize gives you a little bit more than a million dollars, but it’s not the money you receive, it’s the prestige you receive. The Nobel Prize by design was created precisely to reward people who contribute to the welfare of humankind and probably don’t profit so much from it. The problem is that once you make not $10 million, but a billion a year, you can buy prestige in a lot of different ways.

Bethany: That is an interesting economic model. What is the price of prestige? In other words, at what income differential does prestige no longer matter, because the financial outcomes are so disparate that you’d rather have the money than the prestige? But I agree. For some reason, in the world that used to be, I do think that prestige was worth more. It’s not worth as much today for precisely the reason that you articulated, and that’s a huge societal problem.

I think globalization might have played a part, in that global elites are now competing with each other on economic terms, rather than being parts of their community or even parts of their country. And perhaps prestige is tied to being part of a community or part of a country, in that the good you did in your community or the good you did for your country was worth enough that it compensated for a lack of financial success. Now, if you’re competing with other billionaires across the globe, then the money matters more and more and more.

Luigi: Yeah, that’s absolutely true. I recently saw the speech that Truman gave when he stepped down. I think it should be taught in school, because it’s really moving. First of all, he leaves the White House, and he takes a train to go to Independence, Missouri, to live in the house that his wife inherited from her mother because he had no other possessions. At the time, there was no pension for the president. It was introduced later. He refuses to sell out the presidency.

He actually lived very modestly in Independence, Missouri, spending his time with the mayor of Independence, Missouri, and the community of Independence, Missouri. That is a completely different world than the one we live in today. Completely.

Bethany: Contrast that to Bill Clinton or contrast that to the money that presidents go on to make now after serving. It’s become a license to make money, in addition to being many other things, but it has become a license to make money. You’re right. That’s a huge contrast.

I do want to end this by circling back to the discussion about Sandel. I didn’t love his solutions, which boiled down to essentially talking about it, I thought. I still remember an editor telling me when I submitted an op-ed. I think it was to the Washington Post, and it was on one of my little mini books. I think it was on Fannie Mae and Freddie Mac, and I said we needed to start talking about what to do about Fannie and Freddie, and this editor was like, “Ah! No! If I see that phraseology, that construction one more time . . . We don’t need to talk about it. What do you want to do about it?”

To give Sandel some credit, I’m being hard on him, but yes, we do need to talk about it. This should be a broader topic of conversation or debate. But the problem is, what do we do about it? And that brings me back to Adrian Wooldridge’s book, which is, what’s the alternative? And particularly, what’s the alternative to a meritocracy in a world where China is embracing that to some extent and rising? What does that do to the US if we turn our back on meritocracy, even with all its flaws?

Luigi: I completely agree with you that Sandel was much stronger in the critique than in the proposal phase. That’s true of most philosophers, by the way. But paraphrasing the title of Wooldridge, I think that the secret is more in a responsibility of talents rather than an aristocracy of talents. I do believe that talent is important. We should rely on it, but it’s almost like a responsibility rather than a merit. This is maybe too Christian, because it very much resembles Matthew and the Parable of Talents. And if it does resemble it, it’s because it is.

I don’t think that there is an alternative in trying to get the most talented people in the most prestigious positions—actually, the most influential positions rather than prestigious positions—because they can add value to humankind. We should recognize that if you do great things, it’s not only because of your talents, but it’s because of an entire infrastructure that’s around you. That’s where you should not be arrogant, and you should see that as more like a responsibility rather than a privilege.

Bethany: I’m going to phrase this differently. I’m not sure it’s a solution, but it is a way of picturing it that I find interesting, which is that right now we’re caught in a vicious circle, which is that you pay people more and more, and therefore the things that rich people think they should be able to have cost more and more. It’s this escalation, and we’re caught in this vicious circle.

If you can reverse the vicious circle somehow, part of that is not just increasing the amount of prestige and the importance of prestige that people feel, but part of it is also reducing the gap between what great wealth can buy you and what moderate success can buy you. Where I grew up in northern Minnesota, my dad was a doctor and did quite well. We had a house on a lake. But the people who worked in the mine also had houses on lakes, because houses on lakes just weren’t that expensive. Everybody could have a house on a lake.

That’s a very different system than one where you have to be at the absolutely pinnacle making a ton of money in order to afford the house on the lake. And if not, you’re living in an apartment your whole life because you can’t even afford to buy a home. As long as that’s the world that we’re in, then all the prestige in the world isn’t going to make a damn bit of difference, because people are going to see the practical outcomes of the system.

Luigi: Perfect!

Bethany: Luigi and I thought we would add to our podcast by bringing in a little bit of the news of the day, or maybe the news of the week, or the news that’s on everybody’s mind, seeing it through the lens of whether this is something that is a positive comment on capitalism or a negative comment on capitalism, a Capital-is or a Capitalisn’t.

Luigi: We see this also as an opportunity for our listeners to help us select for future episodes. Because, of course, all the themes we’re going to talk about in this current review, week in review, are themes that we can go into deeper in a full episode. If you are interested, let us know.

Bethany: Why don’t we start with the news that Purdue Pharma is close to declaring bankruptcy and decide whether that’s a Capital-is or a Capitalisn’t. Luigi, what do you think?

Luigi: The news is not so much that Purdue Pharma is declaring bankruptcy. The news is that the Sackler family, who used to own Purdue Pharma and was directly involved in the management of the company for a long time, is not declaring bankruptcy and getting away with paying only four and something billion dollars in fines with admitting no wrongdoing. I think that’s what I think is pretty much Capitalisn’t.

On this point, I want to remember an economist who unfortunately passed away, Allan Meltzer, who used to say that capitalism without bankruptcy is like religion without sin. It doesn’t work.

Bethany: That is actually a fantastic line, and I was thinking about that with another topic that we should get to, which is the discussion of sin and forgiveness. Because it is extremely ironic that companies are allowed to declare bankruptcy, for-profit education companies that have defrauded students are allowed to declare bankruptcy, but students can’t get out from under their student loans via bankruptcy. They’re stuck with them for the rest of their life. That’s a small takeoff on that that we can come back to.

But back to the Sacklers, I’d actually written a piece, David Sackler had spoken to me for a Vanity Fair piece that I did a couple of years ago. What really stunned me about it, and why I think it is a Capitalisn’t, is the complicity of the entire system in allowing the opioid epidemic to happen. It wasn’t just the Sacklers lying to people and taking advantage of the system. The FDA looked the other way for a long time and allowed the Sacklers, allowed Purdue, to market their drug with all sorts of claims that weren’t actually true. Other pharmaceutical companies piled into this.

Big drug distributors and national drugstores looked the other way, even when amounts were going out their doors that clearly were way out of scale for the needs of the community. When I look at this, it actually scares me more broadly about our system. Because it’s not just that the Sacklers were able to walk away and keep most of their fortune, it’s that so much of the system was complicit in this. And even today, no part of the system is really stepping up to fix the problem we’ve been left with, which is a gigantic opioid epidemic that is claiming tens of thousands of lives a year.

Luigi: Yeah, I think you’re absolutely right. It reminds of the movie Spotlight when they say it takes a village to rape a child. Unfortunately, all those complicit elements that contributed generally get away with literally murder, because there is a villain, and in this case, the Sackler family. Rightly so. I’m the last one to try to defend them. But, as you said, they are the front end of a village that murdered hundreds of thousands of people.

Many in that village who benefited, they didn’t pay anything, and they are actually now on the cheering side of saying, “Attack the Sacklers.” But until yesterday, there were beneficiaries of their largesse. I will add more thoroughly the entire university system, because a lot of people in the universities got money from the Sackler family, and that money helped legitimize the use of opioids all along the way.

Bethany: It’s a pretty ugly village.

Luigi: And then you wonder why people don’t trust the vaccines.

Bethany: You’re right. That’s actually a really interesting parallel. When you look at what happened in the opioid epidemic and the way in which the FDA was complicit in this, and then we say, “Trust the FDA. They’ve approved the vaccines.” I mean, I’m vaccinated, to be clear. I’m a huge fan and proponent of the vaccines, but I get why people have some skepticism. We have done a lot to undermine trust in institutions in which we need to have unqualified trust.

Luigi: The big news of the week, at least in the sports world, is that Lionel Messi, who used to play for Barcelona, agreed to a two-year contract for $104 million for Paris Saint-Germain. But the more interesting fact is not only that he’s getting paid so much, it is that actually he did not want to leave. He was ready to accept a 50 percent cut in his salary in order to still play with Barcelona, and Barcelona could not afford even a reduced salary for Messi. And so, he had to leave.

He was crying when he announced it, but I think he meant it. I think it’s a reminder that money is important, but especially when you have a lot, it’s not the only thing in the world.

Bethany: Yeah, although it does seem like it was in the end the most important thing to him, unless I’m misreading this—and I could very well be, because I know nothing about sports whatsoever—but he could have taken a 75 percent pay cut if he really didn’t want to leave, and he still would have made plenty of money. In the end, there was a tipping point for him. And I’m not saying there shouldn’t be. There would be for all of us, right? But in the end, there was a tipping point for him at which the money was the most important thing.

Luigi: Yeah. There is a price for anything, but the fact that he was willing to sacrifice tens of millions of dollars to play for his favorite team means that that accounts for something.

Bethany: It does account for something. I guess I always get a little bit cynical, skeptical, when somebody could have made $100 million and instead, they’re making $50 million. I mean, at that amount of money, can’t you still buy everything that would even cross your mind to possibly want? How much are you really giving up? There’s a little more sacrifice involved if we’re talking about somebody who could have made $100,000 doing something, and instead is taking $50,000. That feels real to me. The money we’re talking about feels like Monopoly money.

Luigi: In the language of economists, the marginal utility of money is decreasing. And so, at that point, it’s not that big of a deal. You’re absolutely right. But I thought it was interesting in an episode about meritocracy and about inequality. In soccer—and all the other sports—there is gigantic pay inequality. It’s not so challenged by the fans, because they see with their own eyes the value of the player.

Where would you put it, Bethany, a Capital-is or Capitalisn’t?

Bethany: I think it’s a Capital-is. It’s a market-based system where the market works as it is supposed to work. He made a decision that was influenced by things other than money, but he ultimately decided to go with the money. Nobody was forcing him to do anything. It seems to me like a Capital-is.

Luigi: I think that in the context of our episode, this is an example of, I don’t think he deserves to make all that money. It is simply the marketplace allocating that. I am fine, but I’m neutral. I’m not saying this is a fantastic example. It’s not a terrible example. It’s just morally neutral. It’s just the market working.