True Meritocracy

The world is a crazy place.  It’s probably always been a crazy place, but something’s different right now.  Something’s starting to boil over.

A war is being waged between how things have been done, and how they could be done.  It’s tradition versus progress.  People are afraid.  The future is uncertain.  If you have it good, change isn’t so appealing.  But most people don’t have it so good – so change is coming.

One thing we all seem to agree on though is the concept of a meritocracy.  The best person for the job should get the job..  Seems straight forward but I don’t think we really appreciate what that really looks like.  In a meritocracy, opportunities are only earned, no longer given.

 

I consider myself someone who has fought hard for almost everything he has, but I’d be foolish if I said that I had earned all my opportunities.  I went to an inner-city high school that probably had the lowest graduation rate in the city.  Most of my friends lived in the projects while my family was middle class.  When grade 12 came along, they were barely considering college.  Meanwhile, my dad kicked my ass into gear, paid for biology and math tutors, and even a guy to help walk us through the application process to universities.  That didn’t mean that I wasn’t working my ass off, but still.

And the idea of being able to afford university?  My grandparents set some money aside for that.  It didn’t cover the full ride, but it let me come out of university with barely any debt.  I know I’m intelligent, I know I’m capable, and I know I have a strong worth ethic, so perhaps I earned an opportunity at a university education – but how many other intelligent, capable and hardworking people never had that opportunity?  How many of them are working dead-end jobs because they weren’t given the same opportunities along the way that I was?

In my mind, in a meritocracy, resources and opportunities flow to those who are most deserving.  So how does one determine who is most deserving?  It’s a function of efficiency – If you’re going to do the most with the opportunity, you deserve it most.

In the case of post secondary education, it’s not a matter of payment, access, or even intelligence, it’s a function of who will do the most with that education.  How many times have we seen people end up with a bachelor’s degree only to find out that it had nothing to do with what they wanted to do with their lives?  How many times has someone who would’ve turned that degree into a bright future, been turned down?

In the case of jobs, how often have we seen friends hired over strangers?  I’ll concede that familiarity and trust are important factors to consider when hiring, but the inside track is real.  How many times have mom or dad made a call to one of their friends at the firm to get their kid set up?  How many other kids who were more qualified were turned down because of it?  And here’s the crazy thing, is the kid who got hooked up really better off?

How often do we see kids pushed into careers like accounting or law by their parents, only to discover that it’s not aligned with them at all.  Sure it comes with a decent income and some degree of job security, but if that’s not their gift to the world, they’re holding themselves back.  If they could make the effort to tap into their inner-genius and align themselves with what they were born to do, not only would they probably make a lot more money, they’d probably be a lot happier too.  And for bonus points, that would now free up a spot in their previous profession for someone who was born to do that.

And now we arrive at one of the most interesting and currently relevant oversights of a meritocracy: Inheritance wouldn’t exist.

If you googled: great leaders who come from wealthy families, you might be surprised to at what it returned.  Not much.  If you do, you’ll notice that google tries to auto-complete the query with ‘nothing’ instead of ‘wealthy families’, the second suggestion is ‘poverty’.  This query returns everything you would expect it to.  Is that a pattern worth observing?

If you’re born into a wealthy family, are you more or less likely to encounter obstacles and experience adversity?  Are you more likely to be given your opportunities or earn them?  How likely are you to experience sacrifice?  How likely are you to think of your own self-worth as an extension of your family’s success?  How likely are you to have a skewed perspective of who you are and what you can offer the world?  How likely are to you see equality between you and someone who isn’t as nearly well off?

Maybe this is why Warren Buffett, perhaps one of the most grounded billionaires of all time isn’t passing his billions along to his family.  Not because he doesn’t like them, but because he thinks it’ll do more harm than good.  Personally, I think one of the best things you can do for your children is to help them discover their own success.

Back at the banks, part of my role was to help devise estate plans for my wealthy clients.  More often than not, they were great people who had worked hard their entirely lives to build what they had.  Most were philanthropic, but almost all wanted to leave the majority of their estate to their kids while paying the least amount of tax in the process.  From their perspective, they earned the money and should be able to do as they please when they pass away – it was about freedom of choice.

So is freedom of choice at odds with a meritocracy?  I don’t think so.  On first glance, someone might think that my suggestion would be a 100% estate tax with the proceeds used to fund something like free post secondary education.  I don’t think it’s that simple.  It would be too easy to invest your estate into a business or other asset, and gift that asset to your heirs, only for them to sell it and receive an indirect inheritance.  Rules create loopholes.  They need to be self-motivated to do it.  We have to convince the rich that their families are better off without all the money.  It needs to be logical, and it needs to be their idea.

So why is passing your fortune through to your kids so important?  The average price of a home here is about 20x the average household income.  The cost of living is high across that board.  What that means is that the only people who can afford real estate are people who already own real estate, people who in the top 1%, and children who receive financial assistance from their parents.  Under the guise of a free market, we exist in a scenario where only the wealthy and their children are capable of buying real estate.

You can only own property if your parents owned property – that’s downright feudal.

But how are you going to convince those parents not to help their kids?  I’m sure the parents would much rather spend that money on a vacation home or their favorite charity, but they’re deeply invested in the future of their children and will gladly sacrifice some of their success to see their kids get ahead.  But what if they didn’t?

A market will go up when there are more buyers than sellers.  A market will go down when there are more sellers than buyers.  When the well-off are funding the real estate purchases of their kids, they’re creating buyers.  They’re effectively raising the market price on everyone.  If they were willing to let their kids experience the realities of an unbalanced market, you’d be helping the market find its equilibrium – where an average income could afford an average home.  But they’re scared.  They don’t trust the system, and they definitely don’t trust that the system will look out for the best interests of their kids.  So they take matters into their own hands and take care of their family at the expense of others.  Do I blame them?  No, especially because I don’t think many of them make that connection.  Caring for your offspring is one of the most powerful instinctual drives we have, including protecting them at the expense of others.  So how do we move past it then?

Government as it exists now, if they ever came around to it, would want to put rules in place.  There would be regulations, and taxes, and other nonsense that would be more likely to shift wealth to the lawyers and accountants than to the people who would make the best use of it.  The movement towards a meritocracy needs to be a movement of the people, and it may have already started.

Warren Buffet and Bill Gates spent some time over the last several years speaking with their fellow billionaires about the impact of leaving their wealth to their families.   They’ve made progress.  More than 150 billionaires have already publicly pledged to give half their fortune away, including Zuckerberg who pledged 99% of his Facebook shares.  Just about every self-made billionaire will have a keen eye for investments so what does this really look like?  How is this connected to a meritocracy?  Does it stop at the billionaires?

When you’re looking to make an investment, the first thing most people ask is how much will I make?  I would ask, “of what?”  Investing is not financial by nature, it’s much more dynamic than that.  When these billionaires are looking to invest, most aren’t simply writing a check to their local chapter of United Way, they’re looking for the best return on their investment.  So what are they getting back?  I’d guess it varies on a case by case basis, but I think above all else, they’re looking to put those resources behind those who will do the most with them.  How many women are there in the world who are capable of so much more than the opportunities afforded to them today?  How many children die from poor health care before they’re able to contribute to society?  How much of the world is still off-line and unable to see beyond their own horizon?  These kinds of investments might create a return of capital, they’ll almost definite return some warm and fuzzies, but the real genius is the return that’s created for the rest of the world.

Think of how many women there are in the world who are operating at their full potential.  Now compare it to how many women in the world who will never have the opportunity to work, let alone at something that they were born to do.  Now multiply that number by how many neurons there are in the average brain and you’ll arrive at the world’s largest untapped source of brain power.  You could say something similar about most people living in poverty.  Imagine the power of bringing those minds online.  Imagine what the world would look like if we were all afforded the opportunity to tap into that inner genius – that’s the foundation of a meritocracy.

Does it stop at the billionaires?  I hope not.  They can’t do it alone.  They need our help.  They have the money, but we have the power – we just don’t know it yet.

A Quick Fix to Wealth Inequality?

I was having a chat with a friend yesterday about the incoming Canadian tax reform and he managed to inspire what I think is a rather interesting idea.

When it comes to modern finance, it’s a mess.  For the last few years, I’ve been trying to figure out a system of finance to account for the deflationary nature of technology and best practices while increasing productivity.  I think I’m close but it requires a complete overhaul of the system, and well as a cultural paradigm shift.  I’ll be patient.  Until then, I thought I’d mention an idea which works within the current system: Adjusting the local minimum wage to reflect the local cost of living.

If you’re working 40 hours a week, you should be able to earn a living.  That’s not to say that we should all be making the same, that’s to say that the floor should be set at what it costs to lead of modest lifestyle in that area.

Consider this, if someone is working 40 hours a week and living in poverty, they’re likely relying on social assistance programs.  Those social assistance programs are ultimately tax-payer funded.  That tax burden falls primarily on those who aren’t in poverty.  When someone grows up in a low-income neighborhood, falls in with the wrong crowd and ends up in prison, it’s the tax payers who pay for that too.  No matter how we look at it, we’re all in this together.  We either keep picking up the tab, or make an investment in the future.

For starters, imagine the impact this would have on the country’s collective anxiety – Knowing that if you work full time, you’ll be alright.  Now imagine the positive cultural impact of an entire generation of kids growing up with parents who aren’t barely getting by.  Now think about the reduction of people needing social assistance programs and the reduced government spending.  Now think about the reduced taxes for all tax brackets.  I guess we would call that trickle-up economics?  Just like trickle-down economics except rather than starting with helping those with the most and letting the residual benefits trickle down to those with the least, we start by helping those who need it the most and letting those residual benefits trickle up to those who need it the least.

The definitive test that trickle-up is better than trickle-down?  Trickle-up helps more people.

That all sounds pretty fantastic for people who are struggling to get by but that’s a rather large stone to toss in the water and it’s important to understand how this will affect everyone else in the pond, especially employers.

First off, businesses that haven’t embraced automation but probably should will likely need to.  The jobs which require the least amount of skill are often the ones which are easiest to automate so businesses will no longer need to rely on cheap labor to sustain their operations.  Fast food is already testing out automated ordering systems and burger flipping robots.

As the automation sector booms, the robotics and AI industries will boom and while not on a 1:1 basis, low-skill jobs will be replaced with high-skill jobs.

While measures like these will dramatically reduce low-skill jobs, I think they’ll also have the opportunity to redefine what we think of as an entry-level job.  If the objective is to have people perform at the best of their abilities, it’s about time we stopped putting young people in roles where they’re underutilized and calling it paying your dues.

The real victim in all of these is the entrepreneur who has to pay those increased wages though right?  Well if your business model relies on paying people a wage below what it costs for them to sustain, then yes – expect to be steamrolled.  If you can’t run a profitable business without the use of government subsidized labor, there’s a good chance you’re not fit to be running a business.

What about the businesses who do adapt, but still have to pay higher personnel costs because the average wage is now higher?  Because that’s real.  Well, it’s going to raise the bar for what we consider to be a well-run business.  Ultimately though, it means more money in the hands of the workers and less money in the hands of the owners.  Considering how the best entrepreneurs are motivated by the opportunity to create change, I don’t see the smaller paycheck making a difference – especially when you know that you’re putting extra food on the table of the team you built.

From an economic standpoint, if you systematically shift income from the wealthy to the working class then you’re looking at a far more robust economy.  More money in more hands makes for a much freer market as more people are inclined to make more decisions with their money.  Culturally, fewer wealthy people will mean mean a smaller market for luxury items and materialism may take on a more utilitarian feel.  From a philosophical standpoint, this is about equality in how we distribute the value we collectively create.

So set the local minimum income to be equal to the local cost of a minimum standard of living – seems reasonable.  Now set the minimum standard of living at a point which allows for a focus on personal development, providing them with the opportunity to become the most productive version of themselves.  Also seems reasonable.