It’s Who You Know

by F.

Is the working world meritocratic? If you answered yes, you have probably never experienced it (or are in the grip of a defunct ideology).

One of the many ways meritocracy fails is when hiring choices are made based on membership in closed networks, whether religious, ethnic, gender-based, or other (such as having graduated from a certain university). If this sort of closed networking seems antiquated, think again, and read Paths to Power a new book by Anthony Mayo, Nitin Nohria and Laura Singleton. The main take away, according to the FT, is that the

paths to power are different today from those of 100 years ago, but the new paths are as exclusive as the old. “Such changes have affected only the rules for entry, not the game itself,” the authors say. “A new and different kind of insider may emerge, but the advantages one holds over an outsider remain.” A new kind of inequality, it would seem, has replaced the old.

The criteria for membership in the closed networks change, but the effect is the same:

In the mid-19th century, birthplace was extremely important; the majority of US business leaders came from within the small, tightly enclosed business community of the north-east. Most also shared religious affiliations. The authors suggest that early American tycoons such as JP Morgan, Henry Heinz and department store owner John Wanamaker owed some of their success to their Protestant religious connections. “For as much as three-quarters of the 20th century, factors such as where you were born, who your parents were, and where you went to church were distinctions that mattered, and mattered very much, in the selection of business leadership,” the authors say.

Later, different criteria were used:

by the middle of the century, birth and religion were being displaced by professional qualifications. The first American business schools were founded with the aim of “professionalising” management and making talent rather than background and connections the key to success. But, the authors say, business schools became another path to power. They became the new tabernacles. Their alumni networks turned into ladders, along which members helped each other to the top. The MBA degree was the key to membership of such networks, and men such as Richard Rosenberg of BankAmerica or John Chambers of Cisco used the networks to great effect as they rose to the top of some of America’s biggest corporations.

Do closed networks harm us? They certainly may harm individuals. I have a natural reaction against them, because I’ve never been part of one. So, for self-interested reasons, I dislike them. I need to compete on the merits; otherwise, I’m dead. But put aside your individual situation and think broadly whether these sorts of networks hurt us all, collectively.

It’s an empirical question to which I don’t have the answer, of course. But speculating for a moment for the purpose of entertainment, I would tend to think that, on average, closed networks are bad, because a closed social network is a sort of market distortion.

In a perfect market, the best people would be able to go where they are needed, no matter where they were born, who they knew, and what church they attended. Closed networks may have been necessary or useful in the past because search costs were too high: it was difficult to find the right person, so you hired your friends. If those friends went to Princeton, like you, then probably they were pretty smart (unless they were legacies or something like that) and thus were a good fit for the job. As Google and other information tools become widespread, information will become ever more cheap and so I would expect the networks to be less useful.

However, human nature being what it is, I would expect people to still network like mad, because human beings tend to affiliate and form groups to exclude others. As the saying goes, “Me against my brothers, me and by brothers against my cousins, my and my brothers and cousins against my clan, me and my clan against the world.” So this may be yet another case where human nature works against human welfare, as we hire based on networks and exclude talent, to the detriment of all.