What’s Important in Economics?

As an exercise, consider a comparison between three imaginary villages. Everything will be simplified so that the comparison won’t be confounded by extraneous factors. The villages are mostly identical as well, so comparison won’t be difficult. Let’s start by describing one of the villages; the others are the same in every factor that is mentioned. They have the same housing, the same stores, the same prices in those stores, the same transportation, the same living conditions. That’s the beauty of the example. Nothing is different between the villages except what is called out below.

There are ten identical households in a village. In each of the ten identical households there is a wage-earner, who works regular hours and brings home income, which is used by the household to purchase their necessities and some extras. Each worker in the ten households gets the same wage as the other nine, pays the same tax as the other nine, has the same debt, and the same requirements for necessities, such as shelter and food. There aren’t any significant differences between the ten.

In village 1, workers receive a hundred units of money a week. They spend ninety on necessities, save five and use five for extras.

In village 2, workers receive a hundred fifty units of money a week. They spend ninety on necessities, pay interest on their onerous debts with fifty, save five and use five for extras.

In village 3, workers receive a hundred twenty-five units of money a week. They spend ninety on necessities, pay taxes with twenty-five, save five and use five for extras.

These conditions do not change and nothing external disturbs the arrangements.

Which village is better off?

Households in village 2 have great debt and are forced to spend one third of their income on debt interest and never get a chance to pay it off.

Households in village 3 and burdened with onerous taxes which consume twenty percent of their income. They have no way to escape from these taxes.

Households in village 1 have no debts whatsoever and are fortunately free from taxation.

In this example, nothing changes, so the only way to make a comparison is to look at current conditions. There is some emotional attachment that certain people have with debt, so they would necessarily regard village 2 as worse off. Other people have a strong feeling about taxes, and would therefore regard village 3 as worse off. These are not rational reactions.

The only thing that affects the life of the people in the households in these three villages is the amount of money they have left over to spend on necessities, savings and extras. It is identical in the three villages. The three villages have exactly the same standard of living. They would not be separable if you went to the villages, looked them over, and tried to compare them. In each house you visited, life would be the same in the three villages. You could count their possessions, discuss their activities, compare their health, examine their educations, and every last one of these would be identical. You would be unable to discern any difference from any observation of their lives or their environment. The paint on their houses would be the same, the depth of the tread on any vehicles they have is the same, the trimming of their lawns is the same. The commute times are the same. The electric usage is the same. The water and sewer systems are identical.

The purpose of this example is to make the distinction between irrelevant differences and important ones. Net income is important. Whether that income is affected by debt or tax or anything else is irrelevant if the net income is the same. The level of debt is not worth noting. The percentage of taxation is irrelevant. These are simply economic accounting processes and there could be many other variations, besides the simple debt interest and taxes that subtract from gross income to make net income. They would be irrelevant as well.

Why then is there so much concern about debt and taxes, if they are only accounting labels for subtractions from gross income? Even gross income is irrelevant, except as an input into the accounting for the weekly payment to the workers. Village 2 is paid more than village 3 which is paid more than village 1, yet the higher wages mean absolutely nothing.

It may be true that there are a hundred ways to structure a debt, and economists can have some good times figuring them all out, but it means nothing in comparison to net income. Taxes can also take a hundred forms, and there can be a vast amount of clever thinking expended in arranging them. They are irrelevant in all forms. What matters is net income and how it relates to the expenses of the household.

The units of the payments are also irrelevant, as money is simply another accounting device. What matters is the purchasing power of the money, and if had a different label or unit, it would make no difference in our example.

We are not going to be able to construct a just and decent economic system if we concentrate on accounting intricacies and financial constructs. Yet that is what most economics discussion does concentrate on. To make a good economic system it is really necessary to look past these gimmicks of rearranging the distribution of economic benefits and drill down on what is important. It is the final distribution of benefits that makes the difference.

Perhaps some schemes for rearranging benefits are simpler and easier to implement that others. The simplicity or complexity of such schemes are largely irrelevant. These schemes should be regarded as only the means to accomplishing the end, which is the final distribution of income. Labeling various schemes or the details of various schemes as just or fair or real or the inverse of these attributes does absolutely nothing except obscure what economics should be concentrating on: final distributions.

Someone’s infatuation with one of these particular schemes, that is, with one of the means of determining the final distribution, should not be allowed to interfere with the assessment of the final distribution. That final distribution is what should be assessed and the design of it is what should occupy most of the thinking of an economic theory. Perhaps some of these schemes can be more easily explained, but that does not mean anything at all. Some of them might be more easily propagandized, and again, this means nothing.

The final distribution of incomes is the principal subject matter of a just deserts economic theory. There are two ways of approaching the subject, a micro and a macro approach. The micro approach answers the question of how the details of the distribution affect the recipients. Does it motivate them? Does it ring true with the actual utility provided by those receiving the benefits? The macro approach answers the question of change. How does some distribution arrangement lead to a growth in the total annual benefits production. What is the tradeoff between the diversion of benefits into savings and the growth rate of benefits?

There can also be a long discussion on the mechanisms by which savings happen. There can be mandatory rules for savings, or forced savings which happen earlier in the income stream than the receipt of the residual benefits by those they are going to. There can be various supplemental benefits for savings, or threats of future calamity if savings are not at a certain level. These make as much difference as the debt and tax levels. In other words, none at all. What matters is how much goes into savings, which is another name for capital formation.

The discussions of how savings, or capital formation, is translated into increases in productivity, also known as increases in benefits, is something that needs to be part of an economic theory. Exactly how the savings are implemented or enforced or encouraged is not a top-level consideration. What matters is the determination of what happens to productivity when savings are different levels.

After the theory finishes with both the micro approach and the macro approach, from the broadest perspective, then it might step down a notch and figure out how the few simple quantities that make up this overview might be implemented. Note here that the key word is implemented. To be precise, the word implemented does not mean anything except the generation of details to make something happen. If the overview figures out that five percent savings is right for a balance between immediate consumption and future consumption, then all the rest of the work is simply determining some accounting schemes, such as debt, taxes, withholdings, or whatever, to make that happen. Any economic theory which starts at the bottom and tries to work upward is necessarily doomed to failure. There is simply no way sets of details can be mashed together to make up a coherent theory.

Carrot and Stick in Motivation

Motivation is another word whose meaning or implications change with its application. Generally it means the level of emotion that propels someone to accomplish a task, but in economic systems, it means the emotional drive to produce useful things for society. A highly motivated person produces more, because of the additional attention they apply to the task, the speed at which they work, the creativity they introduce into the work, the analysis they do to ensure the task is done well, the length of time they put into it and the amount of thought about it which is generated during times when they are not focused on the task, and even more. Someone with little experience in working might not feel the same effects from motivation, and only have one or a few of the above effects happening, so the definition is vague, but it can still be used.

We do not have a measure for motivation, as it is so diverse and its effects so varied. Productivity increases with motivated workers, both at an instant in time as they work hard and faster and more accurately, but also dynamically increases as they offer ways to improve the task or incorporate these improved ways in their own efforts. Thus, for a given labor expense, measured in individuals employed for a fixed amount of time, more is produced and society in general has more.

Motivation also feels good to those who have it. It produces some positive emotional feedback. This is colloquially expressed in different way, for example, by saying the individual enjoys their work. They do enjoy it, meaning they feel good when they do it and better when they do it well.

One can find a variety of ways that motivation can affect an individual. One saying in our society is to wish that someone starting a career can find work they enjoy. This is somewhat different than saying some people are motivated, meaning anything they do they find motivating. The difference here is from child-rearing. One individual was complimented and praised for doing a particular thing very well, so they choose to find things to do which are analogous to it, and then their brain dredges up the former happy memories, unconsciously, and they have found work which they enjoy. Other individuals might have been complimented and praised for doing everything well, and their brain dredges up these former happy memories, unconsciously, whenever they have a task to do and they put their full attention and energy into it. Motivation is simply a reflection of some details of child-rearing.

Short of a government program for child-rearing counseling or something else to effect child-rearing among large masses of people, economic systems are stuck with dealing with what they have: a mixture of highly motivated people with generic interests, highly motivated people with specific interests, moderately motivated people within the same two divisions, and unmotivated people. It would be very fanciful to assume that people whose child-rearing positioned them in the unmotivated group could be somehow re-indoctrinated to become motivated or that somewhere there is a undiscovered and productive task area that would motivate them. Instead, the economic system needs to be constructed so it can deal with this mix of people.

This is not to say that there are not people apparently in the unmotivated bin who have simply not yet found some task with attributes which motivate them, moderately or even intensely. There needs to be some aptitude and interest testing, in a very in-depth and professional way, which helps people find what tasks that society has to offer which will strike a chord within what their child-rearing has provided them as positive handles.

There is also a negative side of these handles. A task which might otherwise be something that motivates an individual might also raise in that individual some negative feelings, which would undermine the motivation and render the positive connections impotent.

It is also not to say that some counseling or advice or therapy might not change a person from unmotivated to motivated, either by unlocking some positive associations within their mind or by dissolving or mitigating the negative ones. Both of these methods, interest testing and counseling, can change the percentage of those in the unmotivated category. But they would not eliminate it. An economic system has to be able to deal with individuals with that predilection.

There is a difference between an economic system which has to function during times of scarcity, when actual physical needs are not quite being met, and times of abundance, when they are and are even surpassed in a small or large measure. In older times, when famine struck or war destroyed resources or drought persisted or any of a slew of other problems arose, people perished. Historical records show there were such periods, and populations affected declined. While the records are incomplete in this regard, it would be reasonable to assume that motivated people and their families fared better than unmotivated ones. Perhaps it is more reasonable to assume that motivation ceased to be a problem for most people, as hunger is about as strong a motivator as can exist. This is the stick that can exist to solve the motivation problem.

In times of abundance, where society as a whole has sufficient necessities so that all can survive, this stick might or might not endure, depending on how the economic system allocates its rewards. Rewards are things that flow from their sources, which are the productive facilities of the society such as farms and factories, mines and gathering processes such as fishing, through society to the ultimate consumer. In the oldest times, this was ordered by family or village. The farming family consumed what it produced. The village divided up what was caught or produced in the village commons. After that, property rights came into vogue and partially displaced these older methods. Ownership initially became fractionated, with some sort of higher level individuals possessing some rights to the production of goods and the remainder having their own rights. The fractionation system gradually was displaced by an accounting scheme, which had many variations. Accounting led to money, which is a simpler method of accounting than having everyone keep tallies of what they owed and what they were owed.

These methods obscure the basics of what is happening in the society, and when they become the focus of an economic system, they can capture the direction of thought. Distribution methods are merely the means by which some agreed-upon allocation of production takes place. The agreement, implicit or explicit, is something that needs to be examined most carefully, and then, in a new economic system, some methods need to be determined which will implement it. These methods are important, as they may not work, given the common tendency toward corruption, greed, and criminality, but they should not be taken as the fundamental part of an economic system.

Instead, the fundamental part of an economic system is the choice of allocation. Specifically, who makes the decision about allocation, and when might it be changed? Is it done by some subset of individuals on a recurring basis, so that in each interval of time allocation can be redecided? In this situation, rules that this subset choose can be enforced by the next round of allocation. If the subset is so predisposed, productivity can be a significant factor in allocation, and this re-introduces the stick into motivational questions. People who are not motivated on the basis of their child-rearing and good fortune in finding things to do which they enjoy, might well be motivated on the basis of shortages of necessities. If the society grows too complex, there might be and probably would be an introduction of rights, which are simply part of a system of rules in a formal allocation system.

Allocation is a complex problem, and how individuals are categorized is the first step in any formal system. Is the categorization hierarchical? Does a particular region or village or family receive an allocation or is it done on an individual basis? Clearly there are limits on individual allocations based on the capability of those doing the allocation to deal with individuals, meaning to identify them, connect with them, determine the necessary information about them to implement the rules set up, and then to distribute the rewards. In a hierarchical categorization system, allocation also becomes hierarchical. If rewards are distributed on a family basis, the head of the household determines how they are divided within the family.

Levels of hierarchy work better in situations where the data available for allocation is not easily gathered and processed. But no matter what the degree of hierarchy, the question still exists of how to use the stick of motivation, if at all. Those individuals who have found their carrot, a job they enjoy, have no problem with motivation. Those who have not might be presented with the stick of a shortage of allocation. How this works, dynamically, if different types and organizations of society deserves more discussion.

Greed is Good and Bad

Things are a little bit complicated in an economic system, or rather a political-economic system, as the two can only be artificially divided. The political system sets the rules and the economic system implements them.

What is complicated is that the labels we have for various attributes and entities do not discriminate clearly between different functions that are used in a political-economic system. Greed is an excellent example. Greed has the function of motivating people, whether they are wealthy or poor, to do something to gain more rewards, whether it be money in a money economy, or something else in an earlier or possibly a future economy. This motivation leads individuals and collective groups of individuals to accumulate capital. Capital is another good and bad word. Capital is incredibly useful in a society. Capital is used to facilitate the construction of productive facilities, which are still labeled as capital, and infrastructure, such as transportation systems, which are not typically labeled as capital, but which serve the same purpose.

Greed causes motivation, but that motivation can lead to the production of useful items for the society, and a general elevation of living standards, as well as the development of technology of every sort. That motivation can also lead to the development of monopoly control over necessities or desirable items, that allow large accumulations of capital by some small set of individuals which is unrelated to their contribution to society. There are a host of other devices within a society that equally divert production to a small set of individuals; this host of economic devices will continue to be added to as greed propels individuals in that direction. As long as there is greed there will be good from it and there will be bad from it.

Greed is a desire within individuals, and comes with many trappings. Greed might, in one individual, be connected with the construction of productive facilities so strongly that the only method that individual might contemplate for satisfying his or her greed would be the construction of such facilities, which could benefit the entire set of humans in the population, or at least a large subset. Greed might, in another individual, be associated with disparity, and the only methods that would appeal to such an individual would be those which diminish the wealth or income of others and divert such wealth or income to himself or herself, or to the favored target subset of individuals he or she prefers. Here are two extremely distinct results from the same emotion, or rather from emotions labeled as identical through the use of the single word, greed.

It would be somewhat clumsy to create two new words and try to introduce them into the thinking that goes on about political-economic systems. So, it is necessary to fall back on the coupling of adjectives with the common but misunderstood noun, greed. Before that is done, there should be some thought about how many divisions there should be and exactly where the dividing line should be. The division line should be found or constructed according to the uses for the new word phrases. This blog is concerned about seeing if a new economic system can be devised that does not have the failures inherent in other ones which are caused by feedback loops, unappreciated and largely unnoticed.

The principal feedback loop that dominates the later stages of any economic system is the one the large disparity produces: it serves to increase disparity more and more. Excess of wealth leads to a distortion of the political system to allow a larger degree of disparity to be generated. But wealth, as a mechanism for the accumulation of capital that can be used for productive facilities and other infrastructure or facilities that assist in the generation of benefits for the society, comes also with a good part and a bad part.

Thus it is necessary to define just what the political-economic system is supposed to do. There must be some initial goal or task for it, from which other smaller tasks or even word definitions can be derived. Since there is nothing in the universe that gives us it, it has to be chosen by some humans. I’ll try.

Humans evolved to have both sympathy and practicality, both competitiveness and cooperation. Political-economic systems which stress only one element of each of these two pairs fall afoul of the lessons humanity has learned via evolution. Either one of the two in each pair can appear in a simplified political-economic system that will make sense only if the other one is ignored. But ignoring one part of the two pairs leads to a system which has the feedback loops that generate failure eventually. So the task is to create a system which can have both of these aspects, serving as checks and balances on the other one. Some competition is needed to drive up motivation in a cooperative system. Some sympathy is needed in a system which stresses practicality, meaning where only productive elements are supported.

The symbiosis of these two sides, one relating to the distribution of output of the society and the other relating to the spectrum of motivation for increasing or maintaining the rate of output, has to be done in a clever way, one which does not allow gaming of the rules to the detriment of productivity and a just distribution of the outputs. It also cannot interfere with the generation of capital that is necessary for the construction of new facilities and the development of new technology.

Gaming of the system happens in one mode when resources are not utilized as fully as they might be. The typical example is that of productive individuals for whom motivation has failed, and who depend instead on the sympathy aspect of the political-economic system. The other typical example is that of the consumption of the output of society in ways which do not contribute to either the motivation aspect of the society or the capital increase aspect.

The first example has really two parts to it. The label, productive individual, is a snapshot in time, meaning that such an individual could produce useful output for the society. But snapshots in time are misleading. The match of the individual’s abilities to the roles that can employ them in society can change, meaning the individual must somehow be able to adapt to the changes in the society that surrounds him or her. And again, gaming of the system has to be avoided, so that an individual cannot linger in the adaptation stage, meaning learning or training or educating or even healing stage, for longer than necessary.

The other half of the things to be avoided related to the generation of capital, and concurrently, in the avoidance of the destruction of it for no useful-to-society purpose, or for a purpose which is substantially less than could be found by other means. Capital is generated when consumption is reduced below production, and the difference is diverted into the formation of capital. Consumption can be reduced directly at the source of the output, by never diverting it to individuals. A second way is to send it to individuals, but impose a tax upon consumption, diverting that tax to the formation of capital.

This raises the question of what is the desired role of consumption? Is it an item upon which those afflicted with greed can focus, so that disparate consumption is the goal of this subset of society? Is it an item that those afflicted with excessive sympathy can focus, so that consumption by the non-productive and even those gaming the system can be raised? Or is there some middle ground here, related to the middle ground that must be found between sympathy and practicality and cooperation and competition?

Consider, before attempting to devise some complex set of rules to fulfill these goals, what pitfalls might lay ahead. One pitfall is the difficulty of measurement or assessment. How would society measure if an individual is gaming the system, and could be productive but is motivated to not be? The problem with simple measurement tools is that they are always gamed. Always. Creating some sort of test means that those who will take the test will try to figure out the best way to score correctly on the test, at the least amount of effort and with the least effect on the rest of their lives. So measurement has to be done not as a test that can be gamed, but as an ongoing observation. Again, the cost of observations becomes a pitfall, as if societies output is diverted more into the observational process than would be lost to those gaming the measurement, there is only a negative benefit from the imposition of observational programs. Once again, if the goal is to maximize some output of society, some gaming might have to be tolerated.

It seems that the discussion here has set the stage for the concoction of some possible ways to implement a Just Deserts economic system, but the obstacles are formidable. But if they were not formidable, the system would have been obvious to all long ago.

Capital, Productive and Unproductive

Here’s a serious problem with any Just Deserts economic scheme. In order to build factories and tractors and other stuff useful for the production of useful goods, there has to be some arrangement for this building. Somehow people have to mine the materials, process them into components, put them together and make the useful stuff. They want something in return for their effort. Perhaps they will take promises of future payment, but more likely they want payment concurrently with their work. So, where does it come from?

One way is for someone who has something of value stored somehow can use it to pay the workers. This we can call capital. If there is some new system of economic rewards, and nobody gets to be extremely well-off, how is this storing of value going to take place? To put it another way, rich people in the wild west system take their money and invest it in productive goods, which are then used to make useful goods. With a system that does not allow anyone to become extremely rich, what alternative methods would the system have to introduce to continue the production of useful capital?

In earlier times, the question was irrelevant. If someone needed something productive, like a pot or a spear, they could make it themselves, or barter something they had for whatever it was they needed. Besides self-help and bartering, an individual who needed something and had nothing to barter could expect a ‘big man’ of the clan to provide it as part of the trappings of his position, or a group would form to provide an early form of charity. Specialization came creeping in to these situations, with someone doing a bit more of spear-making or pottery than they needed for themselves, and theirs were better so they spent more time doing their specialty and less on the more generic tasks, relying on barter to fill any gaps. There was still no need for anything that might be called capital.

Once agriculture was in vogue, there had to be governance, which could control who tilled what fields and who reaped what fields, and who received the crops. The governance could be a continuous thing, making on-the-spot decisions every time something had to be done, or it could simply lead to customs and later rules, so someone might be attached to a particular field and do everything needed to bring in the crops, together with whatever shared work contributed to it, such as irrigation. Once the love of one’s children and the generalization of providing for them became amalgamated with governance of the agricultural areas, inheritance can begin, and then capital exists, but only in the form of real estate.

Differential productivity and acquisitiveness can play a role in establishing wealth. If the bartering process does not lead to a roughly equal distribution of goods, because of the productivity of some specialist craftsmen or hunters or farmers, and if they choose to be motivated by personal gain or desire for familial gain, they can orchestrate the bartering arrangements to grow wealthy. If the governance people do not step in to prevent this, wealth will become disparate in the area of personal property, assuming that is accepted by the clan.

Even as early as primitive agricultural times, the dominant feedback loop relating to wealth and governance can start to churn. Those who have wealth and are motivated more by acquisitiveness than charity or the ‘big man’ tradition, can make arrangements with those who govern if they are also so motivated. Rules and decisions by those in governance can favor gradual increases in disparity, provided those in governance share in the bounty.

Thus capital formation can be surmised to have occurred several millennia ago, in primitive tribes, once greed becomes more dominant in a small subset of the population of a small cohesive group than the earlier traditions of caring for all. Since there is a tremendously strong feedback loop to increase it once it does become established, there is no question as to why it still exists despite all the transformations that civilization has seen pass by.

Other psychological processes aid in its persistence, such as the imitation of those who are in charge of governing. Once they adopt the habit of increasing their wealth, charity and gifting those less fortunate become less dominant in the minds of successive generations. This is especially true of those who are most subject to this example, the children of the governed and the wealthy. Whether or not it becomes a universal goal is not too important, as long as the general population becomes accepting of that. And this particular transformation brings in a third specialty group, the theologians or teachers or whoever is responsible for promulgating the cultural traditions. They may also become part of the subset which becomes wealthiest or may only be in a lesser tier, but they provide acceptance of this practice in the minds of the large body of population, and thus disparity, meaning the accumulation of privately controlled capital, can continue to exist and at times grow.

Step forward in time, and the realization that capital used productively can assist in the accumulation of wealth, in the minds of those who favor it, can lead to the growth of the prosperity of the group, or the larger organization if groups have become associated into cities or something even larger. Providing all the hunters with spears which fly straight and don’t break means hunting is more productive. Providing all farmers with seeds and implements means more crops. Dwellings, once they become non-nomadic, can become more robust and comfortable, and convenient for such things as storing grain, another form of wealth accumulation.

As the association of groups becomes larger, the feedback loop for wealth accumulation develops even more disparity, and the use of wealth as productive capital sets up another feedback loop to increase disparity even more. These are very natural loops, based on human mental patterns, which indicates why they exist everywhere and in all time periods. There should be no illusions that something so fundamental can be eliminated or replaced. The most that can be hoped for with a Just Deserts economic system or any other is the modification of it, so the same basic human instincts can be satisfied, but not to the degree that the earlier systems have allowed. The two natural feedback loops must continue to work, but there needs to be some siphoning of the results of them which does not break down their functioning.

There are two avenues which can be invented to preserve the formation of capital, which is essential to the improvement of prosperity of the population involved. Would they actually work?

One is to simply reduce the effects of the feedback loops by something like a tax. Could a tax be designed so that the generation of productive capital is not diminished, while reducing disparity? Quite possibly, disparity reduction will have its own collateral effects in the generation of more productive capital, but would that compensate for the loss of productive capital in the original holders of wealth?

Consider a snapshot in time. Some productive capital exists and serves to increase the prosperity of the population. Much of the prosperity goes to the wealthy subset of the population, where it is turned into both unproductive capital, meaning consumption of luxury or things analogous, and productive capital, meaning that which can be used to promote future prosperity. If the unproductive capital is taxed highly, but not prohibited, that might not reduce the generation of productive capital. Some unproductive capital is needed to continue the motivation of the wealthy to generate more. Thus, one possible mechanism is the taxation in some appropriate way of non-productive use of capital, but not to a prohibitive level. This might be done by some progressive scheme.

The second way would be to accumulate capital directly at the source, such as a tax on output. This would reduce the total amount flowing to both the wealthy and the remainder of the population, but perhaps not affect disparity as much as the first way. However, this method diverts some output to the control of those involved in governance, who are participants in the wealth disparity system engendered by the two feedback loops. It divides up the wealthy into two classes, one of which has more access to large amounts of capital than the other. The first scheme does the same, possibly in a different mechanism, in that taxes on non-productive uses of capital must go somewhere, most likely controlled those in governance, and this opens the door to similar misuse.

Both schemes for better use of the output of productive enterprise suffer from the same failings. One is that a smaller group of potentially wealthy individuals gain control over much more of the output of productive activity. Another related one is that, beside diversion into corrupt loopholes, the utility of the taxed or diverted capital might not be as high as if some highly motivated individuals, highly trained as well, were in charge of it. Something else must be found or some further adaptations of the two schemes mentioned here need to be concocted.

What is Property Worth?

The Just Deserts economic theory, which is what is being set upon its head here, says that the rewards received by contributors to the well-being of society should be proportionate to the benefits provided by them. Initially, a person was compared with other instruments that provide benefits to society, specifically to individual members or to large subsets of the membership, and it seemed likely that there could not be much of a difference in the amount of contribution. Everyone contributes within a factor of five or so from the median on the upside, and of course down to zero on the downside. It was found that the rewards to someone in a more wild west type of remuneration scheme could be hugely different from that, but it was all based on some secret that one person obtained and another person did not.

The effort to obtain the secret could be tiny or large, depending on the method used, and could be moral or immoral, besides being legal or illegal according to whatever system of laws were in place. The idea that huge returns result from perhaps a miniscule but illegal effort are in direct contradiction to the Just Deserts core idea, that rewards are proportional to contribution, and contribution is within a small factor from effort expended, if the core idea is pursued.

So how is it possible that large rewards are obtained from property transfer, movement, and distribution? Some examples may assist in his determination.

Consider someone who buys a piece of property a distance from a city. The city grows, and after some years, the city has expanded to the vicinity of our example property. It has grown in value, greatly, and if the owner can sell it and keep the increase in valuation, he will be well-off. To clarify the example, suppose that the owner did absolutely nothing to increase the value of his property. He maintained it at some minimal level, paid taxes upon it, but nothing else. Just Rewards would imply that he has not earned the increase in property valuation that occurred, and instead, the citizens of the city, who invested their time, effort, and expense on expanding the city. These citizens also supported the government with taxes, and these taxes went to expanding the radius of city services out to the example property. They did all the work necessary to increase the value of that property. The owner did nothing. But aside from some increase in taxes, if the laws allow for that, all the citizens who did the increase get nothing. They may have profited from their efforts some other way, but this example concentrates on one particular piece of property and the changes in valuation that it displays.

It seems fairly clear that a Just Deserts economic theory would have the increase in valuation go largely to the city, as a stand-in for the citizens, and little if any to the owner. This is just the opposite of the wild west rewards system. The Just Deserts theory seems to imply that within it, ownership is not total, but partial, in that someone who improves their own property through their effort, time and expense would benefit from that improvement, but someone who contributes nothing but happens to be the owner in name of a property which is improved by the efforts of others does not benefi t from that windfall. In the case, probably typical in real life, where both owner improvement and city-wide expansion or improvement both are going on, some assessment of what portion of the increased value would go to the owner and what remainder would go to the city or other governmental entity which was responsible for this area. The details of this assessment might be complicated, but they do not play a great role in differentiating between a Just Deserts economic theory and other economic theories. However, there does not seem to be any other economic theory which divides the increase in value of property between a nominal owner and the regional governing entity. In a communist system, property value, increased or static, belongs to the governing entity who are representatives of the residents of that entity. In a libertarian system, property value, increased or static, belongs to the nominal owner. In contrast, in a Just Deserts economic system, the owner has the value that he paid for the property plus any amount that he contributed to the increase in value, the governing entity has the rest.

As noted before, risk is an important element in any economic theory, and there certainly is risk present in the ownership of property. If the valuation of the property goes down, is the owner the only responsible person? This would be in direct opposition to the limitation of gain that the owner faces. It is necessary to expand this question to address several scenarios. Suppose the owner did not maintain the property, and it fell into disrepair. The valuation goes down. It would appear that the owner is the only one responsible for the loss of value, and therefore the recipient of the consequent loss. Suppose instead that the city builds a nuisance next to the property, and the value goes down accordingly. In this case the governing entity has the responsibility and the loss. Suppose as a third scenario, the city for some reason starts to economically struggle, and is unable to perform the maintenance of the city infrastructure in the area near the owner’s property. It subsequently loses value. Is the city itself responsible? The owner did nothing to cause the loss. However, suppose in this third example, the entire city loses value, say for simplicity, all by the same percentage. How can the city, as the representative of all the residents, be responsible for the losses of all those who own property within the city’s jurisdiction?

If the city was to take responsibility for all these losses, what alternatives does it have? Taxing everyone to compensate all the owners does not seem reasonable; consider the case where everyone is an owner and all properties are identical and all lose identical amounts of value. There is simply no solution within the framework of the city as a whole.
Just Deserts tries to assess rewards based on contributory effort, but obviously there are many situations where this scheme does not provide any results, as in scenario three or if the gain or loss was caused by some natural event. A hurricane damages the entire city, so how is loss to be apportioned by any Just Deserts theory?

It might be better to go back to the guiding concept behind a Just Deserts economic theory, which is not based on justice or fairness, but on motivation and removing some of the ease by which corruption can occur. If there is no benefit under some variant of Just Deserts theory, there is no motivation. In a wide-spread loss situation, a good Just Deserts theory should provide some benefit, or equivalently less loss, to people who took steps to reduce their exposure to this type of loss. Thus, in any loss, there is an element of preparation through effort, time or expense, as well as a random component. What role should the random component play? Should Just Deserts act like some cooperative insurance program and seek to equalize the losses according to some metric? And then on top of this should it incentivize the non-random component, the loss-avoidance activities, by rewarding the effort?

To avoid citizens gaming the rules used for rewards during disasters, or actually during other situations as well, there must be some reward related to the actual contribution made, rather than for the effort expended in attempting to make a contribution. These are vastly different things. In a disaster loss situation, each property suffers some loss, which has a large random component. If the property owners were compensated by a fraction of their loss, less than 100%, then there would be an incentive to reduce such losses by taking preventive measures. If the loss were instead of being relative, were absolute in value, then preventive measures would not produce any result. So it is clear that losses as well as positive benefits should be proportionate to results, but not equal to them.

Proportional is not the proper word, but proportionate in the sense of being quantitatively reasonable. There must be diminishing returns on situations like the gold prospector, where a big find produces more reward than a smaller one, but rewards do not go to the moon. Instead, they could approach an asymptote. A monstrous find would produce X amount of reward, but something one tenth as large might produce half of X. This provides incentive to seek larger finds first, but does not greatly diminish the motivation for seeking smaller ones. It also serves as a reduction of the opportunities for corruption, as huge rewards can fund corrupt mechanisms much more easily than scaled ones, which may be a few times that of the average person.

The Disparity Problem in a Nutshell

Just Deserts is an economic theory that has one interesting element: people in a Just Deserts economic system receive rewards proportional to their contribution to the system, meaning to the society as a whole. There are many problem areas with this economic theory, including: Disparity Feedback, Contribution Measurement, Motivation and Efficiency, Capital Utilization, Resource Exhaustion, Insurance, and Inter-Society Arrangements. Since this element, by itself, has some appeal, let’s discuss these problem areas looking for a means of implementing this element and the existence of possible show-stoppers.

The Disparity Feedback problem is simply this. No matter how one arranges the measurement of contributions and the distribution of rewards, it is done by a mechanism that is subject to corruption of some sort. In the Wild West system of contributions and rewards, individuals are largely unfettered in what arrangements they make between themselves. This means that an individual who has accumulated, by luck or nepotism or savings or crime or any other means, a large amount of capital, can use that capital to distort the system so as to increase his/her capital. This is one version of the Wealth Feedback effect. Since wealth is measured relative to other members of the society, it is not really a wealth feedback effect, but one which runs on disparity of wealth, so a better term for it is the Disparity Feedback problem.

It simply means that disparity finds a way to increase itself. If it is a wild west market that prevails in economic exchanges, disparity serves to distort the market by some mechanism. Monopoly is one that is well-known. In the gold prospector example used previously, having a monopoly on prospecting tools, or a monopoly on gold storage, or a monopoly on transportation to the gold field or to the city that is the jumping off stage for prospecting, or any other item, means that prices can be charged far in excess of any costs. If the monopoly is maintained by covert arrangements, or outright purchase of competitors, or threats of violence or blackmail, or any other means, there is little difference. Monopoly means that one individual or group sets prices for some needed item, and can set any price they choose. This implies that there is no Just Desert reward for their effort, but instead a disparity feedback reward.

In a system where there is government control of economic transactions, holders of large disparity in wealth can find the point in the government where rules are made for transactions, or where taxes are collected, or where licenses are granted for certain types of transactions or anything else, and use their wealth to obtain favorable conditions. This can be done by bribery, by blackmail, by threats of violence, by nepotism, or by any other means which are available to holders of a large disparity of wealth. Once again, for the particular transactions governed by this special arrangement, disparity is increased. The disparity feedback effect happens everywhere as it is solely dependent on their being a large disparity and there being some mechanism that can be found or invented, within the economic system that is in operation, which will tilt transactions for favor those who already have the large disparity. Old names for systems such as capitalism, mercantilism, communism, socialism, and more are labels for particular sets or classes of economic transactions, but none of these addresses the root problem, the disparity feedback effect. It is a universal effect, transcending any design of economic transactions.

There are some frills that economic disparity can produce. One is the economic theory frill. The holders of large economic disparity can hire writers in economic theory or novices for that matter to laud the system they are embedded it. This serves two purposes. One is the prolongation of the existence of these particular arrangements. Whatever system that is in existence that produces and amplifies the disparity over time can be described as necessary, or optimal, or justified, or anything else in favorable terms. The more such writing is broadcast, the more likely it would be that the system, whatever it is, continues to exist and continues to produce the disparity that results in this frill.

This frill is well-known, and has been described as there always being economic theorists who serve the needs of those with disparity. The rewards that can be bestowed upon economic theorists who manage to portray the existing system in a very positive light can be large, as they can be collected from all those possessing disparity in the system. They don’t necessarily have to be large, but they could be. All that is necessary is for the holders of disparity to reward those who laud the system which produces the disparity. How this could not happen is the puzzle – it appears so inevitable as to be hardly worth discussing.

Another frill is the promotion of stasis, or the avoidance of change, by other means. Whatever mechanism exists in the society for change can be subjected to the effect of disparity, so that as a society becomes more and more disparate, it should become more and more resistant to change. The mechanism by which this occurs might completely depend on the particular type of system. It could mean that threats of violence are used against anyone attempting or suggesting change could or should be made. It could mean that anyone suggesting change could be co-opted by offering of rewards for silence or retraction or misleading any listeners or other devises. It could be by the legislation of criminal penalties for acts leading or importuning to change of any significant degree.

Perhaps one of the most important frills is the degree of secrecy that is pervasive in the society. If disparity is hidden as much as possible, and the mechanisms that make it possible are also hidden, in both large and small ways, then maintaining the system which produces the disparity is easier. Fewer citizens become aware of these mechanisms and the degree to which they have produced disparity. With secrecy, much can be successfully denied. With secrecy, knowledge of the extent of the disparity and the details of the mechanisms is hard to come by and hard to verify. Any claims can be dismissed as falsehoods. Any law-breaking or immoral but legal acts committed in service of disparity can be concealed. Any theories of disparity’s effects can be pigeon-holed as simply theory without proof, as proof is hidden behind walls of secrecy.

This leads to an interesting conclusion: That excessive disparity and secrecy go hand-in-hand. The first cannot exist without the second. In a system where there is strong custom for just deserts and for the prohibition of acts which will produce large disparity, such as monopoly or blackmail or threats of violence or anything similar, in short any system in a society with very high morality, secrecy does no harm but is of little use. These systems however are simply fertile ground for the introduction of breaches of these customs or morals, which is how the disparity feedback system gets started. For a few generations such morality may hold sway, but not for many, and especially not for many in situations where there is a means for disrupting that morality.

Before going too far with the concept of transparency as the antidote for disparity feedback, it should be noted that some secrecy might be necessary to implement just deserts rewards. One example jumps into view immediately. If an individual or group were working on developing some new invention, in other words, doing science or engineering towards some conclusion, such as a new product or a new theory, and their work were broadcast on a daily basis, they would be subject to competition taking advantage of the early part of their work without paying any compensation for it. So, the concept of patentable work or copyrightable work might be the only legitimate use of secrecy as far as the just deserts economic theory goes. Business deal secrecy is not the same thing. There might be some innovative concept involved in a business deal, but remember that innovative concepts are rewarded in the just deserts scheme as the time involved in developing the innovation times the hourly or monthly value of the time of the innovator or innovators. This is typically tiny in comparison to the unearned benefit achieved by some business deals. In the patentable concept situation, this reward is the whole return, so secrecy in this type of innovation is paramount to ensuring that new developments are rewarded with enough value to make the work to produce them motivating.

To summarize, the disparity feedback effect is destructive of any just deserts economic system. The details of the economic system are largely irrelevant if just deserts are used to determine the distribution of rewards. The only obvious mechanism for the elimination of the disparity feedback effect is universal transparency, with only one or perhaps a few exceptions. This can be seen as a cost or a benefit, depending on the background of the person making the judgment.

How Much is Luck Worth?

In discussing the value of the time of a gold prospector, operating in a situation like one of the historical gold rushes, it became clear that the most valuable component of what the gold prospector brought to the situation was his secret clues, which could have been obtained by illustrious or nefarious means. In the absence of secret clues, identical gold prospectors would achieve their results through the operation of luck, or chance. The gold prospector with the most luck might obtain a bonanza of gold, able to be exchanged for almost anything else, and the other would have a net negative return on their time, effort, and expense.

Gold prospectors might not ascribe the success of the few to luck, but might maintain it was due to diligence, persistence, hard work, acuity, or some other personal attribute. No matter how these other factors played into the result, there was a large component of luck. Similar, the obtaining of secret clues depended in part on luck as well.

Is it the essence of the Just Deserts economic policy that luck is to be compensated for, and that effort and the quality of the effort that is to be rewarded? Before considering eliminating or reducing the effect of luck on personal success, it might be good to consider its value to society as a whole.

Luck is a motivator. Motivation operates on two levels. One is to induce individuals to participate in some activity. In the gold prospector example, each prospector hopes he has the luck to find a lode of gold and obtain much wealth and the accompanying good fortune. Those who had no belief in the possibility of their own luck would have less motivation to commit the time, effort and expenses to the task of gold prospecting. So there is a sorting process as well as a beckoning. Those who are optimistic about their own luck may heed the call of the gold rush and head for that area; so also might those who are desperate.

Those who do not but could have are the ones who have some tolerable level of satisfaction with their current situation. They may not have the same utility for large amounts of money, or have a low tolerance for risk and gambling. They may have a low tolerance for the experience that is involved with the activity, which might involve very discomforting situations. They might have a low tolerance for novelty, as this activity is not anything that they were familiar with.

The ones who do go are those with some personal optimism, both that they would be successful and have the luck that was needed, but also that any potential discomforting situations will not be too bad and be tolerable, and that any novelty will not be beyond their ability to adapt and incorporate it into their lives. They also have to have a high utility for money, perhaps a quite false one, as the utility of money for satisfying physical needs is quite limited and saturates at a fairly low value. The excess utility has to arrive from psychological needs, perhaps by allowing them personal interactions, such as respect or love, that they were unable to find in other ways. This expectation of psychological benefits provides the motivation and the optimism.

This sorting process may have a very great value for society. By having a situation, like a gold rush, that makes such individuals separate themselves and undertake the mission to prospect for gold, they are found or rather find themselves, and move to the area where they can begin their quest.

Consider the alternative, which might happen in an era where there was more widespread governance and control by some central authorities. When the first report of gold come in, the governance figures decide how many people will go and grants licenses to them, with the agreement that they would return all or most found gold to the governing body. In return they would be paid some just amount for their time and effort, and the governing body would cover the expenses.

Provided the bonus of a percentage of the found gold was not too large, the same sorting process that worked in the ‘Wild West’ type of winner-takes-all gold rush would not happen, but instead a very different one. Those who saw this as an opportunity for a higher income that what they were doing previously would be the applicants for the licenses, and essentially for the employment by the government. And this is where the second type of motivation kicks in.

Someone who is being paid for their time, with little benefit for success in the tasks they are attempting, and little expectation of such success, would soon realize that performing that task in the easiest possible way would be the best choice for them. That means the probability of success would be lower, and possibly considerably lower. If a hundred thousand gold prospector years would be necessary under the original gold rush rules to find the majority of gold in a gold rush area, perhaps two or three or four times as many would be required if they each had little interest in success. Perhaps ten times as many would be required as this is a finite task and when it is accomplished, the positions for it evaporate. What happens is that by sorting out highly optimistic and highly motivated people by the first type of gold rush rules, the efficiency of the process is maximized. It could be said that in the society as a whole, there is a small subset of people who are willing to make a great personal sacrifice in order to have a chance at high rewards. They are optimistic about the rate of success, and that optimism, false as it may be, causes them to exert themselves to the highest level possible to obtain the rare but large reward.

What would be the effect of the bonus? If the likely bonus were small, none, and if very large, it would make the government-controlled situation almost as desirable as the uncontrolled one. What is very large? This depends on the distribution of incomes and wealth in the existing society. Images of possible futures depend upon example. In a society where there was a limited dispersion of wealth, maybe a factor of five, the bonus required would not nearly have to be so large as if there was a huge dispersion of wealth, perhaps a factor of a hundred or a thousand. Because the psychological utility is what motives the optimistic gold prospectors, rather than physical utility, the scale involved is a matter of what they have observed and incorporated in the own personal reference frames for reward levels.

This can be restated. In a society where there is a great dispersion of income and wealth, it would be more costly for a governing body to attract and employ highly motivated gold prospectors. A larger fraction of the value of the gold they found would go to them. In a society where there was only a limited dispersion of wealth and income, the costs would be less, and the governing body would receive more. This could be spent, in a situation where the governance was not so corrupt as to divert most of the receipts of the gold prospecting to the benefit of those in the government or their external associates, there would be more gold and therefore more money available to spend on the goals of the government, such as infrastructure, research support, charity, and defense, or equivalently, less taxes would be levied as the gold income would displace some of that.

The value of luck in a situation where there is governance with extensive control can be much less, in absolute terms, if the society in which it is embedded has few or no examples of very disparate incomes or wealth. This is a peculiarity of how a certain group of individuals, those who are highly optimistic and highly motivated, render their psychological utility. Once they have been impressed by examples of extreme disparity, that becomes the goal, and then the costs to direct them to some task where luck plays a large role becomes much greater, by the same measures as the disparity.

There would be a distribution among this set of highly motivated, highly optimistic individuals, and even in a situation of high disparity, there might be some who would be attracted by a much lower return on their effort. How many depends on some difficult-to-determine factors in the society. This does not change the basic result, that individuals, who think they have a lot of luck and are highly motivated to find opportunities to exploit that situation and turn their position in society from one in the lower levels to one in the higher levels, would need to be rewarded in most cases by something commensurate with the difference between these lower levels and the higher ones.

Time doesn’t play too much of a role here, as once the example is set, if society changes toward a lower disparity, the psychological utility of the individuals who might be motivated to take large risks would not immediately change. Perhaps over a long time, it might, or there might have to be a generational effect. This could be thought of as another feedback effect, where high levels of disparity lead to mechanisms, such as something analogous to gold prospecting, which would tend to keep them that high or raise them higher.