Wednesday, September 24, 2008

The Incentive Myth

Pretty Lady, it must be said, is not an economist, except perhaps the household kind. She does not understand 'credit default swaps' or 'hedge funds' or 'asset leveraging.' She is, however, very good at generating a balanced, nutritious meal for under $3/person; she can juggle the bills so as to avoid late fees, interest rate increases and service interruptions, even during long periods of enforced unemployment; she knows exactly where and in what order to invest sudden unexpected infusions of cash, so as to maximize interest and long-term savings. In other words, she's an artist.

However. She must speak out upon one issue that she hears repeatedly during discussions of "Whither Capitalism?" That issue is the one of "Incentive."

People must have Incentive, she hears, to do things. They must have Incentive to invest, to build, to invent, to labor; without this Incentive, they will all become welfare drones. This Incentive, she hears, primarily includes the God-given right to pursue amounts of personal wealth so obscene as to allow the Incentee to say a big, resounding F.U. to Everybody Else. If we remove this Incentive--in the form of salary caps, progressive income taxes, or regulation of industry practices--the world will simply Fall Apart, and we will all go back to living in caves.

Well, Pretty Lady always knew she was a freak, but that's never particularly been the reason she works for a living.

No, Pretty Lady's bizarre, arcane incentives for doing the thing she does include, but are not limited to:

1) Paying for housing, food, clothing, transportation, entertainment, and art supplies.

2) Creating beautiful things.

3) Helping people feel better when they are in some sort of pain or discomfort.

4) Connecting with interesting people, for the purposes of friendship and engrossing conversation.

5) Exploring speculations in the area of psychology, philosophy, spirituality, economics, technology, social science, architecture, fashion design, education, gardening, cooking, physics, mathematics, metaphysics, and all sorts of other fun things, just because.

Making millions of dollars simply in order to HAVE millions of dollars has never appeared on her list. Moreover, she doesn't know too many other people whose top priority is becoming obscenely wealthy, either; they're all too busy living full lives as engaged, creative citizens.

Perhaps all of Pretty Lady's friends are freaks, too.

But she does have it on excellent authority that in Denmark, people work for a living. Despite the fact that the economic system of Denmark provides education, healthcare, housing and basic human dignity to every one of its citizens, at the expense of massive wealth accumulations by the Elite Few, everybody gets up and goes to work anyway. They do good jobs, too.

What shall we make of this?

Well, Pretty Lady is starting to wonder if perhaps she isn't such a freak, after all. It certainly seems to her that many people, perhaps even the majority, share her priorities in life. That there exist, in nature, plentiful numbers of citizens who would go about inventing, building, designing, growing, nurturing, experimenting, and creating, even if the option of becoming a billionaire by manipulating abstract numerical phenomenae was off the table.

In fact, she is starting to wonder if the impulse to manipulate abstract financial phenomenae in order to accumulate disproportionate personal wealth isn't...just...a bit....abnormal. Perhaps even pathological.

At the very least, she is certain that she doesn't want someone whose priorities are thus established to have a greater-than-average share in community decision-making processes. For people who want to make a lot of money without doing any concrete benefit to others tend not to take other people into much consideration. Ergo...well, voilá.


george said...

Pretty Lady

“If we remove this Incentive--in the form of salary caps, progressive income taxes, or regulation of industry practices”

There are incentives and there are Incentives. The tune seems to go something like this: new CEO gets a hefty salary AND the promise of bonuses, profit sharing, financial parachutes etc. The sum of the ANDs (the real Incentive) far exceeds the salary (incentive) and is contingent upon the CEO’s ability to show sustainable profit and growth – no easy task. Enter the “abstract financial phenomenae” i.e. cooking the books. I cannot see caps and taxes and regulations (please God no more regulations and regulators) making much of a difference. I propose another Incentive. Prison terms – long prison terms and confiscation of assets ala convicted drug lords. As for the corporate ethos that bribes managers and officers with obscene amounts of money to devise and manipulate “abstract financial phenomenae”, that might better be left to the small stockholders and stringent accounting procedures. Okay, stringent accounting procedures sounds like a regulation in the making but …

It’s interesting that the FBI has started investigations but the Congress (culpable?) talks of possible “hearings”. I suspect Congress hasn’t enough of an incentive yet.

elizabethbriel said...

Currently I'm living on the fringes of the most capitalistic society on earth: the ex-colony of Hong Kong, now returned to the faux-communist embrace of the motherland.

We're the little toe at the bottom of China, and for decades HK has been a dream destination for mainland Chinese. Here in this trading & financial center you could get rich beyond your wildest dreams, and some people still do (my dreams are more modest, but I've been able to save more here than ever before).

Social welfare programs are skeletal compared to those of the US & Europe, so there's nothing like Social Security, yet basic healthcare is really really cheap. Someone earning around US$15,000/year will pay no taxes, and can live in gov;t subsidized housing which costs 10% of their income. Income taxes on the middle class run between 5-15%. There's no tax on most imported/exported goods, food, or wine.

Having a baby in a public hospital (sharing a room with a half-dozen other women, privacy isn't important in Asia) is practically free. Lifespans are impressively long, even with our choking pollution. Where does this $ come from? The creation of assets by the government building on public land.

The following, though, is not exclusive to HK: some people work to fund their lifestyles, whether extravagant or frugal; other people want their money to work for them. The latter attitude is for people who wish to be truly financially independent. It's impossible in high-taxation countries like Europe, Canada & Australia, so they place their $$ in HK or other offshore places.

I find it interesting what people choose to do with their earnings. As for mine, I live really cheaply, at the edge of one of the most expensive cities in the world. But you can live happily on many different levels: I only need around US$1000/month when not renting a studio. Teaching 2 days/week covers my expenses, and the $ from my freelance work & art goes straight into the bank, where I place it into different currencies or investments.

Pretty Lady said...

George, the distinction as I see it is between investment, which is putting capital to work in order to fund research, industry, and development, and gambling, which is taking theoretical money belonging to other people and placing bets on future events in which you take no direct part. The activities of the investment banks which have collapsed seem to me to be far, far, far on the side of the latter.

I read that these companies had a debt-to-asset ratio of thirty to one. In other words, the money they were 'investing' never existed. That's not 'cooking the books,' that's pure fantasy.

What I am proposing is a return to an economy based on tangibles. That can't be done solely through regulation, although the right kind of regulation can certainly help. What's more important is a recognition of which values are productive and beneficial for society as a whole, and which are toxic. That can only be done by clearly articulating why a system based on gambling is a bad idea, with specific examples.

Pretty Lady said...

Elizabeth, I have lived more or less the way you do for much of my adult life. I agree that Hong Kong is a prime example of the way capitalism done right creates wealth. Note that government is still playing a crucial role, however. Also note that your primary motivation is to create art, and you have responsibly arranged your life with this priority in mind.

I myself invest in broadly indexed mutual funds, filtered for social and environmental responsibility. I put the money in those funds and leave it there; thus it is working on behalf of research, clean industry and clean development, and hopefully increasing in value over the long term. This, to me, is a completely different endeavor than making short-term bets on very narrow occurrences, most of which have nothing to do with any sort of productivity at all.

Michelle said...

Now if only the people in Washington and Wall street would LISTEN (ie hear) people like us, there could be radical changes a'coming!