What is Important in Economics?

There seems to be a lot of unwarranted attention in economic theories paid to what are no more than accounting schemes.

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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 economist 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 than 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. Labelling 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 hard to define, and needs to be broken down into component pieces to see how Just Deserts can affect it.

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 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 the 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, in different types and organizations of society deserves more discussion.

What is Property Worth?

Property gains are fairly easy to incorporate in a Just Deserts economic theory, but loss scenarios require some deeper thought.

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 proportional 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, or perhaps on luck.

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, that increase belongs to 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 benefit 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 is necessary 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 involve rewards only a few times that of the average person rewards for the same duration of effort.

The Disparity Problem in a Nutshell

Disparity Feedback is a very strong force in almost any economic system and could destroy a Just Deserts system.

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 showstoppers.

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 what might be called 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 office or agency or group 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 there 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 to 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. One cannot exist without the other. 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?

Disparity of income is self-generating. Once present, it controls individual choices, which tend to preserve it.

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 achieve a bonanza of 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 need 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 comes 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 the gold prospectors each had little interest in success. Perhaps ten times as many would be required. 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.

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.

How Much is a Gold Prospector Worth?

If you want to have just rewards for effort expended, you must spend some time figuring out how to do it.

There used to be people who would go out hunting for gold, in mountains or deserts or wherever else gold is found. Probably many countries have gold prospector stories. In North America there were at least two world-famous gold rushes, where scads of people went out hunting. One was in the San Francisco area starting in 1848 and another in the Klondike area of Yukon Territory of Canada, in 1898. While very interesting, the details of these important historical events is not relevant to the discussion here. Instead, the question is, what is the value of a gold prospector, or rather a year of a gold prospector’s time?

This is tenuously connected with the idea of Just Deserts, that people should get something proportional or at least related to their contribution to society as a whole. The other half of the Just Deserts idea, that this value is automatically determined by some sort of unencumbered free market, is not of interest today. We simply are breaking the concept of Just Deserts into its two halves, as they don’t necessarily have to be fit together, but can stand on their own separately.

The second half of the Just Deserts concept, that of some market figuring out value and then transferring it, is also composed of two intertwined ideas. That there is some value that can be deduced, somehow, for a person’s time and effort, and then that some sort of market actually transfers this amount. Consider the figuring out part. If that can be done, then perhaps there are other, perhaps multiple ways of transferring that exact amount of remuneration to a person for his time and effort, which would then satisfy the first precept of Just Deserts, that people should get this proportional reward.

Gold prospecting is a good illustration, as it introduces the factor of chance into the mix. Consider two gold prospectors, both of whom have equivalent everything, backgrounds, education, motivation, intelligence, care for details, vision, and whatever other qualities can be attributed to a person. They both go out prospecting for exactly the same amount of time, and they are both identically equipped. Their starting points are chosen randomly in an area believed to have gold deposits. Because they are identical examples, they work identically hard, sleeping just the same amount of time, taking exactly the same amount of break time, pushing themselves at the identical pace, and doing everything else the same, except with different starting points in the gold area.

At this point, it would seem that Just Deserts would indicate that they should get exactly the same rewards, if that theory is used for calculating and transferring benefits. This example was set up so that there is nothing that can be found to discriminate between the two as far as effort or capability goes.

As for results, the first prospector, Arthur, finds an immense deposit of gold during his year of prospecting, and if the ownership rules of the gold rushes were used, he would get all of it for himself. The second prospector, Bertram, finds nothing. If those same ownership rules were used, Bertram gets nothing for his year of work. Just Deserts would say that they should both be rewarded equally, which is the exact opposite of what might be called gold rush rules of ownership, which is a gamble.

Asking about the contrast between what might be seen as two equally justifiable concepts of remuneration can lead to some interesting features of remuneration, all of which are well known in economics and even to those of us uneducated in economics. One is motivation. It is possible to be single-minded about some task, and devote all your attention to it, and strive to maximize your effect on accomplishing this task. It is possible to be reluctant in performing some task and to put as little attention to it as possible, and not give a fig about whether it was accomplished or how well it was accomplished. This calls into question what the task actually consists of.

Some tasks are extremely well-specified, such as an assembly-line worker. The assembly-line moves at a particular speed, and each worker has a task to be accomplished on the line. Some measure of accomplishment exists, such as the tightness of a certain nut that is attached by a particular worker, and the rate of accomplishing the repetitive task is governed by the rate of movement of the line. Someone other than the assembly-line workers has figured out the task breakdown, the best rate of movement of the line, how many workers are required and the specifications for each of the multitude of tasks that are performed on the line by the line workers.

The other end of the spectrum on specification might not exist. If a task has no specification at all, it is not a task. There is no threshold that says if it is done or not done, or if it was done well or poorly, or if it was done once or twice or not at all. So as we move away from the example of assembly-line worker, we get to a forest of possibilities, where the task is partially specified, quality is partially specified, and rate is to be determined. Some trigger must be pulled to know when the task is done, so value can be measured, and that trigger might be somewhat vague. The gold prospecting task was like this, in that we used time expended as a measure of effort, and assumed away all the differences that always exist when only time expended is used as the measure. There are indeed specifications for gold prospecting, but they might not be codified, or be passed only by word of mouth or by partnerships.

Suppose Prospector Arthur knows some secret clues to finding gold, and Prospector Bertram does not. This does not eliminate the randomness of result, but it does tilt the odds. If these clues are valid and with few false positives, then Prospector Arthur might have ten times better odds of finding a gold deposit than Prospector Bertram. What does Just Deserts say about this?

It might say that there are two tasks that the prospectors have to do. One is learning the secret clues and the other is prospecting based on these clues. If the clues are published, and both Arthur and Bertram read them and follow them identically, we are back to the case where Just Deserts indicates they should get identical rewards. But if they are secret, finding out what the clues are is a separate task, and so we have to re-phrase the question. What would Just Deserts say about rewards for Prospector Arthur who has done this extra job of finding out the best clues, as compared to Prospector Bertram, who only did the prospecting task?

Does secret knowledge imply that the value of Arthur’s work is much higher than Bertram’s? It is clearly true that Arthur is much more likely to be successful and to locate very valuable gold, provided he has the secret clues and uses them. But the work involved is the same in the prospecting task, which means that the whole difference in value comes from the obtaining of the secret clues. This might take ten minutes of effort in talking to a friend or come from making a bribe or by threatening the life of someone who knows the secret clues. It could result from a lifetime of investigating geology as a research scientist, who happens to be Arthur’s brother. These examples merely serve to show that learning some secret might involve almost no effort, yet the value of it is very high. Does Just Deserts say that being born as the brother of a good geologist is worth a great deal of reward?

It can not, as any measure of that work, of obtaining the secret clues, by comparison with other similar tasks, turns out to be small. It might involve essentially no work at all, just an accident of birth, or a willingness to perform a criminal act. It might also involve working as a partner to more experienced gold prospectors for years on end until they share the clues they use. If Arthur served as an apprentice for twenty years in a subordinate position, enduring hardship and deprivation, but Bertram did not, does Just Deserts say that some benefit is appropriate for Arthur that Bertram does not merit. This may seem appropriate, but if random luck works the opposite way, and Arthur, after twenty years of apprenticeship, gets his secret clues, but it happens to be Bertram who accidentally finds the huge gold deposit, what does this appropriateness imply?

If there is any economic theory or policy that has a justifiable end result, such as Just Deserts claims to be, it will have to take into account these three things: randomness of results, secret clues obtained either from diligence or from chance of birth or some other way, and motivation. It will also have to take into account something not yet mentioned here: efficiency. A good economic policy should also strive to be efficient for the society, so that the maximum of benefits can be obtained, no matter how they are distributed.

How Much is a Computer Worth?

Does the cost of a computer teach us anything about the value of labor?

Let’s talk about a specific computer to make the discussion simpler. The example will be a standard computer, produced by the millions, which sits on desks everywhere. You plug it into the wall, connect a display, keyboard and mouse, and you can compute with it. You load in a program to process data, put in the data, and you get some output.

Now let’s talk about two of these. One sits somewhere where it processes data from some major corporation, or bank, or government institution, and the output is used for far-reaching decisions, affecting large amounts of money, many people, or both. Another sits somewhere where it processes data from a small business, maybe a little restaurant or a retail outlet for mass-produced clothing. The computers are identical. You could swap one for another and not know the difference except for the serial numbers. Is the first computer worth tremendously more than the second one?

No. They cost the same amount. They are made of parts which each individually cost the same. You can get another one to do exactly the same processing of data at some computer store or on the internet. It is just surprising to some that a computer which processes incredibly important data affecting incredibly important decisions costs the same as the one which processes mundane data affecting almost no one. Why is this? Why doesn’t the use of a computer change its value, and allow the computer store or the online site to charge hundreds of times more for the one which is going to be used for the important job. Why don’t they ask beforehand what the use is and charge accordingly? Obviously charging by the value of the use would make more money for such computer distributors.

The reason is that fungible objects have prices set by the manufacturing cost, not the value of the use. Competition among manufacturers of computers sets the range of prices that can be charged, and more powerful components change the price, not more powerful uses of the resulting computer. A bigger hard drive or a faster CPU can get a bit more money for a computer, but only by a factor of a few, not by thousands.

If there was only one computer in the world, it might be worth some immense sum, but when there are computers in every nook and cranny, the price of a computer is pretty much fixed. One distributor might make a few percent more profit by having a better return policy, or having faster shipping, or something else, but this amounts to some minor percentage, not a factor of hundreds or thousands.

Identical computer, near identical price.

What about the wiring of the computer? If it is connected to a printer in the retail clothing store is it less valuable than if it is connected to a printer in an important office in a major bank? No, plugging it somewhere doesn’t affect the value? How about if it is loaded with an expensive software program rather than an ordinary, run-of-the mill software suite? Nope. Computer still costs the same. What if it is attended by important people instead of unimportant people? No change. Computer still costs the same. There is simply no getting around the fact that fungible objects have a price set by manufacturing costs, plus distribution costs, rather than by their intended use.

Let’s consider the software in more detail. If one software program is written by a good programmer, from instructions he or she has received, and another is written by a good programmer, also from instructions, but different ones, and program length and complexity is about the same as the first one, is it worth more? Software programs aren’t identical, but the cost of programming it is fairly fixed by the length and complexity of it. If you think of a data input – data output type of program, there might be 20 items to consider for each of two programs, and 20 conditions that have to be examined, and 4 outputs get computed. The cost of the program is measured by the cost of the programming, and would be about the same. If there were side conditions, such as speed of computation, there might be some percentage saved by having a more efficient program, but this doesn’t have much play in simpler situations, such as the one we are considering. The cost of both the computer and the program it runs is governed by the cost of construction. Period. If one program is used in the bank’s high official’s office and the other is used in the retail store owner’s office, they are still both worth about the same money. We do assume both are tested programs produced by experienced programmers, rather than some spaghetti code put together by a neophyte, just as we formerly assumed the computers are not made in someone’s garage out of random components.

How about if they are networked; does that change the price? Suppose the first computer in the example is connected to another, identical computer, in another giant bank and both of them are connected to a third, identical computer, in a third giant bank, and so on. Has the computer now become worth a thousand times more that it did for the retail store owner? No.

What if the government of the land where these two examples lived made a law saying that computers for high-importance tasks needed a special license, which required extensive fees and long delays and a very restricted quota. Every such computer would have to be registered, and grave penalties imposed for violating the regulations. Only a few would be available each year. Suddenly, the high-importance computer is worth thousands of times what the low-importance computer is. By throttling the supply, the demand price goes up. A giant bank with a high-importance computing job can easily afford to pay these fees, and high-importance computer brokers would be there to collect them. There would be extensive opportunities for corruption and crime. Thus, it now becomes clear how to make a computer worth thousands of times what an identical one would be worth. The same mechanism would work with the software.

Let’s compare this electronics example with a biological one. People can process data. They have brains which are composed of layers of neurons, but the number of neurons doesn’t vary by very much, and the speed of operation doesn’t vary by much, and the organization of the brain is pretty much the same. One measure of intelligence is IQ, and it is a bell-curve distribution. There are lots of people around with IQ’s of 130 or most any other number short of the extrema. In many jobs, intellectual ones, people function like computers, in that data comes in and decisions come out. Why are they paid so differently?

Education and experience provide the rules by which decisions can be made. The goal of education is to replace experience as much as possible, but unlike computer algorithms, no complete set of instructions is available for decision-making, and therefore it is somewhat random in outcome. People simply do not have the solid rules needed for a good computer software program, so there is nothing available except relying to some degree on chance. Why are different individuals paid so differently, and especially why when there are no good rules for them to follow, nothing derived from repeated exercises in similar situations, and nothing from theories of management and personal relations? What we do have is a natural human tendency to form hierarchies where individuals are stacked over one another, and guilds where various procedures are instituted so that supply of certain training is limited. While these both have some benefits, they obscure the fact that people in our modern era are largely fungible for employment, and if guilds and hierarchies did not occupy such dominant roles in our culture, the value of an individual would be much more closely related to the cost of raising a person plus the cost of educating him or her. In other words, like computers and software programs, people would have a value related to their inherent costs. Like government throttling of supply of computers to high-value uses, these two factors can greatly raise the cost of an individual to an enterprise.

People do not even have the variation in price imposed on computers by the technological progress in the field of semiconductors and other related areas; people haven’t changed much at all over the last few millennia. So, the intrinsic value of people is much more likely to be within a range of a few times average salary, on an annual basis, or lifetime earnings, on a lifetime basis.

This has to do with something in economics called ‘just deserts’, which means that by and large, people get something proportional to the value of their contribution. ‘Just deserts’, if applied to computers, would entail the same government bureaucracy discussed above, but even larger if it was not simply restricted to only computers in very high-value operations. Perhaps the theory of ‘just deserts’ does not make any sense at all, but is simply a simplistic explanation, unrelated to economic reality, of the observation of the huge disparity in the worth of different individuals caused by the non-economic actions of guilds and hierarchies.