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Are incentives more asymmetrical than they used to be?
I was thinking of writing a science fiction story. In this world human capital is incredibly valuable. Even if you lose all your wealth you can earn back lots very quickly, at least if you are talented and well-educated. In fact, even if you stay poor, wealthy friends or a spouse will take care of you and you can have fun watching cable TV or playing Second Life. The only way to get above this baseline level of happiness is to succeed at "winning" and gaining relative status among your peers by superior earnings.
The level of risk-taking is very high and capitalist enterprise starts to collapse. (Credit markets disappeared in 2081.) Every manager plays metaphorical or perhaps even literal roulette with the money of the shareholders. The move toward unlimited liability for corporations only postpones the dissolution of cooperation.
Production resumes only when a) managers precommit to costly drug addictions, so that they again fear pecuniary losses, and b) shareholders find altruistic managers and also initiate charitable contributions to India. They threaten to cut off those contributions if managers perform poorly.
Managers are addicts and blackmailable altruists. The Indian poor flourish. Most Americans remain unemployed. At some point the world becomes poor enough to sustain cooperation once again.
Posted by Tyler Cowen on March 25, 2008 at 06:34 AM in Economics | Permalink
Comments
"At some point the world becomes poor enough to sustain cooperation once again."
Is that the fiction part?
Posted by: John Mark Rozendaal at Mar 25, 2008 7:38:34 AM
Get some sleep.
Posted by: Bill Gardner at Mar 25, 2008 7:50:05 AM
Can someone translate this?
Is this right: Managers act too recklessly. Americans are overpaid and lazy. Offshoring is the only reasonable solution. What is the altruism and charitable contributions referring to?
Posted by: confused at Mar 25, 2008 8:47:35 AM
Unlimited corporate liability and the managers' drug addictions would make managers avoid all pecuniary losses, which would make them unwilling to take any risk at all. Because no investment is 100% guaranteed to make money, all managers would perform exceptionally "poorly" in an absolute sense, and most would not make any money at all because they would be unwilling to risk pecuniary loss by investing in the first place. The only managers who would make any money are the ones who can handle their addiction enough to bear the risk of at least some pecuniary loss.
Posted by: TV at Mar 25, 2008 9:29:43 AM
Um, didn't you just describe a world without private property?
-Current productivity is more important than past earnings? Check!
-Cooperative networks of friends and family only hedge against disaster? Check!
-Risk-taking is high? Check!
-Long-term employment relationships and equity financing are unsustainable without bizarre workarounds (i.e. drugs)? Check!
-People with current earning power have highest status? Check!
-Impossible to limit liability of any organization? Check!
Let's not reinvent the wheel, Tyler. (And I'm not sure how this world comes up with cable TV or Second Life...)
Posted by: Person at Mar 25, 2008 9:36:21 AM
My take is that when worldwide wealth reaches a certain point then the only work for humans will be something like reality shows. We will create entertainment for each other. And it won't be pretty.
Posted by: Huggy at Mar 25, 2008 9:44:36 AM
This book idea reminds me of the 'Beggars in Spain' series by Nancy Kress. Not the same idea, but also tinkered with the demand for labor, and new stratifications emerging in a modern society.
Posted by: at Mar 25, 2008 9:47:33 AM
Is the dissolution of cooperation an assumption or a consequence? I don't see how it would follow from anything above it. Is there any reason why cooperation (at least within a firm) wouldn't still be the best way to "win"?
Posted by: Mitch at Mar 25, 2008 9:48:10 AM
no mention of shareholders?
Posted by: josh at Mar 25, 2008 9:58:18 AM
Aren't you just talking about how the economy would work post-scarcity? That's not really my take on post-scarcity, either ...
Posted by: kjhkjh at Mar 25, 2008 10:02:02 AM
Tyler, I highly recommend Distraction by Bruce Sterling. A lot of the thoughts you have are explored by him.
http://www.amazon.com/Distraction-Bruce-Sterling/dp/0553576399/ref=pd_bbs_3?ie=UTF8&s=books&qid=1206453955&sr=8-3
Posted by: Mark at Mar 25, 2008 10:07:59 AM
Sounds like the Soviet Union with the central planners on drugs.
Posted by: greatzamfir at Mar 25, 2008 11:41:24 AM
You left out government greed and power. Try reading "Dune."
Posted by: jorod at Mar 25, 2008 12:29:47 PM
The level of risk-taking is very high and capitalist enterprise starts to collapse.
This assumption is where you lost me. I understand how you got to this point: extrapolating the behavior of some of today's investment managers, what happens when there is no fear of losing? But in order for investment [capitalist enterprise] to collapse, we have to assume either that
- no one anywhere fears losing any more (psychologically implausible, in my opinion)
- the fearless ones are able to successfully masquerade
Neither case seems to make much sense; barring seamless deception on the part of excessive risktakers, we just end up with capital flowing to those who still have (some) fear of loss.
Posted by: bbartlog at Mar 25, 2008 12:42:31 PM
The level of risk-taking is very high and capitalist enterprise starts to collapse.
This assumption is where you lost me. I understand how you got to this point: extrapolating the behavior of some of today's investment managers, what happens when there is no fear of losing? But in order for investment [capitalist enterprise] to collapse, we have to assume either that
- no one anywhere fears losing any more (psychologically implausible, in my opinion)
- the fearless ones are able to successfully masquerade
Neither case seems to make much sense; barring seamless deception on the part of excessive risktakers, we just end up with capital flowing to those who still have (some) fear of loss.
Posted by: bbartlog at Mar 25, 2008 12:42:51 PM
I think it is unrealistic, even for a novel, to think that India will still be poor in 73 years. Nigeria or Congo or Chad, sure. India, no.
Posted by: happyjuggler0 at Mar 25, 2008 12:49:37 PM
While I applaud your efforts, I think your going in the wrong direction. Why write about the societies collapse at the hands of capitalism? Seems very unlikely, I'd much prefer you to team up with Hanson to write about a bodiless society which uses pleasurable electric shocks as a medium of exchange, which I actually think is more likely than the breakdown of capitalism.
Posted by: Mason at Mar 25, 2008 2:15:13 PM
The end of material scarcity (which is what you're talking about) is an interesting SF topic. You'll have to deal with why the best and brightest are wasting their time fighting over such minimal rewards when there's probably quite a bit more to be gained being the best Guitar Hero 47 player, since the fame, competitive rush, etc. would to the average person be a better bet than slogging away at the no-win financial game you describe.
Posted by: l2p at Mar 25, 2008 3:53:54 PM
A billion people on this planet live on less than a dollar a day. In their perception, the West as it exists today is already very close to your hypothetical science fiction world: a baseline level of financial welfare, enough food so that even poor people can be obese, clean drinking water instantly available on demand, etc. Undoubtedly, the "bottom billion" imagine that if they could live in our world they would be happy forevermore.
We who actually live in the West would not agree. Human psychology is such that we will always worry about something and find challenges and preoccupations to busy ourselves with. The more choices and opportunities you have, the more choices you need to make, which can be very fretful. And so it will be in 2081 also.
To take one example: if you consider clothing, we are already living in your 2081, so to speak. If you look at photographs of refugees from only a few decades ago (say, from the Bangladesh war of independence), they were quite literally dressed in rags or Mahatma Gandhi loincloths. Today even the poorest people on Earth generally dress in the same T-shirts and jeans as we do in the West. Global "baseline clothing happiness" has already been achieved, thanks to technology and China in particular. And yet the fashion industry thrives and wardrobe-related preoccupations and aspirations among consumers is stronger than ever, and stores even exist to sell T-shirts that cost a few hundred dollars apiece to the idle rich and celebrities.
So it will be with all our other material and psychological needs, in 2081 or whenever. It's just human nature. Well, unless we genetically engineer ourselves to literally alter human nature.
Posted by: at Mar 25, 2008 4:58:03 PM
Yeah, we're basically already there, at least for some portion of society. You can take comfort in the fact that some share of people want to do something productive for psychological rather than economic reasons. I don't think Warren Buffett sees any measurable increase in purchasing power by continuing to run his company; it's all psychological utility. On the other end of the spectrum, you have the Paris Hiltons of the world.
Posted by: Greg at Mar 25, 2008 5:51:43 PM
Really you're describing the movie "Rollerball." Better check with your lawyers before the Art Buchwald lawsuits begin.
A world run by a few corporations with entertainment as the daily preoccupation. Burning pine trees with flamethrowers......we're almost there.
Posted by: Motor City Madman at Mar 25, 2008 7:38:08 PM
John C. Wright's "Golden Age" series anticipates some of these premises, but he takes them in an entirely different direction.
Posted by: Tom T. at Mar 26, 2008 11:23:11 PM
