(This is Part 6 of a series. Go back to Part 5.)
Perverse incentives often come in a flavor that looks or tastes like this: An ideal which disregards human nature. Let's look at an example:
The economic system called communism is grounded in an ideal which certainly sounds very noble and desirable: basically, to attempt to see that the wealth of society gets distributed equally to everyone.
Of course, this implies that the equal distribution will be done regardless of the talent or effort of the human beings involved—otherwise the distribution wouldn't be equal. That is, just by virtue of being here you should be able to have the same amount of wealth as anybody else. Sounds good, doesn't it?
However this idea has a fatal flaw, which is that it ignores human nature. It is in the nature of us human beings to seek personal advantage. We're continually trying to increase the "success" of ourselves, our family, our tribe or anything else we identify with.
We seem to share this trait with all living things. Even plants try to move their leaves towards the sun. Every animal strives to survive, flourish and reproduce; this is programmed in by the genes.
Indeed, we can presume that our ancestors were pretty darn good at surviving and reproducing; otherwise we wouldn't be here. And of course, we've inherited this trait: We're continually trying to "maximize" our potential, our success, our well-being—however we'd like to put it.
Yes, we do perform altruistic acts sometimes, particularly towards loved ones. Yet in a way this is part of the same tendency: We're seeking to maximize the success of "our" family, "our" tribe, etc.
Capitalism has some serious defects, but it has one great virtue: It takes advantage of this inherent tendency of us human beings to seek personal advantage.
As the economist Adam Smith pointed out in The Wealth of Nations, as each of us goes about our business trying to maximize our own well-being or that of our family or tribe, we contribute to an "invisible hand" that tends to maximize the economic well-being of society in general.
Consider your local supermarket. Every day one-third of the food disappears off the shelves as people buy food. And magically—overnight—the shelves fill up again.
This is not the result of some central planning bureau in the government. Rather, a vast self-organizing network of growers, companies, truckers, grocery employees, etc.—all seeking to maximize their own well-being—causes the shelves to fill up again by the next day.
In contrast, centrally-planned economies such as Cuba, the former Soviet Union, China before Deng's capitalist reforms and so on, tend to be relatively poor societies which are chronically short of various needed items of life. This is primarily so because a perverse incentive has been created for everyone to do as little work as possible.
In today's Cuba, for instance, it is often difficult to obtain something as simple as soap. In the former Soviet Union it was often difficult to obtain shoes of the right size as central bureaucrats misjudged the sizes that were needed. Housewives desired washing machines but couldn't get them. Waiting in line for hours was often required just for something as elemental as buying bread.
But even worse, enforcing the dictats of the centralized planners apparently is not possible without some form of authoritarian political structure. History shows that every communist country also became a totalitarian state. Much suffering and "evil", both economic and polical, occurred.
In essence, the miracle of free-market capitalism is that it takes advantage of the nature of human nature. In doing so, an enormous efficiency is created. For instance, if we're a shoe manufacturer in a free-market economy we'd better make damn sure that we produce shoes in the right sizes and quantities—or we're going out of business.
Yet free-market capitalism has its own challenges. For example, though free-market capitalism creates more overall economic well-being than other systems—and usually creates a huge middle class in its middle period—yet over time an unrestrained capitalist society's wealth and production also tends to become more and more concentrated into monopolies and private fiefdoms.
Moreover, while the intense propaganda inherent in totalitarian societies can be soul-deadening, so can the excessive and mindless consumerism that unrestricted capitalism tends to promote.
To counteract the perverse tendencies of both systems, capitalism and communism, the best solutions seem to involve a compromise between the two. That is, the system is basically free-market, harnessing the immense power of human drive and ingenuity, but at the same time some socialist elements are brought in to take care of those functions where a public effort is needed, such as assisting the poor and disadvantaged members of society.
Many wonderful instances of such a basic compromise exist. Perhaps the best examples are the Scandinavian countries, which produce a high per capita standard of living from largely free markets and yet provide various equalizing systems and social safety nets at the same time. In fact, most "successful" countries in the world are some variation of this pattern of "socialized free markets".
This element of compromise between ideals tends to be quite important in minimizing "evil" and negativity in human affairs. Fervently insisting on one extreme or the other usually doesn't produce the best results.
(This is the end of Part 6. Go to Part 7.)
—jim sloman, 4.5.05
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