...with a utility function that has both a (standard) absolute and a relative consumption components and is — as is standardly assumed — concave in absolute consumption, the marginal utility from additional consumption through the absolute term approaches zero as income rises. The relative component hence becomes increasingly important as income rises. Status seeking, on this view, becomes increasingly important with economic growth... ”
Status concerns have long been recognized by economists as a major factor driving economic growth. For example, Adam Smith in The Theory of Moral Sentiments emphasized that pursuit of wealth is a response more to want of status, than to pressures of existential needs, or desire to improve one's living conditions. The behavior is also generally seen as beneficial, as it leads to economic growth, which is instrumental for raising the standard of living. On the other hand, economists increasingly point out that consumption-based status seeking leads to positional arms races that waste resources, have suboptimal effects on individual well-being and contribute to environmental degradation.
The point I want to focus on in this post is superiority of the psychological, over "material" motives, for innovation and willingness to work. The pattern is discernible not only in the behavior of the mainstream economy workers who manifest the preference indirectly through status-oriented consumption, but also in the more direct psychological needs-oriented type of motivation, typical for the almost billion volunteers globally. I believe this idea has implications that so far have not been adequately considered in economic theory or practice; in particular, that an opportunity exists for efficiency improvement, by exploiting salience of the psychological motivation in a novel type of work reward.
The distinction between psychological and material concerns implies that a reward for any work we do, has in general two functions: it can be a source of exchange value, and it can also provide a psychological needs-supporting signal. The monetary reward in the capitalist market economy (CME) for example, has both of these functions; it can be exchanged for goods or services, and its amount is also a strong signal of competence. In other economic arrangements, either of the two functions might be weak, or missing. For example, the reward hobbyists, or volunteers receive for their effort is lacking the exchange value component - only the psychological needs-addressing signal is present. In time-based community currencies or remunerative schemes known from socialist economies it is the other way around - differences in wages are not (or only weakly) reflective of the individual workers' abilities, making income ineffective as an economically motivating signal.
The dual function of reward perspective and salience of the signaling function allow for a novel approach to solving some old problems in economics. For example, the efficiency versus equity tradeoff problem can be seen as a consequence of the signaling function of reward - relating to efficiency - being firmly bound to the exchange value of reward, which relates to distributional outcomes. A grant of the desired and work motivating signaling reward, therefore necessarily provides also exchange value to the recipient, regardless of their preferences. The firm bond between the two functions in a single reward leads to income inequality, which in turn makes consumption-based status seeking possible. Separating the two functions into independent rewards and granting them in a welfare-maximizing way, could thus be a key to solving the efficiency vs. equity tradeoff and other problems.
How could a reward mechanism separating the two reward functions look like? The form and amount of the signaling reward can be derived by the following thought process: a market-determined price is an indicator of utility of the traded artifact and its creator's/seller's ability to address human needs. Ability to command high price is commonly associated with prestige and high status. The numeric value of price should then be effective as a motivating reward even if awarded to the creator/seller, stripped of the exchange value.
By establishing a motivationally effective signaling reward, the exchange value reward can be allocated in a way that stops or suppresses status-oriented consumption - that is, as equally as possible. A natural way to achieve the objective is to pay workers for effort, measured in units of labor time: the number of work hours per day is upper bounded, resulting in a virtual equality of income. Now we can formulate basic rules of a System that implements the dual reward mechanism:
1. the System rewards every hour of worker-reported and verified labor time with a fixed, monetary reward, regardless of the type of work performed. By paying in advance, the System now owns (the exchange value of) the produced good or service,
2. to earn the for-motivation-salient signaling reward, a worker attempts to sell their product in the market. If purchased, the buyer pays not the seller, but the System, which converts the payment into a non-pecuniary, non-transferable Score, numerically equal to the purchase price. The Score is assigned to the seller.
The rule #1 grants an economic reward for any provably performed work, without defining what types of activities qualify. The salience of the signaling reward for motivation implies, that the narrow concept of work of the CME can be dropped and a more broad one adapted:
3. Any type of socially acceptable activity is rewarded, regardless of its immediate market value. The social acceptability is determined by the work report-verifying users, with contested cases decided by voting.
Additional rules might be needed to make the System viable. In Rovas - a proof of concept implementation, these include transactional transparency and a freely exchangeable System Currency.
The same hourly rate for everybody, regardless of the market value of the goods or services produced, implies a virtual equality of income, making status seeking by consumption practically impossible. Externalities associated with competitive consumption, like environmental degradation, or reduced well-being are suppressed, or eliminated.
The System rules 1 and 3 translate into material security and increased autonomy -factors known to lead to increased work effort, more innovation and improvements in well-being.
The individual System Score is a multi-dimensional vector, with components corresponding to the domains of expertise. As such, it is a richer source of information than wealth-based status signal.
The virtual equality of incomes brings a host of secondary benefits in social, or political spheres.
Instituting the System
The key requirement, critical for the ability of the System to deliver on its promises, is the Score being more desirable than the consumption-based status signal. Valuing the Score drives workers to create products capable of attracting buyers, whose payments grow the economy. In an implementation of the System with own Currency, every sale also removes a purchase price worth of the Currency from circulation, stabilizing its value.
It is hard to imagine an implementation of a Score-like numeric indicator in the "pre-internet" era, one able to challenge the physical manifestations of status. The global network and technological advances that make computing resources increasingly accessible, however change the way humans interact with each other. The numeric indicators of reputation, popularity, competence and other measures of individual characteristics common on the internet are known to motivate economic activity. The rapidly evolving augmented and virtual reality technology will also (likely soon) allow presentation of status-indicating numeric scores in ways exceeding what conspicuous consumption can deliver even off-line.
The Score effectiveness however can be ultimately determined only by a real-world implementation. I have considered two approaches, but other possibilities likely exist:
One way is to position the System as a solution useful to volunteers, especially the types producing high value crowdsourced, or software products. Creators of these types of projects are facing chronic lack of resources, and a case can be made that the System can capture some of the more than one trillion USD (in 2011) of estimated economic value, they produce every year. The Rovas application was created to address this use case.
Another option is to launch the System by using financial incentives for bootstrapping the economic activity. Practically, an investor would use own funds denominated in national currency, to purchase the System Currency. The purchase would strengthen the Currency (exchange) value, attracting new workers into the System. It can be expected, they would tend to convert most of their earnings to national currency, weakening the Currency and causing slowdown - or even reversal of the inflow of workers. On the other hand, production of valuable goods and services should strengthen the Currency value. The outside investment would act in effect as a fiscal stimulus, albeit one increasing production directly by rewarding work, as opposed to doing so indirectly by increasing consumption. An experiment performed in a similar context suggests that an order of magnitude higher multiplier effects might be achievable by these types of investments. Presence of the System Currency and a free-floating currency exchange mechanism has additional benefit - it naturally directs economic value to the workers most economically disadvantaged in the national economy.
The System can be seen as a donation/aid mechanism with certain advantages over the common schemes. The funds are provided conditionally, as workers must report work to the System to get paid, but they can choose freely what to work on. The System thus retains the autonomy aspect of direct transfer schemes, while avoiding some of their (perceived or real) shortcomings - like "giving people money for nothing," as in UBI. The fact that funding in the System is indirect and workers have the freedom to choose the type of work they want to perform, should also result in a better allocation of the donated funds, when compared to schemes where the projects - or even the recipients - are chosen by the donor. The investor still maintains ability to "soft-incentivize" workers to work on specific projects, by rewarding them with the Currency gained from the investment.
- Heffetz, O., Frank, R.H., 2010. Preferences for Status: Evidence and Economic Implications, in: Handbook of Social Economics. Elsevier B.V., p. 37.
- Smith, A., 2006. The Theory of Moral Sentiments, 6th ed. Μετα Libri, São Paulo. Chapter II.1
- There is a growing body of literature on so called "relative concerns." Some references can be found in my paper https://papers.ssrn.com/abstract=3537408
- Sources can be again found in my paper referenced above. One example: DeVoe, S.E., Pfeffer, J., Lee, B.Y., 2013. When does money make money more important? Survey and experimental evidence. Industrial & Labor Relations Review 66, 1078–1096. https://doi.org/10.1177/001979391306600503
- Salamon, L.M., Sokolowski, S.W., Haddock, M., 2011. Measuring the Economic Value of Volunteer Work Globally - Concepts, Estimates, and a Roadmap to the Future (2011). Annals of Public and Cooperative Economics 82, 217–252. https://doi.org/10.1111/j.1467-8292.2011.00437.x
- Ruddick, W. (2011) ‘Eco-Pesa: An Evaluation of a Complementary Currency Programme in Kenya’s Informal Settlements’ International Journal of Community Currency Research 15 (A) 1-12, <www.ijccr.net> ISSN 1325-9547