The case for Merit economy

raising the roof

This article was first published at

What do we know about Warren Buffett? If a person knows that name, he or she will likely also know, that it belongs to one of the wealthiest persons on Earth. Most people would also assume, that Mr. Buffett leads a lavish lifestyle, one can only dream of. Mr. Buffett however pays himself salary comparable to that of a good Silicon valley computer programmer and lives in Omaha, in an upper-middle class house he bought in the 1950s. The co-founder of Duty Free Shoppers Chuck Feeney seems to share the same quirky perspective on wealth as Warren Buffett. He is known to fly coach, shop at retail stores and "secretly" giving the rest of his wealth away, through Atlantic Philanthropies - a foundation he created. Examples of frugal billionaires like these can be dismissed as out of the norm behavior of a handful of people, if it wasn't for the existence of the Giving Pledge - an initiative established by Gill Gates, asking the wealthy to give at least half of their wealth to charity. By the end of 2016 139 wealthy individuals and families signed the pledge, including five of the top ten richest. At first sight, this doesn't make sense. The same people who feed an army of financial advisors helping them to acquire and retain as much wealth as possible, want to (often at the same time) give it away and some of them even ignore the consumption opportunities their fortune provides. Why to chase wealth if not for its purchasing power? To find an answer to this question, let's first take a look at the motives, that drive individuals to maximize incomes.

It is one of the cornerstones of the neoclassical economic model (the "currently in" description of the economic reality), that utility a person gains from consumption of a good or service is decreasing with the amount consumed. Classical example illustrating the notion is feeding a starving person - sooner or later, consumption leads to satiation. Money however is a type of good, whose acquisition can not be described by this rule, if certain conditions are true. In particular, behavioral economists found, that income from own labor does not diminish desire to acquire more. In fact the opposite is the case - the higher the monetary reward, the greater the motivation to increase work effort. A notable part of these finding is, that people are driven not by the purchasing power (resp. "economic" value) income provides, but by what it represents - a measure (signal) of their competence. Considering that according to the Self-determination theory one's well-being depends on satisfaction of the basic needs of competence, autonomy and relatedness, desire to maximize the income amount is not surprising. Unfortunately, the competence signal is expressed by the amount of income, resulting in a situation, when maximizing the signal necessarily leads also to concentration of economic value, which tends to "morph" into emergence of economic inequality.

The drive to satisfy the fundamental psychological needs reveals also origin of the puzzling behavior of the rich. The indifference of Warren Buffett toward the economic value of his fortune can be explained, if we assume that it is not economic value, but the signaling aspect of income that drives his work effort. The act of giving wealth away through charitable donations should too be seen as manifestation of a desire to satisfy one's basic psychological needs, because sharing is essential for strengthening relationship between people and thus fulfilling another of the basic needs - the need for relatedness. Lastly, the economic value of wealth is often used to buy goods and services that help people raise their position in social hierarchy - yet another manifestation of how economic value ends up being used for psychological signaling.

The take-away conclusion from these observations is, that by and large it is not economic value, but the self-signaling function of income and wealth that is the most important driver of work effort. Accumulation of wealth is a side effect, attributable to a particular work reward mechanism in which the two components of reward are fused together. The conclusion leads to an interesting question: would people be willing to work also for reward lacking the economic value, if the signaling component was present? Can examples of such a mechanism be found "in the wild"?

The answer is affirmative and the evidence is significant. More than a billion volunteers generate every year economic value that would place hypothetical Volunteerland among the top 10 countries by GDP. The wikipedia editors, Linux operating system programmers or volunteers maintaining hiking trails in Oregon, not unlike the workers of the "normal" economy, are too motivated by the signaling component of reward. Yet, volunteers - by definition - work for no economic value in return. The psychological roots of work effort motivation, as well as the very existence of the volunteer economy should therefore make for a believable argument that it is not necessary for a well-functioning system to use reward mechanism, where the two components are inextricably linked.

How could an economic system implementing these ideas look like? First, the signaling component of reward must be uncoupled from anything directly economically valuable. Examples of such constructs can be found in the internet domain: reputation scores, badges or "likes" are all numeric representations of some non-trade-able personal quality, presented in a psychologically effective form. In our hypothetical "merit" economy, the signaling reward is also a number, with its value equal to the magnitude of income a worker would earn in the capitalist system. With the behaviorally salient signaling component separated from the economic value, the later can be set to be distributed virtually equally - the way most people would prefer - without compromising worker motivation. Combined with other rules described on this portal, an economic system emerges, identical to capitalism in the way the self-signaling component is determined, but one that (among other benefits) virtually eliminates the problem of economic inequality.

How does our Merit economy compare to other proposals attempting to solve the related problems of growing income inequality and the by-technological-advances-caused threat of massive job losses? The main obstacle, standing in the way of their advancement is lack of concern for the behavioral aspects of income and wealth. For example, the usual argument against the most-often cited tool aimed to fix economic inequality - taxation - is its negative effect on worker motivation to innovate, resulting in constrained economic growth. As argued above however, taxation lowers the self-signaling component of income, explaining unpopularity of this approach. Opposition to institution of the Unconditional Basic Income can also be understood from the signaling-violation perspective. The main problem of the proposal is funding, which usually calls for some form of (merit-reducing) taxation, but a fair amount of resistance likely originates in a different manifestation of the same problem. Research shows that handing money to everybody might be perceived by people as disruption of their place in social hierarchy. The effect can be seen in dissatisfaction of some of the least-paid employees of Walmart after they learned, that management decided to raise the minimum wage throughout the company. Suddenly the employees who previously earned a bit more than the least-paid ones were earning the same amount, which they interpreted as demotion.

It should be apparent, that taking into account the dual function of income and wealth can improve chances for adoption of any redistribution proposal, attempting to address shortcomings of the capitalist economic model. However, a better option to waiting for the governments for delivery of a fix for the existing system might be to build a new one. The core of Merit economy is distributed ledger - the same technology underlying a slew of cryptocurrencies (like bitcoin), developed over the past decade. Considering its "battle-tested" history, the same architecture if not actual software code should be ready also for the system described here. The new system can be built by a small group of dedicated individuals and started the same way money once appeared on the economic scene - by being adopted on the basis of its merit, by the people themselves.