How Bitcoin’s Sound Incentives Drive A Sound World
Clearing one’s mind and gazing into the machinery of the economic world, one is left with little besides absolute awe.
Humanity’s inventions and their subsequent compounding throughout the years have manufactured a world of great abundance – one which would be close to unrecognizable just five generations ago.
Airplanes physically connecting every point on earth, the internet digitally connecting every person at the speed of light for free, supply abundance in western civilizations, massive complex infrastructures found in manufacturing, supply chains, cities, etc. The result of countless human generations dedicating their entire lifetime in the pursuit of productive aims.
Despite all of the problems that are so apparent to us today, we’ve truly created something great.
Incentives
The delicate balance that led to this creation is that the whole of the world’s modernity has been created through correctly-aligned incentives.
Humans dedicate their entire lifetime in a productive manner, but their end-goal is not to chase productivity “just because.” Rather, they’re chasing money and everything else that comes with it – supplies, goods, status, emotional safety, optionality, freedom.
What Is Money?
Money can be described in many ways and can be unintuitive if one has never spent the time to internalize its meaning. Simply put, money is the stored productivity of one person.
You work all day and provide value, services or goods to others. You, yourself, also want value, services and goods in exchange. In the very distant past, people would directly barter with one another to receive what they wanted. It didn’t take humanity long to realize that more efficient ways existed and thus money as a medium of exchange was born.
Instead of directly bartering your service for another person’s goods, you get rewarded an intermediate, not-yet-consumed state of such value/services/goods in the form of money.
That being the case, money can be looked at as stored productivity: your labor essentially gets calcified in the form of money.
In another way of looking at it, money is human time and energy converted into a token.
Any amount of money, therefore, is an indirect extremely-fungible debit of other people’s time and energy.
Aligned Incentives And Technology
Given that money is a claim on other people’s services/goods, each human pursues money in order to get more goods, or more services, to further his own life’s desires. Akin to having a carrot on a stick in front of them, humans are generally greatly motivated by their desires.
The critical invariant here is that in order to obtain money, one must trade in their own services/goods for it. In that way, a positive flywheel spins up where one has to provide value to the world in order to receive value back.
But there is another crucial component in this mix: greediness. Humans are inherently greedy animals – they always want more than they have.
With this information, it becomes apparent why the consumer economy is successfully structured to always drive us to crave/want more things: it taps into our core human nature.
While the consumer economy is generally perceived negatively, one could argue that this propels society further into making every human more productive. You’re indirectly incentivizing humans to do more (to produce) in order to consume more (to satisfy internal desires).
The cherry on top of all of this is another core human trait: laziness.
When you pair greediness with laziness, you understand why humans always have this inherent desire to get more than what they’ve bargained for: to receive a greater payoff compared to the energy expended.
In a well-aligned system, this is a massive benefit because it incentivizes people to think of more efficient ways of achieving the same thing. When society figures out a way to achieve things with less energy or resources, greater abundance eventually trickles in.
In fact, that is what technology is. Technology is the ability to do more with less through the application of new, innovative methods.
A simple but perfect concoction resulting in a win-win scenario would be to incentivize humans to benefit themselves by receiving more for less through the development of efficient technology, indirectly moving humanity forward in the process.
This simple first-principles way of looking at the world describes how humanity has kept advancing throughout the ages, despite having many periods where one could say we’ve reached a comfortable enough state to have retired from this endless pursuit.
Our desires and greed have kept us going.
Risks
Of course, we’ve seen first hand that this doesn’t work out just perfectly. Humanity’s inherent greediness and laziness is not innately beneficial to society. The carefully-balanced system we laid out is always at the threat of degradation due to another fallible human trait – corruption.
Corruption can be defined as the abuse of entrusted public power for private gain, typically at the expense of others.
Corruption Of Money
When one begins to artificially alter the properties of money, he inevitably messes with the productivity formula that pushes humanity forward.
Through the constant dilution of the purchasing power of money through inflation and the forceful suppression of interest rates into negative territory, central powers (governments) around the world have artificially made money much cheaper.
If money is stored human labor, then it is fair to say that inflation indirectly robs people of their stored energy. In that way of looking at it, governments are leeching institutions (also defined as a parasite), siphoning off human energy out of the productive people that are driving the world forward, in order to further their own means. To play devil’s advocate, a government’s own means should be the good of the public, but we will touch on that later.
In the same way, the artificially-negative interest rates are unintuitively putting a negative price on future labor.
Typically, because the future is always uncertain, any present-day human productivity loaned in exchange for uncertain future productivity should yield a greater return, as the money (current human productivity) is essentially being risked.
There is a fundamental expectation that the future productivity will yield a greater payoff – otherwise nobody would trade in their present productivity for it. At the same time, there is the risk that the uncertain future productivity is less than expected (or zero) and that the current productivity would be, in effect, wasted. Both of these things warrant a return on the money that is loaned – a yield.
By driving interest rates down, governments have forcefully inverted this dynamic and unintuitively made it so that present human productivity is somehow worth more than future productivity. As is the case in Germany (among other countries) putting your money in a bank costs you a negative 0.5% interest rate. Absent of any yield, or present of negative yield, present money is worth more than future money.
Such government interference has made it so that stored human energy is in a constant state of degradation due to two forces – inflation and negative interest rates.
Of course, such manipulation is only feasible with the kinds of money that are entirely controlled by humans, as is the case with fiat currency. One could make a very strong point arguing that this could not happen in a free market, with a free currency which isn’t controlled, yet which might face competition from other free-market forms of currency.
Redistribution And Inefficient Allocation
Taxation is the forceful redistribution of capital in the economy. Practically speaking, taxes end up being a trade-off for being integrated into the society you are in.
When the government takes taxes from its people with the threat of prison for noncompliance, it essentially steals from them just like a robber who mugs you in the street.
This is widely accepted and not thought of as adversarial due to two factors:
It has always been this way; i.e, it is the commonly accepted status quo.There is an expectation that the money is put to good use, ultimately leading to a more stable and prosperous society which benefits us personally in the long term. Inversely, there is the belief that lower taxation would result in a worse society.
The problem with this is that if you believe that the public sector is the most inefficient allocator of capital, you also believe that the money you’re giving away for taxes are being spent very inefficiently.
It doesn’t make sense for any actor to purposefully allocate capital inefficiently. It is the broken incentives of an unchallenged monopoly that allow this sloppiness to flourish.
Governments around the world are legacy institutions that are simultaneously growing in size and crumbling from the inside due to the inefficient and structurally broken ways of organizing themselves.
Because of the government’s privileged position of a monopoly on tax collection, they get a fixed (increasing) amount of revenue without having to ever compete as an organization to be better, faster or stronger than others. They are the ultimate middleman – a pervasive rent-seeker entrenched in our society. As incentives drive the world, such an organization has little reason to innovate or improve oneself whatsoever, precisely because there are no repercussions for not doing so.
In a similar way, their incentives are also skewed towards high time preference – there is a necessity to do good in short-term decisions, regardless of their long-term consequences.
The result is an endless passing on of problems into a future administration’s court instead of strategically dealing with them as early as possible. The incentive here is the politician’s imminent re-election bid in the short-term (a few years) instead of the alternative constructive long-term bricklaying process
These unfortunate incentives lead to inadequate results. This constitutes the bear case for communism, socialism and most other middle-of-the-road type of politics that give greater power to the government.
It makes little sense to give greater power to an institution that is not destined to do its job prosperously.
Revenue And Scope Creep
Once any organization gets access to new cash flow, it is very hard to give it up. Modern governments are only growing in spending (at a faster rate, even), not decreasing.
“Nothing is so permanent as a temporary government program.” – Milton Friedman
A simple example that is widely accepted today? Income taxes were initially introduced to fund wars, and were meant as temporary measures.
Posterity is seemingly undesirable: after all, what organization would purposefully choose to shrink in power, especially when their growth is unchallenged? Further, it is hardly achievable – every government is growing both in size and relative indebtedness (debt to Gross Domestic Product).
The result of this is that the government is growing in power and governing ability, as it starts to try and control (govern) more aspects of daily lives. This leads to an ever-greater scope creep of centralized institutions and therefore an increased inefficiency in society as a greater part is bureaucratized and managed by said monolith.
If communism is a spectrum, then one could indisputably say that we’vee moved further along that spectrum towards the communism end than where we were sitting a couple of decades ago.
Bitcoin
One reason that governments are able to get away with so much is through their monopoly on money.
Through its fixed supply of 21 million, its immutable monetary policy and its indestructible decentralized nature, Bitcoin promises to be the solution that separates money from state by becoming the dominant form of money in the world.
A society powered by incorruptible sound money is a society with one huge gap in the incentive system plugged for good. Through that, the world should end up with a better equilibrium of incentive structures and therefore better results.
The biggest promise of Bitcoin is in fact not the apparent qualities it offers as a monetary good but all the numerous downstream effects that follow after adoption of an incorruptible sound money system.
The second order effects of such a profound change are inherently hard to accurately predict, but it is safe to say that they should trend toward greater prosperity.
Summary
Through the inefficient redistribution, manipulation and dilution of the money supply, the government inadvertently pushes humanity backwards by degrading the well-working incentive system of the world’s free market.
The incentives are aligned against this negative intervention mechanism ever slowing down, let alone stopping. Humans never voluntarily give away power, and because the monopoly of governing functions is unlikely to ever get challenged, the governing structure is just as unlikely to ever meaningfully increase in efficiency.
This stagnation results in a negative network effect, where each subsequent generation pushes itself further into ruin by feeding the negative non-working structures. One would rightfully theorize that such a mechanism is bound to blow up and reorganize itself at some point – practice has indeed shown that this is the case.
Fortunately, we are incredibly lucky to live in a time where we have a life raft available to us. Bitcoin promises to be the light at the end of this grim tunnel – the solution that offers a stable foundation for society to rebuild its institutions upon and reap the greater long-term dividends that come from a fundamentally sounder system.
That starts with a Bitcoin standard.
This is a guest post by Stanislav Kozlovski. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine
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