Incentive

I don’t think that the solution is to treat everyone exactly alike, because that eliminates incentives.

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I live in Mexico, in an expat community part of San Miguel de Allende.  We have a lot of meeting groups.  One of my favorites is our philosophy club. There we have smart people who understand Mexico, the  U.S., and the world.

This week we had a discussion about Karl Marx.  The best video we saw was “How Capitalism Is Killing Itself,” with Richard Wolff.  Prof. Wolff is a Marxian expert, and his major point was that capitalism seems to cycle towards self-destruction.  I think we are seeing that happen today, as the 1% take more and more of the benefits out of the system.  Wolff’s point is that capitalism relies on jobs for workers, so that workers can buy the goods produced.  Right now, workers are getting less and less, and the production jobs are going to developing countries and into AI and robotics.  So the production cycle doesn’t really work because the workers don’t get enough as a group to buy the goods

Ultimately, to preserve capitalism as a system, someone (the government, doubtless) has to suck some of the profits away from the wealthy and use it to support the workers, whether employed or not.  This might be through a minimum living income or through organizations that provide food, clothing, shelter, healthcare, and education to those who cannot afford it.  However, it’s not a complex idea.  If a product can sell reasonably for $100 and costs (including labor and materials) $75 to produce and sell, then the capitalists are probably taking too much by cinching $25 profit.  If they take $10 profit, then the other $15 can go to supporting the workers, employed or not.

In a socialist society, the $25 profit just goes to the government that supports the society including the workers, so all the product value either goes to pay for the product or pay for the society, including the new capital needed to produce more of the same product.

In our philosophy group discussion, one of the participants (George) had a lot of experience living in Russia while it was a socialist state.  George thinks that the USSR collapsed because the soviet system (like the Chinese communist system) didn’t work as it didn’t provide enough incentive to the people.  Therefore, productivity declined. This is true as far as economics are concerned in any society.  The people need to have incentive to produce goods and services for the benefit of the society and for themselves.

You can imagine an early society in which some people hunted and fished and others took care of the living space and provided other goods and services needed by the society.  If the hunters got good but the others didn’t taken care of social needs, eventually the hunters would go off on their own and find people who would do the needed jobs.  Similarly, if the people taking care of the living quarters weren’t provided with food by the hunters, they would go off and find hunters who could do the needed jobs.

In a sense, George is saying that is what happened in the USSR.  The people had to provide the food, goods, and services.  But if they didn’t have incentive to do so, then there wouldn’t be enough to go around,, and the society would collapse.  So incentive to produce is one of the things that the society needs.

What every society needs, therefore, is an understanding of what provides incentive.  Profit is part of it. “You may be asking yourself, “what is a good profit margin?” A good margin will vary considerably by industry, but as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low. Again, these guidelines vary widely by industry and company size, and can be impacted by a variety of other factors.”

If the owner is getting 30%, that’s great for him, but he’s probably ripping off the consumers, the workers, or both.  With those kinds of profits, too, he is going to attract competition and so probably won’t keep those margins forever.

Suppose that the government taxes at a level so that the average is 10%.  Of course, if the business is really good, it might make 15 or even 20%, or if it makes no real effort, it might fall to 5%.  Yet if there are businesses getting 15 or 20%, and some only 5%, with the vast majority getting 10%, they there should be incentive.  People in the business know that they must keep on their toes to keep their 10%, and if they have ambition, they might struggle to get to the higher percentage.  So the society wants to allow up to 20% to keep everyone working hard.  The USSR may have made the error of paying everyone the same regardless of performance.  The U.S. is making the opposite mistake of allowing some people to rip off the employees, the consumers, or both.  Having strong anti-trust laws is one way of making sure that the customers aren’t getting the short end.

And the workers?  They should get bonuses if they do a really good job, and their pay should be low if they are going the opposite.  But it should be clear that the owner isn’t ripping money away from the workers.

What should be done with workers who are disabled or have low intelligence?  I would favor having them compete as well as they can within their groups.  In that way, they will have incentives, too, because they can succeed.

Over the past year or so, I’ve concluded that our society should study ways that they can celebrate people or give them prizes or awards.  We shouldn’t let some people run away with everything. Which is what we seem to do.  Rather, we should understand that everyone has his or her limits and be conscious of that.  I don’t think that the solution is to treat everyone exactly alike, because that eliminates incentives.  But at the same time, we shouldn’t force people in wheelchairs to compete against star athletes.  In other words, everyone should have an honest chance at winning something.

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