The first issue in a bi-monthly series: January 5th, 2018
Incentivism is a type of economic system whose philosophy or doctrine emphasizes the use of financial reward (Incentives) rather than punishment (Jail) to affect how individuals behave.
While in the same category as communism, capitalism or socialism, Incentivism is a vastly different belief system. Incentivism, is not known by that particular label, but variations of it are often utilized successfully in the private sector. However, the most powerful application would be toward Government and the Politicians who comprise the nation’s key decision makers.
Incentivism is more similar to Capitalism than to the other forms of governing. Both embrace the magic of the free market system to match buyers and sellers. Detractors of Capitalism point to the societal “costs” created by the unlimited freedom to pursue gain. Problems arise whenever anyone must choose between money (or profits) and ethics (or doing the right thing).
At the very core of human nature is the tendency to pursue one’s own financial self-interest, even if it comes at the expenses of others’ well-being. Critics view this trait as either a form of mental illness or character flaw (Greed). Incentivists perceive Greed as neither good nor bad. It just exists. Incentivism harnesses normal human Greed to incentivize behavior by adjusting an individual’s reward system ($) to properly motivate socially desired outcomes.
An owner of a manufacturing plant is constantly choosing between profits and cost to society. Pollution. for example, imposes a substantial detriment to society (an Externality) but is a direct trade off with the factory’s bottom line. Capitalism’s many critics point out, that in this situation, the company, motivated by maximizing its profits, would never voluntarily either clean up the pollution it caused nor invest the capital required to make its plants green. Therefore, advocates of government intervention, believe that this “flaw” can only be mitigated via tight regulation and backed-up with fines, penalties or even jail for non-compliance.
What if public policy were turned upside down, whereas instead of using punishment to deter violators of social consciousness, a reward system for complying were used instead?
Incentivism is most commonly deployed in the private sector in cases where employers use compensation plans to properly align the goals of the organization with the specific achievements for which an employee is paid. The most effective way is employee ownership, either through stock options or an Employee Stock Ownership Plan (an ESOP). But more commonly used incentives would be commissions or any other performance-based compensation.
The most dramatic impact of Incentivism would be its application to Politicians by aligning their reward system to be consistent with outcomes that are in society’s interest. While most Politicians claim to be altruistically performing a public service, they often choose their own self-interest over what’s best for society.
Politicians, especially those serving in Congress or the President, are incentivized primarily to get re-elected, raise money for their campaigns and monetize their influence through book deals, speaking fees and other disguised forms of compensation. Bureaucrats, or career public “servants” are incentivized to grow their own bloated fiefdoms by adding staff or other ways that are usually contrary to the public interest.
Incentivism works. Politicians are motivated almost entirely by re-election, thus it should come as no surprise that they have excelled at it. Despite approval ratings that have consistently hovered at 20% or below, the re-election rates are staggering.
Job performance is not even a factor in how a Politician is rewarded. In fact, the lack of criteria required to run for office is startling. Congressmen, for example, needn’t have any work experience nor any education. In fact, no requirement that they even show up for work exists. It is virtually unheard of for a sitting Congressman to be fired.
What if Politicians’ reward system was adjusted in a way that incentivized them to enact policies that were in society’s interest? What if they were rewarded for policies that succeeded and penalized for enacted policies that turned out to be detrimental?
Which policies or objectives are in society’s best interest are often very subjective, thus provoking partisan disagreement. Nonetheless, there is a substantial consensus as to many economic objectives such as a balanced budget, low unemployment and controlling wasteful government spending.
But the desired goals are never achieved, despite the lip service and campaign promises. The reason that Politicians fail to meet these objectives is that there is neither much of a financial benefit for success nor any penalty for failure. For these reasons and more, applying the proper incentives to Politicians could eliminate their own conflict between re-election efforts and promoting legislation which benefits the entire country. It’s really that simple.
More to come as “An Introduction to Incentivism” continues with the publication of the next issue on or about January 18th, 2018.
If you’d LIKE to know more about Incentivism, join our mailing list by providing your contact information to Markonomics101@gmail.com.
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January 4th, 2018
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About the Author
Marko Budgyk is a former hedge fund manager and entrepreneur who now writes about politics, economic events, finance and other miscellaneous matters He has an MBA in finance from the University of Chicago and has a BA in economics from Pomona College. He has been a guest expert on financial channels and quoted extensively in major business papers and magazines. He has returned to his first love which is writing. He can be reached via email at Markonomics101@gmail.com. Markonomics101 has a Facebook page at https://www.facebook.com/Markonomics101/ and its website at www.Markonomics101.com.