Change Incentive, Change Behavior. Change Behavior, Change Trajectory
Following the Munger addage, “Show me the incentive and I’ll show you the behavior,” I’ve become a fan of allowing technology to exert its natural deflationary effect. If allowed, it would mean that the purchasing power of a dollar next year would be greater than it is today.
Think about that. If you knew that you could purchase more with your current salary next year than you can this year, you’d be less inclined to spend this year in order to get more stuff per dollar next year. But next year you’d be inclined to wait another year. And so on. As a result, we’d trend toward consuming less and saving more, which would increase personal wealth and decrease environmental impact. One side effect is that we could choose to work less to have the same standard of living; the 4-hour work week would become a potential reality.
Such a scenario is not just imaginable but possible because tech advancements naturally reduce the need for labor while simultaneously reducing the price of goods, thus increasing the purchasing power of a dollar. Because the long-term cost of goods would trend toward zero, abundance would spread, and material wealth would be more evenly distributed.
A deflationary economic regime would also naturally incentivize reducing, reusing, and recycling because it would no longer make sense to just toss perfectly functional things out for the latest model. Consider: in our current inflationary regime, if your refrigerator breaks down today, you will buy a replacement at a lower real price than it would cost next year. But what if deflation were the trajectory? Then the price for a new refrigerator would be higher today than next year, if only you could put off the purchase a year. Since you can’t, you’d learn to demand the best-built, longest-lasting refrigerator possible to justify the premium you have to pay today, and so that you will not have to buy one again for a very long time. That incentive would reverse consumer culture, thus our current accelerating rates of pollution and resource depletion.
Money would be more efficiently deployed, too: If I came to you with a business proposal you’d be hesitant to lend me money because it would be expensive for you to give me, today, money that’s going to grow in value just by sitting in your bank account (or under your mattress – because even without savings account interest rates your money’s value would grow). So you’d have a more rigorous vetting process to make sure that the time value I offer is worth the risk and inconvenience. It would have to be a strong business model, with a strong return to offset what you’d otherwise get by doing nothing. As a result, a lot of shaky business ideas would never get off the ground, and zombie corporations would cease to exist because without a strong bottom line they’d very quickly not be able to pay back more value than they borrowed, plus interest. Money that today is tied up in stagnant zombie corporations would be redeployed in pursuit of real returns.
On the flip side, innovation might slow because one value of cheap, inflationary money is that it’s cheap to experiment with all manner of crazy schemes, some few of which produce valuable new technology or solutions. Some segment of those successful wild ideas would not be tried if money were more valuable tomorrow than today because there’d be far less incentive to “swing for the fences” on a purely speculative investment.
As a result of slowed experimentation and a reduced consumer goods market, societal change would likely slow down – which might be a good thing since humans don’t adapt to rapid changes very easily, or well. Mental health might improve. Social coherence would certainly benefit. Our behavioral emphasis would shift, too: from consuming things artificially invested with status and ascribed meaning to consuming and producing experiences that are low-cost to provide and that offer high-touch emotional or psychological payoffs. Life would trend toward the human scale.
We don’t pursue a tech-driven deflationary regime because of the two things are required for it to work. One is hard money and, as we know, governments don’t like hard money because they want to print as much fiat currency as they need to build power, buy votes, and threaten others. But additionally, politicians don’t like hard money because “printer go brrr” allows them to blunt the deflationary pressure of exponentially powerful tech-fueled efficiency. The problem they have is that the amount of fiat it takes to blunt deflation is rising in step with the exponentially increasing efficiency. Blunting now takes upwards of a trillion dollars annually. (This is likely why we don’t see as much inflationary pressure as many of us have expected from “printer go brrr.” A large chunk of that new money is just filling in the cost-reduction hole that tech improvements keeps digging deeper.) Governments are engaged in a desperate effort to prevent the prices of goods from actually going down and the corollary purchasing power of the dollar from going up.
But why? Partly because the transition would be highly disruptive. But more importantly to them, in a deflationary economy politicians lose their ability to control the destiny, hence voting behavior, of hundreds of millions of people. The effort to prevent cheaper goods and a stronger currency reflects the second requirement: that governments stop buying votes, influence, and intrigue.
In a naturally deflationary economy, with its necessary hard money support, government adventurism – domestic or international – could not be funded by “printer go brrr,” but would require securing some of the hard money that citizens would naturally want to horde for their own future. Taxation, especially increases, would be resisted because any money surrendered today would grow in value to the government tomorrow, creating a de-facto higher-than-stated and steadily increasing effective tax rate. Everyone would always feel that, whatever small amount they must pay, their actual rate is higher next month than this month, and the same nominal bill next year is actually a functionally higher rate. So the pressure for annually smaller tax bills would be strong.
Similarly, government bonds would be very expensive for government, because they’d be paying back with nominal dollars have become worth more than what they’d initially borrowed. Since government doesn’t actually produce anything, without a printer they could only borrow what they could pay back from next year’s taxes and fees. With taxes and fees under pressure to get smaller in nominal dollars, only the most essential services could be funded by actual tax receipts, and those services would have to be supported by a large majority of taxpayers. Inevitably, government would trend toward small and inoffensive.
In a hard money and deflationary regime there would be no bottomless treasure chest with which to enrich oneself, expand government’s bureaucracy and intrusion into citizens’ personal affairs, or threaten shock-and-awe across the globe. So government service would likely become attractive only to those who sought truly to serve; it would be a discouraging pursuit for those driven by self-aggrandizement and the accumulation of power. Plus, as the work week declined, the ideal of everyday citizens taking a turn at public service would become viable. Imagine our whole country being run by part time legislative branches, as was the case in several states within living memory (when money was harder). It could happen again, devolving power back down to the local level.
All it takes is the right incentive structure. Hard money and deregulation of natural market forces would provide that incentive regime. Of course, the transition would be hard and painful – but no harder and no more painful (perhaps less) than the inevitable consequence of the path we’re now on. However, the crisis at the end of the path we’re currently on is very strong centralized government and enforced material poverty across the populace, without guaranteeing an improvement of the environment. But the world on the other side of a shift to hard money and liberated market forces would be far more humane for people and much better for the environment.
We could achieve a better economy, greater material wealth, a more equal distribution of goods, advances in individual liberty, and a healthier environment simply by deploying human animal spirits within the right incentive structure. The problem is that we could – and therefore would – do it without handing sociopaths more coercive power and new opportunities for graft and grifting. In fact, such a change would incentivize defanging and declawing the political class, and that’s the rub.
(Thanks to the writings and presentations of Jeff Booth and Andreas Antonopolous for helping me wrap my head around the distinctive virtue of production’s deflationary trajectory – it was a hard concept for me to grasp, such is the power of entrenched ideas.)
VT I have to say that is by far the most thoughtful post I have ever read here.
I will have to reread it again and cipher on it for awhile. Very well done mate.
Perhaps you might post some links to specific references from Jeff Booth and Andreas Antonopolous.
MM: If you haven’t, put Booth’s “The Price of Tomorrow” on your reading list. He articulates the deflationary virtue in the power of tech to move goods toward zero cost. I have to say, I find the idea of free goods hard to believe in, so I satisfy myself with “very cheap.” (He says a lot more, of course.)
I read him awhile ago, so I’ve probably started to amalgamate his unique ideas with related things I’ve gleaned here and there from the many podcasts I watch or listen to around the Bitcoin-hard money-macro economics themes. Linking concepts from here and there is how my mind works; finding patterns.
Anton is just so good at clarifying issues. He drops so many little gems in his talks and interviews. Just, wow. I don’t think I can track down his specific contributions to my thinking without replaying a lot of interviews. Precious little time for that; I’m still buttoning up the homestead for winter. But if I remember a particular quip or stumble across things that serve the purpose as I’m listening in the wee hours of the morning I’ll share them.