[Retrospective note: this post is more of a case study of the modern American economy, and not as general as I would like. To see an updated version of this discussion, click here.]
In order for an economy to run, work must be done. Producing and distributing goods and services takes labor and organization. So naturally, the question arises, what motivates people to do these things?
The most common motivation for individuals throughout history, past and present, is the threat of poverty and starvation. You work, you get paid, you pay your bills. But given the opportunity, people will also work for other reasons. Some like the promise of wealth and moving up in the hierarchies of company and society. Others work because it provides joy and purpose to their lives. Still others have a strong sense of duty, and cannot rest unless they have given their fair share of effort toward supporting society. Others see problems in society, and their compassion moves them to help.
People also generally like to do what is right, especially if it is easy. For instance, if recycling means taking a load of trash in your car to a facility twenty miles away, not very many people will recycle. However, if there are conveniently-placed blue bins all over the place that somebody else takes care of, almost everybody will recycle.
The economy does not primarily run on individual people, though. The real power behind an economy is in its businesses. Yes, businesses are run by people, but the businesses themselves can be looked at as if they have their own motivations. It is an emergent phenomenon. If we want to understand the driving force of an economy, it is businesses’ motivations we have to look at.
Like people, businesses have a variety of motivating forces. Some businesses want to provide high-quality services. Some aim to solve problems for humanity. But by far, the most significant driver for businesses is profit. Money allows businesses to grow and become more powerful, so the biggest, most powerful, most economically significant companies are the ones who orient their capacities toward making more money.
Naturally, profit-oriented companies want to increase their prices and lower their wages as much as they can, while still having people buy from and work for them. This is not aligned with the purpose of the economy, which is to meet people’s needs and provide an environment in which they can pursue meaningful lives. The most commonly championed counter-force to these self-centered practices is competition. In a competitive market, more workers apply for the companies with the highest-paying wages, and more customers buy from the companies with the lowest prices.
However, because competition makes wages higher and prices lower, companies don’t like it. So they try to get around the competition, by either putting the other companies out of business, or buying them out. Thus, competitive markets are unstable, because if one company pulls ahead a little bit, they have an advantage that grows at an accelerating rate. This leads to monopolies, companies that control a product’s entire market.
Companies are also prone to causing collateral damage. Pollution, for instance, as well as other kinds. If it is more cost-effective to dump your chemicals in the river than to properly dispose of them, you’re going to dump them in the river. Of course, it is best for all companies together if they don’t pollute, but for each company individually, it is more advantageous to pollute no matter what other companies do. This an example of the Prisoner’s Dilemma.
It is also a senescent behavior. Senescence is a term from biology, which refers to the deteriorative processes of aging. In economics, senescent behaviors are actions that give short term gains, but have negative effects that build up in the long run. The quintessential example of a senescent behavior in the economy today is carbon dioxide emissions, which build up slowly in the atmosphere over time, only causing problems after many years.
Luckily, there are ways to mitigate or guide the profit incentive so that it serves human interests. If a large number of people come together in a social movement and refuse to buy a certain company’s product, the company will lose out on profit unless they change their behavior. Workers can band together in unions to demand more reasonable wages and benefits. And the government can add incentives, like minimum wages, taxes, subsidies, regulations, and plenty of others.
Of course, companies will fight against anything that would reduce their profits. Not all companies, of course, but a significant fraction. They will try to use the government to reduce taxes, limit unions, repeal important regulations, and otherwise turn the tables in their favor.
It is important to note, however, that things are not black and white. It is not simply the good people versus the bad companies. Many companies do a lot of good for humanity, and we want the Elon Musks of the world to be free to do their thing. The key is smart legislation. It is not enough to simply be “for people.” When coming up with policies, it is important to make decisions based on the numbers and the science, so that we know it will help, and not accidentally make things worse.
Finally, we must remember that companies love to replace workers with machines, because a machine costs a whole lot less than a human. As robotics and artificial intelligence continue to get better, the space of economically relevant human tasks continues to shrink. This is both good and bad. Good, because companies can offer their goods and services for even cheaper. Bad, because people are having a harder and harder time finding work. We will talk more about this in discussions to come.
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