Imagine you were made king for a day and had the power to decide how money is distributed in the economy. How would you do it?
Maybe you'd distribute all the money equitably: every man, woman and child gets the same share. What would that look like? Well, maybe everyone has the same amount but not everyone knows how to use their money equally. Some people are gonna save it, some will gamble it away, and some will offers people an option to handle their money for a fee (thus making billions in the process).
If you come back after a few years you're likely to see a level of inequity that's not too far from what we see in the economy today (or at least strongly trending in that direction). Don't believe me? Just look at the economy of Russia; within 35 years since the fall of communism their level of inequity (Gini Index) is about the same as that of the US.
At the other extreme you could be "hands off" and let the market do its thing. What would that look like?
You’d definitely get a lot more productivity than at the other extreme, but not without a cost. Now instead of equal resource distribution you get distribution based on a power law – a few people will have most of the planet’s resources while most people will have significantly less. The real problem though is that the market can’t fix the problem of negative externalities; so you have some people at the top who made incredible contributions to society, but others may be there simply because they figured out ways to offload a lot of costs onto society to get to the top.
But is this really the best solution we can come up with? Why should there be a tradeoff between productivity and fairness, or between self interest and the public interest? Well, there may be a better approach, which doesn’t involve merely moving up or down the scale of self-interest vs. public interest. Maybe we can optimize for both.
The mental model for this approach starts with zooming out – like, all the way out – and thinking how we got to where we are from the very humble beginnings of, let’s say the Stone Age. We have all this information today at our fingertips, all the incredible technology and modern amenities, but it’s not like we have any more resources today than people had during the Stone Age. The resources on our planet remained the same, but our reality is totally different.
Now think what life in the year 2024 would have looked like if people from the Stone Age forward adopted different approaches to distributing resources. If technological progress had been just 10% quicker from the time of the Stone Age, the world in 2024 would have looked more like 2524.
And that may be the best intuition to how money – and therefore access to resources – should be distributed in the economy. It has to be based on what leads to the greatest progress in scarce resource use; the better you are at driving this progress the greater your monetary reward should be. Why? Because you’re lifting everyone up in the process; you’re aligning people’s economic self-interest with the public interest.
Not incentivizing such progress, or having alternative incentives, basically means you’re slowing down this progress and reducing everyone’s wellbeing.
Another way to think about it is that the people living in the bottom 10% in 2524 would still have vastly better lives than the wealthiest people in 2024. So the quicker we are at getting to that standard of living the better the outcome for everyone.
