Perverse Incentive Structures are Ruining Everything!

(This is part 3 of my Effective Populism series. Read the introduction here.)

In the introduction of this series, I noted the importance of understanding society in terms of power dynamics, networks and institutions, and incentive structures. Doing so allows us to pinpoint one of the clearest problems in today’s society: perverse incentive structures.

The “layout” of society will incentivize certain actions over others. Think the Prisoner’s Dilemma, for example. Every situation has incentives for picking action A over B or vice versa.

These incentive structures may incentivize people to take actions/pick options that work contrary to the common good, or any other stated goal of society.

Put simply: When society is structured in such a way that acting in one’s own self interest damages the common good, we have a perverse incentive structure.


“Good governance is when the interests of the rulers are aligned with the interests of the people”


It should be readily obvious that our government is structured in a perverse manner. Lobbying is effectively corruption in everything but name, and the “revolving door” between government and the private sector should make it clear our governance is broken.

When we look at potential solutions to the perverse incentive structures of governance, we want to limit the powers/influence of lobbyists and stopping the revolving door between not just government and lobbying but government and the broader private sector.

First, there must be an absolute ban on working for any company that you previously regulated or otherwise regularly engaged with. No conflicts of interest will be allowed.

Second: For former politicians, there should be a 50% special tax on all remaining income after paying all regular taxes. This special tax is irrespective of the source of income (wages, capital gains, etc.).


Many will argue that the natural impulse of “capitalism” is to align individual self-interest with the common good. Smith’s “invisible hand”.

But this argument is, of course, nonsense. One is not incentivized to make the same distribution to one’s workers as would be the case if resources were equally divided, as Smith argues in his Theory of Moral Sentiments (also where his “invisible hand” is first mentioned).

In his Wealth of Nations, Smith makes numerous examinations of the conflicting interests between Landowner, Worker, and Capitalist, and how the interests of capitalists and landowners are frequently at odds (with each other, and with the common good of society). He tempers his laissez-faire views considerably and presents a potential ideal of unifying the three (landowner, worker, and capitalist) in one person, the “independent workman”, whose interests are (allegedly) always aligned with the common good of society.

Furthermore, market function is usually seriously misunderstood, and unless markets are constructed in a very particular manner, they will undermine themselves and lose their intended function. In other words, if a “free market” is to function properly, it requires very particular layouts that prevent things like accumulation undermining price discovery and creating market power, limited access to credit/capital+land preventing supply from rapidly responding to demand, firms being incentivized to withhold information from the consumer, etc.

In fact, the pareto-efficiency that markets (supposedly) trend towards, is not necessarily good in the first place.

In other words, this problem goes beyond the formal State. Perverse incentive structures pervade our society.

Going Further

This is only the beginning of establishing proper incentive structures. There will always be hierarchies in society, and we need to make sure that all hierarchies incentivize the alignment of interests of elites with the rest.

Ultimately, the elites can perceive the people as a resource to be plundered, or as assets to be cultivated. It becomes far easier to see people as a resource to be plundered when you have bureaucratic governance, as long as it is sufficiently complex to obfuscate responsibility and accountability. Plundering tends to be easier, but it also is anti-social. It can only safely and reliably be done when responsibility is diffuse (and when false consciousness is widespread).

So, we need to de-obfuscate hierarchies across society so that responsibility is clear and accountability can be maintained. In that manner, bureaucracy (and the scale that demands it) are the enemies. I’ve discussed this before:

The greatest tragedy of our world is that, lost in the endless array of kafkaesque bureaucracies and narrative-forming entities, it isn't even clear who I should be mad at.

Following this, I want to do a short piece tomorrow or Wednesday examining how many “solutions” to problems end up generating perverse incentives/don’t do what they are supposed to do and just make things worse. I will focus, I think, on various attempts to solve climate change.

I hope you all enjoyed. Please share and subscribe if you did. And leave a comment for any feedback


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