It's the Incentives, Stupid

Great systems need good incentives, not just good intentions.

Everyone talks about wanting a better system where people can thrive. But unless the system is built on a strong foundation, with the right incentives in place, nothing guarantees that people will actually benefit from it.

If the incentives in the system favor self-interest over the common interest, we get individuals who are motivated to produce — but what they produce doesn’t necessarily benefit society. It may benefit their customers while harming society or the environment.

When we add exponential technology to the mix, we end up with a vast concentration of wealth on one hand and potentially extreme harm to society on the other (in the form of mass unemployment, a crisis of trust in institutions, a lack of sensemaking ability, and so on).

But what if we go in the other direction — if the incentives in the system favor the common interest over self-interest?

Then we get individuals with a reduced motivation to produce. Instead of individuals extracting from society, now society is extracting from individuals. To maintain this state of affairs, the system needs to suppress individuals’ self-interest.

And when we add exponential technology to this mix, we end up with a vast concentration of power in the system, using all the latest technology to suppress the individual.

The solution, then, does not lie in finding a compromise between these extremes — a condition that at times favors the individual and at times favors society — but rather in finding a point of dynamic equilibrium: alignment between individuals and society.

So how do we get there? How can we design an economic system that actually serves everyone better?

We have to start with the right incentives.

In Network Economics, the incentive is designed around aligning individual self-interest with the common interest.

How is this achieved?

The system is designed so that each individual has an economic incentive to contribute to the common interest of the network. At the same time, the network — to maintain its own credibility — has an incentive to compensate contributors in proportion to their contribution.

What happens if the network doesn’t fairly compensate a contributor?

You might think that underpaying contributors would result in the network having more funds. But that would mean the network has an incentive to underpay.

In Network Economies, the opposite is true.

If the network underpays a contributor, it cannot credibly demonstrate that it rewards contributors fairly. Having lost credibility, it is likely to have fewer individuals willing to contribute to it.

The network will also have to compensate individuals more to offset the perceived risk of non-payment.

So a network’s best strategy is always to maintain its credibility and compensate contributors fairly.

But what if an individual or business produces things in the market that harm the network — maybe the production process creates pollution, or a social media algorithm that promotes polarization and ragebait?

In that case, the network could deduct the associated fee from the individual or business once they contribute to the network at some point.

Even if the business has no intention of producing anything for the network, the network could still deduct fees from those buying from the business (once they contribute to the network). This effectively reduces demand for products that harm the network and incentivizes the business to mitigate the harm done.

Networks, therefore, don’t suppress or punish individuals for pursuing their self-interest. Instead, they make production for the common interest profitable, while also ensuring that goods sold in the market don’t harm society.

What’s truly revolutionary about this system is that fair compensation doesn’t just work at the individual level. It also works at the company level.

If a company produces goods that benefit the network, each individual in the company gets compensated based on their contribution. This solves one of the fundamental problems in markets, where workers are only fairly compensated under perfect competition — a condition that exists in economics textbooks, but not in real life.

Now you have a system where self-interest and the common interest align, where workers are compensated fairly, based on merit, and where what benefits the individual inherently also benefits society.

And when you add exponential technology to this mix, you don’t get concentration of power or concentration of wealth. You get diffusion of power and wealth, with greater benefits for individuals and for the network.

As we barrel toward a world dominated by exponential technology — from AI and robots to algorithms shaping much of our lives — having a system with the right incentives is no longer optional. It is the difference between a world of broad prosperity and one of extraction and domination.