Financialism and Perverse Incentives: 1

I believe that financialization of the economy and compensation has created perverse incentives that are destroying the working and vital parts of various economies. Let me explain-

Compare two systems:

System 1- Individuals are compensated with cash, as opposed to stocks/bonds/equities or shares.

System 2- The majority of compensation comes from financial instruments, not cash.

In the first system, there is little incentive to cheat as the payoffs for a scam are smaller than steady, well-paid gainful employment. In the second system, the system offers huge payouts to short-term optimizing scam artists, while punishing honest and competent people.

You may ask- Why are the payoffs for scams higher in the second system?

Answer- The value of cash is fairly constant, unless you living in a very unstable country. However the value of a financial instrument can change a lot from day-to-day, or even second-to-second, based on scams, sentiments and other assorted frauds. It is possible to double or even quadruple you money within a few weeks or even minutes.

Therefore the incentive to fudge numbers, play confidence tricks, use accounting loopholes, create or use legalized scams to get the maximum sale price for the financial instrument you are holding is very high. In such a system, an honest person who plays fair is screwed.

Have you ever noticed that the US middle class flourished when the prices of stocks were low (1930s to late 1970s) and the gains in playing the stock market were nowhere near what they have been since the 1980s? Why could that be?

Compensation via redeemable private financial instruments (stocks, bonds, equities) is one of the major systemic problems in our current socio-economic system. Instead of encouraging honest people to work harder, it perversely creates massive incentives to scam and fraud without doing any useful work.

It can be fixed, rather easily, by compensating employees in cash only. While this step will not eliminate all problems arising from zero-sum world views, it will mitigate many problems and result in a better system than what we have now.

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