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INCENTIVES - An empire collapsed by misunderstanding this mental model

Let’s start by considering two scientific examples from insects:

1. Honeybee

Do you know that bees work in a perfectly synchronized way with their swarm?

They don’t have to be trained or taught how to behave and work.

For example, the first thing a bee does is clean the cell where it was born for the next larva or to store honey, whatever the hive needs. 

It has various roles like building the honeycomb with beeswax, repairing the hives, foraging for nectar and pollen, etc.

All of these duties and roles are built into the bee’s DNA.

As the bee grows older, hormones are released which activate the part of their DNA that tells them what job they need to do and when.

2. Ant

Ant made colonies in the same way.

Individual ants behave according to their DNA and hormones.

For example, a couple of days after an ant dies, it releases a certain chemical that signals living ants to take the dead body to an area within the colony called the graveyard.

If you spray the same chemical on a live ant, it will walk to the grave and lie there — even though it is alive.

My point is that bees and ants form a highly complex and productive society with no quarrels, courts, police, moral code, or religion.

They do what they are programmed to do all their life, to provide great advantage to their colonies.

That was the communist idea.

But humans don’t operate like this because of Incentives.

So, what is the meaning of incentives?

Something that encourages a person to do something.

“Incentives are like magnets. An invisible but powerful pull.” — Andrew Wilkinson

Incentives — The most powerful mental model in the world-
Incentives — The most powerful mental model in the world- Image by author

Arguments why understanding Incentives is important

1. Humans are not bees or ants

We do not simply adopt societal roles at birth that are decided by our DNA and hormones.

We can think for ourselves.

We do not rely on our DNA to tell us what to do.

This is the big thing that makes us different from bees and ants.

We have a sense of self, and we think in our own best interests.

A bee that collects twice as much nectar as the other bees does not think that it deserves something more than

the other bees.

She does not feel discriminated against when the other bees get the same rewards as they did even though they collected only half as much nectar as her.

A bee does not think that if she’s going to get the same number of benefits regardless of how much nectar it collects, then she should do the least amount of work possible.

2. Human nature and its incentives

Humans for the most part think of their own best interests.

We’re talking about 99% of humanity, not the exceptions to the rule.

Most humans are selfish and have an ego.

Anyone who disagrees with this is naive and lacks life experience.

The following are innate parts of human nature:

Selfishness (i.e. what’s in it for me?)
Competitiveness (i.e. do I have more than my neighbour?)
Concept of fairness (i.e. am I getting the same stuff for the same effort?)

Let me elaborate further:

a. Selfishness

When a man works, he does it for his own benefit.

He wants to get something from it in the form of:

  • sex,

  • food (for himself or his loved ones).

Most humans do work only for their own sake. This is especially true for repetitive work like in factories and fields.

Man would not toil on the field if he did not get to eat what he grew on it.

Man would not slave away in a factory producing trinkets if he didn’t get paid for it.

A man only works without reward when he is forced to do so — under threat and coercion.

The black slaves in America would not have worked on the plantations if they didn’t fear the punishment of their masters.

“I can fix the $32 trillion US debt problem in 5 minutes. You pass a law that when there’s a deficit of more than 3% of GDP, all sitting members congress are ineligible for re-election” — Warren Buffett

b. Competitiveness

Wealth and status are relative.

Wealth is relative 
Wealth is relative

Our human nature wants us to be better than our neighbours and peers.

You see this in your everyday life.

  • When the average Joe sees his friend has a new car, he wants to buy a better car to compete, even if he has to go into debt to do so.

  • Women get jealous of their friend’s more successful husbands and compete with each other on who has the best purses and dresses.

  • Middle-class person of today lives a better life than the kings of ages past with their air conditioners and computers, but still don’t feel like a king because they know many people are doing much better than him.

Humans are competitive.

They want to be better than their neighbour and they get jealous when they see others do better than them.

Even though this is the uglier side of human nature, it is still human nature.

It’s part of how evolution wired us (only the best men pass on their genes), and we have to accept it and design society while accounting for it.

“Never attribute to conspiracy what is more easily explained by incentives and incompetence.” — Naval Ravikant

c. Fairness

The concept of fairness is also wired into our genes and is closely tied to competitiveness.

People expect equal rewards for equal work and feel discriminated against when they think they’re not getting enough rewards (recognition/money) for their effort or others are getting more rewards for the same effort.

  • If you’re running a business and you pay the guy who does 2x the work the same amount as a guy who does half the work, the guy who does twice the work will either quit or ask to be paid more.

  • If you are a teacher and you give two students different marks for writing the same answer, the student who got the lower grade will ask for a grade revision and will complain if he isn’t given an equal grade.

  • If you take two children who are brothers and give only one of them a chocolate, the brother who didn’t get the chocolate will cry to his mother that he should get a chocolate too because his brother got a chocolate.

So why did Communism fail every time it tried?

The reason communism fails every time is because communism (and to a large extent socialism) doesn’t account for human nature.

Under communism, you can’t have personal gain because the concepts of money and private property do not exist.

Everything belongs to the state and is distributed equally or according to need.

The government decides what job a man needs to do and also determines what reward he will get for it.

Not only does this demotivate people as they don’t get to decide their occupation, but it also goes against man’s desire to have more than his neighbors and the principle of fairness.

When a man realizes that he will be forced to work a job he is not particularly interested in performing and that he will be given the same reward regardless of whether he is extremely productive or if he does the minimum — the vast majority of men decide to do the minimum.

You can observe this in government organizations even in Western capitalist societies.

The working man chooses to do the least he can while staying out of trouble not out of laziness but because he doesn’t find it fair that if he works harder, he will get the same rewards as others who didn’t work hard.

The same man would stop being lazy and work his ass off if he was promised more reward (money/status/recognition) depending on the person for more effort.

This culminates in massive drops in the productivity of the communist economy as a whole as most men choose to do the minimum, they can without getting punished for it.

What this leads to is problems for the government, which tries to fix it by issuing quotas for production from workers and telling the governmental managers of the factory that they need to do whatever it takes to meet those quotas (or they will be punished).

The average person (i.e. a worker) is reduced to a lowly paid slave who will be sent to prison if he doesn’t work as hard as his manager needs him to work.

If the manager is kind and doesn’t comply, he will be sent to prison for not meeting the production quota.

In a cruel twist of fate, the workers who went on strikes to get communism find themselves being sent to forced labor camps if they ever strike again in their new communist regime.

Instead of a man freely choosing his occupation and working for personal profit and gain, in communism, a man is assigned a role and is given no incentive to work harder except that he will be severely punished if he doesn’t produce enough.

This makes the entire country and system poorer as you never get the best work of man which is produced when he has the desire to improve his work and product in expectation of personal gain and when he’s not trying to meet a government-assigned quota but trying to make more money for himself.

The reason why capitalism makes societies richer, and communism makes societies poorer is simply this: 

capitalism is aligned with human nature while communism goes against human nature.

Many men think “I will work hard so I have more”.

No man thinks “I am going to work hard so that everyone including the people I don’t know have the same as me”.

Communism works in theory just like how everyone is nice and selfless in theory.

Capitalism works in practice because people are people.

“The theory of Communism may be summed up in the single sentence: Abolition of private property.” — Karl Marx

Theory vs Practice
Theory vs Practice

“I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.” — Charlie Munger

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