Fixing The Incentives: Fiat Money Fuels Broken Corporations

The broken incentives driven by fiat money props up large corporations, keeping workers unproductive and stifling entrepreneurial innovation.

This is an opinion editorial by Jimmy Song, a Bitcoin developer, educator and entrepreneur and programmer with over 20 years of experience.

In the last essay, I covered how fiat money ruins individual incentives. The lack of savings vehicles and the availability of debt create a potent mix of terrible incentives at the individual level. Lack of savings vehicles mean that individuals have to work to keep any value they have and the availability of debt means that they can bring forward a lot of consumption.

The result is a lot of people who consume and relatively few productive people who save.

Why Companies?

One level higher from the individual level is the company level. We used to be organized into families and tribes. Nowadays, we’re organized into companies, which are very debased versions. Companies are artificial and don’t have anywhere near the level of history or close relationships that families do. You can feel it in the pointless meetings you’re forced to attend. Yet companies are very much the way individuals are organized in a fiat economy and this is due to the incentives of fiat money.

We used to depend on our families, our clans or our tribes for our security. Kin was who you depended on to help you in times of need. Fiat money has changed everything by providing all manner of safety nets for individuals through these companies. Health insurance, unemployment insurance, social security, pensions and even life insurance protect people in a fiat economy from disaster. Many of these government/corporate safety nets existed before, but their use became much more ubiquitous after fiat money. The reason for their popularity will be explored more in the next essay on national/country incentives, but suffice it to say that governments operating under fiat money provide all sorts of safety nets to win popular support.

Because of these safety nets, people no longer depend on their families. Instead of depending on your family to help you out when you lose your job, you now have unemployment insurance. Instead of depending on your family when losing a wage earner to death, you now depend on life insurance. Instead of relying on your children to take care of you in old age, you now rely on social security or pensions.

All of these functions have been subsumed and you are now free to replace your family with government goodies. Insurance and money are poor substitutes for human relationships, like seed oils for butter and just about as toxic. Social security and pensions have replaced children. A cold, impersonal company that will lay you off at the drop of a hat has replaced the traditional family trade. Is it any wonder that people are so depressed?

These fiat safety nets are intimately connected to the job you have. Even the word “job” indicates that you have a single employer and the employer, the company, provides a lot more than just a salary. In a fiat economy, working for a corporation has significant non-salary benefits. At least in the United States, healthcare is much more affordable and has fewer restrictions with a company than as a self-employed person. Other countries put this benefit one level up, at the national level, which we’ll discuss in the next part of this series.

The W-2 also gets you access to mortgages with fewer qualifications. Pensions/social security are also an automatic old-age insurance that you only get working in companies. 401ks and their equivalents are much easier to take advantage of in a company setting. Unemployment insurance is often non-existent as a self-employed entrepreneur, but available automatically for those in companies. Your credit score generally is much better with an easily-verifiable salary history which comes with your W-2, which means that credit cards and other loans are more available.

The system is set up so that you can get more access to more safety nets if you’re working for a corporation. I haven’t even mentioned other benefits like gym memberships, childcare reimbursement and education credits. Life working a corporate job is just easier and has much less friction. Tech companies take this even further and take care of all kinds of other needs like oil changes, haircuts and free meals at all hours of the day. Of course, this naturally means you spend less time with your family and your company, by default, becomes your primary social group.

How did we get to this situation? How did companies get this powerful? Unsurprisingly. the reason is fiat money.

Why Are Companies So Large?

The largeness of companies these days is quite unnatural. Historically, most organizations topped out at around Dunbar’s number of people (around 150) because, after that, keeping track of what each person is doing gets very difficult. When a company becomes unaware of what individuals are doing, more employees become rent seekers. Rent seekers are people who live off the company’s profits without contributing much, if anything. This makes large companies uncompetitive against smaller competitors that run with less waste.

There’s also organizational momentum and politics that get worse as companies get larger. A large company has a much harder time innovating or pivoting to new markets. They’re simply too big and too dependent on their existing businesses to be able to really do anything new. The inability to move faster in an industry makes large companies uncompetitive against smaller competitors that can navigate the market more nimbly.

Lastly, large companies have a more difficult time serving smaller communities. Preferences differ in each place and large scale only works by serving a lot of diverse communities with the same good or service. Small companies, on the other hand, don’t have to serve lots of different communities and can serve a single community with tailored goods and services. We can see this at a global level where multinationals lose to local competitors because the local competitor is able to better adapt to local tastes.

Large Companies’ Advantage

With all these disadvantages, it’s a wonder why large companies exist at all. What is going on? The answer is that there are significant advantages given to them by the fiat monetary system, specifically the Cantillon Effect.

The Cantillon Effect lets the first spenders of newly-printed money get unfair benefits at the expense of the last spenders. And indeed, companies, particularly large companies, are some of the biggest beneficiaries. They get access to cheap loans, which are how new money comes into existence. And these loans give major advantages to large companies, more than compensating for the disadvantages they have versus smaller companies.

The mechanics of fiat money are such that money gets pumped into the economy through loans. Loans disproportionately go toward large companies because it’s just much easier for bankers. Think about it, if you are a commercial bank, would you rather loan out $1 million to 100 small businesses or $100 million loan to a single large business? The overhead and paperwork involved in handing out 100 loans makes this a no-brainer. You would probably take a discount to give out a single loan.

There’s a huge advantage to being large because of this access to new money. Indeed, the commercial loan market is an enormous business. When most people think of banks, they think of the retail bank that they use for their checking account like Wells Fargo or Bank of America or even their credit union. These are peanuts compared to the commercial banking business. Many of these banks don’t do any retail banking, like State Street. They create enormous quantities of money through commercial lending.

How Large Companies Beat Small Companies

The access to large amounts of money is a giant advantage. The most obvious way in which this money can be used by large corporations for unfair advantage is by underpricing the competition. Loans can be used to scale up and create better economies of scale, or more cynically, can be used to sell at a loss for a while until smaller competitors go bankrupt or pivot. Companies like Walmart and Amazon have used this strategy to great effect, crushing mom-and-pop stores the world over like Godzilla.

Another obvious way in which this money can be used is by providing all those benefits mentioned earlier. Pensions, unemployment insurance, life insurance, health insurance, childcare credits, education credits, even free meals and haircuts are ways to attract talent. The burden of having to take care of these things outside of companies is often the major reason why many talented people don’t try working for themselves.

Another way of using this money is to hire away the best talent for your organization. By paying way beyond what smaller competitors can pay, the best talent is put into the larger organizations. Even if such talented people end up rent seeking, at least they’re not at smaller competitors helping them innovate. Companies like Facebook and Google have used this strategy, essentially hoarding the best talent and leaving a lot less talent for entrepreneurship and innovation.

Still another way is to use the money to lobby the government to create regulatory moats for your own business. Smaller companies have a much harder time justifying lobbying costs as it’s a much larger chunk of their profits, but for a large corporation, regulatory defense is a much smaller part of their revenue. The costs for compliance tend to be fixed, meaning that they are unaffordable until companies reach a certain size, creating a sizable barrier to entry. So, at both ends, at the lobbying level and at the compliance level, larger companies have an advantage over their smaller competitors.

Large companies can also afford a large portfolio of patents and use lawsuits to defend their territory. This isn’t a regulatory moat, but has a similar result in that smaller competitors have a much higher barrier to entry than in a free market.

If the above methods don’t drown out small competitors, there is always the option of buying out smaller competitors. If you can’t beat ’em, buy ’em! This tactic has the nice side effect of bringing a lot of small company innovation in house, though in practice, most of the products of the small company simply die out once acquired. Many acquisitions are cynical, as they’re done to reduce competition and increase pricing power.

How Large Companies Zombify

The access to large loans also lets large companies last well beyond the point of adding value to an economy. As these large companies grow old and stale and provide less and less value, they can be propped up through loans.

The health of public companies in a free market is measured through their stock prices, but in a fiat economy, even this can be manipulated. Large companies can use loans for stock buybacks. By taking on debt, companies can give the illusion of prosperity while hiding the reduction in profits. The high-time-preference behavior is unsurprising given that the low-time-preference planning and execution is not rewarded nearly as much. Many CEOs do stock buybacks because it’s much easier than innovating. IBM, for example, spent $201 billion in stock buybacks over the period of 1995 to 2019 and has a market cap of nearly $124 billion as of this writing. It is a zombie company, continuing its undead existence by feeding on fiat money.

Many of these large companies don’t even need to make a profit. Many airlines, for example, lose money on a per-seat basis. They only persist through fiat games, like selling airline miles to credit card companies. In addition, they get bailout funds, but they file for bankruptcy on a regular basis to clear their debts. The growth and maintenance of these large companies is fiat fueled and completely unnatural. They are the living dead.

The zombification of the economy means that all the resources they have control of don’t get used for productive activity. Entrepreneurship and innovation are cast aside for ossification of large chunks of the economy. It’s a wonder that any small company, or individual entrepreneurs, succeed at all.

Startups

“But there are so many startups!” Or so the tech writers say. Startups are just as beholden to the same fiat economics as any other company. The game that startups play is one of becoming a large company as quickly as possible, because in a fiat economy, small companies have too many disadvantages.

Small businesses don’t get access to these cheap loans and don’t have any of these large company maneuvers available to them without getting larger, fast. As such, the only way to carve out a niche in the economy is to become a large company. This is why there’s a whole industry of venture capital that fuels their growth.

Venture capitalists are like Dr. Frankenstein, trying to turn small companies into large ones. Their failure rate is astonishing because venture capitalists (VCs) don’t consider small, profitable companies as successes and are only interested in large ones. Hence, they feed these companies significant amounts of fiat money, essentially trying to fuel their growth to get to a certain size. They’re like commercial pig farmers trying to fatten their products before selling them to the market.

Hence, we get this phenomenon of unicorns, or billion-dollar market cap companies, in the startup world. VCs know that small companies have a permanent disadvantage and that getting to a certain largeness is a critical part of capturing value in a fiat economy. Hence, every startup is made to grow at all costs. The messed up startup ecosystem we have today with all of the waste is entirely because of the bad incentives of fiat money. If a company doesn’t grow to a certain size, it gets underpriced, bought out or outbid by another company that has. Thus, most startups fail, trying to get to the billion-dollar mark and waste more time and resources than Calvin Ayre.

Winner-Take-All Ossification

In other words, small companies are all just trying to get big and there’s really only so much room at the top. The result of fiat money at the company level is that there’s a winner-take-all dynamic. If you’re not the one winner in your segment, you’re likely to get destroyed because the winner will always have access to more loans than everyone else. The loans go to whoever is already winning and those loans can be weaponized. The debt creates industry ossification and the companies in a fiat economy spend vast amounts of money and effort to stay where they are.

The loans for these companies, if they’re not used for taking out competition, get used for scaling. Instead of creating new products and new services, the newly-created money gets used to manage the companies better and to make production more efficient. This is not a surprise since, as I mentioned before, it’s very difficult to manage a company past Dunbar’s number. Getting even a little more productivity out of your thousands of workers is bound to be a better investment than in research and development (R&D).

The sad reality is that large company R&D tends to be a waste. Even if one creates something useful, there’s no guarantee that the rest of the company will make a product out of it. Kodak, for instance, created the first digital camera, but didn’t pursue it because it thought it would hurt its film business. Xerox PARC made the first graphical user interface, which it didn’t pursue because its core business was in copiers. On the other end of the scale, many R&D departments pursue completely unrealistic tech that has no chance of succeeding. Projects like nano-tech, quantum computing and cold fusion are great for rent seekers as they can endlessly claim that they’re making progress but not quite there yet.

Thus, with little progress and slightly better efficiency, the large Cantillon-winning company uses the fiat money advantage to keep these industries the same.

Lack Of Progress

As a result, there’s little to no innovation that actually comes out of large companies and we get only incremental upgrades to technology instead.

Why don’t we have better nuclear technology? Why are we stuck trying to make losing energy propositions like solar and wind work? Why haven’t we gotten better long-range transport than airplanes, which haven’t improved transit times since the ’70s? Even the best innovation of the last 50 years, the internet, is really just many incremental improvements of the telegraph.

Fiat money has stalled societal progress through the ossification of companies. Big companies can live out a zombie existence while small companies that innovate are quickly fattened by VC money and zombified through commercial banking. Resources go to zombies who waste resources for their rent-seeking existence instead of providing value to civilization.

Bitcoin Fixes This

Fiat money’s large advantages given to large companies is neutralized by sound money. With Bitcoin, loans cost much more so all of the typical uses of large commercial loans suddenly become uncompetitive. Underpricing your competition and losing money for a long time is going to cost way more than it does now. Hiring away your competitors’ best people and paying them way more is unlikely to provide enough value, especially if they just sit on the bench so your competitors can’t have them. And acquiring a company is going to have to be justified by a lot more profit later, a much harder prospect without fiat money.

Thus, the natural advantages of small companies will start manifesting themselves in the economy. Goods and services will be a lot more personalized, many more new ideas will get tried and a lot more innovation will result. Because there won’t be a need for them to grow especially large, they won’t get force fed into growth like a commercial hog. We’ll get a lot more smaller businesses where each individual will be adding value.

Large companies will also stop being the default way people work. Insurance, pensions and such will not be backstopped by the government’s money printer, so these services will be market driven again. Resources will be freed up from these zombies that will die off and they’ll be redirected to innovators and entrepreneurs. Finally, we’ll see more people depending on their families and communities again.

Companies in our current system have become way too important. People will become free of them because Bitcoin will throw off their shackles. And good riddance. The resources unlocked as a result of these zombies dying off will be astounding. But more importantly, modern life will feel a lot less like a bunch of zombies going through the motions and a lot more human.

This is a guest post by Jimmy Song. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.