John M. Keynes (1930), Economic Possibilities for our Grandchildren
Peter Kolarov provided valuable feedback on draft version of this paper.

Discussion

The World Economic Forum recently identified growing income inequality as one of the most pressing problems facing the world economy today, threatening stability of the social order as well (\citealt{mohammed_outlook_2015}; \citealt{dabla-norris_causes_2015}). The solutions of the problem presented to date have focused on redistribution of income or wealth through taxation (\citealt{piketty_capital_2014}, part 4), or on policy changes \citep*{hacker_prosperity_2012}, which for various reasons are encountering opposition. However, analysis of relationship between worker motivation and reward suggests a new approach to the problem.
A body of research show, that work reward has two functions - economic and signaling (\citealt{devoe_when_2013}; \citealt{kohn_why_1993}; \citealt{mickel_getting_2008}). The former provides recipients with economic value that can be exchanged for goods or services (the exchange value), while the later is perceived by workers as a measure of their competence, recognition, status, or respect (their “merit”). Additionally, a number of studies (\citealt{cohn_social_2014}; \citealt{clark_effort_2010}; \citealt{kohn_why_1993}; \citealt{ariely_large_2009}) suggest, that the signaling function of reward is a more accurate predictor of worker motivation, performance or creativity, than the exchange function. Existence of volunteer economy provides further evidence for the signaling aspect of reward being more important for worker motivation than its exchange value. Driven primarily by purely non-material motives \citep{clary_motivations_1999} volunteer work nevertheless results in producing significant economic value (\citealt{salamon_measuring_2011} chapter 4.4, sect 3). The research-identified worker preference for the signaling aspect of income from own labor, as well as willingness of volunteers to exchange labor for reward that lacks exchange value can be explained by the self-determination theory \citep*{deci_intrinsic_1985}. In particular, the desire to maximize merit, signaled by the amount of monetary reward, or willingness to perform volunteer work can be seen as behavior directed toward fulfillment of the three SDT-identified basic needs: autonomy, competence and relatedness.
These observations lead to a new kind of answer to the question of the origin of income inequality. In the mainstream remuneration mechanism, the merit measure is inseparable from the exchange value and therefore any attempt to reward merit, necessarily rewards workers with exchange value as well. The \citep{devoe_when_2013} study shows, that income originating from own labor is perceived by the workers as a signal of their merit, which they try to maximize by increasing effort. The most rewarded workers are therefore motivated to acquire even more reward, necessarily accumulating also exchange value. Such concentrations of wealth from income are over time further amplified by other mechanisms (\citealt{piketty_capital_2014}, part 3), resulting in growing differences in wealth distribution.
Different attitude of workers towards the two aspects of reward suggest a novel solution for the income inequality problem – an economic system (the “Merit economy”) based on remuneration mechanism, where the economic and signaling functions are separated. In such a scheme, the – for the worker motivation salient - merit reward is kept numerically equal to marginal product of labor. The motivationally less significant exchange value of reward can be set to a suitable welfare-maximizing principle as a result. As argued by (\citealt{rawls_theory_1999}, pp 5-6), socially optimal distribution should be guided by the 2nd principle of justice – the difference principle:
“…Social and economic inequalities are to satisfy two conditions: (a) They are to be attached to positions and offices open to all under conditions of fair equality of opportunity; and (b), they are to be to the greatest benefit of the least advantaged members of society.”
The Merit economy – in agreement with this principle - rewards merit unequally, reflecting natural differences between workers, while setting the exchange value of reward to the amount of work effort exerted, regardless of its marginal productivity. The notion of equality of effort stems from Rawls’ argument that unearned advantages like natural talents should be considered a common heritage (\citealt{rawls_theory_1999}, pp 87). An hour of work of any kind therefore is rewarded equally and economic losses produced by labor without (immediate or apparent) economic value are balanced by surplus generated by more productive workers. Opportunity is therefore equally available to all, in contrast to capitalism, where access to resources necessary to address one's needs is asymmetrically distributed, in favor of the privileged (see for example \citealt{frank_success_2016}, for role of luck in entrepreneurship).
The 2nd requirement of the difference principle, dictating to direct greatest benefits to the least advantaged members of society is also addressed. From the law of diminishing marginal utility follows, that utility from a unit of exchange value received by the least advantaged members of society is larger that utility gained by the advantaged members. Therefore, considering that in Merit economy exchange value reward is granted for labor time  - the natural measure of exchange value (\citealt{sraffa_production_1960}, p. 32, \citealt{wright_classical_2011}, p. 13) - utility of workers exerting comparable effort (working the same number of hours) will eventually reach a state of virtual equality.

NEO

In this section, framework of an economic system (“NEO”) is presented, incorporating the Merit economy distribution principles. The goal is to provide just enough information to illustrate how the proposed model could be implemented.

The infrastructure

In departure from the capitalist system, which relies on its actors to know and follow the economy rules, most NEO rules are encoded into a software application "Rovas," running on personal computing devices owned by the economy actors. Among other functions, Rovas processes work data provided by workers, payments for all purchases made in NEO, calculate rewards and distribute them to the proper recipients. Rovas provides interfaces for manual entry, as well as application programming interfaces to allow data transfers to and from accounting software packages used by firms. To ensure robustness, uninterrupted availability of services and to prevent possibility of unauthorized changes, the software is deployed on a global, distributed computing platform (for example Ethereum \citealt{Dannen_2017}) with transactions being recorded into a tamper-proof, distributed ledger. From governance point of view, Rovas development follows the open source philosophy.

The economy actors

Any person wanting to participate in NEO can create an account in Rovas. The registration process - among other requirements - ensures, that each person has exactly one account. Biometric information is also collected, to support various usage scenarios where ease of use and/or security concerns need to be addressed (authentication, payments authorization…).

Merit - the signaling measure

Based on the conclusions made in the Discussion section, the proposed remuneration mechanism calls for existence of two types of rewards, with corresponding measures. The unit of signaling measure is called “Merit”. Merits are issued when new value is created in the economy - at the moment when asset is sold – in an amount that is numerically equal to the asset purchase price. Merits don’t expire and can’t be gifted or exchanged for goods or services, as Merit score is a reflection of the particular worker’s abilities. Merit scores are attached to the individual accounts in Rovas and are publicly visible, alongside information about the assets for which they were granted.

Chron - the NEO currency

The carrier of exchange value is a new digital currency called “Chron.” Chrons are created by Rovas for labor reported by workers, in the amount of ten Chrons for each hour. A number equal to the newly-minted Chrons is marked as liability in a special Rovas account – the General NEO account. Conversely, Chrons are liquidated when Rovas receives payments from buyers purchasing assets, by lowering the negative balance in the General NEO account, by an amount equal to the purchase price.

The NEO Rules

To describe the Merit economy rules a simplified economic scenario is assumed, which involves three actors - a worker creating an asset for sale, a buyer and the remaining economy participants. According to this scenario a worker creates an asset and when ready to sell it, makes a record (creates a work/project report) in Rovas, containing among other information about the number of hours worked. Rovas then creates ten new Chrons for every hour reported and deposits them into the worker’s account. Next, the worker attempts to sell the asset for as high price as possible, motivated by desire to receive the merit reward. If a sale is realized, the buyer sends the payment for the asset directly into Rovas. At that moment Rovas rewards the worker with Merits, in an amount numerically equal to the purchase price. The table 1 shows a somewhat more complex version of the basic scenario, involving several transactions among three actors.

The Advance payment

As can be seen, NEO workers receive exchange reward before their output is sold. This rule is a consequence of the two Merit economy principles: separation of the exchange value of reward from its signaling (merit) measure and the Rawls’ 2nd principle of justice, from which follows that all effort is to be rewarded by exchange value equally, regardless of the resulting asset value (the purchase price).
There are several important consequences to this rule:
  1. Money supply in the economy is regulated algorithmically, limiting the need for monetary policy-controlling institutions.
  2. The mechanism of advance payment allows workers (prospective buyers) to immediately receive payment for goods or services they produce. Thus this rule not only allows to monetarily bootstrap the economy, but to a significant degree encourages entrepreneurship, by guaranteeing that all labor will be reimbursed.

Non-labor factors of production

Similar to the capitalist system, economic actors in NEO too can use resources they own as investment in business ventures. Unlike in the capitalist economy however, NEO workers may be rewarded at most with the signaling value of the potential profit earned – the merit reward. The exchange value of profit belongs to all and is used by Rovas to restore balance of the general account. Finally, NEO considers any worker activity and therefore also investing their own resources to be an act of merit seeking and does not reimburse investors for the value invested, regardless of whether any profit is made.

Merit reward distribution

If a particular asset is made by more than one worker, Rovas by default allocates the merit reward among them, according to the share of their labor time. It can however be expected, that this measure will not in general be a reliable indicator of individual contributions to the produced asset’s value. For example, some workers may have higher levels of knowledge or talent, making their labor time contributions more valuable. In that case, collaborating workers negotiate among themselves a share of merit reward that reflects their individual contributions. The workers record such agreed-upon allocations into their work reports and Rovas uses this information to override the default labor time-based allocation, when calculating and assigning merit reward. A non-default distribution of merit reward can occur also in other contexts, for example, when factors of production are rented instead of purchased.

The relatedness distribution

According to the self-determination theory \citep*{deci_intrinsic_1985}, interpersonal relatedness - a term defined as a feeling of “…being personally accepted by and significant to others, and cared for by others and caring of them…” (\citealt*{ryan_self-determination_2000}; \citealt*{lavigne_fundamental_2011}) -  is together with autonomy and competence a basic human psychological need, that people are willing to satisfy at a cost \citep*{weinstein_autonomy_2014}. The very existence of human beings has therefore - from this point of view - certain economic value, one that a person would be willing to give up in order to be with another person. A simple thought experiment suggests, that being presented with an option to either live completely isolated or to pay for the opportunity to live in the society, a person would choose the later and would readily give up everything, except an amount necessary for self-preservation. Human society therefore has for most people practically unlimited value.
For this reason NEO implements mechanism of “Relatedness distribution” – a regularly issued exchange value payment to all economy participants, compensating them in effect for their “work” on maintaining the universally valued “commodity” – themselves. While the argument brought up above could lead to a conclusion that all value generated by all workers – and therefore the total economy product - should be equally distributed, an alternative mechanism is proposed, where the decision to set the distribution amount is left to the economy participants. In practical terms, the actual Relatedness distribution amount is determined by averaging values selected by the workers in their Rovas profile from a set range. For example, with range of 0 to 240 Chrons per day setting value to “0” would mean that no exchange value is to be paid into the Distribution, whereas value of “240” would signify that every hour of the day is to be rewarded (as if everybody worked 24 hours a day). Consequently, the total exchange value received daily by an economy actor is the sum of the Relatedness distribution plus a part of the work reward the actor might be claiming for own labor. The labor part of the exchange value granted is determined by a rule, constraining the total exchange value received for a period of 24 hours to no more than 240 Chrons.
An actual implementation of the Relatedness distribution mechanism is not critical for the stability of the NEO model, as in principe the same outcome can be achieved using rules already available in NEO. In particular, the advance payment rule can serve this purpose, if the concept of work as perceived by the majority of the economy actors shifts its meaning, to include also “idle” existence of a person.

Defections-preventing measures

The NEO advance payment rule allows workers to receive exchange value reward by merely submitting a work report. For various reasons (privacy concerns, the current state of technology,…), algorithmically enforcing reportability of only labor actually performed is impossible, opening the possibility that some actors will report fictional labor. If not addressed, such behavior could have direct impact on the NEO economy, due to inflow of Chrons not covered by real value, albeit it might not be as severe as it might seem. Market economies are sufficiently robust to sustain certain losses of this type. For example the US economy loses in not- and under-reported taxes more than 18% of total income \citep*{feige_americas_2011}. A more serious harm however might be caused by changes to the economy actors’ behavior, as unpunished defections erode cooperation \citep*{fehr_altruistic_2002} and diminishing willingness of workers to participate in the economy, posing a threat to its viability.
To address the problem, NEO implements mechanism based on a propensity of humans to punish norm defectors at own cost, even if the offense is not harming them directly (\citealt*{fehr_altruistic_2002}; \citealt*{fehr_third-party_2004}). Using publicly available information from work reports, the economy actors can spend their own Chrons as a vote against fraudulent claims. Based on such actions a Rovas rule performs adjustments to the offending account, including confiscation of the inappropriately issued payments, setting the worker Merit score to negative value and other measures.

Examples

An entrepreneur creating web application

An entrepreneur creates web application with an intention to offer it as a paid service to the public. She reported into Rovas the number of work hours worked, the amount of non-labor expenses and other information. Users can gain access to the new application by paying a fee. The payments are made by transferring Chrons from their NEO accounts (if they have one), or by paying with any non-NEO currency, utilizing a third-party solution, which converts the funds into Chrons.
To provide a more concrete picture of the rewards distribution, let’s suppose the entrepreneur invested 100 hours of labor into creating the web application - value equivalent to 1,000 Chrons. She also paid 100 Chrons for a software module with specific functionality, needed in the application. If we assume, that in a given period the application generated 20,000 Chrons in sales, Rovas distributes rewards in the following way:
• The entrepreneur receives 1,000 Chrons as an advance payment. If she used her own money to buy the 100 Chron software module, her net gain is 900 Chrons. For each Chron of revenue she is also rewarded with one Merit - therefore she receives 20,000 Merits.
• The general NEO account is credited with 20,000 Chrons, where it is used to lower the negative balance, caused by advance payments to all workers in the economy.

A group of workers making physical goods

A company owned and run by Jane, Mary and Bill produces sandwiches and resells them through a network of merchants. When starting the business, they made an agreement to divide any merit reward earned, with Bill receiving 20% and Jane with Mary 40% each - to reflect their individual value contributions. With the help of technology, they make 100 sandwiches in 1 hour, from 20 Chrons worth of ingredients. Therefore labor costs are 0.3 and capital costs (amortization of machines, electricity…) 0.1 Chrons per sandwich. The total cost is 0.3 + 0.2 + 0.1 = 0.6 Chrons per sandwich. They set the sandwich price to 1.5 Chrons. Assuming an eight-hour workday, each of the workers earn 80 Chrons for their labor, regardless the number of sandwiches sold. If all 800 sandwiches made during a shift are sold, they collectively also earn 1,200 Merits. These get divided among them according to the agreed-upon formula: 240 Merits to Bill and 480 Merits to Jane and Mary each. The workers are responsible for all production costs of 240 Chrons, leaving them with 10 Chrons for a day’s work. If the costs should reach a level the workers would be unwilling or unable to pay, they would have to seek outside investors to share the costs (and likely also the Merit benefits).

Volunteering

There are several levels at which workers might engage in a Merit economy. The minimal engagement level, where a worker is interested only in earning Merits and not the exchange value reward, is equivalent to volunteer work. In this scenario, a worker submits into Rovas a project/work report, where the information about the number of hours worked is omitted. Next, in order to earn Merits, the worker makes the asset available for consumption, using a suitable monetizing scheme. Due to it’s user friendlies and simplicity he/she will likely choose the pay-what-you-want one. Any payments for purchases of the asset are sent to Rovas, alongside the unique asset ID generated by Rovas at the time when the worker submitted his/her project report. Rovas uses the received information to calculate and issue the Merit reward, while the exchange value of the purchases funds the General NEO account.
To support the pay-what-you-want scenario Rovas might implement a mechanism, for making payments for consumption of certain types of assets easier. The functionality would periodically present economy actors with a list of assets they consumed during some period of time and let them use (a portion of) their Chron balance to pay for their consumption. Distribution of payments for consumption of the listed entries could be made by the actors themselves manually, or they could choose to delegate the task to Rovas.

Instituting Neo

Unlike most proposals for solving the problem of income inequality, instituting NEO does not require an act of government. Instead - similar to volunteer economy from which it evolved – it can be adopted organically, with an expectation that volunteers will be also the economy first adopters. The technological foundations the proposed system calls for should attract volunteer workers from the IT sector, by virtue of the technological challenge building the technology behind NEO presents. They should find it attractive also as users, due to features like existence of a well-defined measure for reputation in the form of the Merit score, or the potential for participating on creating/supporting a global and socially just, algorithmically-driven economic system. Considering the potential of this type of volunteers for generating economic value recognized in the the mainstream economy markets, it is these workers whose output should establish a real exchange rate between Chron and the mainstream currencies. All Chron currency holders will thus gain ability to buy products made in the non-NEO economy.
Such development will attract other groups of workers, currently outside of the over one billion participants (\citealt{salamon_measuring_2011}, p. 244) of the volunteer economy. In particular, the world least economically well-off should want to join NEO, as the economy guarantees everybody opportunity to earn Chrons for work of their choosing. Money earned this way can be used either to purchase NEO-produced goods or services, or exchanged for local official currency at the rate determined by the currency exchange markets. It can be expected, that the number of Neo participants from this group will depend on the value of Chron against the local currency and the cost of living expenses.
The strength of Chron against other currencies will be determined not only by the value generated by the NEO economy participants, but likely also by donations and investments from wealthy donors and governments. The former might appreciate, that donating or investing resources into NEO is a more economically efficient option for making a positive change than donating them via traditional NGOs. Governments as well might decide, that instead of creating employment opportunities by providing local or foreign firms with various types of non-systemic incentives a better use of national resources is to invest them into the NEO economy, where work is abundant and of the kind chosen by the workers themselves. One way governments could support NEO is to augment the workers' Chrons income with payments in local currency, to ensure their total income has purchase power sufficient to provide for socially acceptable living standard. Even without help from governments – at first in the least developed countries – the NEO currency should relatively quickly reach value high enough to lift purchasing power of one hour of NEO labor above the purchasing power of average hourly wage in the local currency. It can be expected, that effects of such developments for the local economies, as well as the global one would be significant.

Conclusion

The aim of this work is to bring attention to a known, but in economic theory and public policy little exploited fact, that work reward has two distinct functions and that separating them into two separate rewards is not only practical but also desirable. The “exchange value” function of reward is the more familiar one. It allows workers to acquire life necessities like food or shelter as well as goods and services, that address their less essential needs. The second - “signaling” - function provides information about the rewarded worker's abilities and is also an expression of regard or respect of the rewarding entity (person or organization) toward the rewarded. Ample evidence exists suggesting, that the signaling function is behaviorally more important for human well-being and by implication, for willingness of people to engage in economic activities. However, the established remuneration mechanism does not discriminate between the two components and instead “communicates” the size of the signaling reward by varying magnitude of at any moment limited in supply, but motivationally inferior exchange value reward. This fundamental misunderstanding of nature and the roles of reward functions leads to a distribution of economic product that is economically suboptimal and socially harmful.
The normative part of the paper acknowledges different roles of the two functions and proposes a reward/distribution mechanism, where the exchange value granted to a worker is commensurate with the number of hours worked, while the separate signaling reward (Merit) is numerically equal to the market-determined value (price) of the worker's output. The remaining surplus exchange value is imputed to the society as a whole. In such a system, the size of the motivationally salient signaling reward worker can earn remains relatively unconstrained, whereas the exchange value of reward is limited by universally equal and over time constant hourly rate. Not unlike the capitalist economy, Merit-seeking should therefore motivate also NEO workers to generate valuable output causing growth of the currency (Chrons) value.
An important question concerns robustness of the proposed system against actions, that could threaten its stability. For example, the Merit economy rules are implemented in software, presenting an opening for attacks. However, digital ledger technologies that would form the core of the new economy have been evolving rapidly in the past decade and therefore are, or soon will be mature enough to serve as a base for the proposed system. Another type of defection might be attempts to report and collect payment for work never performed. Such claims can't be algorithmically verified with current state of technology, but there are two constructs that should limit such behavior to acceptable levels. First, the hourly wage is constant and workers can't claim more than 24 hour workdays, establishing an upper limit to any fraudulent claim. That fact, together with the NEO function that allows actors to verify existence of assets and punish those who submit false claims, should provide sufficient defense for most potential attacks.
The prospects for the pace and extent of the Merit economy adaptation might be affected by a number of factors. One of the most important is validity of its founding idea, that signaling reward is the controlling parameter of human economic behavior. However, the evidence in favor for the proposition seems robust. First, there is the very existence of the volunteer economy – a real, economic value-generating system, where workers are rewarded with a pure signaling reward. Behavioral economic research also confirms dominant role of the signaling component of reward for worker behavior. An important roadblock for adoption might be also the numerical form of the Merit reward and in particular the question, whether it will be as behaviorally effective as the “natural” manifestations of signaling (like money in the mainstream economy or gratitude In the volunteer economy). It can be expected, that the answer will be negative in general, but in certain domains numerical representation is actually the only technically available or practical. For example volunteer workers who work in the IT sector are used to measure impact of their work in terms of the number of users using their products or by a reputation score received from the users. As was already mentioned, these are also the workers who are likely to produce the most economically valuable output and thus are the most important for viability of the new economy. Finally, it can be expected, that advances in technology will make Merit signaling over time available also in physical form. Wearable electronics, ubiquitous internet access or augmented reality devices will eventually allow the numeric Merit scores to become accessible to our biological senses, removing also this barrier to the adaptation of the Merit economy.