What Money Can't (Shouldn't) Buy: Incentives and Moral Entangelemnts
Paul Samuelson's identified economics with its traditional subject matter: "the world of prices, wages, interest rates, stocks and bonds, banks and credit, taxes and expenditure." The task of economics was concrete and circumscribed: to explain how depressions, unemployment and inflation can be avoided, to study the principles that tell us how productivity can be kept high and how people;s standards of living can be improved.
But today economics has wandered quite a distance from its traditional subject matter. Greg Mankiw in a recent edition textbook: There is no mystery to what an economy is. An economy i sjust a group of people interacting with one another as they go about their lives.
In this account, economics is about not only the production, distribution, and consumption of material goods but also about human interaction in general and the principles by which individuals make decisions. Mankiw observes is that "people respond to incentives".
In the opening pages of Freakonomics, Steven D. Levitt, an economist, and Stephen J. Dubner, declare that incentives are the cornerstone of modern life and that economics is at root the study of incentives.
The language of incentives is a recent development in economic thought. It didn't enter economic discourse until the twentieth century. Conceiving economics as the study of incentives does more than extend the reach of markets into everyday life.
The shadow prices that Gary Becker invoked in the 1970s to explain human behavior were implicit, not actual. They were metaphorical prices that the economist imagines, posits, or infers. Incentives, by contrast, are interventions that the economist (or policy maker) designs, engineers, and imposes on the world. They are ways of getting people to lose weight, or work harder, or pollute less.
"Economists love incentives, they love to dream them up and enact them, study them and tinker with them" (Levitt and Dubner). They typical economist believes the world has not yet invented a problem that he cannot fix if given a free hand to design the proper incentive scheme. His solution may not always be pretty - it may involve coercion or exorbitant penalties or the violation of civil liberties -- but the original problem, rest assured, will be fixed. An incentive is a bullet, a lever, a key: an often tiny object with astonishing power to change a situation.
This is a far cry from Adam Smith's image of the market as an invisible hand. Once incentives become "the cornerstone of modern life, the market appears as a heavy hand, and a manipulative one. (Recall the cash incentives for sterilization and good grades). Most incentives don't come about organically, someone -- an economist or a politician or a parent has to invent them." (Levitt and Dubner).
The growing use of incentives in contemporary life, and the need for someone deliberately to invent them, is reflected in an ungainly new verb that has gained currency of late: "incentivize." To incentivize is to motivate or encourage by providing incentive, usually financial.
President Barack Obama hopes to incentivize doctors, hospitals, and health-care providers to give more attention to preventive care and wants "to poke, prod, and incentivize bank" to provide loans to responsible homeowners and small businesses.
Britain prime minister, David Cameron, was speaking to bankers and business leaders for doing more to incentivize a risk0taking investment culture. Speaking to British people after London riots 2011, he complained that some of the worst aspects of human nature had been tolerated, indulged, even sometimes incentivized by state and its agencies.
Despite their new incentivizing bent, most economists continue to insist on the distinction between economics and ethics, between market reasoning and moral reasoning. Economics simply doesn't traffic in morality, morality represents they way we would like the world to work, and economics represents how it actually does work. (Levitt and Dubner).
The notion that economics is a value-free science independent of moral and political philosophy has always been questionable. But the vaunting ambition of economics today makes this claim especially difficult to defend. The more markets extend their reach into noneconomic spheres of life, the more entangled they become with moral questions.
Consider economic efficiency. Why care about it? Presumably, for the sake of maximizing social utility, understood as the sum of people's preferences. As Mankiw explains, an efficient allocation of resources maximizes the economic well-being of all members of society. Why maximize social utility? Most economists either ignore this question or fall back on some version of utilitarian moral philosophy. But utilitarian is open to some familiar objections. The objection most relevant to market reasoning asks why we should maximize the satisfaction of preferences regardless of their moral worth. If some people like opera and others like dogfights or mud wrestling, must we really be nonjudgmental and give these preferences equal weight in the utilitarian calculus? When market reasoning is concerned with material goods, such as cars, toasters, and flat-screen televisions, this objection doesn't loom large; it's reasonable to assume that the value of the goods is simply a matter of consumer preference. But when market reasoning is applied to sex, procreation, child rearing, education, health, criminal punishment, immigration policy, and environmental protection, it's less plausible to assume that everyone's preferences are equally worthwhile. In morally charged arenas such as these, some ways of valuing goods may be higher, more appropriate than others. And if that's the case, it's unclear why we should satisfy preferences indiscriminately, without inquiring into their moral worth.
So when market reasoning travels beyond the domain of material goods, it must "traffic in morality", unless it wants blindly to maximize social utility without regard for the moral worth of the preferences it satisfies.
There's further reason that the expansion of markets complicates the distinction between market reasoning and moral reasoning, between explaining the world and improving it. One of the cnetral principles of economics is the price effect -- when prices go up, people buy less of a good, and when prices go down, they buy more. This principle is generally reliable when we're talking about the market for, say, flat-screen TVs.
But as we've seen, it is less reliable when applied to social practices governed by nonmarket norms, like arriving on time to pick up your child at the day-care center. When the price of arriving late went up (from no charge), late pickups increased. This result confounds the standard price effect. But it's understandable of you recognize that marketizing a good can change its meaning. Putting a price on late pickups changed the norm. What was once seen as a moral obligation to arrive on time -- to spare the teachers an inconvenience -- was now seen as a market relationship, in which late-arriving parents could simply pay teachers for the service of staying longer. As a result, the incentive backfired.
The day-care story shows that, as markets reach into spheres of life governed by nonmarket norms, the standard price effect may not hold. Raising the economic cost of coming late led to more late pickups, not fewer. So to explian the world, economists have to figure out whether putting a price on an activity will crowd out nonmarket norms. To do so, they have to investigate the moral understandings tha tinform a given practice and determine whether marketizing the practice (by providing an financial incentive or disincentive) will displace them.
At this point, the economist might concede that, in order to explain the world, he or she must engage in moral psychology or anthropology, to figure out what norms prevail and how markets will affect them. But why does this mean that moral philosophy must enter the picture? For the following reason: Where markets erode nonmarket norms, the economist (or someone) has to decide whether this represents a loss worth caring about. Should we care whether parents stop feeling guilty for picking up their children late and come to view their relationship with the teachers in more instrumental terms? Should we care if paying children to read books leads them to view reading as a job for pay and diminishes the joy of reading for its own sake? The answer will vary from case to case. But the question carries us beyond predicting whether a financial incentive will work. It requires that we make a moral assessment: what is the moral importance of the attitudes and norms that money may erode or crowd out? Would the loss of nonmarket norms and expectations change the character of the activity in ways we would regret? If so, should we avoid introducing financila incentives into the activity, even though they might do some good?
The answer will depend on the purpose and character of the activity in question and the norms that define it. Even day-care centers differ in this respect. Displacing shared expectations of mutual obligation may be more damaging in a cooperative, where parents volunteer a certain numbe rof hours each week, than in a conventional day-care establishment, where parents pay the teachers to look after the children and then go about their day. But it is clear in any case that we are on moral terrain. To decide whether to rely on financial incentives, w e need to ask whether those incentives will corrupt attitudes and norms worth protecting. To answer this question, market reasoning must become moral reasoning. The economist has to traffic in morality after all.
But today economics has wandered quite a distance from its traditional subject matter. Greg Mankiw in a recent edition textbook: There is no mystery to what an economy is. An economy i sjust a group of people interacting with one another as they go about their lives.
In this account, economics is about not only the production, distribution, and consumption of material goods but also about human interaction in general and the principles by which individuals make decisions. Mankiw observes is that "people respond to incentives".
In the opening pages of Freakonomics, Steven D. Levitt, an economist, and Stephen J. Dubner, declare that incentives are the cornerstone of modern life and that economics is at root the study of incentives.
The language of incentives is a recent development in economic thought. It didn't enter economic discourse until the twentieth century. Conceiving economics as the study of incentives does more than extend the reach of markets into everyday life.
The shadow prices that Gary Becker invoked in the 1970s to explain human behavior were implicit, not actual. They were metaphorical prices that the economist imagines, posits, or infers. Incentives, by contrast, are interventions that the economist (or policy maker) designs, engineers, and imposes on the world. They are ways of getting people to lose weight, or work harder, or pollute less.
"Economists love incentives, they love to dream them up and enact them, study them and tinker with them" (Levitt and Dubner). They typical economist believes the world has not yet invented a problem that he cannot fix if given a free hand to design the proper incentive scheme. His solution may not always be pretty - it may involve coercion or exorbitant penalties or the violation of civil liberties -- but the original problem, rest assured, will be fixed. An incentive is a bullet, a lever, a key: an often tiny object with astonishing power to change a situation.
This is a far cry from Adam Smith's image of the market as an invisible hand. Once incentives become "the cornerstone of modern life, the market appears as a heavy hand, and a manipulative one. (Recall the cash incentives for sterilization and good grades). Most incentives don't come about organically, someone -- an economist or a politician or a parent has to invent them." (Levitt and Dubner).
The growing use of incentives in contemporary life, and the need for someone deliberately to invent them, is reflected in an ungainly new verb that has gained currency of late: "incentivize." To incentivize is to motivate or encourage by providing incentive, usually financial.
President Barack Obama hopes to incentivize doctors, hospitals, and health-care providers to give more attention to preventive care and wants "to poke, prod, and incentivize bank" to provide loans to responsible homeowners and small businesses.
Britain prime minister, David Cameron, was speaking to bankers and business leaders for doing more to incentivize a risk0taking investment culture. Speaking to British people after London riots 2011, he complained that some of the worst aspects of human nature had been tolerated, indulged, even sometimes incentivized by state and its agencies.
Despite their new incentivizing bent, most economists continue to insist on the distinction between economics and ethics, between market reasoning and moral reasoning. Economics simply doesn't traffic in morality, morality represents they way we would like the world to work, and economics represents how it actually does work. (Levitt and Dubner).
The notion that economics is a value-free science independent of moral and political philosophy has always been questionable. But the vaunting ambition of economics today makes this claim especially difficult to defend. The more markets extend their reach into noneconomic spheres of life, the more entangled they become with moral questions.
Consider economic efficiency. Why care about it? Presumably, for the sake of maximizing social utility, understood as the sum of people's preferences. As Mankiw explains, an efficient allocation of resources maximizes the economic well-being of all members of society. Why maximize social utility? Most economists either ignore this question or fall back on some version of utilitarian moral philosophy. But utilitarian is open to some familiar objections. The objection most relevant to market reasoning asks why we should maximize the satisfaction of preferences regardless of their moral worth. If some people like opera and others like dogfights or mud wrestling, must we really be nonjudgmental and give these preferences equal weight in the utilitarian calculus? When market reasoning is concerned with material goods, such as cars, toasters, and flat-screen televisions, this objection doesn't loom large; it's reasonable to assume that the value of the goods is simply a matter of consumer preference. But when market reasoning is applied to sex, procreation, child rearing, education, health, criminal punishment, immigration policy, and environmental protection, it's less plausible to assume that everyone's preferences are equally worthwhile. In morally charged arenas such as these, some ways of valuing goods may be higher, more appropriate than others. And if that's the case, it's unclear why we should satisfy preferences indiscriminately, without inquiring into their moral worth.
So when market reasoning travels beyond the domain of material goods, it must "traffic in morality", unless it wants blindly to maximize social utility without regard for the moral worth of the preferences it satisfies.
There's further reason that the expansion of markets complicates the distinction between market reasoning and moral reasoning, between explaining the world and improving it. One of the cnetral principles of economics is the price effect -- when prices go up, people buy less of a good, and when prices go down, they buy more. This principle is generally reliable when we're talking about the market for, say, flat-screen TVs.
But as we've seen, it is less reliable when applied to social practices governed by nonmarket norms, like arriving on time to pick up your child at the day-care center. When the price of arriving late went up (from no charge), late pickups increased. This result confounds the standard price effect. But it's understandable of you recognize that marketizing a good can change its meaning. Putting a price on late pickups changed the norm. What was once seen as a moral obligation to arrive on time -- to spare the teachers an inconvenience -- was now seen as a market relationship, in which late-arriving parents could simply pay teachers for the service of staying longer. As a result, the incentive backfired.
The day-care story shows that, as markets reach into spheres of life governed by nonmarket norms, the standard price effect may not hold. Raising the economic cost of coming late led to more late pickups, not fewer. So to explian the world, economists have to figure out whether putting a price on an activity will crowd out nonmarket norms. To do so, they have to investigate the moral understandings tha tinform a given practice and determine whether marketizing the practice (by providing an financial incentive or disincentive) will displace them.
At this point, the economist might concede that, in order to explain the world, he or she must engage in moral psychology or anthropology, to figure out what norms prevail and how markets will affect them. But why does this mean that moral philosophy must enter the picture? For the following reason: Where markets erode nonmarket norms, the economist (or someone) has to decide whether this represents a loss worth caring about. Should we care whether parents stop feeling guilty for picking up their children late and come to view their relationship with the teachers in more instrumental terms? Should we care if paying children to read books leads them to view reading as a job for pay and diminishes the joy of reading for its own sake? The answer will vary from case to case. But the question carries us beyond predicting whether a financial incentive will work. It requires that we make a moral assessment: what is the moral importance of the attitudes and norms that money may erode or crowd out? Would the loss of nonmarket norms and expectations change the character of the activity in ways we would regret? If so, should we avoid introducing financila incentives into the activity, even though they might do some good?
The answer will depend on the purpose and character of the activity in question and the norms that define it. Even day-care centers differ in this respect. Displacing shared expectations of mutual obligation may be more damaging in a cooperative, where parents volunteer a certain numbe rof hours each week, than in a conventional day-care establishment, where parents pay the teachers to look after the children and then go about their day. But it is clear in any case that we are on moral terrain. To decide whether to rely on financial incentives, w e need to ask whether those incentives will corrupt attitudes and norms worth protecting. To answer this question, market reasoning must become moral reasoning. The economist has to traffic in morality after all.
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