MARKET REASONING RENDERS MORAL CONSIDERATIONS IRRELEVANT ---Episode 11

 
                            THE MORAL LIMITS OF MARKETS


      INCENTIVES AND MORAL ENTANGLEMENTS 


   During the second half of the twentieth century, Paul Samuelson's Economics was the leading economics textbook in this country. Samuelson identified economics with its traditional subject matter : "the world of prices, wages, interest rates, stocks and bonds, banks and credits, 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." 
   Today, economics has wandered quite a distance from its traditional subject matter. Consider this definition of an economy offered by Greg Mankiw in a recent edition of his own influential economics textbook : There is no mystery to what an 'economy' is. An economy is just 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. One of the most important of those principles, Mankiw observes, is that "people respond to incentives."
   Talk of incentives has become so pervasive in contemporary economics that it has come to define the discipline. In the oening pages of Freakonimics ( surely all of you have read this ), Steven D. Levitt, an economist at the University of Chicago, and Stephen J. Dubner declare that "incentives re the cornerstone of modern life" and that "economics is, at root, the study of incentives." 
   
   It is easy to miss the novelty of this definition. The language of incentives is a recent development in economic thought. The word "incentive" does not appear in the writings of Adam Smith or other classical economists. In fact, it didn't enter economic discourse until the twentieth century and didn't become prominent until the 1980s and 1990s.  The Oxford English Dictionary finds its first use in the context of economics in 1943, in Reader's Digest : "Mr. Charles E. Wilson . . . is urging war industries to adopt 'incentive pay'----that is, to pay workers more if they produce more." The use of the word "incentives" rose sharply in the second half of the twentieth century, as markets and market thinking deepened their hold. According to a google book search, the incidence of the term increased by over 400% from the 1940s to the 1990s. 
   Conceiving economics as the study of incentives does more than extend the reach of markets into everyday life. It also casts the economist in an activist role. 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," write Levitt and Dubner. "They love to dream them up and enact them, and tinker with them. The 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," Levitt and Dubner observe. "Someone --- an economist or a politician or a parent --- has to invent them."
   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"incententivize." According to the OED, to incentivize is "to motivate or encourage (a person, esp. an employee or customer) by providing a (usually financial) incentive." The word dates to 1968 but has become popular in the last decade, especially among economists, corporate executives, bureaucrats, policy analysts, politicians, and editorial writers. In books, the word scarcely appeared until around 1990. Since then,its use has soared by more than 1,400 percent. A LexisNexis search of major newspapers reveals a similar trend : 

   Appearance of "Incentivize" or "Incentivise" in Major Newspapers


   1980s-----------------------------------------------------------48

   1990s-----------------------------------------------------------449

   2000s-----------------------------------------------------------6159

   2010-11--------------------------------------------------------5885


Recently,"incentivize" has entered the parlance of presidents.George Herbert Walker Bush, of the Kennebunkport Bushes, the first U.S president to use the term in public remarks, used it twice. Bill Clinton used it only once in eight years, as did the younger Bush. In his first three years in office, Barack Obama used "incentivize" twenty-nine times. He hopes to incentivize doctors, hospitals, and health-care providers to give more attention to preventive care and wants "to poke, prod, {and} incentivize banks" to provide loans to responsible homeowners and small businesses. 

Britain's prime minister, David Cameron, is also fond of the word. Speaking to bankers and business leaders, he called for doing more to "incentivize" a "risk-taking investment culture." Speaking to the British people after the London rits in 2011, he complained that "some of the worst aspects of human nature" had been "tolerated, indulged, even incentivized,"by the 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," Levitt and Dubner explain. "Morality represents the way we would like the world to work, and economics represents the way it actually does work."