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A Pioneer of Economic Analysis in Victorian England

Mises Daily: Wednesday, October 23, 2013 by

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(The Economics of Edwin Chadwick: Incentives Matter by Robert B. Ekelund, Jr. and Edward O. Price III, Edward Elgar, 2012, 246 pp.)

This book is the first full-length study of the economic writings of Edwin Chadwick, the 19th-century utilitarian social reformer. Although not an economist in the strict sense of the term, Chadwick wrote a voluminous amount on all manner of economic subjects, especially with regard to the problems of public goods and the promotion of the general welfare. To those ends, Chadwick used innovative economic ideas and empirical methods to explain and improve conditions in 19th-century England.

In terms of his practical approach to economic reform, Chadwick distinguished himself through his pioneering use of statistics in economic analysis. Chadwick’s work was simply unparalleled in terms of his ability to gather data on economic conditions: his “web of medical and other contacts throughout England were constantly pressed for data on disease, mortality statistics, and information on practically every subject imaginable” (p. 43). He did not merely assemble this data, however, but consistently deployed it in an effort to promote economic reform. And although Chadwick’s empirical methods were not modern, his noteworthy efforts to incorporate statistics into policy analysis are obvious in practically all the topics discussed in this book. Incorporating empirical evidence did not, however, always result in sound economic analysis, and Chadwick does seem to have made some hasty generalizations based on data that were biased, either through accident or deliberate massaging (p. 44).

Another central theme in this book is that Chadwick’s peculiar approach to reform led him to view undesirable economic conditions — and the policies necessary to improve them — as matters of effective remuneration; in other words, as incentive problems. Chadwick did not use the term “incentives” to describe his ideas, but he nevertheless viewed the problems of industrial-era economic reform as fundamentally intertwined with remuneration and punishment.

Chadwick’s thorough-going appreciation for the complex and ubiquitous nature of incentives might seem unremarkable by today’s standards, but in the mid-19th century economists had not yet begun to think in the now-conventional language of incentives, and certainly had not begun to advance the mantra “incentives matter” (which is also the subtitle of this book). This fact makes Chadwick’s attention to incentives that much more interesting for historians of economic thought.

Despite displaying great originality of thought in considering economic policy, Chadwick was not alone in his focus on incentive-based social reform. As Ekelund and Price explain, the role played by incentives was an important theme in the British utilitarian tradition, especially in the work of Bentham, whose social reforms often emphasized the proper arrangement of incentives. Bentham recognized the existence of what we would today call “externalities,” and his social reforms were intended to ensure that proper incentives would bring about a harmony of personal and public interest (pp. 27–29).

The notion of incentives can be seen, for example, in the structure of the panopticon, where prisoners’ behavior is molded by the authorities through (seemingly) constant monitoring. The panopticon is simply a version of the conventional moral hazard problem in which agents alter their output when unobserved. Much of the literature on moral hazard revolves around the problem of the cost of monitoring agents, which can be prohibitively high, thus effectively allowing or encouraging undesired behavior. Bentham’s panopticon, however, actually provides a novel and entrepreneurial solution to this problem: in the panopticon, prisoners do not actually know when they are being observed; but at any given time, they might be. Because the prisoners cannot be sure, and so long as they are at least sometimes punished for any offenses, they must take care to act as if they always are being observed. Thus the actual cost of monitoring may be reduced without sacrificing good behavior.

However, Bentham’s incentive-oriented panopticon worked at the administrative level as well, and this aspect is the focus of Ekelund and Price’s analysis. Bentham was primarily concerned with protecting prisoners from abuse and discouraging adminstrative waste. His suggestion was to provide incentives for the prison administrators to promote the well-being of prisoners. Specifically, Bentham advocated a system of contract management, whereby entrepreneurs would pay for the right to use a convict’s labor, providing a monetary impetus to care for the prisoner and thus ensure a sufficient quantity and quality of labor to justify their “investment” (pp. 56–57).

In any case, the notion of self-interest and proper incentives were fundamental for Bentham, and the same type of reasoning about the problems of agency and moral hazard appears in Chadwick’s writings as well. In fact, it might even be said that Chadwick’s “entire career may be characterized as the application of Bentham’s principles to economic and social phenomena” (pp. 34–35).

As a social reformer, Chadwick dealt with many of the uglier aspects of industrial life, including public sanitation and the criminal justice system, which, in terms of quality, were often enough metaphors for each other. Each of these receives its own chapter, through which the authors argue convincingly that Chadwick anticipated many insights of contemporary economics.

Ekelund and Price show that his views often anticipated the work of 20th century economists, and another merit of this book is the way it weaves together historical discussions with the work of contemporary economists like Gary Becker, Ronald Coase, Harold Demsetz, and George Stigler. Further, because of the wide range of Chadwick’s interests, as well as those of his intellectual influences, a review of his contributions leads Ekelund and Price to survey many important events from this most revolutionary time in economic history. This book will capture the curiosity of readers interested in more than the relatively narrow subject of Chadwick himself.