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Do Incentives Really Matter?

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The phrase “incentives matter” is ubiquitous in economics, from undergraduate teaching to economic policy debates. The mantra is especially popular in the growing literature targeted at the general public, which I’ve criticized before for its undue focus on incentives (see here and here). My point is that while it’s good to see economic ideas reaching a larger audience, it doesn’t help much if the ideas aren’t sound to begin with. Such is often the case with the concept of incentives. To answer the question posed in the title, yes, incentives matter, in the sense that individuals have motivations, and it’s important to think about what those motivations are if we want to know how people act in the real world. For example, in the words of Steven Kerr, ignoring incentives often leads to “the folly of rewarding A, while hoping for B,” which produces managerial chaos. Nevertheless, emphasizing incentives too much glosses over several problems: economic laws can make incentives irrelevant; incentives are in any case too narrow a concept to be the defining characteristic of economics; focus on incentives sometimes leads to a paternalistic view of economic policy. The last point raises some questions concerning how economists view their science, as well as their role as scientists. Consider that ideas about incentives are usually cast in terms of “rewards” and “punishments,” or “nudges” toward “better” decisions. As Levitt and Dubner put it,

People aren’t “good” or “bad.” People are people, and they respond to incentives. They can nearly always be manipulated—for good or ill—if only you find the right levers. (Superfreakonomics, p. 125)

This kind of language highlights a problem in how economists think about motivation—the implication is that incentives are introduced into the decision making process from somewhere outside it. In other words, incentives are imposed or even foisted on the unwitting public, presumably by policy makers. While there is certainly a risk in seeing paternalism lurking around every corner, it’s hard to read the above as a call for free choice and self-determination. Looking at incentives in this sort of way encourages us not only to think in paternalistic terms, but also to downplay basic ideas about choice. Too much focus on incentives makes it easy to think of economic behavior as merely a passive response to external stimuli, thereby ignoring human beings as thinking, acting individuals. As a last point, no one seems to ask much whether the people who design incentives for others, e.g. economists and policymakers, also respond to them. Who incentivizes the incentivizers? When trying to influence people’s behavior, economists can be quick to overlook their own motivations by assuming the mantle of dispassionate science, even though economic research is often anything but. Sadly, it’s a short step from the top-down, external view of incentives to adopting fatal conceits about social planning.

Matt McCaffrey, former Mises Research Fellow, is assistant professor of enterprise at the University of Manchester.

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