Economists and morality

This weekend I sat in the garden a lot, reading Sam Bowles’ excellent new book

. The book explores the incorrect standard (although shifting, I think) assumption in economics that incentives and morals do not affect each other – or in jargon, that they are additively separable. It describes research involving many, many experiments looking at how people behave in different contexts, cultures and communities in response to incentive changes.

The book begins with an explanation of the first theorem of welfare economics and underlines its power as a demonstration of the fact that in life, contracts are almost always incomplete, asymmetric information pervasive – and ever more so in modern economies – and externalities rife. Given the reality, Bowles writes: “Morals must sometimes do the work of prices, rather than the other way round.” His key argument is familiar in the post-public choice literature discussion targets and incentives in the public sector: that treating people as knaves (in Hume’s well-known formulation) makes them more likely to act knavishly. Introducing incentives – like the standard Pigouvian taxes or subsidies to correct externalities – can crowd-out intrinsic motivation, sometimes to the extent that the policy intervention backfires altogether.

‘s astonishment on visiting the London Stock Exchange:

“The Jew, the Mohameddan, the Christian deal with one another as if they were of the same religion, and give the name infidel only to those who go bankrupt. … upon leaving this peaceful and free assembly some withdraw to the synagogue, others retire to their churches, some to have a drink … and everyone is happy.”

An apt quotation the week after the Mayoral election in London. The book suggests that there is a virtuous circle whereby “in more market-oriented societies … people learn from their market experiences that fair dealing with strangers is often profitable.” Equally, there can be a vicious circle of distrust outside the family or clan. The point is that preferences are endogenous, not fixed. But, “Where market failures arise because contracts are incomplete, socially valuable norms like trust and reciprocity may be important in attenuating these market failures.”

Finally, the book touches on mechanism design, and why it is not a solution for the policymaker who wants to stick with incentive-based responses to market failures, explaining the impossibility result in this literature: that if there is private information, no voluntary mechanism produces a Pareto efficient outcome. It would also be interesting to think about the role of Al Roth-style market design in using the informational power of markets to devise better policies even where the involvement of money would be ‘repugnant’.

The book does end with some rather general suggestions for ‘Aristotelian’ policymakers who understand the important role of virtue in underpinning efficient as well as fair outcomes. I concluded that in fact there is still a lot of work to be done to understand how incentives and intrinsic values interact. Early in the book, Sam talks about the well-known experiment in a nursery introducing fines for parents who were late to collect their children; the fines made parents feel they were paying for being late, so lateness rose rather than declining. But other examples go the other way:

report on the use of mosquito nets rising when a small charge was introduced, rather than giving the nets away for free.

We don’t understand well enough when markets and price incentives are effective and when counter-productive, or the balance between the anonimity of market transactions, the role of reputation and trust in repeated transactions, and the power-laden character of both market and non-market transactions. There is a reason people flock away from their villages for the monetary relations of the big city. In an interesting section the book discusses the importance of identity for understanding these distinctions: people mind being manipulated through incentives by their boss – ‘he doesn’t trust me’ – but they don’t seem to mind the application of monetary incentives like fines so much when the authority is the collective decision of their peers.

It would be good to get to first base with policy makers, and have them appreciate the fact that policies change behaviour at all – there are still so many examples of the assumption that the economist or rule maker is ‘outside’ the economy. For this reason I find the fashion in policy circle for ‘nudging’ alarming as it is being done so much in the spirit of Madison Avenue. Having said this, the insights of

point to a potentially far more fruitful approach to policy than either of the current modes of the policy world, where it is either all about incentives or all about nudges. Fundamentally, designers of policies need to recognise that the people to whom they will apply have moral agency. So I applaud this book. And as it is non-technical and a terrific summary of the research on the relevant kinds of experiment concerning collective choice, I’ll be adding it as ‘further reading’ to my public policy course syllabus next semester.



8 thoughts on “Economists and morality

  1. Re the nursery experiment, keep increasing the fine. Do parents start coming even later or do they suddenly start coming on time? Its just about the size of the fine.

    • Bowles suggests there are two alternatives – a very much larger fine than you initially imagine, because of the crowding-out, or more pro-social alternatives – he gives examples.

  2. Looks great, and thanks for the blog, as ever.

    This is the kind of book that is fun for good citizens not to buy on Amazon, despite the incentives. Although not out until August (so my garden reading will have to wait) this is open to order, like 97% of other books, from News from Nowhere – women’s worker coop and independent book shop based out of Liverpool:

  3. One of us misremembers Bannerjee and Duflo. I remember there being no difference between free and a small charge and less usage when there was only a small discount. My book is at work so this is from Duflo’s TED talk:

    8:42 How about bed nets? Should you give them for free, or should you ask people to pay for them? So the answer hinges on the answer to three simple questions. One is: If people must pay for a bed net, are they going to purchase them? The second one is: If I give bed nets for free, are people going to use them? And the third one is: Do free bed nets discourage future purchase? The third one is important because if we think people get used to handouts, it might destroy markets to distribute free bed nets. Now this is a debate that has generated a lot of emotion and angry rhetoric. It’s more ideological than practical, but it turns out it’s an easy question. We can know the answer to this question. We can just run an experiment. And many experiments have been run, and they all have the same results, so I’m just going to talk to you about one.

    9:32 And this one that was in Kenya, they went around and distributed to people vouchers, discount vouchers. So people with their voucher could get the bed net in the local pharmacy. And some people get 100 percent discount, and some people get 20 percent discounts, and some people get 50 percent discount, etc. And now we can see what happens. So, how about the purchasing? Well, what you can see is that when people have to pay for their bed nets, the coverage rate really falls down a lot. So even with partial subsidy, three dollars is still not the full cost of a bed net, and now you only have 20 percent of the people with the bed nets, you lose the health immunity, that’s not great. Second thing is, how about the use? Well, the good news is, people, if they have the bed nets, will use the bed nets regardless of how they got it. If they get it for free, they use it. If they have to pay for it, they use it. How about the long term? In the long term, people who got the free bed nets, one year later, were offered the option to purchase a bed net at two dollars. And people who got the free one were actually more likely to purchase the second one than people who didn’t get a free one. So people do not get used to handouts; they get used to nets. Maybe we need to give them a little bit more credit

    • I’ve looked again and agree with you, I misremembered the book. Interestingly, though, the press coverage interpreted it the same was as I did so maybe it’s a little unclearly presented. A quick Google Scholar this morning suggests this specific issue is still under debate among field specialists – it’s not my area so I’m not going to venture any further opinion without reading more of the papers.

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