Economics: Motivations and Incentives – Take 2

Economics:
The Purpose of the Economy
A Problem-Solving Mindset
Production and Distribution
Motivations and Incentives
Inequality

While reading over the past entries in the Economics series, I found the previous discussion of motivations and incentives was too narrow. So I decided to rewrite it, making it more general, and adding in a few more thought I’d had since then. I’m actually happy about backtracking like this, because the whole point of this series is to journal my economic views as I construct them, and things like this happen. So here we go, a new and improved version of Economics part 4.

In order for an economy to run, work must be done. Producing and distributing goods and services takes labor and organization. So naturally, the question arises, what motivates people to do these things?

The most common motivation for individuals throughout history, past and present, is the threat of poverty and starvation. You work, you get paid, you pay your bills. But given the opportunity, people will also work for other reasons. Some like the promise of wealth and moving up in the hierarchies of society. Others work because it provides joy and purpose to their lives. Still others have a strong sense of duty, and cannot rest unless they have given their fair share of effort toward supporting society. Others see problems in society, and their compassion moves them to help.

People also generally like to do what is right, especially if it is easy. For instance, if recycling means taking a load of trash in your car to a facility twenty miles away, not very many people will recycle. However, if there are conveniently-placed blue bins all over the place that somebody else takes care of, almost everybody will recycle.

Individual workers are not the primary drivers of the economy, though. The real economic power is in organizations: businesses, corporations, cooperatives, governments, fiefdoms, and plenty of others I haven’t thought of. Although these organizations are run by people, they can be treated as if they have their own motivations. It is an emergent phenomenon.

Like individuals, organizations have a diverse range of motivations. These could be to provide high-quality services, to solve problems for humanity, or to gain economic power (profit, in modern society). Here we find a feedback loop. If an organization makes it its goal to gain more economic power, it will become more powerful than organizations that value other things. Therefore, the organizations that have the most influence over the economy are naturally going to be the ones that prioritize accruing economic power.

This can lead to all kinds of practices that are not in alignment with the greater purpose of the economy, to provide people with what they need in order to pursue fulfilling lives. These organizations might form cartels, agreements between producers of a certain commodity to raise prices ridiculously high. They might buy out competing companies, becoming monopolies with total control over a market. They might leverage governmental influence in their favor, either through lobbying or direct political power. And they do whatever they can to raise prices and lower wages.

Organizations aiming to increase economic power can also cause collateral damage. Pollution, for instance. If it is more cost-effective to dump chemicals in the river than to properly dispose of them, such an organization is going to dump them in the river. Damage caused in this way might be temporary, or it might build up over long periods of time and cause serious damage later on. Even when it is best for all organizations in the economy collectively if they don’t cause collateral damage, it is often more advantageous for each individually to do so, no matter what the others do. In game theoretical terms, this is called a Prisoner’s Dilemma.

No matter what kind of economy we live in, we want to mitigate these negative effects of power-seeking organizations that inevitably rise to the top. Luckily, there are ways to do this. If a large number of people come together in a social movement and refuse to use a certain provider’s product or service, the organization will lose out unless they change their behavior. Workers can band together in unions to demand more reasonable wages and benefits. And the government can add incentives, like minimum wages, taxes, subsidies, regulations, and plenty of others.

It is important to note, however, that things are not black and white. It is not simply the good people versus the bad forces of the economy. Strong economies do a lot of good for humanity, and we want the Elon Musks of the world to be able to do their thing. The key is smart legislation. It is not enough to simply be “for people.” When coming up with policies, it is important to make decisions based on data and science, so we can be sure they will actually do the good we want them to do.