The Problem with Homo economicus - The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens - Samuel Bowles

The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens - Samuel Bowles (2016)

I. The Problem with Homo economicus

The Problem with Homo economicus

Two and a half centuries ago, Jean-Jacques Rousseau invited readers of his Social Contract to consider “Laws as they might be” for “men as they are.”1 Aside from the gendered language, the phrase still resonates. We know that governing well requires an understanding of how people will respond to the laws, economic incentives, information, or moral appeals that make up a system of governance. And these responses will depend on the desires, objectives, habits, beliefs, and morals that motivate and constrain people’s actions.

But what are we to understand by Rousseau’s “men as they are”?

Enter economic man—Homo economicus. Among economists, jurists, and the policy makers influenced by their ideas, it is widely held today that in thinking about the design of public policy and legal systems, as well as about the organization of firms and other private organizations, we should assume that people—whether citizens, employees, business partners, or potential criminals—are entirely self-interested and amoral. Partly for this reason, material incentives are now deployed to motivate student learning, teacher effectiveness, weight loss, voting, smoking cessation, the switch from plastic grocery bags to reusable ones, fiduciary responsibility in financial management, and basic research. All are activities that, in the absence of economic incentives, might be motivated by intrinsic, ethical, or other noneconomic reasons.

Given this assumption’s currency in legal, economic, and policy-making circles, it may seem odd that nobody really believes that people are entirely amoral and self-interested. Instead, the assumption has been advanced on grounds of prudence, not realism. Even Hume, at the end of the epigraph for this book, warns the reader that the maxim is “false in fact.”

I hope to convince you that when it comes to designing laws, policies, and business organizations, it is anything but prudent to let Homo economicus be the behavioral model of the citizen, the employee, the student, or the borrower. There are two reasons. First, the policies that follow from this paradigm sometimes make the assumption of universal amoral selfishness more nearly true than it might otherwise be: people sometimes act in more self-interested ways in the presence of incentives than in their absence. Second, fines, rewards, and other material inducements often do not work very well. No matter how cleverly designed to harness the avarice of knaves (as Hume put it), incentives cannot alone provide the foundations of good governance.

If I am right, then an erosion of the ethical and other social motivations essential to good government could be an unintended cultural consequence of policies that economists have favored, including more extensive and better-defined private property rights, enhanced market competition, and the greater use of monetary incentives to guide individual behavior.

I show that these and other policies advocated as necessary to the functioning of a market economy may also promote self-interest and undermine the means by which a society sustains a robust civic culture of cooperative and generous citizens. They may even compromise the social norms essential to the workings of markets themselves. Included among the cultural casualties of this so-called crowding-out process are such workaday virtues as truthfully reporting one’s assets and liabilities when seeking a loan, keeping one’s word, and working hard even when nobody is looking. Markets and other economic institutions do not work well where these and other norms are absent or compromised. Even more than in the past, high-performance knowledge-based economies today require the cultural underpinnings of these and other social norms. Among these is the assurance that a handshake is indeed a handshake; where one doubts this, mutual gains from exchange may be limited by distrust.

The paradoxical idea that policies considered necessary by economists for “perfecting” markets might make them work less well applies beyond markets. A people’s civic-mindedness, their intrinsic desire to uphold social norms, may be squandered as a result of these policies, perhaps irreversibly, shrinking the space for better-designed policies in the future. Thus, while some economists imagined that in a distant past Homo economicus invented markets, it could have been the other way around: the proliferation of amoral self-interest might be one of the consequences of living in the kind of society that economists idealized.

The problem facing the policy maker or constitution writer is this: incentives and constraints are essential to any system of governance. But when designed as if “men as they are” resemble Homo economicus, incentives might backfire if they foster the very self-interest that they were designed to harness in the service of the public good. The problem would not arise if Homo economicus were indeed an accurate description of “men as they are.” In that case there would be nothing to crowd out. But over the past two decades, behavioral experiments (as we see in chapters III, IV, and V) have provided hard evidence that ethical and other-regarding motives are common in virtually all human populations. The experiments show that these motives are sometimes crowded out by policies and incentives that appeal to material self-interest. Here is an example.

In Haifa, at six day care centers, a fine was imposed on parents who were late in picking up their children at the end of the day. It did not work. Parents responded to the fine by doubling the fraction of time they arrived late.2 After twelve weeks, the fine was revoked, but the parents’ enhanced tardiness persisted. (Their lateness, compared to that of a control group without the fine, is shown in figure 1.1.)

The counterproductive result of imposing these fines suggests a kind of negative synergy between economic incentives and moral behavior. Placing a price on lateness, as if putting it up for sale, seems to have undermined the parents’ sense of ethical obligation to avoid inconveniencing the teachers, leading them to think of lateness as just another commodity they could purchase.


Figure 1.1. The effect of a fine for lateness in Haifa’s day care centers (Data from Gneezy and Rustichini 2000.)

I do not doubt that had the fine been sufficiently high, the parents would have responded differently. But putting a price on everything might not be a good idea, even if this could be done and the right prices could be found (both very large ifs, as we will see).

Even the sight of money and the discussion of coins (rather than nonmonetary objects), in a recent experiment, induced children to later behave in less prosocial ways and to be less helpful toward others in their ordinary interactions.3

In another study, kids less than two years old avidly helped an adult retrieve an out-of-reach object in the absence of rewards. But after they were rewarded with a toy for helping the adult, the helping rate fell off by 40 percent. Felix Warneken and Michael Tomasello, the authors of the study, conclude: “Children have an initial inclination to help, but extrinsic rewards may diminish it. Socialization practices can thus build on these tendencies, working in concert rather than in conflict with children’s natural predisposition to act altruistically.”4

This might be good advice for public policy too.

How should policy makers respond to the realization that while both economic incentives and ethical and other-regarding motives are necessary for effective policy, the former may diminish the latter? If both sources of motivation are taken into account, then policy makers may reasonably consider giving economic incentives a more limited role in their policy packages. If incentives undermine social values, yet incentives and social values are both needed, then it would seem to follow that one ought to make less use of incentives than one would in the absence of this crowding-out problem.

Similar reasoning might lead policy makers to restrict the role of markets in allocating resources, and to favor instead a larger role for governments or informal nonmarket organizations. Doing so would be consistent with Michael Sandel’s main point in What Money Can’t Buy: The Moral Limits of Markets: “Putting a price on every human activity erodes certain moral and civic goods worth caring about.”5 Sandel makes a convincing case for a public debate on “where markets serve the public good and where they don’t belong.” Debra Satz provides political reasons for this in Why Some Things Should Not be For Sale, advancing the view that restricting some markets is essential to sustaining the political equality that is fundamental to a democratic culture and political system.6 My concern is less with the extent of markets (as opposed to governments or other systems of allocation) than with the sometimes problematic use of economic incentives, whether in markets, firms, or public policy. The evidence that incentives may crowd out ethical and generous motives is complementary to the reasoning of Sandel and Satz.

But a good case can also be made that incentives per se are not entirely to blame. Crowding out may reflect fundamental problems stemming from the relationship between the person implementing the incentive and its target. The incentives built into an employer’s compensation and supervision policies, for example, may tell the employee that the employer is greedy or controlling, or does not trust the employee. Or the incentive may inadvertently convey the wrong message—such as, in Haifa, “It’s okay to be late as long as you pay for it.”

If this is the case, then the policy maker can do better than limit the role of incentives and markets. She may be able to turn crowding out on its head. In a new policy paradigm based on this reasoning, the conventional policy instruments—incentives and punishments—might enhance rather than undermine the force of citizens’ ethical or other-regarding motives, which in turn might contribute to the effectiveness of the legal constraints and material inducements. The idea that laws and morals might be synergistic goes back at least to Horace two millennia ago: “What is the point of dismal lamentations if guilt is not checked by punishment? What use are laws, vain as they are without morals?” (Odes, book 3, no. 24).7 For Horace, both laws and morals, working in tandem, are essential to a well-ordered society.

I wish to advance here this policy paradigm of synergy between incentives and constraints, on the one hand, and ethical and other-regarding motivations, on the other. Before Horace, the ancient Athenian assembly devised the rudiments of such a paradigm. And I explain in the last chapter why things might have turned out quite differently in Haifa had its example been followed.

A new policy paradigm would be based on an empirically grounded view of “men as they are.” Replacing Homo economicus would be a place to start. But a complementary part of such a paradigm would incorporate new evidence on cognitive processes that account for the actions we take. The work of Richard Thaler, Cass Sunstein, Daniel Kahneman, Amos Tversky, and others has made it clear that people are not nearly as farsighted, calculating, and consistent in their decision making as economists have generally assumed.8 Instead, we are biased toward the status quo and inconsistent in choosing among alternatives occurring at different times in the future.

Even after being instructed in how to avoid these biases, we insist on making what economists consider computational mistakes. For example, in taking actions in an uncertain situation, people treat a positive probability that something may occur, no matter how small, as very different from knowing for sure that it will not happen. Kahneman, a psychologist honored by economists as a Nobel laureate in their own discipline, concluded, “People are myopic in their decisions, may lack skill in predicting their future tastes, and can be led to erroneous choices by fallible memory and incorrect evaluation of past experiences.”9

Economists, who have placed the act of choosing at the center of all human activity, have now discovered, in short, that people are not very good choosers.

Thaler, Sunstein, Kahneman, and others have drawn out the public-policy implications of the new evidence on cognitive processing. In part for this reason, in the pages that follow I am less concerned with how we make decisions than with what we value when we make decisions, how incentives and other aspects of public policy may shape what we value, and why this suggests there should be changes in how we make policy.

I will begin by explaining what the Homo economicus-based policy paradigm is and recounting the strange story of how its practitioners came to be either unaware or unconcerned that the policies it favored might crowd out ethical and other social motivations.