Thursday, January 02, 2003

Incentives matter

D-Squared Digest believes that all political positions boil
...square down a Left/Right axis: either you think that it is more important to provide a decent life for everyone in the world, or you think it is more important to preserve the rights of people who own property. You can hum and haw as much as you like about whether the two are necessarily incompatible, or whether the one is instrumental to the other, or what constitutes a "decent life" anyway, but when you've finished humming and hawing, I'm still gonna be asking you the question, and your answer to it will determine whether or not we're gonna have an argument.
This is a pretty typical position, not because people's actions split into one camp or another, but because it squarely ignores the question of incentives. In their actions, people follow neo-classical models with a verve that would make Friedman blush, but in their thoughts folks tend to espouse ideas quite at odds with how they actually act.

I was having dinner with a very smart physician friend of mine a few weeks ago who insisted that the environment was his number one current concern, even through he had not contributed his time, money, or anything else to any environmental causes in the past 5 years. He was baffled when I asserted that the environment could not be all that important to him since he hadn't done anything about it. There's a deep gulf between what people say and what they actually do, and I think the reasons why people find economics weird and counter-intuitive lies somewhere in that gulf.

I was chatting with another smart friend (who also happened to be a physician) who was adamantly in favor of revoking all patents on drugs so they could be given to the poor. In her mind, the tradeoff was between poor people having drugs vs. drug companies having profits, and the choice was pretty straightforward. The real tradeoff of course is between people having drugs now vs. people having (new) drugs later, since drug companies only invest in developing new drugs if they have the opportunity to profit off them. Now, I'm not saying sacrificing some benefit in the future for some benefit now can't sometimes be a good idea, but it's the sort of thing that can go either way (dare I mentioned the word "balance?") But when people talk about issues that involve tradeoffs, they are notoriously poor at identifying what the real tradeoffs are, and the benefit now vs benefit later is one of the typical things people miss.

Take dear old d-squared. Property rights may seem like a bum deal for those who don't have stuff now, but they do give people incentive to do things like work, invest, and produce in the future so they can have stuff later. He sets up "decent life for everyone in the world" and "preserve the rights of people who own property" in opposition to each other, where the real opposition is "decent life for people NOW" vs "decent life for people LATER". And it's not at all clear what the right answer to that is, but Daniel (and many other folks) don't seem to even set up the right question.


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