Incentivism

A foundational assumption in economics is that the behavior of individuals is the product of the incentives they face. A direct corollary to that is that if you want to change behavior, you need to focus on changing the incentive structures within which people operate.

This has a bunch of political consequences. It would be good if we had a word to describe this philosophy! I propose incentivism.

Incentivism

n. The belief that an individual’s actions are determined by the system of incentives within which they operate.

From this basic definition, I propose the following further usages.

n. The manipulation of incentive structures to influence behavior in society, organizations, and institutions; incentivization.

n. The belief that such incentivization is or will be effective.

n. A philosophy of political economy in which the purpose of social norms and government is to align the incentives of free individuals toward pro-social ends.

You’re probably an incentivist.

Incentivism is an extremely common approach in thinking about policy. I would say it is the preponderant view among educated people who consider themselves ‘wonks’, regardless of political affiliation.

What are these social ends?

I have my preferences, but a rigorous definition is not necessary to define incentivism. Incentivism is more of a strategy to design institutions that work. If you are hiring an agent to do a job, you want to align the incentives of the agent with the principal. If you are designing or reforming a health care system, you may want to align the incentives of providers to maximize public health at low cost.

Examples

Patents

Society benefits from inventions, but if anyone can steal your idea, there’s no reason for a normal person to invent stuff and bring it to market. To align the potential inventor’s incentives with the interest of society in more inventions, we have patents that allow inventors to reap some of the economic surplus generated by their invention. The incentive mechanism of government-inforced monopoly has a huge deadweight loss, as well as problems with corruption. More efficient incentive mechanisms might include direct monetary rewards for inventions or advanced market commitments for new products.

Limits

Traditional patents create monopolies, and monopolies create deadweight loss. Patent buyouts are a better solution.

Employee Stock Compensation

This one is obvious. Employee stock options often have the word incentive in the name.

Singapore

In Tracing Woodgrains’ review of Lee Kuan Yew’s From Third World to First, he writes, “constant tinkering and fine-tuning around incentive systems is core to [Lee]'s planning.” Lee has a particular vision for what prosperity and social ends look like, but he typically pursues them through manipulation of incentive systems rather than direct legislation. For example, Lee believes that a “sense of ownership [is] vital for [a] society [with] no deep roots in a common historical experience,” (96) so he strongly incentivizes homeownership through subsidies. In designing the health care system, he subsidizes low cost treatments in smaller, less comfortable wards, allowing patients to pay for less subsidized, more comfortable rooms. He does not subsidize outpatient clinics and general practitioners, so as not to incentivize unnecessary care.

To decrease congestion, Singapore continues to employ large excise taxes on cars, while subsidizing public transport.

Limits

When Lee identified a problem of low birthrates among educated women in Singapore, he tried to solve that too with incentives by giving “preferential school selection for children of graduate mothers who have at least three kids.” This backfired in a way he couldn’t predict. It wasn’t so much non-graduate women who objected to the discrimination, but graduates, who said things like:

“I am deeply insulted by the suggestion that some miserable financial incentives will make me jump into bed with the first attractive man I meet and proceed to produce a highly talented child for the sake of Singapore's future.” (137)

Indeed, around the developed world, birthrates have been falling despite many countries’ attempts to incentivize having children through programs including generous parental leave, baby bonds, tax policy, and much more.

Georgism/LVT

Besides being a no-deadweight-loss source of government revenue, a land value tax is worthwhile because it aligns the incentives of property owners with the interest of the community: in order not to lose money, land must be developed in a manner that maximizes its economic value. The primary issue Georgists have with our current system is that without LVT, property owners are incentivized to underspend on developing land and instead wait for it to appreciate then collect economic rent from the value created by the rest of the community.

Limits

Land value taxes, even when optimally calculated, are regressive, disproportionately hitting landowners without the capital to develop their properties to their economically optimal use.

Moreover, land value taxes do not do anything to facilitate capital investment in real estate. They incentivize it in the sense that a landowner who doesn’t invest in their property will not be able to afford to keep their land. But for development to actually occur, there must be capital waiting to be deployed. High property taxes, even if they are imposed only on the land and ignore improvements, tend to make real estate development less profitable, and thus we should expect that an LVT will decrease development.

Carbon Pricing

Carbon emissions cause climate change, which imposes costs on the whole world, especially to future generations. At the same time, modern prosperity is built upon the exploitation of fossil fuels, and different industries are cheaper and easier to transition than others. The incentivist solution is to avoid heavy-handed regulation and instead try to quantify the social cost of carbon, then force polluters to bear it. A carbon tax thus creates a direct and proportional monetary incentive for every polluter to lower their emissions to avoid the tax. Incentivist advocates of the carbon tax are often uninterested in how the tax revenue is spent: some would prefer that it be distributed in a universal tax credit for every citizen.

Limits

Though still the preferred approach of many economists and wonks, carbon taxes have been largely abandoned as a policy by mainstream political parties in the US and Europe because they are unpopular with voters.

The incentivist carbon-pricing approach has been replaced by an industrial policy approach in which governments support the incubation of low-cost renewable alternatives to carbon-based technologies. The government-funded development of solar panels and batteries has brought their prices down so much that solar is now the low-cost energy technology.

There is no reason carbon pricing should not coexist with subsidies for renewable energy technologies. But in a world of limited political capital, Democrats have been correct to prioritize technological development on the supply side with the potential to radically change the underlying economics of energy production over an incentivist attempt to maximize the carbon-efficiency and justice of a carbon-based economy from the demand side.

Separation of Powers

Incentivism is at the heart of Madisonian constitutionalism. This is the thrust of Federalist 51, where Madison wants to align “personal motives” with the stability and function of the government. These incentives are supposed to work on the individual level and on the institutional level. Madison imagines the different branches as possessing an institutional self-interest which works to check the other branches. He may have miscalculated by failing to predict the emergence of cross-branch national political parties, but in any case his thinking is highly incentivist. While he and his contemporaries were also devoted to choosing moral leaders, he firmly rejects a moralist reliance on personal virtue in a system of government: “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.” (Fed. 51)

Limits

The Constitution Madison helped write has worked pretty okay for 250 years. However, the rise of political parties meant that the incentive structure created by the Constitution was actually different from the one he intended to create. This is a common flaw in policymaking and system design generally. The META (most effective tactics available) often turns out to be different from that imagined by the game designer in hard-to-predict ways. It is useful to have flexibility to modify incentive structures when they aren’t working as intended.

Excise Taxes and Subsidies

Pigouvian taxes are classic examples of incentivism.

Limits

It’s hard to calculate what the optimal tax should be. Some economists argue that calculation of the socially optimal Pigouvian tax rate is impossible in principle. Rightsizing incentives is a general problem in incentivism.

Deterrence

Deterrence is the idea that the threat of violence provides an effective incentive against undesirable behavior, from crime to international conflict to nuclear war. The violence threatened is highly negative-sum (up to nuclear war), but the threat is usually cheap and can actually prevent conflict.

Limits

Deterrence fails when it assumes rationality from actors who are motivated by something other than what the would-be deterrer imagines. For example, deterrence doesn’t typically work on revolutionaries who welcome violence to bring attention to their cause or to rigid ideologues.

‘Push and Pull’ Theories of Migration

These theories suggest that people migrate mostly for economic gain.

Limits

While there is some evidence that this is true (there a lot more migrants from poor countries to rich countries), it is a poor predictor of migration patterns. If and how people migrate is more determined by examples of friends and family migrating somewhere, information and misinformation regarding the ease of migration, and much more.

Is this an original idea?

No. It’s a new name for an old idea that deserves its own word.

Is this just capitalism?

Defenders of capitalism often argue that free markets align incentives toward the common good through the mechanism of price signals. Essentially, if society needs more of something (if that something is an excludable good with no externalities in a competitive market etc. etc.), its price will rise, which incentivizes profit-seeking firms to enter the market and provide more of it until the ideal amount is produced, at which point it is no longer profitable (so there is no more incentive) for new firms to enter the market. This is the magic of Adam Smith’s invisible hand, and it does work marvels: even capitalism’s discontents often confess that this mechanism is responsible for modern prosperity.

We could call that the incentivist argument for capitalism.

But capitalism means a lot of different things beyond this, even to capitalists: private property, private investment, and private ownership of the means of production do not inherently align individual and institutional incentives toward the common good. We don’t have to look hard to find perverse incentives in our economic system. Incentivist critics of capitalism point out that laissez-faire markets incentivize externalization of costs and environmental degradation.

Is this just libertarianism?

Libertarians often make the argument that economic and social freedom tends to produce wealth and flourishing because the actions of profit-seeking economic actors in a free and competitive market tend to create economic surplus. In doing so, they make a somewhat incentivist argument for freedom.

But they are often resistant to any form of social engineering or social incentives created by the state. Instead, they tend to see freedom as an end in itself. They also tend to claim that society doesn’t always know what is good for it, so letting people do their own thing generates innovations that everyone benefits from, but which are not directly incentivized by society.

In theory, you could have a centrally planned, totalitarian incentivist state, with strong ‘incentives’ (including harsh punishments for deviation) to act in accordance with the state’s highly specified ends.

In practice, though, libertarians are often incentivist, because incentives do not need to be harsh to achieve most social ends, and manipulating incentives on the margin still leaves people free to choose the disincentivized thing. Incentivization is often an alternative to coercion or direct state control.

Is this just utilitarianism?

Incentivism is consistent with utilitarianism, but they are not the same. Utilitarianism seeks to maximize total utility as the ultimate good without taking a position on how best to get there, while incentivism takes no position on what the ultimate good is, but reckons that the best way to achieve any goal is to align people’s incentives toward it.

Is this just behaviorism?

Incentivism is close to behaviorism. Behaviorism holds that human behavior is determined by mostly predictable responses to stimuli. Behaviorism also studies how people can influenced through conditioning, the process by which we come to associate neutral stimuli with reward and punishment until those stimuli become effective proxies that we cannot help but chase.

The biggest difference is that behaviorism, which was invented by psychologists, is more interested in explaining the behavior of the individual, whereas incentivism is focused on the system of incentives operating in larger social units.

Is this just economics?

Yes. Economists are always trying to find incentive structures to explain why people act the way they do.

Ironically, incentivism is more common in classical economics, which tends to assume that individuals always follow incentives, whereas behavioral economics, which has its roots in the behaviorist tradition in psychology, identifies biases that cause individuals to act in irrational ways contrary to their incentives.

Incentivism as a Political Philosophy

I want to focus on the last definition, which introduces normative claims.

n. A philosophy of political economy in which the purpose of social norms and government is to align the incentives of free individuals toward pro-social ends.

This definition establishes the basis for a whole political philosophy which I think is coherent and even pretty common but doesn’t yet have a name.

It’s okay for society to desire certain ends and pursue them by attempting to influence people’s behavior.

This is in contrast with a libertarian view which holds that most societal ends beyond the establishment and protection of individual rights are inherently suspect and illegitimate.

All societies/cultures/governments already create and sustain incentive structures, whether or not they were consciously designed.

Many work as intended. Ones that flagrantly don’t work tend to get weeded out eventually.

Incentives are sometimes opaque to participants.

Monetary incentives are the exception, rather than the rule.

Most incentives are enforced by social norms, which can be thought of as a low-cost form of incentivization using the opaque metric of status.

Changing incentives does not necessarily conflict with individual freedom.

Because everyone is already embedded in nearly comprehensive incentive structures, tweaking them in a given direction does not necessarily decrease freedom.

Less coercive incentives like Pigouvian taxes, fines, and social norms are often an effective alternative to more coercive and damaging incentives like threat of sanction and imprisonment.

Incentivism vs. Moralism (Legalism vs. Confucianism)

Incentivism is not the only view. An equally ancient school of thought holds that behavior is the product of virtue or the lack thereof. The consequences of this view for political philosophy, which I’ll call Moralism (for lack of a better term) are also straightforward, but quite different from Incentivism. The role of society and the state is a) to instill moral values in the people, insofar as morality can be taught, and in any case b) to empower the virtuous and disempower the immoral.