If incentives matter, we might be in trouble

Theologian C.S. Lewis was a keen observer of people and the consequences of their ideas — good or bad.
He took note of our topsy-turvy world with these cogent words: “In a sort of ghastly simplicity we remove the organ and demand the function. We make men without chests and expect of them virtue and enterprise. We laugh at honour and are shocked to find traitors in our midst. We castrate and bid the geldings be fruitful.”
So behavior is actually influenced by the incentives and the disincentives we confront? You bet it is. This is an iron law of the human condition.
The biggest advocates of taxes and regulations on smoking argue that such penalties will deter the smoker. Strange, isn’t it, that many of those same people think they can soak the entrepreneur, the investor, the saver, the employer and the inventor with little or no negative consequence.
The Obama administration says it wants to stimulate the economy but calls for higher taxes on those who take a risk, create an enterprise, hire people, invent a product. It says it wants to foster medical innovation, then it imposes a tax on medical devices. It vilifies the rich and successful while imploring us to work to become rich and successful.
People respond to incentives and to their opposite, disincentives. An individual will feel compelled to respond favorably to something which promises great personal benefit at low cost or risk. The same individual will shun those things which would set his progress back, much as a hot stove is a disincentive to bare hands. Human choice is thus influenced by economic incentives and by changes in economic incentives.
Incentives and disincentives explain why higher prices call forth greater supply and why lower prices do not; why bad behavior never goes away if it’s subsidized; why students work harder in a class where excellence is rewarded and failure is penalized than in a class where everyone gets a “C”; why some people quit working and go on welfare; why politicians promise more spending as long as voters re-elect them for it; why capitalist economies do better than socialist economies, and so on and so forth.

The future world we are creating will surely be shaped by the incentives and disincentives we are putting in place today. In that light, we must hope that this warning from novelist and philosopher Ayn Rand does not also become our epitaph:

“When you see that trading is done, not by consent, but by compulsion; when you see that in order to produce, you need to obtain permission from men who produce nothing; when you see that money is flowing to those who deal, not in goods, but in favors; when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you; when you see corruption being rewarded and honesty becoming a self-sacrifice -- you may know that your society is doomed.”
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(Lawrence Reed, a resident of Newnan, is president of the Foundation for Economic Education in Irvington, N.Y., and Atlanta.)



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