Frederick Taylor, Burrhus Skinner and the economics that charm snakes
8' min read
8' min read
Gregory Mankiw's Principles of Economics, published this year in its tenth edition, is probably the most widely used economics textbook in the world. In the introduction, the Harvard economist lists what he sees as the ten core principles of the modern economic approach. Among them, the fourth principle says 'People respond to incentives'.
Some have gone further. Steven Landsburg, for example, writes in his The Armchair Economist that 'The bulk of economics can be summed up in four words: people respond to incentives'. Mankiw and Landsburg are, after all, in good company. Chicago economist Canice Prendergast states that incentives are the very essence of economics ('The Provision of Incentives in Firms. Journal of Economic Literature 37(1), 1999, pp. 7-63). But the most radical position in this regard is probably the one expressed by Steven Levitt and Stephen Dubner on page one of their megaseller Freakonomics (Sperling & Kupfer, 2010) where we read that "incentives are the cornerstone of modern societies". But what do these statements mean? "An incentive," writes Mankiw, "is something that induces a person to act, (...) the prospect of punishment or reward. Because rational people make decisions by comparing costs and benefits, they respond to incentives'. The prospect of punishment or reward, therefore, are the tools we can use to bring about behavioural changes in others. To get them to do what they would otherwise be unwilling to do or to stop them from doing what they would like, instead, to do. Incentives are instruments of control and the exercise of power.
An additional tax on cigarettes pushes people to smoke less because it alters the cost-benefit ratio of that choice, disincentivising it. A subsidy, on the other hand, reducing, for example, the price of electric cars promotes their purchase. If we want to discourage the consumption of fizzy and sugary drinks we can increase their price through a tax, and if we want to induce workers to work harder than they would normally, we can promise, for example, productivity bonuses.
It has long been known that the effects of incentives can have strange and unexpected effects. In the United States in 1968 it became compulsory to install seat belts in all cars and gradually all states legislated on the subject. What were the effects of this legislation that penalised driving without a seat belt? Of course seat belt use makes it less likely that people will be injured or killed in a car accident, but at the same time, so the data tells us, it also makes accidents themselves more likely. The increased sense of security that comes from wearing a seat belt prompts many drivers to drive less carefully and this leads to more accidents. This is the so-called 'Peltzman effect', named after the economist who first studied the phenomenon (Peltzman, S., 'The Effects of Automobile Safety Regulation. Journal of Political Economy. 83(4), 1975, pp. 677-726).
In addition to regulations introducing prohibitions and sanctions, taxation is of course also a powerful incentive instrument. And even this instrument can generate side effects. The houses built along the canals in Amsterdam, like those in Venice, rest on piles driven into the seabed. To reduce construction costs, the citizens of Amsterdam often reduced the number of supporting piles by building houses that, in the long run, proved to be unstable and dangerous. In order to eliminate this phenomenon, the state obliged owners to only use authorised builders. To cover the costs of this new service, a tax was introduced that increased in proportion to the surface area of the house. But as people responded to the incentives, in order to reduce the cost associated with the new tax, people started to build narrower and taller houses. Those characteristic houses that we still sell today overlook the picturesque canals of the Dutch city.
