The Cornerstone the Economists Rejected

An economist discovers that morality matters for healthy markets—and society.
March 30th, 2017

The ancients had it wrong. They were trying to find a unique substance—the philosopher's stone—that would transform mercury and other base metals into gold, bringing unimaginable wealth and immortality to boot. But they had it backward. It is gold itself that is the transformative substance. Instead of transmuting metals, gold transmutes people. And instead of making us immortal, gold transforms us from creatures a "little lower than heavenly beings" into base animals.

More plainly: Say you tell your kids you'll pay them to take their empty dinner plates to the dishwasher, or you tell your students that you will take them for steak and lobster if they master the Republic. When you introduce money or other economic incentives into social situations like these to achieve a certain end, you are not just substituting a unique means of achieving that end, you are changing the end, and changing yourself. If we do this across society, our personal habits begin to be shaped by these cost-benefit evaluations. The more our communities and behaviour are shaped by economic incentives, the more weight we—and the state—place on the important but limited space of economics. And the less attention we pay to social behaviour that is not driven by the hermeneutic of costs and benefits, the less stable our society gets. "Good incentives," it turns out, "are no substitute for good citizens." That, in addition to being its subtitle, is the argument of Samuel Bowles's new book, The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens, in a nutshell.

The economy is not, as many believe, a morally neutral ground.

George Akerlof, Nobel laureate in economics, says the book "plows new ground in exploring how the actions we take are motivated by their meaning," and that "Bowles is proposing a paradigm shift in how we think about our lives and about economics." This might be true—if you've never been in a family, been a member of a church, worked for a living, been part of a poodle-admirers society, or kept your eyes open in virtually any setting involving more than one person. It's true if you're one of the "we" who has ignored theology, political theory, and a host of other disciplines (including the sources of the discipline of economics) for the last five decades or so. It's true, that is, only if you're a modern economist.

If you read the book as an insider critique written by an economist, for economists, using economic methods to try to convince them of the inherent contradictions and shortcomings of the dominant paradigm in their field, then it is groundbreaking indeed. Bowles's observations are astute, his analysis is clear-eyed and thoughtful, and, for the most part, his recommendations are sound, even if for Pete's sake they've been hiding in plain sight for aeons.

The Making of the Shrewd

Bowles's first insight is the most obvious to the non-economist, and the one already mentioned. Paying someone to do something changes the nature of the relationship.

Take, for example, the study Bowles cites about a daycare in Haifa, Israel.

This daycare had challenges with parents arriving late to pick up their children. They had to do something to address this, as it was becoming a problem for staff who were in turn having difficulty keeping their own commitments. In other words, lateness was a community problem.

Their solution was to impose fines on the tardy parents. Parents who arrived late would be tacked with an additional charge on top of the fees they paid for daycare. The solution was simple: make them pay and they'll stop coming late.

Except "it did not work. Parents responded to the fine by doubling the fraction of time they arrived late."

What happened?

Well, the parents did the math. Imagine a young chemical engineer working in Haifa. He thinks to himself "I only need twenty more minutes to finish this project, and it will look really good if my boss sees this on her desk tomorrow morning. It's worth the extra few bucks if I'm late picking up my daughter."

The calculation doesn't even need to involve cash returns. Think of another young dad at the same office. He's tired out, and doesn't really want to deal with the arsenic hours of parenting that start before supper and end thirty minutes after bedtime. He thinks to himself, "I'll take the next train home—I'll have to pay, but it's worth the half an hour less that I have to deal with the kids tonight."

What happened here? What changed in the relationship before and after the "incentive" (in this case the fine) was introduced? What are the markers of a relationship dominated by incentives?

It isn't simply that economic considerations are involved. They are always involved in any relationship. The parents were already paying for child care after all. The same goes for relationships. We are trained, by Hollywood and others, to think money doesn't really matter in love and marriage. We've come a long way from the days of Pride and Prejudice, when marital relationships were dominated by financial interests. But economics still matters for marriage habits. Even things as non-economic as a community choir or an ultimate Frisbee team need to pay for sheet music or field time. Returning to the daycare and its fine, what happens is that the economic aspect of the parent/daycare-provider relationship gets promoted beyond its (and I use this term with caution) natural place. The relationship, which was originally built on an agreed economic exchange constrained by assumed moral codes (you'll pick your kids up on time so that the providers can meet their other, non-work obligations), is now entirely (or predominantly) a cost/benefit relationship.

Now it's not that people suddenly become "shrewd" in the sense we usually use it. Incentives don't suddenly make you "cheap"; people might be willing to part with great sums in a relationship defined economically (i.e., the dad who wants to avoid arsenic hour might be willing to pay handsomely for the quiet time!). What happens is that the question, Is this worth it to me? takes precedence over other questions, say, Is this honourable? or, How is this going to affect my community?

Liberalism is architecturally unstable. It is a massive edifice that has been slowly, intentionally, and by design, built without concern for its foundation.

As interesting as this is, you might say that there's really nothing new here. We get that people act differently when money's in the picture. But that's not the end of the Haifa daycare story. What happened next—with apologies to Buzzfeed—will shock you.

The daycare operators quickly discovered that the fines weren't working and got rid of them. But they discovered equally quickly that their community had changed and that the status quo prior to the fine was gone. Parents continued to arrive late at virtually the same rate as they did when the fine was in place. "Placing a price on lateness, as if putting it up for sale, seems to have undermined the parents' sense of ethical obligations to avoid inconveniencing the teachers, leading them to think of lateness as just another commodity they could purchase," says Bowles. The assumption that the incentive acted as a separate, additional spur to the moral obligation of being on time was simply wrong. Instead, the incentive pushed, or "crowded out," the moral obligation. After reviewing a wide range of political and workplace experiments, Bowles notes that "policies premised on the belief that citizens or employees are entirely self-interested often induce people to act exactly that way" (emphasis added).

The daycare case and other examples Bowles provides confirm something that most people who aren't economists, and even a good number of economists, have known for a long time: that "the economy produces people as well as goods and services." The economy is not, as many believe, a morally neutral ground. Instead, "economies structured by differing incentives are likely to produce people with differing preferences."

A short aside about the use of "preferences" here. "Preferences" is economy-speak for what the rest of us—including theologians and political theorists—know as the traditional concepts of justice, equity, morality, and so on. Concerns for equity or justice are not imperatives for the economist. They are "preferences." It's notable that even in a book that breaks down the conceit of economics as being separate from morality the author has a hard time bringing himself to use a language that is itself laden with a thick morality. This conceit of economics runs very, very deep.

Which is why the broader social point of Bowles's book will jar many in the world of economics. His book does not confine itself to economics, but makes a much deeper, political point.

It's the Citizens, Stupid

Bowles wants to take on what has become a maxim in the world of economics and politics: that you can form a functioning political constitution without regard for the morals of your citizens. Pointing to Machiavelli, Hume, J.S. Mill, and others, Bowles notes that the Western tradition gradually abandoned the classical endeavour of politics—the moral formation of citizens of a political community—in favour of attempting to form a "constitution for knaves." The idea is that a political community will be more stable if it is constituted in such a way that it will work even if everyone in your polis is concerned only about themselves. This was originally framed as a "realist" project—people are knaves, and it's ludicrous to pretend otherwise. Forming a constitution on the basis of this reality—instead of some ideal but impossible setting where people are moral and care about others as much as or more than themselves—is just prudent. Over time we were left with liberalism: neutral governance via rewards and punishments that would allow us to respond to our base instincts: economic self-interest. Such a constitution is agnostic about peoples' "social preferences" both as a matter of principle (liberal states are supposed to be neutral with regard to morals), but also as a matter of practicality. Economic incentives have a basis in a material reality common to us all, while "social preferences" are simply that: individual preferences that operate on a separate plane unaffected by incentives.

But if Bowles's reading of the data is accurate and morals and incentives are not separable, then it follows that liberalism is architecturally unstable. It is a massive edifice that has been slowly, intentionally, and, by design, built without concern for its foundation. It has been built on the assumption that a stable, prosperous, and free society can allow "incentives to do the work of morals"—and that assumption is wrong.

In fact, Bowles says as much. He notes that "the canonical model of policy making in economics" cannot possibly work. "Mechanism design has discovered," he notes, "that the three conditions of liberal constitutional design and public policy—neutrality with respect to preferences, voluntary participation, and Pareto efficiency—are generally not compatible."

Any combination of two of these conditions—efficiency and voluntary participation, say—can only take place in a situation where the third is not met. As an example, think of the Amish barn-building bee. It is both voluntary and highly efficient—but it only occurs because extremely high levels of trust and reciprocity exists within the Amish community (i.e., the Amish are famously not neutral when it comes to morality). The trust exists despite the lack of a complete contract between Amish farmers.

Or because of the lack of a contract. "Incomplete contracts cause market failures, as economists know, but they also encourage trust which, as Arrow says, may be essential to attenuating market failures." To borrow a phrase, markets in place of morality will leave you bereft of both morality and functioning markets. This leads Bowles to cut to the political thrust of his book:

The Legislator's visits to economics faculties have left him with five uncomfortable facts about incentives: incentives are essential to a well-governed society; incentives cannot singlehandedly implement a full efficient use of economic resources if people are entirely self-interested and amoral; ethical and other social preferences are therefore essential; unless designed to "do no harm," incentives may stand in the way of "creating better people"; and as a result, public policy must be concerned about the nature of social preferences and the possibility that incentives may affect them adversely. The last point is not something to be celebrated by anyone committed to the idea that in a liberal society the government ought to stay out of the business of cultivating some values and discouraging others. But the Legislator does not see how it can be avoided.

Bowles's book turns the French economist (and another Nobel laureate) Gerard Debreau's famous Le Figaro title ("la supériorité du libéralisme est mathématiquement démontrée"—the superiority of liberalism has been mathematically demonstrated) on its head and asserts that the impossibility of liberalism has been mathematically demonstrated.

What's interesting about the conclusion of Bowles's book is that he recognizes the importance of recovering moral language—even the inclusion of moral language into our incentives—but doesn't provide a thick account of which moral language we should use, or why we might choose one over the other. He speaks highly of the ancient Greeks (he leans heavily on Aristotle and, like most modern philosophers, skips over vast swathes of the medieval period), and offers some small translations of their wisdom to the daycare providers at Haifa, but when it comes to the big questions about the morality that should guide the polis, we don't get much. Why? In some sense the book is itself a case study of itself—a meta-example of the inability to recover morality after incentives have driven it away.

If we want to recover a sense of how a thick conception of morality and economics go together and enable each other, of how good citizens can also make good incentives, we'll have to look elsewhere. Who knows? Maybe it means revisiting that which we've consigned to the dustbins of irrelevance. But in the meantime, it's encouraging to see economists minding the moral foundations of their discipline.

 

Brian Dijkema is Program Director, Work and Economics at Cardus and senior editor with Comment. Prior to joining Cardus, Brian worked for almost a decade in labour relations in Canada after completing his master's degree with Cardus Senior Fellow, Jonathan Chaplin. He has also done work on international human rights, with a focus on labour, economic, and social rights in Latin America and China.

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