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Economics And The Mundane

Source: Wikipedia

Years ago, when I first read that there is a strong relationship between welfare payments for single mothers, and the number of welfare mothers, I found it surprising. I have no doubt that this is true, and this fits in so well with my cynical view of the world. But, I still find it hard to believe that many teenagers are willing to bear illegitimate children for a measly welfare cheque. This is a common mistake. Intellectuals often grossly underestimate the lure of the welfare cheque. It is hard for them to imagine that there are people who find the life of a welfare bum tempting. The fact that there are teenagers who are willing to bear illegitimate children for a welfare cheque is just too unbelievable.

But, economists are quite vocal about their belief that monetary incentives can influence many decisions we take in our personal lives, including “baby making”. Free market economists are unusually likely to think so. But, I do not think this is because economists find this easier to imagine than other social scientists. If introspection can fail other intellectuals, it can fail economists too. I believe it is because economists are far less romantic. Economists are often more interested in the truth than politicians, policy analysts and journalists. They look into observable facts of reality.

Economists are also unusually likely to see the influence of monetary incentives in the everyday things we take for granted. In his The Freeman article The Mystery Of The Mundane, Peter Boettke argues that economics students should be more open to the mystery of the mundane:

“So as you are studying economics this year as a teacher, a student, or a casual reader, step back from the chapter or the lecture notes and look out the window of your room. Drive around town. Pick any good or service and track down all the exchange relationships that must have been formed to enable that good or service to be available to people like you. From lawn services to milk shakes, the marvel of the market is on full display.”

As Boettke observes, many libertarian economists have tried to defend the virtues of the market economy system, by explaining how the laws of supply and demand apply to everyday life. This is true. But, libertarian economists are not unusually likely to be vocal about the importance of non-monetary incentives in the market place. I think this is a mistake.

When I started working, what I quickly noticed was that economists grossly underestimate the role of politicking inside offices. It is not hard for a young man to notice that many things that people do inside an office do not make a lot of sense. It is not hard to spot the problems, and see where the solution lies. As Robin Hanson observes, private firms are often highly inefficient because the powerful coalitions inside a firm do not want to change things too much. It is easy to think of feasible solutions, but such changes might lower their status considerably.

Intellectuals underestimate the role of coalition politics. Even economists underestimate this. Of course, when faced with this fact of reality, firms can try to minimize the harm coalition politics can inflict. Robin observes that they often channel coalition politics in productive directions. But, still the outcome might be grossly inefficient and unfair.  Why are free market economists not vocal about this?

It is true that coalition politics is not the only key constraint. The constraints imposed by the bureaucracy can lead to many inefficient outcomes, especially in third world countries. The firms can minimize the harm inflicted by the bureaucracy by bribing the politicians and bureaucrats. Even the moderately capitalistic intellectuals in the third world admit that the governments have made it hard to do business honestly. In India, a popular joke is that anti-corruption activists have made it hard for even dishonest firms to exist and function.But, free market economists do not mind confronting this fact. Many economists like Murray Rothbard had argued that bribery could make the economy more efficient. So, why is coalition politics so under-analyzed?

If free market economists easily see how welfare mothers respond to monetary incentives, why is it hard for them to see how white-collar employees might respond to non-monetary incentives? If anti-capitalistic intellectuals can easily see how corruption can make the bureaucracy so inefficient, why is it hard for capitalistic intellectuals to see that coalition politics can make private firms inefficient? An obvious explanation is that most intellectuals, even free market economists do not have much real world experience. They perhaps underestimate the politicking nature of people. But, I do not think this fully explains this. The primary reason, I think, is that people are not really comfortable admitting the role of coalition politics.

Is this hard to believe? I will draw an analogy. Tyler Cowen once said that people are primarily motivated by status. People claim to be motivated by money because they are ashamed to admit that it is the approval of the society that motivates them. But, when people say that money is the root of all evil, they tend to assume that they themselves are an exception to this rule. If they want to pose as an exception to this rule, why is it hard to be more honest and blame the status motive itself? If people are ashamed to admit what really motivates them, they tend to act as if it does not even exist. When economists focus on the mundane, this is a mistake that they should not make.

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