The Incentive Trap
The political season is upon us again, and all sorts of half-truths, mis-statements, and outright lies are filling the air. It’s not hard to get fooled by some of them. After all, the politicians work long and hard to make them effective. You have to deal with them only occasionally, but a politician may spend a thousand hours a year on these little manipulations.
Today I want to focus on one of the greats - the incentive trap.
Imagine that you and twenty other people are all given an Amex number. You can use it for anything you want, and at the end of the month, you divide the bill twenty ways.
Can you imagine how people would use that card after a short time? Someone would start spending big. (After all, he or she can spend a fortune, and still pay only 1/20th of the bill.) Then the rest of you would start spending big, just to protect yourselves. If you’re going to pay a huge bill anyway, you might as well get some value out of it.
This is called an incentive trap, and it is an excellent analogy of how modern governments operate. For example, in my home town, we’ve always had candidates that ran as friends of either the Irish, the Italians, the Jews, the Poles, the Swedes, the Blacks, the Latinos, or others. Each group elects politicians to look out for their interests - and to grab as much from the treasury as possible.
As long as people vote for someone to “get their share,” politics will be a free-for-all of profligate spending and economic insanity. It is the Amex card trap, writ large.
So, realize that every time a candidate says he’s going to stick up for ANY group, he is also guaranteeing that the pain will keep on coming.
Sure, you can blame the politician, but it is the voters that reward this stupidity. Blame the people. And…
Don’t get fooled again!
PS: I explained this in another way as Mindless Slogan #85: Bringing Home The Bacon. Some day I’ll publish an explanation of how and why this situation developed.
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December 11th, 2007 at 12:40 am
I very much like your description of the “Incentive Trap.” The idea of a credit card bill that everyone knows will be split evenly, however much any particular person uses it, is an excellent example that makes the “tragedy of the commons” problem of government spending intuitively obvious.
June 29th, 2008 at 7:58 am
Isn’t it much more the big money public interests that are getting too much of a share by politicians? What has happened in recent years is that the campaign contributors with the fat checkbooks were promised to get a disproportionate share of government money, mostly in the form of tax breaks, making the entire financial system top-heavy with a very few haves and an ever increasing amount of have-nots.
As a result there are a very few with so much money that they don’t know what to do with it, and so they speculate on the dot.com or housing or commodities market with it, inflating bubbles and then bursting them, while the government, having promised not to tax those speculators, is forever in the red, printing more and more cash to keep up with national and international debt. And in all this those barely eking out have actually less and less money while prices and inflation skyrocket in a rollercoaster economy.
In light of all this actually wasting some of that inflating money on special groups of regular people sounds like a much, much less disastrous strategy. Ever hear of a concept called demand-side economics…?
July 17th, 2008 at 3:54 am
Are you arguing that stealing from the rich and giving to the poor is less damaging than stealing from the poor and giving to the rich?
I am not sure that this is true - but neither am I sure that it isn’t.
What I am pretty confident about is that stealing from anyone to give to anyone else has two large associated costs - enforcement costs (to pay for the stealing and transfer) and deadweight loss (the reduction of beneficial economic activity that would have otherwise taken place had there been no theft in progress.)
I have heard of both supply-side and demand-side economics, and they both seem to be ways to justify theft - just with different ideas about who should be stealing from whom. Since any theft incurs the above costs, a system that routinely justifies theft will always do worse than a system that minimizes theft.
July 19th, 2008 at 5:06 am
It depends on the situation what wealth distribution is best for everyone involved.
I like to see it through a car analogy. The car has a power source and a power sink. Those are the “rich” side and the “poor” side. If it’s an electric car that’s the minus and the plus pole of a battery. If it’s a combustion engine it’s fuel and a heat sink.
Of course you want the imbalance of rich vs. poor to exist, because the power flowing from where there is a surplus to where there is a need is what makes the car going. But you also don’t want your engine to overheat, which is why you have devices such as a cooling fan built in. And the bigger the car the more sophisticated the cooling needs to be…
As far as I’m concerned the wealth redistribution from the very rich to social infrastructure for the poorer is the cooling fan, keeping your motor from melting down, which, in the case of society, would be all the bad things we see associated with dirt poor people living in a very wealthy nation, making that nation less safe and less productive by being prone to turn into a criminal element easily…
As for the “large associated costs,” well, they are incurred anyway if you don’t treat your society right. You’re much less safe on the streets, or you have to pay taxes for lots of prisons (or both). You’re not necessarily “minimizing theft” by leaving lots of people disgruntled and feeling disempowered who just might not have the knack for making it on their own by the rules of “free trade,” without any safety net at all. Actually you’re breeding thieves that way.
And anyway, life is just costly. Any form of redistribution of goods incurs costs, whether it’s trade or theft. There’s always friction, leakage, entropy… That’s why there are no cars out there with a perpetual motion machine for an engine—because such a thing does not exist. And the same way that you’d wind up with a car that doesn’t work if you tried to build one based on the premise that a perpetuum mobile exists, the same way you might be creating a society that doesn’t work based on the idea that you can do it without hardly any forcible wealth redistribution built into the system…
July 22nd, 2008 at 12:48 pm
No offence, Ool, but I find “distribution of wealth” to be an arrogant thug’s argument.
How dare anyone claim the right to oversee millions of people and tell them that the wrong people have money! Who pretends to have the god-like wisdom to know this?
And once we decide that the distribution of wealth is “wrong,” do we take it away from the ones who have “too much”? How many thugs will we have to hire to take it away from them? Do we shoot them or lock them into cages if they don’t comply?
And how dare we take it away from people who earned it honestly?
This line of argument is the legacy of suck-up intellectuals, providing a justification for massive power-grabbing by an arrogant ruling elite.
PR
July 29th, 2008 at 5:59 pm
@Ool
I don’t understand your analogy at all. How is it we need rich people and poor people to create value? How are they like poles on a battery or a power source for a car? If your analogy had any viability, then those who are “middle class” would not be producing anything at all, as they would represent a neutral wealth differential.
I think you are confused about what generates value. It is certainly not some flow of goods from rich to poor or poor to rich. Value is generated by people working to make things better, and by trades which allocate the product of work to where it has greater value.
As for costs being incurred in trade and theft, that is certainly true. However, in trade, the costs are incurred voluntarily, and therefor will not happen unless the overall value created by the trade is greater than the cost of the trade. In theft, the overall value is not an issue, just the value gained or lost by the thieving party is considered. Thus where each free trade increases overall value, it is a very rare theft indeed that increases overall value.
Even when the thieving party is a government that is claiming to be acting for the overall good - even if they happen to believe what they are saying - when those deciding where value will be redistributed are not required to balance the equation by paying the full costs of their choices with their own value, there is no reason to believe that their actions will increase overall value, and a lot of historical evidence showing that such actions almost always do the opposite.
As for your perpetual motion machine analogy - even though the car concept it starts out with seems to be a broken analogy - the point that no system can be perfect is well taken. There is probably no way to completely eliminate theft, but a big step in the right direction is to recognize all theft for what it is, and not try to set some theft in a different category and legitimize it under the guise of necessary intervention by authority.
August 1st, 2008 at 4:32 am
That second paragraph is striking because it contradicts my point while then stating again. You say value is not generated by flow of goods from rich to poor or poor to rich but by allocating products to where they have greater value. But where do products have greater value other than where there is a scarcity of them, as opposed to where there is a surplus of them? In other words the products flow from where people are rich in those goods to where they are poor in them.
As for (all) trade being voluntary, no it isn’t. That is, unless you consider the option to perish as a voluntary matter. I buy food I trade. But I do buy food in order to survive. It may not appear urgent to me if I live in a surplus economy, where food is cheap and plentiful and available from many sources, requiring not too much sacrifice from myself in order to acquire it. But ultimately I buy food or shelter or clothing because I’m *forced* to have these things (if I wish to live). I trade because I must. And that becomes nowhere as apparent as in situations where there is suddenly a scarcity of essential goods, in which what I must sacrifice in order to survive is much higher.
Usury or gouging are forms of theft that don’t seem to show up on your radars at all because you’ve spent all your life in a place where the present abundance of resources have kept them in check.
I think the idea that all trade is voluntary and not a matter of life and death can only be hatched by people who have never had it rough, who have always had the middle class existence in a huge Goldilocks zone, where goods flow from rich to poor, from energy source to energy sink, and they’re right in the middle.
That’s where we live, in case you haven’t noticed. There is this huge heat source called the Sun and there is this huge heat sink called deep space. And in between we live, in an equilibrium we haven’t created, but in which we can be mobile and creative. Everything we produce and trade is fed by our ability to tap into various power sources, which ultimately all originate from this sun or previous suns, and into various energy sinks, which is, in essence, the night sky.
As for your faulty proof by example that authority forcing redistribution of value led to decrease in value in many historical instances and that therefore all forcible redistribution of value is bad, well, may I redirect you to the example of fire being a fearsome tool of destruction and usually having been bad news in our prehistoric past? But just because fire can be used to destroy doesn’t mean that, properly utilized, it isn’t actually a handy tool to produce greater value. It is the same with forcible redistribution of wealth. Properly funneled it can be the kind of activity keeping your house at a steady ambient temperature, enabling you to lots of things with ease you couldn’t do if you were forced to wrap yourself in blankets depending on which room you are in and what time of the day it is. That’s what a society without a government-provided social net is like…
Oh, and, regarding Paul’s comment about locking up people who don’t comply with paying their share of their wealth to the comunity—that’s how they got Al Capone, isn’t it? Getting rid of taxes wouldn’t always get us rid of thugs, I’m afraid…
August 1st, 2008 at 11:56 am
Hi Ool,
You have a lot of pre-decided opinions supporting your arguments. You don’t really state them, but you do assume them to be true.
The old Objectivists used to say, “check your premises,” and I think that is a good idea.
I’ll just comment upon your past paragraph: “about locking up people who don’t comply with paying their share of their wealth to the community—that’s how they got Al Capone, isn’t it? Getting rid of taxes wouldn’t always get us rid of thugs, I’m afraid…”
No one “got” Capone because of anything having to do with taxation. He was just a thug who got a big opportunity because of Prohibition. There are always such twisted people on earth, and they do not decide to become evil because taxation takes a different form.
And, in actuality, taxation was rapidly on the rise during Capone’s time.
I’m not trying to be rude here, but you really do need to examine what you believe and why. It seems to me that you are defending emotionally-precious territory rather than searching for what is true.
PR
August 5th, 2008 at 4:49 pm
It was a joke. “They nailed a homicidal mobster for tax evasion, so taxes can’t be all bad.” The rest of the post was serious, but the Capone bit wasn’t…
September 15th, 2008 at 12:55 am
@Ool
You are either being intellectually dishonest or are just confused. You were clearly using the terms “rich” and “poor” as designations of different relative overall levels of wealth, but now you are trying to claim that you were just talking about people with different goods for trade being rich in one thing and poor in another, and saying that my description of free trade proves your point. But then you immediately go back to the “goods flow from rich to poor” with no reference to the goods flowing in the other direction, or mention of the fact that both parties may be equally “rich” albeit in different goods. In fact your analogy of the sun shining on the earth is quite clearly pointing to a situation with no value exchanged in the other direction. When you attempt to make your point by switching the meaning of words between parts of your argument, this is known as the fallacy of equivocation.
* * *
Yes we are certainly free to choose to starve to death rather than trade. Survival is just one of the many things we might want. It may be something we want badly, but that doesn’t mean that we will not sometimes forgo survival in favor of other things that are more important to us.
* * *
What you call a “faulty proof by example” was not any kind of proof at all - merely an observation that all of the various political experiments that I am aware of support the idea that freer markets produce greater average well being.
I will not argue that it is impossible for involuntary transfer of wealth to produce an overall good, just that it is healthier to start with the assumption that it will produce overall harm until you can prove otherwise.
The question here is one of where burden of proof lies. The libertarian believes that before you can morally use force to prevent free individual action, you must show that you are not causing overall harm by preventing that action - that the presumption of good lies with individuals acting freely.The authoritarian believes that the presumption of good lies with decisions made by the group - that individuals must first obtain permision for individual action by demonstrating that their actions will cause greater good than harm.
It is pretty clear that the historical record of the outcomes of various political experiments is indicative that the higher the standard of proof to which entities are held before they can use force to suppress free voluntary action, the greater the overall benefit. This in no way proves that good can not come from some use of force that you have in mind, but it is compelling evidence that the more stringent a burden of proof you apply to those who would use such force, the better off your society will be.