Incentives matter

Incentives matter.

This is something that seems obvious but people tend to forget. In every society, there is a set of rules (informal or formal) that economists like to call Institutions. Few if any are exempt from the influence these rules have on them. They work as incentives, where they reward some kind of behaviour while punishing other. These rules or institutions shape human interaction.

I do not regard humans as being naturally good or evil. Among other things because these are concepts that change over time, so the one who is regarded as good today might have been considered evil a couple hundred years ago. However, we are human and humans respond to incentives. Human desires and intentions are a complex thing, that vary from each individual to the next. I doubt any one person could fully grasp this. Human nature is hard to change. Conventions change only progressively over time.

To co-exist in the same place harmoniously, the (moral) judgement of human nature is, I believe, irrelevant. The important thing is to have a set of rules that leads to an outcome that is efficient (in the sense that for someone to be better-off no other person has to be worse-off), regardless, of human nature. So for example, If I am a very ambitious person and want to have X, the set of rules should make it possible for me to gain X only by voluntary action instead of say theft.

In the world, we see a lot of things we regard as wrong or immoral. Cronyism, for example. We jump to pass moral judgement on the person doing the action, being the verdict anywhere between **shole and Satan. We even end up thinking: “It is because of people such as him/her, that the world is in such a dismal state.”. It is of course, easier that way. These strong, brief moral judgements do not require much thought. But let us ask ourselves: If that person had not done that, would someone else have?. If the answer is yes, it is not so much that the person is the reincarnation of Satan, but that the incentives are not right. Someone pursuing their self-interest did harm to others. Things are not being rewarded/punished the way they should have been.

Incentives DO matter. Life is complicated. People are not wholly good or evil. Human nature is complex. What you believe as morally right, does not necessarily mean that I regard it as moral. In order to live with such differences in a society it is important that our pursuit of moral goals or self-interest does not lead us to (directly*) harm others, only by respecting others’ rights as we would like ours to be respected may we live in peace.

*I say directly because it is more complicated when the harm is indirect. For example if the success of one person leads to envy by another person ( thus making him worse-off) it would be an indirect harm, but this does not necessarily mean that it is a wrong outcome. Externalities are also a major issue which for simplicity matters and because I have not yet arrived at formed opinion I will not be discussing.