And the men of Kharkov and Karachi are not different from the men of Kalamazoo. The specific objects of wealth and power may differ between Kalamazoo and Kharkov. But if Kalamazoo teems with thieves and brigands while Karachi is serenely industrious, the explanation lies not in differences in goals. Differences in goals will not explain differences in the way individuals pursue those goals.
This is from William H. Meckling and Armen A. Alchian, “Incentives in the United States,” American Economic Review 50 (May 1960): 55-61, reprinted in The Collected Works of Armen A. Alchian, Vol. 2, Property Rights and Economic Behavior.
I’ve been working on a chapter on Alchian and property rights in a short book on the UCLA School. (Steve Globerman, a fellow UCLAer, and I are writing it for the Fraser Institute.)
So I’ve been going though the Collected Works volume published by Liberty Fund.
So what does explain differences in the way people pursue their goals. The answer is in the title of their piece: incentives.
READER COMMENTS
Jon Murphy
Sep 3 2020 at 2:35pm
I’ll be pre-ordering that as soon as I can!
Jon Murphy
Sep 3 2020 at 3:06pm
I think there’s a very important lesson here. Incentives matter. But economists can sometimes get swept up and think that only price incentives matter.
Prices do affect behavior, it is true, but price is only one margin. Incentives can take on many, many forms. One of the thing Coase’s famous 1960 paper The Problem of Social Costs emphasizes is the many non-price ways in which we can solve externalitites. If we focus only on marginals and only on price, we likely impose taxes (or subsidies) that are sub-optimal. Indeed, they could very well make matters worse!
Demsetz, in a 1996 paper entitled The Core Disagreement Between Pigou, the Profession, and Coase in the Analyses of the Externality Question states (and I agree) that Coase’s recognition of these “alternative assignments of responsibility,” which are completely removed from the Pigouvian story, are the key difference between Coase and the Profession (also one of the reasons why I think many people do not understand Coase, but that’s a different story).
The great thing about freedom, where law and policy are constrained to helping resolve disputes rather than allocation issues, is that freedom allows for us to explore these many alternative arrangements. Freedom allows us to adjust along price, if we so wish, but we can also adjust along so many other margins. The Joy of Freedom is discovering how we can live with one another in the best possible way.
Phil H
Sep 3 2020 at 7:59pm
Ultimately I assume there’s no rigorous distinction between goals and incentives. An example DH gave recently suggests why: he walks into a shop and sees a new design of hat; up until that moment he did not know that he wanted that hat; but having seen it, he now realises that it is right for him. Or: no-one had the goal of flying first class when there were no planes. That is to say, our goals are ultimately constituted of the incentives (including market availability of stuff) that act upon us.
But for day-to-day analyses, goals and incentives are both useful concepts.
Tom DeMeo
Sep 5 2020 at 10:02am
noun
plural noun: incentives
a thing that motivates or encourages one to do something.
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