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posted on 29 May 2017

Perverse Incentives

Written by , Econoblog101

"If I watch a football match"

Sarah Bakewell’s new book “At the Existentialist Café" contains a nice description of reality and the perception of it:

If I watch a football match, I see it as a football match, not as a meaningless scene in which a number of people run around taking turns to apply their lower limbs to a spherical object. If the latter is what I’m seeing, then I am not watching some more essential, truer version of football; I am failing to watch it properly as football at all.

dirkehntssmall


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This connects to the issue of the way institutions work and influence our behavior. Institutions are mostly ignored in economics, but with the quote in mind one should say that this ignorance is not only wrong, but renders any economic analysis completely irrelevant. If we don’t understand institutions, we cannot understand human behavior. There are many, many games going on that are social in character and institutional in form:

  • the way that political parties are constructed;

  • the way that people move into certain neighborhoods because they have prestige;

  • the way that people attend events;

  • etc.

The same goes for capitalism. If it is not understood what the people inside (financial and non-financial) firms are aiming for, then we get wrong ideas about the way firms behave. We just learned in the last financial crisis that banks apparently have a problem because bankers can get some extremely high bonus payments during a boom that leave no incentive to think about the long-run.

Just as in football, it is important who is the one determining who plays at what position and how much freedom that person has to make his plays. It is also important to think about the rule book and the penalties and who enforces them. These issue have something to do with power, and Sarah Bakewell and “her" existentialists would probably not miss that fact.

If perversion is incentivized should we expect any other outcome?

This article was adapted from a post on Econoblog101.

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