Book Reviews

More Virtuous Than We Think

Homo Economicus is a fundamentally selfish man. But what if he’s been vastly overhyped?

By Henry J. Aaron

Tagged EconomicsGovernmentPublic Policy

Samuel Bowles’ slim, fascinating, and thought-provoking book, The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens starts with two assertions. The first is that policymakers have over-learned Adam Smith’s lesson that people achieve collective good when they pursue private interest. Smith noted that pursuit of self interest often produces societal benefit. But Smith hedged his bets. Bowles charges that economists, jurists, and policymakers often don’t hedge theirs, and they have come to rely excessively on incentives based on the proposition that people’s behavior is entirely self-interested and amoral.

To be clear, most policymakers probably recognize that people behave from diverse motives. But standard economic analysis indicates that policy should normally be based solely on the self-interest assumption. Bowles’ second assertion is that policies based on the assumption that people are motivated primarily or entirely by selfish motives often work poorly and sometimes backfire. Worse, such policies may actually promote selfishness and amorality.

Put more positively, public and private policies often work much better if they are designed with the recognition that people act in part from self-interest and in part from “social preferences,” which include “altruism, reciprocity, intrinsic pleasure in helping others, aversion to inequity, ethical commitments, and other motives that induce people to help people more than is consistent with maximizing their own wealth or material payoff.” Furthermore, incentive-based policies may strengthen or weaken these motivations. Simply put, public policy can promote or erode civic virtue.

The view of government as moral tutor may seem odd today, especially to those on the political right. But not to all. The belief that government should shape and, in fact, cannot avoid shaping public character is the sum and substance of George Will’s 1981 Godkin Lectures, published two years later under the title Statecraft as Soulcraft: What Government Does. Writing soon after Ronald Reagan was sworn in as President, Will argued that government willy-nilly shapes public character by what it does. He warned that legislators, especially conservatives, should take that duty seriously and posed what has turned out to be a question of increasing relevance: “[C]an conservatives come to terms with a social reality more complex than their slogans?” It is not clear whether Will’s 2016 decision to leave the Republican Party is a delayed negative answer to that question, Trump-induced revulsion, or perhaps some of both.

Bowles’s ideal lawgiver, what he calls an “Aristotelian legislator,” is one who, in the philosopher’s own words, recognizes that the duty of legislators is to “make the citizens good by inculcating habits in them. It is in this that a good constitution differs from a bad one.” Inculcating good habits is important because “[m]ost men are rather bad than good and the slaves of gain.” The object of the Aristotelian legislator is, to the extent possible, to change that.

Although Bowles, a founding member of the Union for Radical Political Economics, and Will are the oddest of bedfellows, they agree that government inevitably shapes the character of the governed. Nonetheless, it would be hard to find two books more different in style. Will’s book is a veritable Bartlett’s compendium of quotations from great thinkers, held together by the author’s distinctive prose. Like Will, Bowles also provides a tour d’horizon of musings on the role and purpose of government. But Bowles uses intellectual history primarily to set the stage for a review of contemporary research from economics, psychology, sociology, and anthropology on how people actually make decisions.

Bowles is the author or co-author of a goodly share of that research, in areas ranging from economic inequality to human cooperation. In addition, he breathes life and tangible meaning into the research with piquant reports and factoids. A few provide a decent starting point for understanding what Bowles is about:

  • At an Israeli day care center, social scientists imposed a fine on parents who picked up their children late. The fine was expected to lower the number of late pickups. Instead, late pickups doubled. Why?
  • The economist Thomas Schelling reports that when he was young and working in the White House, Friday afternoon work often spilled over into Saturday morning meetings. Although staff willingly sacrificed their Saturdays without pay, the President ordered overtime pay to compensate weekend workers. Saturday morning meetings virtually ended. Why?

For those who have mastered undergraduate economics but not gone on to graduate school, where they would unlearn some undergraduate oversimplifications, these results are extremely odd. They are odd because in each case only one thing seems to have changed—the introduction of an incentive to promote a certain behavior, either prompt parental pickups or weekend work. Yet both policies backfired, suppressing what they were supposed to foster.

In fact, however, two things changed, not one. To be sure, a new incentive was introduced. But more importantly, something else changed. Rather than treating prompt pickups as expressions of courtesy to others and weekend work as evidence of one’s commitment to a shared political vision, the incentives recast each action as something to be traded for money, as just another tradable commodity. Within the new frameworks, those affected came to regard tardiness and Saturday leisure as nothing more than “good buys.” Financial incentives “crowded out” social motivations.

And one more. Bowles cites the entrepreneur David Packard, who reported that when he started Hewlett-Packard, the typical employer attitude toward employees was the one that prevailed at General Electric: distrust. There, managers made a “big thing of plant security…guarding its tool and parts bins to make sure employees didn’t steal.” The result, Packard wrote, was that “many employees set out to prove this obvious display of distrust justified, walking off with tools and parts whenever they could.” Packard had a different idea. He “ . . . determined that our parts bins and storerooms should always be open,” which had two main benefits: “The easy access to parts and tools helped product designers and others who wanted to work out new ideas at home or on weekends” and “open bins and storerooms were a symbol of trust, a trust that is central to the way HP does business.” Packard was, quite literally, banking on the proposition that treating people with trust made them trustworthy. He used trust—the absence of overt measures to prevent theft—to “crowd in” social preferences, in contrast to the Israeli day care center and the White House, where incentives crowded them out.

The idea that motivations beyond self-interest enter into individual decision making is simple common sense to many. Nonetheless, it differs fundamentally from the psychology attributed to homo economicus, the relentlessly self-interested character who populates many economic models, which in turn frame thinking about public policy. Now, ignoring social preferences as these economists do in their models is a convenient simplification—and it’s even a valid one, if changes in financial incentives do not change the weight given to social preferences. For example, the day care incentive went awry because a monetary incentive weakened the salience of social motivations. The problem is that incentives that appeal to self-interest often change the salience of social preferences, and ignoring these effects may lead to bad policy.

To illustrate this point, Bowles takes readers on a journey through recent behavioral research on how people make decisions, much of which he has authored or co-authored. The range is enormous and the review fascinating. Much of it entails information on how people from around the globe respond to a large number of games or structured choices—some simple, some complex—that test what motivates behavior.

One of the simplest games is illustrative. Person A is given a sum of money and told to offer some of it to person B. A may give some, all, or none to B. If B accepts the offer, both A and B keep their shares. If B refuses the offer, neither gets anything. If both people think like homo economicus, A will give B the smallest possible amount, and B will accept it. For A to give more reduces A’s welfare. For B to refuse even a pittance reduces B’s potential welfare.

In practice, things seldom turn out that way. People in position A generally offer a sizeable share of their “endowment”—something approaching half or even more. Presumably they are acting out of either a sense of fairness or a fear that B will take offense at a paltry offer and send them both away empty-handed. This fear has been shown to be well-justified, as people in position B often refuse offers they regard as insultingly small. Most of the experiments are more complex than this one. Many are close replicas of real-life situations that the experimental subjects experience. For example, one study involved Colombian villagers who were jointly dependent on forest resources owned by none but used by all. They were asked to play a game structurally similar to their actual real-life choices. In the absence of rewards or penalties, the villagers, operating without information on how others were behaving, recognized that if they pursued narrow self-interest, the group would be damaged by “over-exploitation” of the common resource. When a fine was introduced for selfish behavior and the participants were informed how others had behaved, selfishness first declined but then, stunningly, increased until it was indistinguishable from what a completely selfish person, entirely uninterested in the welfare of group, would do. Some of the experiments play out sequentially, showing how responses change over time as people “learn” from experience.

In addition to a panoply of such studies, Bowles gives readers a clear and accessible explanation in plain English of some pretty advanced economics, including Nobel Prize-winning research on the conditions under which markets can achieve “optimal” outcomes, and of “system design,” a new field that explores how to structure choices to produce the best possible results.

Financial incentives that play upon self-interest are often weakened or strengthened by citizens’ sense of identity.

This ramble through economics is not a side trip, but is central to Bowles’s larger message. The theoretical conditions under which markets dependably produce “optimal” results are never fully satisfied in practice. Not everything can be traded. Contracts seldom specify all possible contingencies and establish payments for them. In such cases, trust and mutuality come into play. For example, we cannot accurately evaluate our physicians’ knowledge and skill or buy insurance against all possible errors. So, we choose physicians based on the testimonials of friends and relatives and in the end must trust our own inexpert impressions. As a second example, employers often cannot detect whether their employees are delivering their best efforts. So good employers may pay more than they have to and use a wide range of other tools to promote a sense of company loyalty to encourage workers to feel personally invested in the success of the business.

It is hard to translate the results of the research Bowles describes into concrete advice about how to use incentive-based policies to develop social preferences, because the complexity and richness of human interactions and motivations make each situation close to sui generis. Two pages near the end of the book summarize the qualitative suggestions. But the best demonstration may be Bowles’s own redesign of the Israeli day care policy in order to encourage parents to pick up their kids on time.

In his alternative formulation, the day care center posts a notice on its bulletin board that starts by thanking parents for their past efforts to pick up their children promptly, noting that promptness allows staff to be with their families. To support such efforts, the center offers a sizeable prize to be shared by those parents who, over the succeeding three months, have a perfect record of picking up their children on time. The prize will be announced, and the reward presented, at a parent and staff holiday “Teacher of the Year” party. Winners will be given the option to contribute their prize to the Teacher of the Year, whose identity will be announced at the same time. Parents who pick up their children late will face a large fine (many times larger than the one that was actually imposed). The names of the tardy parents will be announced and the fines collected at the same holiday party, with the proceeds also going to the Teacher of the Year. Parents would be told that if tardiness happened for a good reason or if the fine would result in extreme hardship, the fine would be waived, but the tardiness would nonetheless be announced.

One can certainly argue with the details. But the idea is clear—financial incentives that play upon self-interest, however legitimate, are often weakened or strengthened by interactions with social preferences, people’s sense of identity and reputation, and interpersonal empathy.

It is far from easy to transfer such principles to major matters of state. Bowles attempts to do so, but with only limited success. But some perennial differences between left and right come into focus when seen through this lens. Perhaps the most obvious is the dispute revolving around the advantages of income- and means-tested aids to the poor on the one hand versus social insurance on the other. Although it is technically possible to design policies with identical distributional effects in either form—a set of taxes and targeted assistance in the one case, a different set of taxes and universal benefits in the other—the difference helps explains why many who are eligible do not claim food stamps or Medicaid and many who do are embarrassed, but virtually everyone who is eligible for Social Security or Medicare claims them with no sense of shame. The basic point is simple and important: Models based on homo economicus are useful starting points in thinking about public policy, but the key words are “starting point.” While citizens shape their governments, governments always and inescapably shape the citizenry.

Read more about EconomicsGovernmentPublic Policy

Henry J. Aaron is the Bruce and Virginia MacLaury Senior Fellow at the Brookings Institution. The views expressed here are his own and do not necessarily represent those of the trustees, officers, or other staff of the Brookings Institution.

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