Choose: Incentive or Incentive?

Everybody responds to incentives. 

(And not surprisingly, a lot of you might not agree) 

Somewhere, in my mind, I did know it, but realized it only after reading Freakonomics - a fascinating description of the "hidden side" of everything by Steven Levitt and Stephen Dubner. Thanks to them, I have been able to write whatever follows. 

Incentive may not always and necessarily indicate an extra amount of money. Incentive is "an influence", could be positive or negative, motivational or demotivational, and is the major factor which influences the way you act. Helping - a friend with his call; a kid cross the road; a shopkeeper with extra change; yourself, hooking up with a partner and whatnot – comes mostly out of incentive. Not many of us realize that and react when told. 

Had it not been for incentive, you might not have been reading this, in the first place. The possibility of your getting something good out of this article urged you to at least skim through it. And now, all of a sudden, incentives seem the only important raison de vivre. 

Mr. Prescott, a winner of the 2004 Nobel Prize for Economics, and now a senior monetary adviser at the Federal Reserve Bank of Minneapolis and professor of economics at the W.P. Carey School of Business at Arizona State University, has this to say - 

People respond to incentives. You don’t make economic policy for nations, you make it for people. And it’s the responses of those people, when aggregated, that give us those data that we all love to analyze. 

So, why did the European labor supply decrease by a third from the early 1970s to the mid-1990s? Because the marginal effective tax rate was increased to 60%

from 40%. People chose to work less than before. Consequently, tax revenues fell. You can’t raise revenues by taxing people beyond their willingness to pay. And

you can’t expect an economy to grow when people don’t have the incentive to work, or when entrepreneurs lack the incentive to take a chance. 

Every professional would identify with the example above. Why would you run to a shopping store, a kilometer down, for someone else when there isn’t anything that you could buy for yourself! 

A visit to the park if your child completes her/his homework on time, your treating a friend with a beer for making special brithday plans for you. Your friend, on the other hand, making those special plans to get something from you.

So there definitely is an incentive to almost everything that we do. What are the types of incentives, how different are they from each other, how to identify them, are questions that need not a lot of in-depth analysis. It could either be for money or for someone you love (no monetary gains to be enjoyed) or maybe for a stranger for humanity, etc. 
 
 

There are three basic flavors of incentive, Freakonomics says, – economic, social and moral. An excerpt from the book will throw more light on them – 

Very often a single incentive scheme will include all three varieties. Think about the anti-smoking campaign of recent years. The addition of a $3-per-pack "sin tax" is a strong economic incentive against buying cigarettes. The banning of cigarettes in restaurants and bars is a powerful social incentive. And when the U.S. government asserts that terrorists raise money by selling black-market cigarettes, that acts as a rather jarring moral incentive. 

We all learn to respond to incentives, negative and positive, from the outset of life. If you toddle over to the hot stove and touch it, you burn a finger. But if you bring home straight A's from school, you get a new bike. If you are spotted picking your nose in class, you get ridiculed. But if you make the basketball team, you move up the social ladder. 

The typical economist believes the world has not yet invented a problem that he cannot fix if given a free hand to design the proper incentive scheme. 

Now, let’s take the other end of it. Let’s go in the reverse direction. What if there were no incentives at all! What if everything you did gave you nothing in return! Strange? 

Imagine traveling a couple of kilometers to pay your grocery bill, which you usually do to avoid unwanted circumstances like: the grocery store not willing to sell you anything anymore or a bad image in the society or maybe even a legal action against you. Let’s control for all these unwanted circumstances. Let the grocery guy maintain a very healthy relationship with you, you also maintain the good image in the society and let there never be a legal action taken against you – all this even after you don’t pay the bill. Why would you bother to work then? You’d never be paid. No incentives. Forget the bonus! No one works, no one earns, no one smiles, no one jokes, no one helps, no one eats, no one sleeps, no one gets out of bed… no one does anything! 

Is there a single selfless good deed! 

I’ve started to feel uneasy now.