Always Think of Incentives
OCTOBER 01, 2006 by STEPHEN DAVIES
While visiting FEE a few years ago, I was lucky enough to hear a talk by the “armchair economist,” Professor Steven Landsburg. In it he remarked that most of economics could be summarized in just two sentences: “Resources are scarce” and “People respond to incentives.” These two apparently simple and obvious observations are in fact profound insights into the nature of human beings, the world they inhabit, and the social life they lead. As Landsburg said, exploring them and their implications leads to an enormous body of thought and insights, often surprising.
It is the second one that concerns me here. All human beings have to act in order to survive, and these acts involve choices between alternative courses of action. We choose according to the perceived balance between benefits and costs accruing to any action. This is what is meant by responding to incentives. The obvious corollary is that if the incentives change, then choices and subsequent behavior will change as well. The change may be actual or one of perception or a change in the subjective evaluation of the alternatives, but that is a secondary matter. The crucial point is that the pattern of incentives will tend to shape the way people choose and act.
Thus if you want to understand human behavior, the pattern of incentives must be established. If you can do this, then in many cases you will have found a way to explain what might otherwise seem incomprehensible. This is even, or perhaps particularly, true in the case of behavior that is apparently self-destructive or pointless. It also means that one way of changing human behavior is either to change the incentives directly or else to change the subjective evaluation of the payoffs and hence the choices made. This can help us to understand both the nature and origin of major social problems and what will or will not work in trying to resolve them—or indeed if they can be resolved by deliberate action at all.
A common response is to say that this is a narrow and impoverished view of human motivation that relates only to the realm of money and economic incentives in the narrow sense. However, understood properly, this principle has much wider application. Incentives clearly include financial or monetary costs and benefits, and it is foolish and naïve to underestimate how important these are. However, the term also includes all sorts of other benefits, which are often more powerful than money. The most significant is social status. When we think about incentives in this wider sense, it is possible to make sense of areas that at first sight have nothing to do with economics as it is generally understood.
One of the best examples of this is the criminal-justice system. Historically this was one of the first areas of human life to be analyzed using this insight, and the effects were profound. In eighteenth-century Europe the penal system, which had largely been created during the later Renaissance (roughly 1450 to 1650), was exceptionally harsh and brutal. Many crimes attracted the death penalty, which had a central place in the system. As time passed, the number of capital crimes grew steadily. In England there were about 100 capital crimes in 1700, but by 1815 this had risen to over 250. Execution was invariably in public and attended with all kinds of ritual and ceremonial. The commonest form was hanging, which often did not involve the “drop” so that the condemned felon would die a slow and agonizing death by strangulation. Even those who escaped the death penalty suffered punishment that was public and painful. Moreover in most of Europe (though not in England) torture was widely used to extract confessions.
However, this grim system was ineffective and became more so as it became harsher. All contemporaries believed that crime of all sorts was increasing, and so far as we can tell they were correct in this assumption. Moreover, looking at the records reveals several paradoxes, the most striking being that while the number of capital crimes increased, the proportion of criminals who actually were executed went down. In fact so many were acquitted or had their sentences commuted that it seems a minor miracle that anyone ever was executed. What you had was the worst of all worlds, a system both inhumane and ineffective.
This was to change largely as the result of one man and one short but brilliant book. The man was Cesare Beccaria, the Marquese de Bonesana (1738–94). He was a leading figure in the Milanese Enlightenment, and in 1764 he was persuaded by his friends Alessandro and Pietro Verri to write a book called Dei Delitti e delle Penne (On Crimes and Punishments). This was one of the first works to apply the principle that human beings respond to incentives to the brutal yet incompetent judicial systems of the time.
Beccaria argued that criminals were motivated by the balance between the possible benefits of crime and the likely costs, which were essentially those of being caught and punished. He also argued that future punishments and benefits both counted for less than those inflicted in the present or near future. (This is an early version of the economic concept of “time preference.”) The problem with the system, he argued, was that for the individual criminal the chance of being caught, and if caught convicted and punished, was too low. In response punishments were made even more severe so as to maintain the deterrent. However, after a time this did not work. One reason was the slowness and sheer incompetence of the system, which meant that punishment was still uncertain and often long delayed. More serious was the way that the sympathy of jurors and judges led them to acquit those charged or to manipulate the system to find them guilty only of a lesser charge because they saw the punishment as excessive and unreasonable compared to the actual crime.
Mild, Swift, and Predictable
Beccaria argued that punishment should be comparatively mild but also both swift, so it occurred soon after the offense, and certain and predictable rather than uncertain and arbitrary. This, he said, would produce a criminal-justice system that was more humane but also more effective because it would have a greater deterrent effect. He was particularly opposed to the death penalty and its widespread use. One separate argument he made was that it was both morally wrong and dangerous to give the state the power to kill people. His incentive-based argument was that the widespread use of execution not only did not deter but might even encourage certain crimes. The reason was, first, that for many people the prospect of their own death was hard to envisage and actually less terrible than the prospect of lifelong confinement, and second, that the public nature of the event actually cast a romantic glamour over the crime and its perpetrator, which might lead some individuals to seek it as a route to fame.
Beccaria’s little book was soon translated into most European languages and had a tremendous intellectual impact. Its effect on actual policy, however, was delayed, not least because of the conservatism of the legal profession. Eventually, his arguments were accepted, and the result was a radical reform of the criminal-justice system throughout Europe. The consequence was exactly as he had predicted—the system became both more humane and more effective, with a gradual decline in both actual and recorded criminality. (There were several other reasons, but the reforms inspired by Beccaria were a major part.) By 1900 recorded crime rates in almost every part of Europe and North America were at an all-time low.