The Trouble with Incentives


Review of The Moral Economy: Why Good Incentives Are no Substitute for Good Citizens, by Samuel Bowles

New Haven: Yale University Press, 2016

According to legend, when the father of modern Greece, Ioannis Kapodistrias, attempted to address the malnourishment of his people by importing and freely distributing potatoes, the Greeks roundly rejected his offer. Heeding Laocoön’s ancient wisdom, the people of the Peloponnese knew better than to trust a Greek bearing gifts. As the story goes, Kapodistrias responded to the people’s refusal to accept the potatoes by unloading a shipment on the streets of Nafplion and instructing his soldiers to pretend to stand guard. The untrusting Greeks would not accept free potatoes—if they are free, something must be wrong with them—but were more than happy to steal provisions so important they needed to be guarded by the army. Kapodistrias’ ploy worked, and potatoes soon became a staple of the Greek diet. In Nafplion, the offer of free potatoes did not stimulate demand. Nor did the threat of punishment deter theft. Instead, the threat of punishment communicated the value of the potatoes. If something is worth guarding, it is worth stealing, and the Greeks responded to the new information by stealing more.

Samuel Bowles’ recent book, The Moral Economy: Why Good Incentives Are no Substitute for Good Citizens, is an extended meditation on the complexities of human motivation. Bringing together insights from the history of Western political thought, neoclassical microeconomics, and behavioral game theory, Bowles launches a sustained, persuasive attack on the Homo economicus assumptions of contemporary political economy. His objective is to persuade readers that the project of transforming brute self-interest into socially desirable behavior is as productive as the alchemy of medieval Europe. If he is correct, Bowles has delivered a blow to what many regard as the essence of Enlightenment liberalism—namely, the premise that well-designed institutions and market prices can channel selfish private vice into salutary public good. 

Bowles traces this axiom of liberalism to Niccolò Machiavelli, who rebelled against the then-dominant Aristotelian vision of politics. To Machiavelli, the state should abandon the project of cultivating moral rectitude and should focus merely on harnessing self-interest in promoting tolerably decent behavior among citizens. We must take men as they are—“ungrateful, voluble, dissemblers, anxious to avoid danger and covetous of gain”—and not as they should be. Machiavelli’s legislator must assume, in other words, that “all men are wicked.” The state is incapable of making men moral. It can merely design institutions to profit from intractable vice. In Bowles’ words, “The job description of the wise policy maker in this case is no longer that of Aristotle’s Legislator, tasked with uplifting the population, but instead that of Machiavelli’s republican, tasked with ordering the right laws to induce citizens to act as if they were good” (31). Political wisdom, on this telling, begins from a Hobbesian assumption of self-interest, a Madisonian recognition that men are no angels, and a Kantian faith that collective-action problems “can be solved even for a race of devils, if only they are intelligent.”

Interdisciplinary thinking at its best, Bowles’ argument demonstrates how this Machiavellian turn underlies both liberal political philosophy and classical economics. According to at least some formulations of liberalism—anti-perfectionist formulations, to be precise—the state ought to remain neutral among competing visions of the good life. Rooted either in a skeptical refusal to endorse any moral facts or in a principled objection to “legislating morality,” such liberals call for the state to accept and accommodate all (or virtually all) of life’s radically diverse ethical worldviews. The parallel economic paradigm calls for a free market that makes no assumptions about what individuals’ preferences are and does not try to shape behavior according to an external standard of morality. Just as the state must remain neutral among competing conceptions of the good, the market must produce efficient outcomes no matter what preferences are thrown in. These preferences are the exogenous axioms of political and economic institution building.

The neutrality of the polity and the neutrality of the market flow from David Hume’s supposition that reason is merely the slave of the passions—or in Thomas Hobbes’ more elegant telling, that “thoughts are to the desires as scouts and spies, to range abroad and find the way of things desired.” If the state is not interested in advancing a substantive vision of what makes life meaningful—and if the very consideration of such a matter is declared outside the domain of reason—we are left with the sovereignty of preference. Accordingly, self-interested preference satisfaction is raised to the highest object of social concern. Incentives in the form of prices must supplant morals. And politics and economics become primarily concerned with the alchemical transfiguration of wildly divergent preferences into tranquil, socially desirable ends. This is the landscape of contemporary political economy’s basic assumptions, as Bowles sketches it anyway. It is an expertly curated intellectual genealogy of Homo economicus. But Bowles is cautious never to insist that this liberal turn relies on the belief that all motivation really is nothing more than self-interest. The basic Homo economicus model is compatible with the existence of what Bowles calls “social” or “other-oriented” motivations, so long as those motivations are additive or separable with self-interested ones. But what happens if existing social motivations cannot be neatly combined with self-interest? What happens if “moral and other prosocial behavior” is “affected—perhaps adversely—by incentive-based policies designed to harness self-interest?” (21). It is precisely this crowding-out and its implications that Bowles seeks to uncover in this book.

Surprisingly given his post-Marxist pedigree, Bowles’ strategy fits within the quintessentially conservative mode of argument outlined by Albert Hirschman in The Rhetoric of Reaction. The taxonomy fits arguments into one of three categories: arguments from futility, from perversity, and from jeopardy. In other words, introducing incentives that reward self-interest might fail to promote the incentivized behavior (futility); they might make individuals less likely to behave in the way incentivized (perversity); and they might undermine the moral ecology in which individuals make choices, rendering them less trusting and less altruistic (jeopardy).

The Moral Economy is replete with examples of how incentives fail on each (and sometimes all three) of these fronts. Some of Bowles’ examples are well-known—how introducing fees for tardy parents drastically increased the frequency and magnitude of late-pickups from Haifa preschools, for instance, or how the Boston Fire Department’s decision to set a cap on annual sick leave led to virtually everyone taking off close to the maximum number of allotted days, more than they took off before the cap was introduced. Other examples come from highly stylized game-theory experiments performed by Bowles or others, which demonstrate how explicit incentives undermine altruistic norms. Making sense of this impressive array of evidence, Bowles outlines two mechanisms by which incentives that respond to self-interest can crowd out and undermine other-oriented, moral motivation: sphere changes and endogenous preference formation.

Sphere changes, or “situation-dependent” preferences, as Bowles describes them, reflect incentives’ role in providing “cues to the nature of the situation in which a person finds herself” (85). Though Bowles does not use this language, we can make sense of Bowles’ story by borrowing an analysis made famous by Michael Walzer. Life is divided into a series of social spheres. Though not sharply delineated from one another, these spheres each operate according to distinct internal logics. The norms and criteria regulating one might not be appropriate if extended to another. In Walzer’s words: “different social goods ought to be distributed for different reasons, in accordance with different procedures, by different agents … These differences derive from different understandings of the social goods themselves—the inevitable product of historical and cultural particularism.”

Though Bowles doesn’t put it quite this way, a Walzerian lens illustrates how incentives that appeal to self-interested motivations can confuse individuals as to what social sphere they find themselves in. Consider, for example, the Israeli preschools mentioned above. We would expect that penalizing tardy parents with fines should discourage tardiness. To understand why the policy had the opposite effect, we must appeal to the logic of sphere-changing. Originally, the sphere of social life associated with the punctual picking up of children rested on norms of politeness. Parents recognized that their children’s caretakers had busy lives of their own—perhaps their own children to pick up. Correspondingly, a conscientious respect for the needs of others motivated them to arrive on time. Introducing the financial penalty drastically changed that calculus. No longer was tardiness an unfair burden placed on busy workers; it was an additional commodity available for purchase. The guilt once felt in response to arriving late had been paid off financially, according to the logic of the market. In this case, the other-oriented motivation to pick up one’s children on time was far stronger than the self-interested motivation to avoid the additional cost. Far from internalizing the negative externality caused by tardiness, the new financial penalty (the price of tardiness) served as a confusing social cue, producing a less optimal outcome than was reached when social motivations alone governed the sphere of daycare pickup.

The second mechanism by which self-interest-based incentives crowd out moral motivation is through a complex process of endogenous preference formation. The Homo economicus approach begins from the assumption that preferences—be they moral conceptions of the human good or tastes in the market economy—must be taken as sovereign inputs, free from rational scrutiny or critical evaluation. Yet as Bowles points out, Homo economicus is not born; he is made: “the extensive use of incentives may adversely affect the evolution of civic preferences in the long run” (115). Introducing incentives that exploit self-interest doesn’t just crowd out other-oriented motivations in particular circumstances; it teaches individuals to think primarily in terms of self-interest over the long term. As John Rawls put it “an economic system is not only an institutional device for satisfying existing wants and needs but a way of creating and fashioning wants in the future.” By leading us to impute self-interested motivations on the otherwise altruistic actions of others and by rewarding our own self-interested impulses, incentives reshape our preferences. The problem with the caricatured view of men and women as self-interested utility maximizers isn’t that the view is wrong; it’s that introducing policies that assume and correspondingly reward self-interested behavior turns people into self-interested actors, at great costs to society and the individual.

Yet this observation—that institutions which reward self-interest may themselves create self-interested men—may be a feature, not a bug of the liberal political and economic order. As Albert Hirschman explains in his authoritative treatment of pre-capitalist arguments for capitalism, The Passions and the Interests, many early champions of liberalism understood quite well that considerations of self-interest crowded out traditional moral motivations. Such theorists of doux commerce were unsatisfied with societies governed dominated by (often bloody) appeals to heroic demonstrations of virtue. They sought instead to uncover “more effective ways of shaping the pattern of human actions than through moralistic exhortation or the threat of damnation.” Self-interest was of use precisely because it lessened the role of moral passions in life. As Hirschman points out, the rise of one-dimensional men (Homo economicus in Bowles’ language) is the reason so many took capitalism and liberalism to be desirable in the first place. The curtailing of our most violent, dangerous passions—those which respond to considerations of virtue and vice—may well be liberalism’s greatest achievement.

What is needed to refute this argument in favor of liberalism is an explanation of how our social life has been impoverished by the substitution of prices for morals. Arguments of this sort have been given by critics of liberal society left and right, from Stephen Marglin and Herbert Marcuse to Alasdair Macintyre and G.K. Chesterton, who point to the insidious forces of cultural homogenization in mass society, the elimination of distinctive personality, and the decline of meaningful communal life as scourges both for individuals and for the broader culture. Though Bowles periodically voices sympathy with such arguments, he never directly confronts this central defense of self-interest.

Instead, Bowles focuses primarily on the apparent contradiction within capitalism produced by the rise of self-interest. By undermining traditional bonds of personal affection and solidaristic concern, a market economy transforms social life into a series of depersonalized transactions. This depersonalization in turn undermines social trust, which ultimately has the effect of compromising the market itself. As Kenneth Arrow observed, “norms of social behavior, including ethical and moral codes,” are important for a society to “compensate for market failures.” The functioning of a market society itself depends on social trust and altruistic cooperation.

As it turns out, however, the most market-based of societies remain relatively rich in social trust. We seem far removed from Marx’s prediction that collapsing all of social life into the realm of commerce would bring on an age “of general corruption, of universal venality.” Bowles credits the persistently high social trust in market societies to the citizens’ altruistic willingness to sacrifice their own welfare in order to enforce collectively desirable norms. This social enforcement stems from an abandonment of clan-based identification, which follows from the introduction of the rule of law, economic stability, and social insurance. By protecting them from the predations of their self-interested fellows, such institutions encourage individuals to act on other-oriented, social motivations. As Bowles puts it, “the puzzle of vibrant civic cultures in many market-based societies may be resolved by paying attention to how geographic and occupational mobility, the rule of law, and other aspects of liberal societies preserve social order by sustaining civic virtues” (150).

Yet the explanation that liberal political institutions save altruism from self-interest is not entirely satisfactory. Moving from the family and the clan to the state as the locus of the administration of justice no doubt plays an important role in promoting social trust. But Bowles neglects a wide-ranging literature on other important determinants of social capital, such as ethnic diversity, inequality, and civic associational life. Moreover, in crediting a liberal political order with the success of staving off the consequences of Homo economicus, Bowles overlooks the tight philosophical connection he himself diagnoses between the roots of liberal politics and market economics. It is difficult to understand without further elaboration how a set of economic institutions that assume and reward self-interest can be healthily offset by political institutions that assume and reward the same.

Nonetheless, Bowles continues, even the most salutary of liberal political cultures may still be undermined by the imposition of incentives designed to exploit self-interest. By replacing social norms with market utility maximization, such incentives corrupt the complex moral ecology in which individuals live and choose. The social practices that are abandoned in favor of the logic of the price system aren’t arbitrary social constructions to be tossed out. They embody distinctive cultural values and shared social meanings. Their loss leaves society all the poorer. On this point, Bowles’ critique is most damaging to particularly enthusiastic defenders of the market economy, who fail to see the costs of recklessly trampling over traditional social constructions.

It is most surprising here that Bowles never addresses E.P. Thompson’s influential use of the phrase “moral economy” in the context of his landmark study of popular resistance to the English Corn Laws. Thompson documents the respect in which traditional norms and shared social expectations undergirded an internal logic of economic morality that stood radically opposed to the forces of capitalist market competition. In light of this implicit allusion, one wishes Bowles had more seriously addressed the impact of the logic of self-interest on the culture of market economies—one of Thompson’s major historical interests. Private property, after all, is the economic institution par excellence of the self-interested principles of modern political economy. Bowles points to economic games in which self-interested initial constraints permanently damage altruistic behavior. He appeals to sociological evidence as well concerning how the introduction of private property can undermine social trust and reciprocity. But he has little to say about how capitalist institutions and knavish assumptions have shaped American history and society. It is clear how on the micro-level the appeal to self-interest can distort preferences and behavior. But it is less clear what the broader societal implications of such distorted preferences have been. This absence is especially a shame given the rich empirical literature on the decline of social trust in America. Readers would profit from a more direct discussion as to whether that decline is connected with the phenomena Bowles documents.

Bowles is persuasive that by encouraging individuals to abandon previously salient social motivations and by directing them to form increasingly self-interested preferences, incentives can prove toxic to valuable social goods and norms. Yet importantly, Bowles clarifies that it is not the incentives per se that are problematic. Rather, it is the information conveyed by them. Friedrich Hayek’s greatest contribution to economics was insisting upon the price system as an unparalleled mechanism for communicating information in a complex society. Bowles’ contribution is the recognition that not all news is good news.

The trick then is to employ incentives in a way that communicates information to bolster rather than undermine existing salutary social motivations. But this can’t be done from a starting point of neutrality. If a particular incentive intends to supplement moral motivations, those motivations must be explicitly endorsed and celebrated. Otherwise, the rhetorical appeal to self-interest invites individuals to ask “what’s in it for me?” and crowds out the moral motivation to align one’s behavior with a promulgated societal vision of the good. Thus, incentives which complement existing moral judgments are the most likely to be effective. If the incentive is introduced through a process of extended deliberation, its legitimacy stems not from self-interest but from the moral authority of the community. Likewise, if material incentives are coupled with a moral insistence on what constitutes praiseworthy action—as they did in Ancient Athens—they work synergistically with organic moral motivations.

Carrots and sticks must be part of a moralized judgment, not independent of competing conceptions of the good. In the words of the Victorian jurist, James Fitzjames Stephen, “the law is to the moral sentiments of the public … what a seal is to hot wax. It converts into a permanent judgment what might otherwise be a transient sentiment.” Incentives can’t be an alternative to social scripts for a life well lived; they must strengthen them. To this end, Bowles quotes a powerful passage from Confucius’ Analects: “Guide them with government orders, regulate them with penalties, and the people will seek to evade the law and be without shame. Guide them with virtue, regulate them with ritual, and they will have a sense of shame and become upright.”

Samuel Bowles formulates a critique of contemporary liberalism that is in many respects largely familiar. In 1977 Richard Titmuss’ book, The Gift Relationship, sparked a fierce debate among economists and philosophers in arguing that altruism was far superior to markets in promoting blood donations. Kenneth Arrow replied with an influential critique, levelling two major objections: Titmuss failed to adequately theorize how market incentives crowd out moral motivations, and Titmuss failed to bring adequate evidence to bear in defense of the theoretical claim. Bowles’ contribution in this book is in many respects his response to both objections. The mechanisms of situation-dependent social cues and endogenous preference formation provide the theoretical account Titmuss, and the major advancements in experimental economics and game theory provide compelling evidence for the phenomenon’s empirical validity.

More importantly still, Bowles has demonstrated how Titmussian critiques of market economics apply just as powerfully to the philosophical doctrine of liberal neutrality. Perhaps not entirely comfortable with some of his conservative bedfellows on this latter point, Bowles is reluctant to appeal explicitly to the language of “soulcraft,” as George Will put it decades ago. He is happier lamenting the loss of altruism and other-oriented moral motivation. Yet his argument may prove more than he would like. For if it is true that political and economic institutions can’t help but shape our deepest assumptions about the world, Aristotelian Legislators can’t limit themselves merely to the cultivation of “social preferences.” They must recognize instead that sound policymaking requires a fairly thick underlying vision of the human good.

The Moral Economy appeals to an ancient truth. Incentives and self-interest are no substitute for moral motivation and altruism. The state cannot rudely impose laws on society with the alchemical hope that the right institutions, the right prices, and the right political form can successfully shape any people, any preferences, and any political matter. As Aristotle understood well, and which political economy has only recently recognized, the coercive power of the state depends on and is inextricably bound up with the character and norms of the community.

Posted on 21 November 2016

DIMITRIOS HALIKIAS works at a think tank in D.C. (though these opinions are strictly his own). He occasionally blogs at Omphaloskepsis.