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The Role of Incentive $($by Lawrence W$.$ Reed$)$

There$$s a great deal of talk these days about incentives. An

incentive is something which incites one to action. It is a spur,

a motive, a provocation, a goad, a stimulus. Economists have

long understood that the incentive to act comes from the

prospect of the action yielding benefits to the actor. Because of

that fact, particular incentives and incentive structures

explain a very great deal of the economic world which swirls

around us$.$

People respond to incentives and to their opposite, disincentives.

An individual will feel compelled to respond favorably

to something which promises great personal benefit at low cost

or risk. The same individual will tend to turn away from those

things which deliver little or no benefit, especially if they do so

only at high cost. He will positively shun those things which

would set this progress back, much as a hot stove is disincentive

to bare hands. Human choice is thus influenced by economic

incentives and by changes in economic incentives. Let$$s

take a look at some current situations and see how this might

explain some things.

Many people complain today about the poor schooling

their children receive in public schools. Declining test scores

and a breakdown of discipline in the classroom, even as the

costs of schooling rise, bear testimony to the failure of public

education. Does this happen because public school teachers

and administrators do not wish to provide a quality product?

Not really.

There is no reason to believe that public school teachers

and administrators are any less desirous than other people

that quality education be imparted. They are, however,

responding to a peculiar set of incentive structures. I ask the

reader, what would your performance be like if your business

could legally draft customers and compel them, under threat

of penalty, to buy your product? Suppose you could go a step

further and force even those who do not use your product in

any way to pay for it$$and to continue paying throughout their

productive lifetimes! Not exactly a prescription for creativity

and productivity, would you say?

Why do industries and labor unions contribute heavily to

political campaigns? It isn$$t always to promote better government

for everybody. Such groups have an incentive to contribute

if the expected returns $($favors$,$ protections, subsidies,

immunities, and the like$)$ exceed the value of their contributions.

If government could not or would not pay off, the contributions

would slow to a trickle.

The charge is frequently heard that British and Swedish

workers have become lazy. They don$$t work as hard as they

used to$.$ Studies indicate, however, that when these same

workers migrate to America, they work harder! The reason for

the difference is that the incentives for work in America, in

spite of high taxes, are greater than in Britain or Sweden,

where taxes are even higher. If one encourages something, one

gets more of it and if one discourages something, one gets less

of it$.$ That applies to work as much as it does to any other

activity.

What about pollution? Why would anyone dump his junk

into Lake Erie? Doesn$$t he know that it doesn$$t belong there?

Well, consider the incentives and disincentives a polluter may

face. Dumping junk into the lake undetected may be much

less costly than alternative methods of disposal. And since no

one $$owns$$ Lake Erie, it may be some time before anyone takes

notice and complains.

Cattlemen of the Old West were accused of overgrazing on

public lands. They would allow their animals to strip the land

bare, leaving it vulnerable to erosion, and then move on$.$ This

was land they temporarily leased from the government or

acquired free by government grant. With no incentive to maintain

the capital value of the land, their actions were perfectly

rational. The same men seldom exhibited such callous behavior

toward property they bought and paid for and therefore

owned outright.

Incentives explain so many of life$$s events: why higher

prices call forth greater supply and why lower prices do not;

why students work harder in a class where excellence is

rewarded and failure is penalized; why capitalist economies do

better than socialist economies; why some people quit working

and go on welfare; and so forth and so on$.$

Finally, those who seek to improve economic life in

America today would do well to learn the importance of incentive.

In order to stimulate improvement, the disincentives for

individual improvement must be abolished. In The Wall Street

Journal David M$.$ Smick wrote:

Growth involves ideas and thus is unpredictable. All

we can provide is buoyancy$$that sense of economic

boundlessness where a person can, with energy and

initiative, take a new idea as far and as high as he or

she wants. If we can keep that initiative from being