Incentives Rule the World

 Our behavior is profoundly influenced by the incentives we face. Money is a very important motivator but money is not everything. Our behavior is also influenced by prestige, power, benevolence, and all the feel good stuff. All of these help determine the incentives we face to work hard for our own benefit and for the good of man kind. Our cultural and moral values are also important more directly for the quality of our lives and for the success of any economic system—capitalism or socialism—by supporting or failing to support voluntary compliance with the needs of that system. They provide the lubricant that helps the economic system function smoothly.

Knowing that I favored market economies, a bright and idealistic young man in Kenya asked me recently if I thought capitalism encouraged immoral behavior. I don’t think he had the Madoffs and Stanfords of the world in mind as that kind of criminality exists everywhere (though generally on a smaller scale). He was reacting, I think, to his impression that the profit motive had driven many greedy players on Wall Street to risk and lose a lot of other peoples’ money. He was reflecting an image of capitalism as greedy and socialism as benevolent.

My reply to him had two parts. The first part was that I see capitalism as driven primarily by the nexus of service and profit (the better we serve the wants of others the more we profit) and of socialism by the nexus of need and power (those in power politically define what we need and strive—in the best of worlds—to satisfy them). The second part was that capitalism and socialism are economic systems, not moral systems. Societies with either economic system will be more successful if their citizens also largely embrace cultural and moral values that respect honesty and the rights and property of others.

From the beginning of time societies have enforced rules of behavior meant to protect and enrich their existence. The more successful they were in convincing their members to voluntarily live by these rules, the less time and resources they needed to spend on their enforcement. Such societies prospered relative to others. If every member of society were totally honest and lived by the Golden Rule, the substantial share of our resources devoted to our security and enforcing rules and agreements (military, policy, courts, security equipment, fences, etc) could be used to produce goods and services we would actually like.

People and their values differ but also have much in common. Almost all of us work hard to survive (feed and cloth ourselves and our families) and when possible to live more comfortably. But most people are also genetically hard wired to please others. Once we have satisfied our basic needs, we desire to win the approval of our families and friends and to make the world a better place, not just make a better living. In his new book “Drive,” Daniel Pink “argues that the most powerful emotional motivators are the desire for
autonomy, the satisfaction that comes from mastering a skill or a task, and the need to serve some larger social purpose.” Capitalism better aligns these motivators with economic success. Those people and firms that are the most successful in providing other people with what they want at the lowest cost are the most profitable and the most likely to survive. Capitalism rewards virtue and thus encourages virtue.

Socialism starts out proclaiming the virtue of sharing—giving—but does not reward it and thus provides little incentive to achieve it. In its fully egalitarian form, it provides no reward for harder work and effort at all, leaving every thing to our good hearts. Power—the control of the levers of government—displaces profit as the system’s most tangible reward. The best but imperfect example of a capitalist nation is the United States and of a Socialist nation was the USSR. The results speak for themselves.

While capitalism’s profit motive rewards and thus encourages virtue, without supportive moral values it can promote and inflame greed. Economists often look at capitalism (competitive, market economies) as directing man’s natural greed (self interest) to the service of the public good (Adam Smith’s invisible hand). Before he wrote his most famous work, The Wealth of Nations, Adam Smith wrote the Theory of Moral Sentiments (1759). It provided the ethical, philosophical, psychological, and methodological underpinnings to his later works, including The Wealth of Nations (1776). In it he elaborates far more fully his views on the supportive and reinforcing relationship between man’s nature (self-love, reason, sentiment, etc.) and morality (propriety, prudence, benevolence, etc.) and the invisible hand of the market place that leads mans’ quest for personal gain (profit) to serve the public good.

But whether capitalism tends to promote morality or not, any economic system will perform better if supported by moral values of mutual respect, compassion, and honesty. Our persons and our other property—our very lives—are best protected by the voluntary respect and honesty of our neighbors. If everyone (or almost everyone) is honest and does not steal, our property can be protected at negligible cost and we will all be wealthier. Today’s need to imbed security sensors in merchandize is a cost of business, like a tax, necessitated by weakened public morality and it makes us poorer. It is a cost with no benefit other than counterbalancing a failure of morality. Whether capitalism makes us more virtuous or not, the quality of our lives will be better in a moral society than an immoral one. Thus we need to be concerned with the inculcation of such values in each generation as much as with the preservation of free markets.

Beyond some point, a larger government, responsible for more and more of our needs and behavior, begins to displace and to undermine the morality that supports our prosperity. Our sense of self-reliance and personal responsibility begins to give way to reliance on others through state institutions. Profits become more reflective of the ability to gain favors from the state than from satisfying the wants of our neighbors. The incentives for corruption thus created bring forth more corruption. Capitalism begins to slide into socialism.

I replied to the young Kenyan man that capitalism is not immoral nor does it encourage or promote immorality. But it is not in itself a set of moral principles that any society needs to be prosperous and good. We need to worry about preserving such values as much as our freedoms to develop our talents and serve our fellow man as we each see fit.

Comments on my Torture note

As usual friends sent some interesting comments on my note
on torture. Here are two of them with a further comment from me.


Dear Warren,

As always, I enjoy your deliberations.

It would please me no end to agree fully with you — not so
much to be in agreement with you (that’s only a bonus) but to have a firm
conclusion about a difficult and unseemly issue.

These are among my difficulties:

It doesn’t work argument: As best I can tell, a wide variety
of torture has been used, probably every year, for thousands of years. All
kinds and manner of men. Has it been used by so many and so different people,
only because they are ignorant that it doesn’t work and because they "feel
good" torturing people? That seems most unlikely. Is there any comparable
practice, that spans most cultures and civilizations over centuries, that
continues to be done despite "never working"?

Might one think that torture is a specialized case to
terrorism. The use of violence, not for its own sake, but to change the
political/psychological dynamics. One would hardly argue that "terrorism
never works" repugnant though it is.

The military: the military has another reason for avoiding
torture — the belief that their military personnel are more likely to be
tortured if they are believed to torture. This seems true in some
circumstances, but not others (depending who the opponent is), but it seems
important for them to make this part of their creed. The FBI and the military
seem pretty vocal, but the CIA seems not to share their aversion.

The Geneva Accords: It’s my understanding that it applies
primarily or exclusively to standard "wars" with disciplined military
under state control.

I am very troubled by the lost of standing the U.S. has
suffered over the past decade or more. The lack of disciplinary action after
Abu Ghraib is particularly damaging and disgusting. But I wonder, of the nearly
200 countries, which of them would not have been tempted to waterboarding three
people had that country suffered something comparable to 9/11 and had very
likely suspects in hand? That is, I suspect almost all the governments would
have done something comparable if they were in comparable circumstances. That’s
a version of the argument above that most everyone thinks it works, but also an
argument that there is a certain disingenuosness going on here.

One might, of course, argue that even if it does work, and
even if most everyone else does do it, the U.S. should not — that the U.S. is
more moral than all other countries and should conduct itself as truly
"exceptional" — even if it means risking more terrorist attacks than
would otherwise be the case. An appealing argument but considerably less

All this from someone who was very against the Iraq invasion
— and continues to think it arguably the biggest blunder the US has made in at
least half a century — and that the biggest costs may well be in the future.
The the Patriot Act was a terrible piece of legislation. That Yoo’s argument
for a "unitary" executive a very shoddy and self-serving concoction.

That said, I think we are still at sea, as a nation, on how
to react to the challenge of terrorism. It is distinct from simple criminality
and traditional war. Does the phenomenon need distinct institutions and
structures to accommodate it into a constitutional and rule of law framework?
Bush II worked on this but failed to engage the rest of the country which is
desperately necessary for an enduring consensus to be formed. It looks as if
the challenge of terrorism, or at least the Islamic version, may fade before we
wrestle with the larger issues. Releasing terrorists, (like sex molesters,
criminally insane and other such) seems mistaken yet holding them indefinitely
violates something very fundamental, to cite but one example. Judicial
oversight, with legislative guidance, is needed together with speed and secrecy
in many cases. Etc.

As always, my best,

Bob [Robert Schadler, former Director of the Office of
International Visitors and Chief of Staff to the Director of former U.S.
Information Agency in the Reagan Administration]


My reply:

Dear Bob,

Thanks for your thoughtful comments. As you note, both
morality and effectiveness matter. As you imply, torture seems to works some
times or it wouldn’t have such a long history. The statements last year by Adm.
Dennis Blair (Ret), the Director of National Intelligence, are
interesting in this regard. His comments were in relation to the controversy
over the use of torture by the Bush W administration.

“High value information came from interrogations in which
those methods [“enhanced interrogation”] were used and provided a deeper
understanding of the al Qa’ida organization that was attacking this country…."

"The information gained from these techniques was
valuable in some instances, but there is no way of knowing whether the same
information could have been obtained through other means. The bottom line is
these techniques have hurt our image around the world, the damage they have
done to our interests far outweighed whatever benefit they gave us and they are
not essential to our national security," Blair concluded[1] 

Best wishes,



Warren, A good and unfortunately still a timely message that
bears repeating for future generations.  I personally thought we as a
country had finally learned, back in my law school days in justice torn
Mississippi, that if we don’t adhere to the rule of law we can not expect
anyone else to do so.  Now we’re in the very sad situation of having other
countries in both the developed and developing world use our illegal and
counterproductive behavior in the torture arena as an excuse to engage in even
worse behavior  — all in the name of fighting terrorism and promoting
"national security." While it is one thing for us to have lost our
moral and legal standing in the world, which is something we will hopefully
eventually overcome, it is another to think about all of the additional people
now being imprisoned and "legally" tortured around the world under US
legal cover.  I would say thank you for nothing Messenger Yoo; I sincerely
hope that one day you will see the light and that you will find a way to ask
all of the detainees who have and will suffer under your own
"tortured" legal machinations for forgiveness.

Hope to see you soon!

Keith [Henderson, anticorruption consultant]

[1] Peter Baker,
Techniques Yielded ‘High Value Information,’ Memo Says"
, New York
Times, April 21, 2009.