Why does Earth orbit the Sun? Why is there ebb and flow in some parts of the sea? Why does the pencil in my hand fall to the ground if I let go of it? Physical forces, invisible to our eyes, shape the world. In the same way, there is an invisible force shaping human action: incentives. Every action and every decision is driven by this unseen yet powerful force. This force, often unnoticed, influences everything from our daily routines to the vast mechanisms of society. An understanding of incentives will help you influence the people around you as well as avoid being pushed around by mighty rulers.
Reward and Punishment
At its core, an incentive is a motivational factor that influences behavior. It can be the wish to attain a reward or avoid the punishment for taking a particular action. Incentives are the driving forces behind economic choices, personal decisions, and societal norms. Effective leaders of large teams as well as tyrannical rulers of nation-states utilize incentives, although often unnoticed (or at least not investigated specifically), to shape human behavior. Understanding and leveraging incentives is crucial to promoting a free and prosperous society as well as living a successful life personally.
Investigating decision-making, you can even go so far as to make the argument that every decision is a free choice. Force simply means designing some of the consequences of making certain decisions so unattractive that you have to choose a specific option. You can, for instance, choose to resist state power and not pay your taxes, but that means, at the end of the day, armed officers knocking at your door and, if you resist, killing you. In this case, you can choose to obey the state or resist it, but if you choose to resist it consequently, this will cost you your life.
The Invisible Hand
Ancient philosophers like Aristotle pondered over what motivates decision-making. The Stoics explored how motivation fuels human action and how one can stay motivated. An insightful illustration of this is Marcus Aurelius trying to find motivation to start the day: “At dawn, when you have trouble getting out of bed, tell yourself: ‘I have to go to work—as a human being. What do I have to complain of, if I’m going to do what I was born for—the things I was brought into the world to do? Or is this what I was created for? To huddle under the blankets and stay warm?’”
In economic deliberations, classical economists described how the market structure is influenced by individuals following their incentives to maximize the perceived value they attain. Adam Smith introduced the idea of the invisible hand, which can be seen as describing incentive structures. Shaping the Austrian School of Economics, Ludwig von Mises argued that human action is driven by subjective preferences and incentives. He recognized: “The incentive that impels a man to act is always some uneasiness.” Although incentives are frequently discussed nowadays, they are often not mentioned explicitly.
Doomed to Failure
Incentives are not just economic tools; they form society and, with individuals making decisions voluntarily without government meddling, they align harmoniously. They encourage productivity, innovation, and responsible behavior. For instance, competition encourages entrepreneurs to innovate and take risks. The prospect of higher wages and career advancement motivates workers to perform well. Within communities, social incentives like recognition and respect can drive individuals to contribute positively.
Looking at the incentives they create, many government programs are doomed to fail from their very beginning. While cheap housing, for instance, may sound appealing to many and helps you get elected, if you plan to achieve this by setting rent ceilings, this plan will not work because it destroys the incentive for landlords to rent out their apartments and the incentive for home builders to invest in creating new residential properties. On the other hand, if you offer tax breaks and erase legislation making it hard for landlords to evict non-paying or property-destroying tenants, more housing will be built soon. Another example is provided by government-issued fiat money incentivizing short-term thinking which encourages bad investments and, through that, leads to boom-and-bust cycles. The fact that this money loses value, also leads to manufacturers shrinking their products.
Reinforcing Good Behavior
Knowing about the concept of incentives, you can question the motives of any party making an offer to you and be more aware of what they want to achieve. Whenever something is free, ask yourself why this is the case and how the company makes money if it doesn’t charge you. Profit-oriented corporations, offering their product for free and creating an incentive for you to use it, want to earn money. They may be offering a free version to get you to sign up for the premium version, show you ads, or sell your data. That is not necessarily harmful to you, but now you can make a conscious decision next time you sign up for a free product.
Further, you can design incentives for your own life to live the life you want. Reward yourself if you take ownership of your actions and reach your clearly-set financial goals to motivate better saving and spending habits. Reinforce healthy behavior by utilizing apps that track your progress and create a streak of healthy eating and regular exercise that you don’t want to break. Encourage your children to develop good study habits and academic performance by praising their achievements and rewarding good behavior. However, be sure to complement this by teaching them about the world when they are old enough so that they question independently and do not follow state incentives blindly.
Steering Decision-Making
Incentives are the invisible hand that guides human behavior. From personal decisions to societal norms, they play a crucial role in shaping our actions and outcomes. By looking at the world through the lens of incentives, a rarely adopted perspective, Austrian Economics provides another helpful perspective to understand human behavior. By understanding and leveraging incentives, we can enhance our personal lives and contribute to a more harmonious world. Remember, the key to harnessing the power of incentives lies in recognizing what motivates us and aligning our actions with these motivators. What incentives have you created to achieve your goals?
Think for yourself and question everything, my fellow liberty people!
"Knowing about the concept of incentives, you can question the motives of any party making an offer to you and be more aware of what they want to achieve. Whenever something is free, ask yourself why this is the case and how the company makes money if it doesn’t charge you."
If it doesn't charge you must be paying in some other way, spot on.
I especially enjoyed the "Doomed to Failure" portion of this piece. One of the most unfortunate, but illustrative, examples of government programs incentivizing the wrong behavior is the welfare state incentivizing fatherlessness. Roughly 25% of American children today have no father in the home, with poorer minority groups showing rates as high as 60-70%. This was not a serious issue for American children of any race prior to the rise of the welfare state in the 1930s and 1960s.