What exactly are incentives, and why should they be important to Christians?
Yesterday we began answering this question by looking at how the Bible treats incentives. Today we’ll look at incentives from an economic perspective stemming from what the Bible says about reality and human nature.
As we’ll see, incentives can be a powerful tool in encouraging human flourishing and living out the whole-life stewardship we’ve talked so much about.
Incentives in Everyday Life
Each one of us engages with incentives, whether we realize it or not. As James Gwartney, Richard Stroup, and Dwight Lee said yesterday, incentives impact even the decisions we make at the family level.
We all usually assess the payoff before engaging in a specific activity. If the cost of an activity goes up, we tend to see the quantity of that activity go down, all else equal.
- When it snows outside, you might decide to work from home if possible.
- If your daycare provider charges you for being late, you’ll try to drop you children off on time.
- A class held the day before an exam will have a high attendance rate.
In each of these examples, you are responding to an incentive or a perceived change in cost. It is costlier to drive in the snow, given the higher chance of accidents, so you might choose not to do it. If someone charges you for being late, you will try to be on time to avoid the charge.
Prices: Incentives for Stewardship
In a free economy, incentives are usually in the form of prices and property. These forms are critical not just for encouraging “good behavior,” but for overall flourishing resulting from wise, whole-life stewardship.
Prices help ration scarce resources and direct them towards their highest value use. When the price of something goes up, we tend to conserve that resource.
The price hike relays a signal to us: that good or service just grew scarcer – use it conservatively.
Gwartney, Stroup, and Lee, in their book Common Sense Economics, use the example of the record-high gas prices in 2008 to illustrate this concept. When gas prices skyrocketed, we conserved gas. I remember not using air conditioning in my car and eliminating gratuitous trips. I was trying to conserve a resource that had become more scarce.
We might not want prices to go up, but as participants in a free economy, we need prices, i.e. incentives, to be nimble. They convey information about relative scarcities that we would otherwise never have known.
The good news about a price increase like the increase in gas prices is that an increase sends an important signal to other producers: sell more of the commodity in question, get into this business. The price increase actually moves entrepreneurs in more productive directions so that eventually, the rest of us can have that particular good or service at lower prices.
Property Rights: Incentives for Flourishing
Property rights are another form of incentives, and an important aspect of attaining both wise behavior and human flourishing.
When you own something, you have a natural incentive to care for it and make it better. Think of how you treat your home or your car.
Without property rights, we don’t have the the natural incentive to care for something or to grow our resources. Someone has to have ownership to care for the resource.
In his book Money, Greed, and God, Jay Richards applies this concept to the plight of poor coffee farmers in developing countries:
Many farmers don’t have solid titles to their land, so they’re neither willing nor able to make long-term investments in it…
Further making the point that property rights serve as an incentive to flourish, Economist Hernando de Soto argues in his book The Mystery of Capital that the poor possess resources to prosper, but
They [the poor] hold these resources in defective forms: houses built on land whose ownership rights are not adequately recorded, unincorporated business with undefined liability…
Property rights and prices are just two examples of incentives and their importance in society.
So should Christians care about incentives? Yes.
When we better understand incentives, we allow economic thinking to help us become better stewards. By allowing prices to be as nimble as possible, and by defining and protecting private property – be it land, ideas, or capital – we have a chance at flourishing, especially the least among us.
Should Christians care about incentives? Why? Leave your comments here.