Category: Incentives

A Critical Mass Need to Be Motivated by the Telos of a Practice

(p. 227) The fact that some people are led into a practice in pursuit of goals that are external to the practice– money, fame, or what have you– need pose no threat to the integrity of the practice itself. So long as those goals do not penetrate the practice at all levels, those in pursuit of external goals will eventually drop out or be left behind or change their goals or be discredited by those in pursuit of a practice’s proper goals. However, if external goals do penetrate the practice at all levels, it becomes vulnerable to corruption. Practices are always developing and changing, and the direction that development takes will be determined by participants in the practice. Good practices encourage wise practitioners who in turn will care for the future of the practice.

Source:
Schwartz, Barry, and Kenneth Sharpe. Practical Wisdom: The Right Way to Do the Right Thing. New York: Riverhead Books, 2010.

A somewhat similar point is made in:
Diamond, Arthur M., Jr. “How Institutional Incentives and Constraints Affect the Progress of Science.” Prometheus 26, no. 3 (Sept. 2008): 231-239.

George Bailey Wanted to Make Money, But He Wanted to Do More than Just Make Money

(p. 219) Actually, it’s not so strange. The norm for bankers was never just moneymaking, any more than it was for doctors or lawyers. Bankers made a livelihood, often quite a good one, by serving their clients– the depositors and borrowers– and the communities in which they worked. But traditionally, the aim of banking– even if sometimes honored only in the breach– was service, not just moneymaking.
In the movie It’s a Wonderful Life, James Stewart plays George Bailey, a small-town banker faced with a run on the bank– a liquidity crisis. When the townspeople rush into the bank to withdraw their money, Bailey tells them, “You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here.” He goes on. “Your money’s in Joe’s house. Right next to yours. And in the Kennedy house, and Mrs. Backlin’s house, and a hundred others. Why, you’re lending them the money to build, and they’re going to pay you back, as best they can…. What are you going to do, foreclose on them?”
No, says George Bailey, “we’ve got to stick together. We’ve got to have faith in one another.” Fail to stick together, and the community will be ruined. Bailey took all the money he could get his hands on and gave it to his depositors to help see them through the crisis. Of course, George Bailey was interested in making money, but money was not the only point of what Bailey did.
Relying on a Hollywood script to provide evidence of good bankers is at some level absurd, but it does indicate something valuable about society’s expectations regarding the role of bankers. The norm for a “good banker” throughout most of the twentieth century was in fact someone who was trustworthy and who served the community, who was responsible to clients, and who took an interest in them.

Source:
Schwartz, Barry, and Kenneth Sharpe. Practical Wisdom: The Right Way to Do the Right Thing. New York: Riverhead Books, 2010.
(Note: italics in original.)

To Maintain Enrollments Professors Are Often Pressured to Inflate Grades

(p. 198) Dedicated college professors demand that students do the difficult reading and writing necessary to become skillful in understanding the complexities of the world. But the university distributes resources like research funds and new faculty positions based in part on how many students populate classes and how positively students evaluate courses. How much do you simplify to keep up enrollment and keep resources flowing into your department?

Source:
Schwartz, Barry, and Kenneth Sharpe. Practical Wisdom: The Right Way to Do the Right Thing. New York: Riverhead Books, 2010.

Should Students Read to Learn, or to Get Gold Stars?

(p. 181) When a consultant tells teachers to concentrate on the bubble kids and ignore the kids who are most in need of help, something has gone wrong. And if gold stars turn reading from an adventure into a job, something has gone wrong. But what? The typical response to examples like these is not to blame incentives but to blame “dumb” incentives. The presumption is that “smart” incentives, or at least “smarter” incentives, will do the job.
This is a mistake. In many situations, for many activities, no incentives are smart enough. Teachers like Deborah Ball and Mrs. Dewey spend their day figuring out how much time to spend with each student and how to tailor what they teach to each student’s particular strengths and weaknesses. They are continually balancing conflicting aims– to treat all students equally, to give the struggling students more time, to energize and inspire the gifted students. Along comes the incentive to bring up the school’s test scores, and all the nuance and subtlety of Mrs. Dewey’s moment-by-moment decisions go out the window. And what “smarter” incentive is going to replace judgment in making sensitive choices in a complex and changing context like a classroom?
Or what, exactly, would you incentivize to encourage hospital custodian Luke to seek the kind and empathetic response to the distraught father who wanted his son’s room cleaned? Incentives are always based on meeting some specific, measurable criterion: read more books; raise more test scores; wash more floors. Left to his own devices, Luke asks himself, “What can I do to be caring?” and because he has moral skill, he comes up with a good answer. With “caring” incentivized, Luke (p. 182) might ask, “What do I have to do to get a raise or a bonus?” “Reclean the room” might be a right answer. “Look sympathetic” might be a right answer. “Be caring” surely is not. Aristotle thought that good
people do the right thing because it is the right thing. Doing the right thing because it’s the right thing unleashes the nuance, flexibility, and improvisation that moral challenges demand and moral skill enables. Doing the right thing for pay shuts down the nuance and flexibility.

Source:
Schwartz, Barry, and Kenneth Sharpe. Practical Wisdom: The Right Way to Do the Right Thing. New York: Riverhead Books, 2010.
(Note: italics in original.)

Under Perverse Institutions, It Takes “Canny Outlaws” to Do What Is Right

Practical Wisdom is a hard book to categorize. It is part philosophy, and one of the co-authors is an academic philosopher. But most of the book consists of often fascinating, concrete examples. The examples are usually of perverse institutions and policies that create incentives and constraints that reward those who do bad and punish those who do good. The authors’ main lesson is that we all should become stoical “canny outlaws” by finding crafty ways to do what is right, while trying to avoid or survive the perverse incentives and constraints.
Maybe–for me the main lesson is that we all should get busy reforming the institutions and policies. But whether their lesson or my lesson is the best lesson, their book is still filled with many great examples that are worth pondering.
In the next few weeks, I will be quoting several of the more useful, or thought-provoking passages.

The book discussed, is:
Schwartz, Barry, and Kenneth Sharpe. Practical Wisdom: The Right Way to Do the Right Thing. New York: Riverhead Books, 2010.

Innovation and Jobs Destroyed by Tax

(p. 7A) I was humbled to receive in November the National Medal of Technology and Innovation at the White House for the development of life-changing medical devices. Traveling to our nation’s capital, I couldn’t help but think: There is no way I could have had the same impact if the tax on medical devices was in place when I got started over 50 years ago.
Simply put, the medical device tax is destroying job creation and innovation, and as a result, patient care is suffering.
. . .
Every day, I see firsthand the difficult choices innovators must make as a result of this ill-conceived tax. Perhaps worst of all, the medical device tax is helping cause a steep drop of investments in promising therapies.
. . .
It’s time to put an end to this disastrous policy so that medical device entrepreneurs can do what America does best — innovate.

For the full commentary, see:
Tom Fogarty. “Opposing View: Tax Destroys Jobs and Innovation.” USA Today (Mon., January 5, 2015): 7A.
(Note: ellipses added.)
(Note: the online version of the commentary has the date January 4, 2015, and has the title “Tax Destroys Jobs and Innovation: Opposing View.”)

Affordable Care Act Reduces GDP, Employment and Labor Income

(p. A17) Whether the Affordable Care Act lives up to its name depends on how, or whether, you consider its consequences for the wider economy.
. . .
I estimate that the ACA’s long-term impact will include about 3% less weekly employment, 3% fewer aggregate work hours, 2% less GDP and 2% less labor income. These effects will be visible and obvious by 2017, if not before. The employment and hours estimates are based on the combined amount of the law’s new taxes and disincentives and on historical research on the aggregate effects of each dollar of taxation. The GDP and income estimates reflect lower amounts of labor as well as the law’s effects on the productivity of each hour of labor.
. . .
The Affordable Care Act is weakening the economy. And for the large number of families and individuals who continue to pay for their own health care, health care is now less affordable.

For the full commentary, see:
CASEY B. MULLIGAN. “OPINION; The Myth of ObamaCare’s Affordability; The law’s perverse incentives will have the nation working fewer hours, and working those hours less productively.” The Wall Street Journal (Tues., SEPTEMBER 9, 2014): A17.
(Note: ellipses added.)
(Note: the online version of the commentary has the date SEPTEMBER 8, 2014.)

Mulligan’s research on the effects of Obamacare is detailed in his Kindle e-book:
Mulligan, Casey B. Side Effects: The Economic Consequences of the Health Reform. Flossmoor, IL: JMJ Economics, 2014.

Shellshock Bug Shows Low Quality of Open Source Software

(p. B1) Long before the commercial success of the Internet, Brian J. Fox invented one of its most widely used tools.
In 1987, Mr. Fox, then a young programmer, wrote Bash, short for Bourne-Again Shell, a free piece of software that is now built into more than 70 percent of the machines that connect to the Internet. That includes servers, computers, routers, some mobile phones and even everyday items like refrigerators and cameras.
On Thursday [Sept. 25, 2014], security experts warned that Bash contained a particularly alarming software bug that could be used to take control of hundreds of millions of machines around the world, potentially including Macintosh computers and smartphones that use the Android operating system.
The bug, named “Shellshock,” drew comparisons to the Heartbleed bug that was discovered in a crucial piece of software last spring.
But Shellshock could be a bigger threat. While Heartbleed could be used to do things like steal passwords from a server, Shellshock can be used to take over the entire machine. And Heartbleed went unnoticed for two years and affected an estimated 500,000 machines, but Shellshock was not discovered for 22 years.
. . .
Mr. Fox maintained Bash — which serves as a sort of software interpreter for different commands from a user — for five years before handing over the reins to Chet Ramey, a 49-year-old programmer who, for the last 22 years, has maintained the software as an unpaid hobby. That is, when he is not working at his day job as a senior technology architect at Case Western Reserve University in Ohio.
. . .
(p. B2) The mantra of open source was perhaps best articulated by Eric S. Raymond, one of the elders of the open-source movement, who wrote in 1997 that “given enough eyeballs, all bugs are shallow.” But, in this case, Steven M. Bellovin, a computer science professor at Columbia University, said, those eyeballs are more consumed with new features than quality. “Quality takes work, design, review and testing and those are not nearly as much fun as coding,” Mr. Bellovin said. “If the open-source community does not develop those skills, it’s going to fall further behind in the quality race.”

For the full story, see:
NICOLE PERLROTH. “Flaw in Code Puts Millions At Big Risk.” The New York Times (Fri., SEPT. 26, 2014): B1-B2.
(Note: ellipses, and bracketed date, added.)
(Note: the online version of the story has the date SEPT. 25, 2014, and has the title “Security Experts Expect ‘Shellshock’ Software Bug in Bash to Be Significant.”)

Incentives Limit Collusion

(p. 476) Carnegie’s business strategy was the one he had followed twenty years earlier: keep production steady by accepting orders at any price. In early (p. 477) October, he notified Frick that the time had come to leave the rail pool. “I confess I can see nothing so good for us as a ‘free hand'” in setting prices. He was willing to lower his prices and profit margin on rails if that was the only way to get the orders he needed to keep his works running. “By this policy we shall keep our men at work.” Carnegie had never been entirely happy as a member of the rail pool, especially after Illinois Steel was allocated a greater share than Carnegie Steel. “For my part,” he now declared, “I do not wish to play second fiddle in the rail business any longer. I get no sweet dividend out of second fiddle business, and I do know that the way to make more money dividends is to lead…. I am sure that The Carnegie Steel Co. can make more dollars, even next year, and certainly in future years, by managing its own business in its own way, free from all understandings with competitors, than by continuing in any combination that possibly can be formed. Now having made my speech, which I trust you will read to all my partners, I take my seat and imagine the loud applause with which my sentiments are greeted.”

Source:
Nasaw, David. Andrew Carnegie. New York: Penguin Press, 2006.
(Note: underlines and ellipsis in original.)
(Note: the pagination of the hardback and paperback editions of Nasaw’s book are the same.)

Carnegie’s Uncle Aitkin Expected to Make a Good Profit Starting a Private Lending Library

Shortly after arriving in Allegheny City (near Pittsburgh) Andrew Carnegie’s Uncle Aitkin had complained in a letter:

(p. 42) “There is no possibility of getting papers or periodicals to read here for a small sum–most of the people being in the habit of purchasing them for their own use. This has been to me a great deprivation. I really find that books here are as dear as in the old country everything considered.”

Uncle Aitkin hoped to remedy this flaw in American cultural life–and make a profit at it–by starting up his own lending library. “I am now convinced that for any one to keep a library and to give works out at a cheaper rate would pay very well & I think I will be engaged in this business in a short time,–after I make a little money by lecturing etc.” Regrettably–for Uncle Aitkin and for Allegheny City’s starved readers–he never got around to setting up his business.

Source:
Nasaw, David. Andrew Carnegie. New York: Penguin Press, 2006.
(Note: the pagination of the hardback and paperback editions of Nasaw’s book are the same.)

Creating Parking Spaces by Variable Meter Pricing Saves Time and Reduces Air Pollution and Double-Parking

SanFranciscoStreetParking2013-10-25.jpg “San Francisco is a city chronically plagued with a shortage of street parking. On a recent night in the North Beach neighborhood, the slow chase for a parking space was well under way.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A1) SAN FRANCISCO — The maddening quest for street parking is not just a tribulation for drivers, but a trial for cities. As much as a third of the traffic in some areas has been attributed to drivers circling as they hunt for spaces. The wearying tradition takes a toll in lost time, polluted air and, when drivers despair, double-parked cars that clog traffic even more.

But San Francisco is trying to shorten the hunt with an ambitious experiment that aims to make sure that there is always at least one empty parking spot available on every block that has meters. The program, which uses new technology and the law of supply and demand, raises the price of parking on the city’s most crowded blocks and lowers it on its emptiest blocks. While the new prices are still being phased in — the most expensive spots have risen to $4.50 an hour, but could reach $6 — preliminary data suggests that the change may be having a positive effect in some areas.

For the full commentary, see:
MICHAEL COOPER and JO CRAVEN McGINTY. “A Meter So Expensive, It Creates Parking Spots.” The New York Times (Fri., March 16, 2012): A1 & A3.
(Note: ellipsis added.)
(Note: the online version of the commentary has the date March 15, 2012.)

MetersWithVariablePricing2013-10-25.jpg “San Francisco has installed sensors and new meters on some blocks to track where cars are parked and set prices accordingly.” Source of caption and photo: online version of the NYT article quoted and cited above.