The article in the url below reviews a book by Samuel Bowles ('The Moral Economy: Why Good Incentives are No Substitute for Good Citizens,' Yale University Press) that challenges the central tenet of rational economic theory – that the pursuit of self-interest generates optimal societal-level outcomes:
"If there is a single dogma that has dominated mainstream economic and political thought since the 18th century, this is it. Samuel Bowles, an economist at the Santa Fe Institute, thinks this dogma is false. In his tightly argued and illuminating book, The Moral Economy: Why Good Incentives are No Substitute for Good Citizens, Bowles makes the case that appeals made to our self-interest can undercut instinctive moral impulses; and that when these impulses are weakened, crucial institutions work sub-optimally, if at all. This is the case even for markets, institutions which the dogma holds up as exemplars of the unique organising power of greed."
In order to make his point, Bowles presents examples of various research studies that show the potentially damaging influence of financial incentives:
"Fifteen years ago, the Boston Fire Department ended its policy of unlimited sick days, hoping to curb the flu outbreaks that seemed to happen on Mondays and Fridays. Fire fighters taking more than 15 sick days would have their pay docked. The following year, the number of sick days taken more than doubled. And sick days around the year-end holidays increased by an order of magnitude."
The reason offered to explain this phenomenon is that we work for multiple reasons. Of course, we seek financial remuneration, but the work that we do also shapes our identity, which is closely tied to our self-esteem. Belonging to an organization also fulfills our needs as social beings – the value we place on belonging to a group and working towards something that is bigger than ourselves:
"The change in sick-day policy replaced a relationship that respected the honour of the firefighters with one that put a price on their obedience. Instead of treating showing up to work over the holidays as a duty, it became something they could buy their way out of. Many decided the price was worth paying."
While I agree with all of this as an explanation as to why financial incentives will often produce unintended outcomes, whether this is the same as saying self-interest is not the primary driver of behavior overall seems less clear. My sense is that humans act largely according to their perceived self-interest. A broad definition of 'self-interest' therefore includes the need to build identities that enhance our self-esteem and satisfy our need to belong to a larger group. In other words, it is consistent with our self-interest for us to reject financial incentives when they harm our moral or psychological wellbeing:
"Prices crowd out goodwill because they are not just incentives. They convey messages too. In the simplest cases, they can signal that the domain of the incentive is not the proper home for moral concerns."
In this way, it is easy to arrive at the conclusion that true altruism does not exist. In other words, people donate to charities or volunteer their time (or work as firefighters) because doing so makes them feel better about themselves – it reinforces their perception of themselves as being the kind of person that helps others. The key seems to me to be the importance of instilling certain values in people at an early age (e.g., good parenting and good education) that builds the need to define an individual's self-interest in terms of the wellbeing of the society in which they are based, rather than in terms of a narrow focus on personal success and material gain.
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When greed isn't good
By Robert Armstrong
August 20/21, 2016
Financial Times Weekend, Life & Arts
Late Edition – Final