As the cold war ended, markets and market thinking enjoyed unrivaled prestige, understandably sho. No other mechanism for organizing the production and distribution of goods had proved as successful at generating affluence and prosperity. Market values were coming to play a greater and greater role in social life.
The era began in the early 1980s, when Reagan and Thatcher proclaimed their conviction that markets, not government, held the key to prosperity and freedom.
If the only advantage of affluence were the ability to buy yachts, sports cars, and fancy vacations, inequalities of income and wealth would not matter very much. But as money comes to buy more and more — political influence, good medical care, a home in a safe neighborhood rather than a crime-ridden one, access to elite schools rather than failing ones — the distribution of income and wealth looms larger and larger. Where all the good things are bought and sold, having money makes all the difference in the world.
It is not about inequality and fairness but about the corrosive tendency of markets. Putting a price on the good things in life can corrupt them. That’s because markets don’t only allocate goods; they also express and promote certain attitudes towards the goods being exchanged.
When we decide that certain goods may be bought and sold, we decide, at least implicitly, that it is appropriate to treat them as commodities, as instruments of profit and use.
Without quite realizing it, without ever deciding to do so, we drifted from having a market economy to being a market society. It’s a place where social relations are made over in the image of the market.
Part of the appeal of markets is that they don’t pass judgment on the preferences they satisfy. They don’t ask whether some ways of valuing goods are higher, or worthier, than others. Markets don’t wag fingers. They don’t discriminate between admirable preferences and base ones. Each party to a deal decides for themselves what value to place on the things being exchanged.
We don’t allow parents to sell their children or citizens to sell their votes. And one of the reasons we don’t is, frankly, judgmental: we believe that selling these things values them in the wrong way and cultivates bad attitudes.
To an economist, long lines for goods and services are wasteful and inefficient, a sign that the price system has failed to align supply and demand. Letting people pay for faster service at airports, at amusement parks, and on highways improves economic efficiency by letting people put a price on their time.
The 2nd argument for markets, more familiar among economists, is utilitarian. It says that market exchanges benefit buyers and sellers alike, thereby improving our collective well-being, or social utility. The fact that my line stander and I strike a deal proves that we are both better off as a result.
This is what economists mean when they say that free markets allocate goods efficiently. By allowing people to make mutually advantageous trades, markets allocate goods to those who value them most highly, as measured by their willingness to pay.
The ethic of the queue does not govern all occasions. If I put my house up for sale, I’m under no obligation to accept the first offer that comes along, simply because it’s the first. Selling my house and waiting for a bus are different activities, properly governed by different norms.
Universities typically admit students with the greatest talent and promise, not those who apply first or offer the most money for a place in the freshman class. Hospital emergency rooms treat patients according to the urgency of their condition, not according to the order of their arrival or their willingness to pay extra to be seen first. Jury duty is allocated by lottery.
What makes the bribe objectionable is not that it’s coercive but that it’s corrupt. The corruption consists in buying and selling something that should not be up for sale.
At the heart of this science is a simple but sweeping idea: In all domains of life, human behavior can be explained by assuming that people decide what to do by weighing the costs and benefits of the options before them, and choosing one they believe will give them the greatest welfare, or utility.
If this idea is right, then everything has its price. The price may be explicit. Or it may be implicit, as with sex, marriage, children, education, criminal activity, racial discrimination, political participation, environmental protection, even human life. Whether or not we’re aware of it, the law of supply and demand governs the provision of all these things.
To Becker, this is a piece of sentimentality that obstructs clear thinking. “With an ingenuity worthy of admiration if put to better use, he writes, those who resist the economic approach explain human behavior as the messy, unpredictable result of “ignorance and irrationality, values and their frequent unexplained shifts, custom and tradition, the compliance somehow induced by social norms.” Becker has little patience for this messiness. A single-minded focus on income and price effects, he believes, offers social science a sturdier foundation.
Some incentive programs target teachers rather than students. Although teachers’ unions have been wary of pay-for-performance proposals, the idea of paying teachers for the academic achievement of their students is popular among voters, politicians, and some educational reformers.
The Advanced Placement incentive programs have succeeded not by bribing students to achieve but by changing attitudes toward achievement and the culture of schools.
Underlying this objection is the idea that “we can all control our own weight,” so it’s unfair to pay those who have failed to do so on their own — especially if the payments come from the NHS. “Paying someone to ditch bad habits is the ultimate in nanny state mentality, absolving them of any responsibility for their health.”
It is also about developing the right attitude to our physical wellbeing and treating our bodies with care and respect. Paying people to take their meds does little to develop such attitudes and may even undermine them.
More than 90% of smokers who were paid for kicking the habit were back to smoking 6 months after the incentives ended. In general, cash incentives seem to work better at getting people to show up for a specific event than at changing long-term habits and behaviors.
By putting an actual, explicit price on activities far removed from material pursuits, they take Becker’s shadow prices out of the shadow and make them real. They enact his suggestion that all human relations are, ultimately, market relations.
The US should scrap its complex system of quotas, point systems, family preferences, and queues and simply sell the right to immigrate.
In 1990, Congress provided that foreigners who invested $500K in the US could immigrate, with their families, for 2 years, after which they could receive a permanent green card if the investment created at least 10 jobs.
Economists often assume that markets do not touch or taint the goods they regulate. But this is untrue. Markets leave their mark on social norms. Often, market incentives erode or crowd out nonmarket incentives.
Introducing the monetary payment changed the norm. Before, parents who came late felt guilty; they were imposing inconvenience on the teachers. Now parents considered a late pickup as a service for which they were willing to pay. They treated the fine as if it were a fee. Rather than imposing on the teacher, they were simply paying her to work longer.
Fines register moral disapproval, whereas fees are simply prices that imply no moral judgment.
Which policy would you find less objectionable: a fixed quota system that limits each couple to one child and fines those who exceed the limit, or a market-based system that issues each couple a tradable procreation voucher entitling the bearer to have one child?
Critics of carbon offsets have compared them to indulgences, the monetary payments sinners paid the medieval church to offset their transgressions.
Talk of incentives has become so pervasive in contemporary economics that it has come to define the discipline. In the opening pages of Freakonomics, the authors declare that “incentives are the cornerstone of modern life” and that “economics is, at root, the study of incentives.” It is easy to miss the novelty of this definition.
The language of incentives is a recent development in economic thought. The word “incentive” does not appear in the writings of Adam Smith or other classical economists. In fact, it didn’t enter economic discourse until the twentieth century and didn’t become prominent until the 1980s and 1990s.
This is a far cry from Adam Smith’s image of the market as an invisible hand. Once incentives become “the cornerstone of modern life,” the market appears as a heavy hand, and a manipulative one. “Most incentives don’t come about organically. Someone-an economist or a politician or a parent— has to invent them.”
Economics “simply doesn’t traffic in morality. Morality represents the way we would like the world to work, and economics represents how it actually does work.”
Consider economic efficiency. Why care about it? Presumably, for the sake of maximizing social utility, understood as the sum of people’s preferences. As Mankiw explains, an efficient allocation of resources maximizes the economic well-being of all members of society. Why maximize social utility? Most economists either ignore this question or fall back on some version of utilitarian moral philosophy.
But utilitarianism is open to some familiar objections. The objection most relevant to market reasoning asks why we should maximize the satisfaction of preferences regardless of their moral worth. If some people like opera and others like dogfights or mud wrestling, must we really be nonjudgmental and give these preferences equal weight in the utilitarian calculus? When market reasoning is concerned with material goods, such as cars, toasters, and flat-screen televisions, this objection doesn’t loom large; it’s reasonable to assume that the value of the goods is simply a matter of consumer preference. But when market reasoning is applied to sex, procreation, child rearing, education, health, criminal punishment, immigration policy, and environmental protection, it’s less plausible to assume that everyone’s preferences are equally worthwhile. In morally charged arenas such as these, some ways of valuing goods may be higher, more appropriate than others.
From the standpoint of market reasoning, it is almost always better to give cash rather than a gift. If you assume that people generally know their own preferences best, and that the point of giving a gift is to make your friend or loved one happy, then it’s hard to beat a monetary payment. Even if you have exquisite taste, your friend may not like the tie or necklace you pick out. So if you really want to maximize the welfare your gift provides, don’t buy a present; simply give the money you would have spent.
The bottom line is that when other people do our shopping, for clothes or music or whatever, it’s pretty unlikely that they’ll choose as well as we would have chosen for ourselves. We can expect their choices, no matter how well intentioned, to miss the mark. Relative to how much satisfaction their expenditures could have given us, their choices destroy value.”
But to give money rather than a well-chosen gift to a friend, lover, or spouse is to convey a certain thoughtless indifference. It’s like buying your way out of attentiveness.
We’d rather the gift giver buy us something less mundane, something we wouldn’t buy for ourselves. From our intimates at least, we’d rather receive a gift that speaks to “the wild self, the passionate self, the romantic self.”
Gift cards represent a halfway house between choosing a specific gift and giving cash. They make life easier for shoppers and give recipients a greater range of options.
Friendship and the social practices that sustain it are constituted by certain norms, attitudes, and virtues. Commodifying these practices displaces these norms-sympathy, generosity, thoughtfulness, attentiveness — and replaces them with market values.
Suppose, however, that most of the places were allocated according to merit, but a few were quietly made available for sale. And let’s also suppose that many factors entered into admissions decisions- grades; SAT scores; extracurricular activities; racial, ethnic, and geographical diversity; athletic prowess; legacy status (being the child of an alumnus)—so that it was hard to tell, in any given case, which factors were decisive. Under conditions such as these, universities could sell some places to wealthy donors without undermining the honor that people associate with admission to a top school.
The fairness and corruption objections differ in their implications for markets: The fairness argument does not object to marketizing certain goods on the grounds that they are precious or sacred or priceless; it objects to buying and selling goods against a background of inequality severe enough to create unfair bargaining conditions. It offers no basis for objecting to the commodification of goods (whether sex or kidneys or college admission) in a society whose background conditions are fair.
The corruption argument, by contrast, focuses on the character of the goods themselves and the norms that should govern them. So it cannot be met simply by establishing fair bargaining conditions. Even in a society without unjust differences of power and wealth, there would still be things that money should not buy. This is because markets are not mere mechanisms; they embody certain values. And sometimes, market values crowd out non-market norms worth caring about.
Willingness to accept the nuclear waste site reflected public spirit — a recognition that the country as a whole depended on nuclear energy and that the nuclear waste had to be stored somewhere. If their community was found to be the safest storage site, they were willing to bear the burden. Against the background of this civic commitment, the offer of cash to residents of the village felt like a bribe, an effort to buy their vote.
Although cash payoffs are generally resented, compensation in kind is often welcomed. Communities often accept compensation for the siting of undesirable public projects— an airport, a land fill site, a recycling station-in their own backyards. But studies have found that people are more likely to accept such compensation if it takes the form of public goods rather than cash. Public parks, libraries, school improvements, community centers, even jogging and bicycle trails are more readily accepted as compensation than are monetary payments.
A monetary payment to residents for accepting a new runway or landfill in their town can be seen as a bribe to acquiesce in the degradation of the community. But a new library, playground, or school repays the civic sacrifice in the same coin, so to speak, by strengthening the community and honoring its public spirit.
What’s the moral of the story? The authors of the study conclude that, if you’re going to use financial incentives to motivate people, you should either “pay enough or don’t pay at all.”
If you had to rely on financial incentives to get communities to accept nuclear waste, you’d have to pay a lot more than if you could rely instead on the residents’ sense of civic obligation. If you had to hire schoolchildren to collect charitable donations, you’d have to pay more than a 10 percent commission to get the same result that public spirit produces for free.
When people are engaged in an activity they consider intrinsically worthwhile, offering them money may weaken their motivation by depreciating or “crowding out” their intrinsic interest or commitment.
The commercialization of blood leads to more blood “being supplied by the poor, the unskilled, the unemployed, Negroes and other low income groups.” A “new class is emerging of an exploited human population of high blood yielders,” he wrote. The redistribution of blood “from the poor to the rich appears to be one of the dominant effects of the American blood banking systems.”
The “commercialization of blood and donor relationships represses the expression of altruism,” he concluded, and “erodes the sense of community.”
Robertson began by conceding that economics, concerned as it is with the desire for gain, does not deal with the noblest human motives. “It is for the preacher, lay or clerical,” to inculcate the higher virtues-altruism, benevolence, generosity, solidarity, and civic duty. “It is the humbler, and often the invidious, role of the economist to help, so far as he can, in reducing the preacher’s task to manageable dimensions.”
How does the economist help? By promoting policies that rely, whenever possible, on self-interest rather than altruism or moral considerations, the economist saves society from squandering its scarce supply of virtue. “If we economists do our business well,” Robertson concludes, “we can, I believe, contribute mightily to the economizing … of that scarce resource Love,” the “most precious thing in the world.”
He concluded with a reply to those who criticize markets for relying on selfishness and greed: “We all have only so much altruism in us. Economists like me think of altruism as a valuable and rare good that needs conserving. Far better to conserve it by designing a system in which people’s wants will be satisfied by individuals being selfish, and saving that altruism for our families, our friends, and the many social problems in this world that markets cannot solve.”
Reckless expenditures of altruism in social and economic life not only deplete the supply available for other public purposes. They even reduce the amount we have left for our families and friends.
But the metaphor is misleading. Altruism, generosity, solidarity, and civic spirit are not like commodities that are depleted with use. They are more like muscles that develop and grow stronger with exercise. One of the defects of a market-driven society is that it lets these virtues languish. To renew our public life we need to exercise them more strenuously.
It has long been common practice for companies to take out insurance on the lives of their CEOs and top executives, to offset the significant cost of replacing them if they die. In the parlance of the insurance business, companies have an “insurable interest” in their CEOs that is recognized in law. But buying insurance on the lives of rank-and-file workers is relatively new. Such insurance is known in the business as “janitors insurance” or “dead peasants insurance.” Until recently, it was illegal in most states; companies were not considered to have an insurable interest in the lives of their ordinary workers.
Few workers were aware that their companies had put a price on their heads. Most states did not require a company to inform employees when it bought insurance on their lives, or to ask workers’ permission to do so. And most COLI policies remained in effect even after a worker quit, retired, or was fired. So corporations were able to collect death benefits on employees who died years after leaving the company.
To the contrary, a cash-strapped company with millions of dollars due upon the death of its workers has a perverse incentive to skimp on health and safety measures.
The life insurance business also turns our mortality into a commodity. But there’s a difference: With life insurance, the company that sells me a policy is betting for me, not against me. The longer I live, the more money it makes. With viaticals, the financial interest is reversed.
We commonly think of insurance and gambling as different responses to risk. Insurance is a way of mitigating risk, while gambling is a way of courting it. Insurance is about prudence; gambling is about speculation. But the line between these activities has always been unstable.
Not only did life insurance create an incentive for murder; it wrongly placed a market price on human life. For centuries, life insurance was prohibited in most European countries. “A human life cannot be the object of commerce,” a French jurist wrote in the eighteenth century, “and it is disgraceful that death should become a source of commercial speculation.” Many European countries had no life insurance companies before the mid-nineteenth century. In Japan, the first one did not appear until 1881. Lacking moral legitimacy, “life insurance did not develop in most countries until the mid-or late nineteenth century.”
This was finally achieved with the enactment of the Assurance Act of 1774. The law banned gambling on the lives of strangers and restricted life insurance to those who had an “insurable interest” in the person whose life they were insuring.
Since traders would have to back their predictions with their own money, those willing to bet a lot presumably would be the ones with the best information. If futures markets were good at predicting the price of oil, stocks, and soybeans, why not tap their predictive power to anticipate the next terrorist attack?
Research indicates that markets are extremely efficient, effective and timely aggregators of dispersed and even hidden information. Futures markets have proven themselves to be good at predicting such things as election results; they are often better than expert opinions.
With market triumphalism at high tide, the defenders of the project articulated a new precept of market faith that had emerged with the age of finance: not only are markets the most efficient mechanisms for producing and allocating goods; they are also the best way of aggregating information and predicting the future.
The claim that free markets are not only efficient but also clairvoyant is striking. Not all economists subscribe to it. Some argue that futures markets are good at predicting the price of wheat but have a hard time predicting rare events, such as terrorist attacks. Others maintain that, for intelligence gathering, markets of experts work better than ones open to the general public. The DARPA plan was also questioned on more particular grounds: Would it be open to manipulation by terrorists, who might engage in “insider trading” to profit from an attack, or possibly conceal their plans by shorting terrorist futures?
Previously, people who no longer wanted or needed their life insurance policies had no choice but to let them lapse, or in some cases to cash them in with the insurance company for a small surrender amount. Now they can get more for their unwanted policies by selling them off to investors.
Insurance companies don’t like life settlements. In setting premiums, they have long assumed that a certain number of people will drop their policies before they die. Once the children are grown and one’s spouse is provided for, policyholders often stop paying premiums and let their policies lapse. In fact, almost 40 percent of life insurance policies result in no death benefit payout.
Just as mortgage securities bundle loans from different regions of the country, a bond backed by life settlements could bundle policies on people “with a range of diseases-leukemia, lung cancer, heart disease, breast cancer, diabetes, Alzheimer’s.” A bond backed by this diversified portfolio of ailments would enable investors to rest easy, because the discovery of a cure for any one disease would not cause the bond price to tank.”
Skyboxes, for all their cozy frivolity speak to an essential flaw in American social life: the elite’s eagerness, even desperation, to separate itself from the rest of the crowd.
The federal tax code gives those who use college stadium skyboxes a special tax break, allowing buyers of the luxury suites to deduct 80% of the cost as a charitable contribution to the university.
And on Wall Street, where computer-savvy, quantitative whizzes were displacing schmoozers and inventing complex new derivatives: “In the last 30 years,” Summers observed, “the field of investment banking has been transformed from a field that was dominated by people who were good at meeting clients at the 19th hole, to people who were good at solving very difficult mathematical problems that were involved in pricing derivative securities.”
This illustrates a point I’ve tried to make about various goods and activities throughout this book: making markets more efficient is no virtue in itself. The real question is whether introducing this or that market mechanism will improve or impair the good of the game.
If you let the company paint the entire exterior of your house (except the roof) with brightly colored ads, they would pay your mortgage every month for as long as the house displayed the ads.
Those who visit state parks are “excellent consumers,” with high incomes, she explains. In addition, the park setting is “a very quiet marketing environment,” with few distractions. “It’s a great place to reach people; they’re in the right state of mind.”
Advertising encourages people to want things and to satisfy their desires. Education encourages people to reflect critically on their desires, to restrain or to elevate them. The purpose of advertising is to recruit consumers; the purpose of public schools is to cultivate citizens.