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.