Welcome back to our examination of N. Gregory Mankiw’s “ten principles of economics.” (Part 1 of this series is here; Part 2 is here). We got through two principles last time, but today we’ll only manage one. It’s a big ‘un:

Principle 4: People Respond to Incentives

An incentive is, according to my computer’s dictionary, “a thing that motivates or encourages one to do something.” So people respond to incentives, which are things that people respond to. This is a tautology rather than a principle.

Of course, there’s more to it. In the explanatory text, Mankiw points out that keeping incentives in mind is crucial when designing public policy (which is true — unintentional incentives in the tax code in Sweden led to the horror that was Abba’s outfits), and that, for example, a gasoline tax would likely encourage people to use less gasoline (also true). But then he gives this example, which I’ll quote in full.

When policymakers fail to consider how their policies affect incentives, they often end up with unintended consequences. For example, consider public policy regarding auto safety. Today, all cars have seat belts, but that was not true 50 years ago. In the 1960s, Ralph Nader’s book Unsafe at Any Speed generated much public concern over auto safety. Congress responded with laws requiring seat belts as standard equipment on new cars.

How does a seat belt law affect auto safety? The direct effect is obvious: When a person wears a seat belt, the probability of surviving an auto accident rises. But that’s not the end of the story because the law also affects behavior by altering incentives. The relevant behavior here is the speed and care with which drivers operate their cars. Driving slowly and carefully is costly because it uses the driver’s time and energy. When deciding how safely to drive, rational people compare, perhaps unconsciously, the marginal benefit from safer driving to the marginal cost. As a result, they drive mroe slowly and carefully when the benefit of increased safety is high. For example, when road conditions are icy, people drive more attentively and at lower speeds than they do when road conditions are clear.

Consider how a seat belt law alters a driver’s cost-benefit calculation. Seat belts make accidents less costly because they reduce the likelihood of injury or death. In other words, seat belts reduce the benefits of slow and careful driving. People respond to seat belts as they would as they would to an improvement in road conditions–by driving faster and less carefully. The result of a seat belt law, therefore, is a larger number of accidents.

This sounds like blackboard bullshit, but there’s actually empirical support for it (it’s called the “Peltzman effect” from the person who found that yes, people take bigger risks on the road when they feel safer.) My favorite example of the Peltzman effect, as long as we’re talking about Sweden: Sweden switched from driving on the left to driving on the right, overnight, in 1967. Everyone expected a wave of accidents, but instead accidents went down because drivers were paying more attention. Note that this means that we don’t calculate risks exactly–drivers overreacted in that case.

But Mankiw makes it sound like government efforts to improve road safety have been, and must be, futile because drivers will simply adjust their driving to keep the risk constant. That just plain ain’t the case. I’ve read Unsafe at Any Speed, and here are some other problems with Detroit’s cars back then, besides the lack of standard seat belts:

• If you were one of those safety-conscious people who had paid extra for a seat belt, a head-on collision could insert the steering wheel into your face (the steering column was one piece, instead of two shorter pieces connected by a gear).
• Even if that didn’t happen, your seat might break off, hammering you into the steering wheel.
• Brake fluid had a tendency to boil, leaving the brakes useless. By the time anyone checked at the accident scene, the fluid would have cooled, leaving no evidence except the driver’s word.
• The snazzy designs of yesteryear left big blind spots (and a few people were even impaled on those cool tailfins).
• Even outside rear-view mirrors weren’t standard (until 1966).
• In fact, the car companies had only adopted windshield wipers, directional signals, and brake lights (which were standard by the time Nader was writing) under compulsion from the government.

As Peltzman (1975) acknowledges, offsetting behaviour could be trivial or substantial. Indeed, the amount varies between road safety measures. Behavioural adaptation generally does not eliminate the safety gains from programmes, but tends to reduce the size of the expected effects.

And that person who saw blood on the road? He was quoted in Richard Titmuss’s The Gift Relationship (1968), describing why he gave blood regularly. And Titmuss’s book is relevant to this discussion. It showed how the blood supply in Britain, where people donated for free and where the distribution was done by a socialist bureaucracy, was cheaper and better than in America, where donation and distribution were rewarded with money. A reviewer summarized the message of the book:

For a lesson in modern political economy, consider the trade in doolb. In the land of Niatirb, the supplie[r]s of this vital commodity receive no pay, and its processing and distribution are in the hands of government bureaucrats. In Acirema, by contrast, nearly all doolb supplie[r]s receive cash or other tangible, individual incentives, and much of the processing and distribution is carried out for profit. Obviously, Acireman doolb supplies will be higher in quality, lower in price, more accurately attuned to demand, and involve far less wastage—right? Wrong.

Point being, “incentive” is a broad term. The desire to do good is an incentive as much as the desire for money. People gave more blood in Britain, where giving was a noble, selfless act, than in America, where it was a troublesome way to make a couple of bucks.

Mankiw doesn’t deny this, but he doesn’t mention it, either. It’s easy to misread this section as saying that our individual, selfish gain/loss calculations are all that matter.

And Mankiw doesn’t mention that taking incentives into account doesn’t always work. Consider crack cocaine. When it first appeared in American cities in the early 80s, it was new, it was scary, and a (somewhat justified) moral panic ensued. The result was the Anti-Drug Abuse Act of 1986, which imposed wildly disproportional penalties on crack (100 times those for a similar amount of powder cocaine). I’m old enough to remember that the idea was to stop crack from spreading. Addicts were expected to look at the incentives and say, “heck, it’s just not worth it. I can get as high as I want to on heroin.” To put it mildly, that didn’t happen. We can conclude that people become crackheads for some reason other than a rational cost-benefit analysis.

And it’s not just crackheads. The Earned Income Tax Credit is a helpful subsidy for the working poor, but that doesn’t mean that people take its incentives into account when making life decisions:

“I mean, Earned Income Credit is nice, but it’s not everything!” said one 25-year-old mother of three. “I’m not going to let it factor into my marriage if I ever want to get married. I’m not marrying the Earned Income Credit. I’m marrying the man I love.”

I’m not creating a straw man here: a lot of public-sector reform in the English-speaking world, and the countries we bully, really has been based on the idea that monetary incentives trump everything. Many still cling to this idea in the face of the fact that these “reforms” haven’t actually made things better.

Grade: C-.

The principle itself is a dull tautology, redeemed in part by some clear explanation of policy consequences, but even that winds up being misleading.

Suggested replacement principle: “Human behavior is a complex thing that is only partly explained by measurable incentives.”

It’s worth pointing out that Mankiw’s errors and omissions so far have all pointed in the same direction–toward a defense of the status quo (redistributing income reduces the size of the pie so don’t bother, environmental regulations do the same so don’t bother, and safety regulations lead to offsetting behavior so don’t bother). We’ll be seeing more of that.

The first four principles were categorized as “how people make decisions,” although they barely scratched the surface of how people actually make decisions. The next three are “how people interact.” We’ll start with them tomorrow.

On to the next post!

So a while back I posted about how economics education as it’s usually done can manage to be dull, misleading, and (covertly) political, all at the same time. Which is, after all, why I wrote Economix, which is not (I hope) dull or misleading, and is overtly political.

But there’s always someone who will say that any given criticism of the field, or part of the field, is unfair, that economists don’t really believe X or Y, that you’re taking something out of context or looking at the wrong source, and so on. And sometimes they’re right.

So I thought I’d look at N. Gregory Mankiw’s Principles of Economics. Mankiw (a Harvard professor) is the 29th most cited economist. If there’s a mainstream in economics, Mankiw is in it. His textbook is one of the most popular out there, and judging a field by its textbooks is at least as legitimate as judging it by its scholarly journals.

And we don’t even have to look at the whole book; Mankiw has thoughtfully provided us with with ten principles right at the beginning. This must be the very distillation of what Mankiw–and thus, a large part of the economics profession–thinks is important. Here’s Mankiw saying so:

The study of economics has many facets, but it is unified by several central ideas. In this chapter, we look at Ten Principles of Economics. . . . The ten principles are introduced here to give you an overview of what economics is all about.

Let’s take a look. This is going to be long, so I’ll split it into several posts.

Principle 1: People face trade-offs

This is a good, common-sense rule of thumb–every transaction, for instance, is a tradeoff between giving up our money and not getting the thing we want. But elevating it to a principle is a mistake. In another post I point out that we can sometimes find situations where there’s no tradeoff if we think more carefully. (Buying swirly lightbulbs is a tradeoff between higher up-front costs and lower electric bills, but those bulbs also pump less heat into your apartment. If you buy the swirly lightbulbs and a cheaper air conditioner than you otherwise would have, there’s no tradeoff–you get lower up-front costs and lower bills down the line). We generally don’t think like this, but that’s no reason to ignore the fact that there’s good reason to try.

Again, though, that’s okay as a rule of thumb. But Mankiw doesn’t just state principles; he gives explanatory text for each one. And in the explanatory text for the very first principle, he starts to get into real trouble.

All he’s trying to do is give examples of tradeoffs, and he gives a couple of good ones. But then he says that there’s a tradeoff between a clean environment and a high level of income. According to him, environmental laws increase the cost of producing goods and services, which means more expensive goods and services. (He also thinks that this means lower wages, but that’s silly–a plant that has to hire people to clean up its mess is paying more wages and driving the general wage level up.)

So is there a tradeoff? Sometimes, yes. But remember, waste isn’t just bad for the environment, waste is inefficiency. Reducing inefficiency can reduce waste and costs. For instance, have you noticed that soda bottle tops are smaller than they used to be? That means cheaper bottles (leaving us with more resources for other things) and less waste—when we throw the empty bottle into the nearest dolphin’s eye the dolphin is less hurt. Where’s the downside?

And what about using old fryer grease to power cars? That turns the waste into a resource, meaning less oil extraction, less global warming, and smaller fatbergs.

And in the real world, when nasty old government has twirled its moustache and forced innocent businesses to clean up their own messes, the results have been far better, and far cheaper, than expected–often just the unexpected benefits have outweighed the cost, which is pure gain for society. For instance (according to Barbara Freese’s book Coal):

One economic study found that the Acid Rain program’s improvement of visibility—a benefit barely considered when the law was passed—is alone worth the substantial cost of pollution controls, quite apart from the many environmental and other health benefits.

For that matter, there’s pretty good evidence that getting lead out of gasoline in the 1970s was a big cause of the reduction in crime in the 1990s (as the 1970s babies approached their high-crime years and just didn’t commit crimes, surprising everyone). If that’s even a little true, the purely economic benefits dwarf the costs so much it’s not funny. Literally not funny.

It’s hard to avoid the conclusion that there is not always a tradeoff between a high level of income and environmental protection.

Speaking of efficiency, Mankiw also says that society faces a tradeoff between efficiency and equality. If you take that as a principle, then the most unequal economy is also the most efficient.

That sounds wrong, and it doesn’t sound any less wrong when Mankiw tries to explain it:

When the government redistributes income from the rich to the poor, it reduces the reward for working hard; as a result, people work less and produce fewer goods and services. In other words, when the government tries to cut the economic pie into more equal slices, the pie gets smaller.

This is of course true, in economies where equality is so extreme as to interfere with efficiency. So this is essential information for Mankiw’s many North Korean readers. But in other economies, like–to pull an example out of the air–ours, this doesn’t apply. My evidence is not some smug logic but the real world: Our economic performance, measured by annual real increase in GDP,  has not improved as inequality shot up starting in the 1980s. It’s fallen off. It’s not 1-to-1; our economic performance has been falling off since the 1950s, while inequality only started increasing later. But still, where’s the evidence that more inequality is more efficient?

In fact, there’s pretty good evidence that the level of inequality we have is a drag on the economy.

And here’s something interesting: the two examples above are highly political statements posing as neutral, technocratic ones.

So this “principle” doesn’t tell us anything we don’t know, but still manages to be both wrong and political.

Grade: F.

Suggested replacement principle: “People don’t always face trade-offs.” That covers the fact that usually we do, for readers who have been lobotomized, and for the rest of us it’s at least a bit startling and gets us thinking in terms of finding win-win situations.

Phew.

Onward to part 2, here!

You can see it here: https://www.kosmas.cz/knihy/198734/ekonomix/!

Writing Economix took a lot of work—I started in earnest in 2004 and the book wasn’t published till 2012—and the whole time I had a rather loud voice in my head telling me that I was simply throwing away my life.

At some point during those years I came across Stephen Notley’s brilliant Bob the Angry Flower. One comic, called “Rhetorical Flair,” especially spoke to me.

I recently contacted Notley about buying the original art, and soon afterward it showed up at my house. And it’s great! It’s much larger and more awesome than I had any right to expect. Check it out:

Behold my take on net neutrality, illustrated by the awesome Ian Akin!

(I have Dan Burr working on a piece on Obamacare, but that will take a while.)