The Moral Economy:
Why Good Incentives are no Substitute for Good Citizens

Samuel Bowles

Yale University Press 2016
A book review by Danny Yee © 2017
Financial incentives and other rewards can backfire by undermining non-economic motivations: in a randomised trial of day care centres in Haifa, fining parents increased the number of late pickups; Boston firemen took more days off sick after a limit was introduced; and so forth. In The Moral Economy Samuel Bowles explores the details of this and its broader implications, "the policy paradigm of synergy between incentives and constraints, on the one hand, and ethical and other-regarding motivations, on the other". In this he draws on psychological and experimental studies as well as economic theory, and he always keeps both the historical context of ideas and their policy implications in view.

The Moral Economy is equation-free and has only a few of the diagrams beloved of economists. And it uses engaging examples and is clearly written and presented. It fails to be genuinely popular, however, because it doesn't shy from formal language and precision, and because it works through the details carefully; those who don't appreciate the fine nuances and distinctions may not appreciate this. I suspect The Moral Economy will work best as a primer for students and lay readers — including, one hopes, many policymakers — with at least an elementary economics background and some bent to the scholarly.

The first two chapters introduce the basic problem, embedded in its historical context: the idea of Home economicus, going back to Machiavelli and Hume's "constitution for knaves", and the assumption of separable moral and material interests and the idea of markets as extra-moral, with avarice repackaged as a motive. The reality is that:

"Ethical and other-regarding motives have always been essential to a well-governed society and are likely to be even more so in the future. Policies that ignore this fact and are indifferent to the preferences that motivate people's actions may compromise these essential predispositions."

There follows a brief introduction to game theory and various "games" that capture aspects of social-economic interactions, and to some of the evidence from experiments, in the lab and natural. Bowles presents a taxonomy of the different ways in which incentives and "social preferences" can interact ("crowding-out" and "crowding-in", marginal and categorical) and considers the problems of context and the differences between real-life and experimental behaviour.

Bowles explores three ways in which incentives can produce side effects through the information they convey: they may provide evidence for the provider's bad motives, they can induce moral disengagement by changing the framing context within which decisions are made, and they can compromise autonomy. (There is a blessedly limited foray into neuroscience here.)

The widespread use of incentives may also adversely affect the broader evolution of civic preferences. People generalise from one "game" to others, and the economy shapes the people who live in it through the socialisation of children.

"The evidence suggests that ethical crowding-out effects can be substantial and that the lessons of our economic experiences are sometimes long-lasting and tend to be generalized to other domains of life."

Exploring this, Bowles looks at the relationship between markets and fair-mindedness, and at cultural differences in cooperation and punishment and ways of sustaining the social order. Markets can promote honest dealing, but at the same time depend on a non-market "liberal civic culture".

Going back to Aristotle, Titmuss (The Gift Relationship, 1971) and Adam Smith, Bowles considers the problems of "mechanism design". Unfortunately, analysis here shows that we can only get two out of three of voluntary participation, Pareto efficiency ("no one worse off"), and preference neutrality. This leaves us with a legislative challenge, forced to balance second-best options. Bowles explores examples of how "fixing" incomplete contracts, for example by formalising land tenure and labour markets, can backfire by undermining community norms:

"efforts to perfect the working of markets may have collateral cultural effects that make people less likely to learn or retain the exchange-supporting norms and other values essential to good governance."

Going back to ancient Greece and the challenge for "Aristotle's legislator", Bowles looks at how the Athenians used honors and rewards to encourage rich citizens to outfit and man triremes for the fleet. This approach makes use of "constitutive" reasons for action, of people's concerns about how they appear (Akerlof and Kranton's 2010 Identity Economics). In contrast, appeals based purely on self-interest fail to tap the social preferences that might lead people to support a policy; they also invite voters to ask "What's in it for me?" and to reduce the salience of their ethical and social concerns.

"Good policies and constitutions are those that support socially valued ends not only by harnessing self-interest but also by evoking, cultivating, and empowering public-spirited motives."

There is nothing earth-shaking in that conclusion, but The Moral Economy provides the analysis to put it on a robust theoretical footing, as well as some ideas for working out when and how it can be given practical force. It does this with an attractive combination of rigour and accessibility, and deserves a broad audience.

August 2017

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%T The Moral Economy
%S Why Good Incentives are no Substitute for Good Citizens
%A Bowles, Samuel
%I Yale University Press
%D 2016
%O hardcover, notes, references, index
%G ISBN-13 9780300163803
%P 272pp