Scarcity and Incentives
Date: 2020-10-16
Source: https://craigwright.net/blog/economics/scarcity-and-incentives
When people query why elite athletes
such as NBA basketball players are getting paid so much more than teachers, the
argument is one of scarcity: it is not that basketballers get paid more; it is
that the NBA selects an elite of basketball players. Such individuals are rare and hence scarce. The
other side of the scissors is that such individuals are in demand. Whenever
scarcity and demand meet, price increases, arising from the values attributed
by the people seeking the good. The range of the teacher’s salary also varies.
In part, the problem with public schools, in general, is that good teachers are
not only paid the same as mediocre teachers, but they gain the same external
incentives. The incentivisation to be the best teacher is frequently not monetary.
Still, when we fail to reward and incentivise individuals, it may not merely be
because we are doing so in monetary terms. The incentive to be a better teacher
is not limited to one that is based on financial reward (Wisener & Eva, 2018).
When we compare the scenario of the
teacher to the one of the NBA basketball player, we must next look at how many
teachers there are, compared to how many elite athletes there are. It is also
simple to argue that teachers spend many years at university. Elite athletes
can train seven days a week, to an intensity that exceeds the completion of a
doctoral degree multiple times over. The consequence is that we reward the
elite few who can sacrifice to such an extent, and succeed. When people can
compete and earn based purely on merit, the few individuals who are most
skilled in their roles will generally receive more than others.
What people are not thinking about when
they are making such comparisons is the incentive and value outside of a pure
monetary reward. Many people become teachers because they wish to teach. The motive
lies in bringing up and educating the next generation of society. For many teachers, the motivation to be
a teacher is the reward. Balancing incentives is computationally demanding. The ability to find
and report market prices accurately is the primary strength of the free market. Markets do not make judgements. They
don’t have ethical values; markets are merely tools that reflect the principles
of those who act in them. In taking the small, incremental changes and
interactions that everyone completes daily, the invisible hand of the market (Smith,
1776) comes to form equilibrium prices, based on the standards of society, as
they are reflected within the rules. The rules, of course, can skew how the
market works. Legislating for maximum prices will impact the number of goods
produced and lead to shortages. Even though many socialist nations have tried
to plan their economies centrally, the sheer volume of interactions is beyond
human calculation.
Cassar and Meier (2018) provide strong
evidence that workers are influenced and incentivised by nonmonetary aspects of
the job. Job satisfaction and productivity are not derived from the size of
one’s pay cheque. Wisener and Eva (2018) focused their
study on the incentivisation of medical teachers. Medical education requires
valuable time from physicians and clinicians. Many medical educators volunteer
their time or take significant pay cuts to be able to teach. On a purely
monetary basis, doing so would seem irrational. The motivations of people who
engage in such activities cover many diverse roles, and rather than receiving fiscal
benefits, such individuals gain a sense of self-worth and feel valued. It is
important to note that the introduction of monetary rewards can act to disincentivise
good performance (Titmuss in Wilson, 1972; Upton, 1973).
The selection of incentives is as essential
to businesses and individuals as it is to society. From an ethical standpoint,
many people have started reacting to the focused shareholder approach promoted
by Milton Friedman (Posner, 2020), which has resulted in an emphasis on
short-term gains at the expense of long-term growth and the building of
capital. One of the consequences of such failed incentive structures comes in
the form of excessively large bonus cheques, paid to many CEOs. Many such cheques
have been handed for strategies that are detrimental to the long-term viability
of a business. Essential business activity such as research and development
returns value to the company after long periods of time—that may exceed a
decade. Such departments become easy targets in a drive to cut costs, allowing
executives to increase the corporate bottom line in the short term and boost
executive salaries.
There is no simple answer that covers
all aspects of life. People have an ingrained sense of fairness, but it is very
rarely attuned to an accurate focus on what is truly right and wrong. But the
common-sense approach to how people interact works more often than not (Gwartney
et al., 1985). Creating successful incentive structures is difficult, and one
can rarely be legislated for from above. One of the hardest lessons may be that
not everybody is motivated by money. Although it may otherwise make for more
straightforward reporting on the news, the reality is that people seek meaning
and fulfilment. In creating a system where people work and provide, whilst
gaining a sense of dignity, it needs to be remembered that different people
will end up with different outcomes. To merely hate and envy others who have more
does little to improve our lot or to incentivise productive behaviour.
References
Cassar, L. Meier, S. (2018). Nonmonetary Incentives and the Implications of Work as a Source of Meaning. In: Journal of Economic Perspectives, 32(3), pp. 215–238. doi: 10.1257/jep.32.3.215
Gwartney, J. Stroup, R. Clark, J. R. (1985). Essentials of Economics (2nd ed.). Academic Press.
Posner, E. (2020). *Milton Friedman
Was Wrong*. [online] The Atlantic website, retrieved from: https://www.theatlantic.com/ideas/archive/2019/08/milton-friedman-shareholder-wrong/596545/,
last accessed 2020/08/20.
Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations (1st ed.). W. Strahan and T. Cadell.
Upton W. E. (1973). Altruism, Attribution and Intrinsic Motivation in the Recruitment of Blood Donors [dissertation]. Ithica, NY: Cornell University.
Wilson, R. N. (1972). The Gift Relationship: From Human Blood to Social Policy. By Richard M. Titmuss, New York: Pantheon Books (1971). 339 pp. In: Social Forces, 50(3), 411-412. https://doi.org/10.1093/sf/50.3.411
Wisener, K. Eva, K. (2018). Incentivizing Medical Teachers. In: Academic Medicine, 93(11S), S52-S59. https://doi.org/10.1097/acm.0000000000002383
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