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

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

(bright upbeat music) – Good afternoon everyone. And thanks Ellen for a great organization. My name is Rui de Figueiredo,
I’m emeritus professor at the Haas School of Business in the Department of Political
Science here at Berkeley. And, I’m also the chair of the
Weinstock Lecture Committee. Along with the graduate division
and the graduate council of the academic senate, I’m very pleased to
welcome today’s speaker Professor Samuel Bowles. This year’s speaker in the Barbara Weinstock
Lectures on the Morals of Trade. I’ll introduce Dr. Bowles in a minute. But, first let me take
a moment to tell you how the endowment supporting the lectures came to the University
of California Berkeley. In 1902 Harris Weinstock,
a well known business man based in Sacramento, provided
the university with a fund in honor of his wife Barbara, who the lectures are named after, to support an annual public
lecture on the morals of trade. Weinstock explained his
motivations in an article written after the first lecture
was delivered in 1904. Thus, he said, “Hope is in the air “and there is a better
and clearer day in store “for all destined to spend their lives “in commercial pursuits. “The thing to do at this hour
is to accelerate the movement “and to bring this hopeful day “as near to our own as possible. “The California University Lectureship “on the Morals of Trade, “is a small effort in that direction.” Others who’ve delivered
the lecture include, consumer advocate Ralph Nader, member of the British
Parliament Neil Kinnock. Nobel laureate Amartya Sen. Former US Secretary of Labor Robert Reich. Former Secretary of US Department of Health and Human
Services, Kathleen Sebelius. And most recently, nutritionist
and author Marion Nestle. And then last year,
Governor Jennifer Granholm who was a two term governor
of the state of Michigan. And now, a few words about our
distinguished speaker today. A very noted economist. Professor Samuel Bowles
is the research professor and director of the
behavioral sciences program at the Santa Fe Institute
in Santa Fe, New Mexico. He’s published prolifically
in many journals including, Science,
Nature, The New Scientist, American Economic Review, The Journal of Theoretical Biology, Antiquity, The Harvard Business Review, and The Journal of Political
Economy, amongst others. A very wide spread of disciplines. He’s also published a
number of books including, A Cooperative Species: Human Reciprocity and Its Evolution, 2013. Microeconomics Behavior,
Institutions and Evolution in 2006. And his most recent
book, The Moral Economy: Why Good Laws Are No
Substitute for Good Citizens, which was published in 2017. He’s currently working on
another manuscript called, Equalities Moment: The Origins and Future of Economic Disparity
and Political Hierarchy. With a global team of
researchers and teachers he’s also developed an new
introduction to economics that demonstrates the
power of modern economics to eliminate problems
such growing inequality, climate change, innovation,
wealth creation and instability. A year long highly
interactive eText called, The Economy, is open
access and freely available to anyone in the world
with internet connectivity on their phone or other device, at Professor Bowles received
his bachelor’s degree from Yale University, his PhD in economics
from Harvard University. He’s advised South African
President Nelson Mandela, Dr. Martin Luther King Junior,
US presidential candidates, including Robert F
Kennedy, and Jesse Jackson. And in 2006 he was
awarded the Leontief Prize for his outstanding
contribution to economic theory. Today, he’ll be speaking
about, The Moral Economy: Why Good Incentives are No
Substitute for Good Citizens. So with that, please welcome
Professor Samuel Bowles. He will give a lecture and
then we’ll have a discussion once his comments are completed. (applause) – Well, I gotta say that morals and trade, and a moral economy sound
like an oxymoron, doesn’t it? I mean, there’s something a little jarring about somebody who gives a
grant to study morals and trade, at least in economics
where we try to separate these issues as much as possible. But, I’ll try to convince
you that’s a mistake. The picture in front of you is a fresco in the town hall in Siena
where I often teach. And, it’s a representation
in the 14th century of good government. Notice it’s a secular image. If you look carefully
you can see it’s an image about commerce and peaceful
intercourse among people. The constitution of the town
of Siena at the same time made it quite clear, it said, “This city must be governed by men “who love peace and justice.” So the a marriage of
morality and good governance was the basic idea of that period. An idea which came to be displaced particularly in economics
in the years later. A story which I’ll tell. And then try to reverse
before we’re finished. It’s a long story. So let me give you the basic idea first, just a few, there summary points. This is what I would like to pursued you is worth considering and is perhaps true. First, is something which
I think you’re aware of, it’s widely held that in
designing public policies and legal systems, and so on, we should assume, at least
on grounds of prudence, that citizens are entirely
self-interested and amoral. That’s the so called, Homo
economicus assumption, which is the foundation
of the public policy, sciences in economics, what’s called, mechanism
design, and so on. And, of course it effects
legal practices as well. But, and this is the main point here it’s anything but prudent to
assume that Homo economicus is a good representation of our citizens and the people who make
up the body politic which we’re governing. And there are two reasons for this. The first is, and I’ll try to convince you this is really true, policies that follow from that paradigm are more likely to make
it’s assumptions true. That is are more likely to convert people to acting more like Homo economicus, than they would in the
presence of other policies. So, the policies are self
defeating and backfire. But, the reason why this takes place is not per se something
wrong with incentives. This is a more subtle point. I’m not going to argue here
that incentives are the problem. I’m going to argue that
incentives are used for purposes that people reject because they’re either
attempting to implement an unfair outcome, or are
attempting to implement a type of domination
of the incentive giver over the target of the incentives. So, we should be thinking,
not about incentives as intrinsically a problem, but rather the social
relationships that are behind the incentives as the problem. And again, I’ll try to
give you some reason for believing that. And finally, in economics
we have a field called, mechanism design, in which
we think of very clever ways of defining new property
rights, new incentives, new constraints and so on. Whereby, we can implement
good outcomes no matter what. No matter what the people are like. I’ll return to this theme later. But, the conclusion that I
think I will convince you of is no matter how clever we
are in designing incentives and property rights, and so on, that alone will never be
sufficient for good governance in facing the kinds of problems
that humanity now faces, such as, climate change,
mounting inequality, economic instability,
political violence, and so on. So that’s what I’m gonna talk about. The ideas, many of them here are not new. It begins in the social sciences
with Richard Titmuss’s book called, The Gift Relationship, in which he said, “The
commercialization of blood “and donor relationships
represses the expressions “of altruism, and erodes
a sense of community.” The idea was that public spirited motives are crowded out by the explicit
application of incentives. And therefore, we should
use these incentives less because they have that
crowding out feature. Now, at the time that he wrote, early 70s, there was a lot of research being done. A lot of it happen to be in
near by Stanford University, by Nisbett, Deci, Green,
others, Lepper in particular who I’ll come back to. That was in psychology it’s called the over-justification literature. An what it shows, for example,
is that you can crowd out children’s desire to paint by paying them for their
paintings, things of that nature. So, it received a warm
welcome in psychology but a rather chilly one in economics. It was surprising, Arrow and
also Solow, reviewed the book and I suppose if you’re a sociologist that’s the most you can hope for, that an economist would actually read your book and review it. Two Nobel price winners is not bad. But, what they said is, they didn’t believe
that there was evidence for this crowding out phenomenon. Here is kind of Arrow, “Why should it be that the
creation of a market for blood “would decrease the altruism
embodied in giving blood? “I do not find any
clear answer in Titmuss. “I see no real evidence that the presence “of a commercial blood supply “decreases the amount of altruism.” I had the same reaction. I read the book with great interest. And I didn’t think that he made his case. Now, of course, since
then a lot has changed. The skepticism announced by
these two great economist, Arrow and Solow, was on
the basis of the fact that at the time there was little evidence that the kind of moral incentives that Titmuss was talking
about were important. And there was even less evidence that they would be crowded
out by the use of incentives. So, Arrow and Solow were on good grounds and Titmuss was essentially
making a good argument that turned out to be probably correct based on later evidence. In fact, an unpublished dissertation the same year that Titmuss wrote made a pretty good case for the fact that Titmuss had been right. Though Titmuss had been
unaware of this dissertation. Now, since then in
economics a lot has changed. And here I’m gonna refer to things going on within economics. Bear with me because
I’ll come back to them in the course of the talk. So if you don’t, if you’re
not familiar with the themes they’ll come around again. The first is obvious
you all know about this. There’s now a lot of experimental
evidence in economics that these moral incentives
or ethical principles, other-regarding preferences, generically called, social preferences, these are important as
a basis for behavior. It doesn’t mean they’re important
instead of self interest. Self interest is also important. But, there’s no question on the basis of the experimental evidence
that our introspection and our natural observation around us which says to us, yes
other motives matter. That is now strongly confirmed
in the experimental evidence. Equally important but
a little less obvious. Economics has now taken
up the idea as the norm, that when I contract
with you for something the contract is probably incomplete. If I hire you for example, or you hire me, the contract says I’m
supposed to show up on time and obey the supervisor. It doesn’t say what
work I’m supposed to do. Now, why is that important? How does that get norms into play? It gets the norms into play directly. Because if I hire you I
care about your work ethic. If I loan money to you I care about whether you’re telling me the truth about what you’re gonna do with the money. Because the contract of
a lender to a borrower is also incomplete. So, because we have, because
most contracts are incomplete including very important ones, for credit and labor for example, it now becomes obvious even to economist who have resisted interdisciplinarity, it becomes obvious that
the exercise of power and the salience of social norms is a part of very conventional
economic problems. Like, what’s the wage,
what’s the interest rate? Now finally, perhaps even more esoteric to those of you who’ve never
heard of the Lucas critique, the Lucas critique is a very important intervention in economics. And it said, when you
design a economic policy you have to take account of the effect that that policy will have on the beliefs that individuals in the society have about what’s gonna happen next and how the government will behave. In other words, when you design a policy don’t take the beliefs
of people as exogenous, they’ll be affected by the policy. Well, all I’m doing here is
I’m taking the Lucas critique and instead of applying it to beliefs, I’m applying it to norms and values. And saying, when you implement a policy don’t think that the preferences which existed before
you had the intervention are gonna be around later. And I’ll come back to that. Now, in response to these three things, some economists have
rediscovered Aristotle. At least that’s what they said. I suspect that some of them
just had discovered Aristotle. (crowd laughing) But, if they did, probably the thing they would like to read
most is the following. This is from, The Ethics. “Lawgivers make the citizens good “by inculcating habits in them, “and this is the aim of every lawgiver. “If he does not succeed in doing that, “his legislation is a failure. “It is in this that a good constitution “differs from a bad one.” Now notice, it’s not
this is a characteristic of a good constitution. This is the characteristic
of a good constitution. This is the sine qua non
of a good constitution. Teaching the public to be good citizens. Now, this gives us a dilemma then. If Titmuss is right, that
incentives compromise the kind of values that we would hope to have in a citizenry, then what is Aristotle’s sophisticated legislator supposed to do? Because by now Aristotle’s
legislator knows that incentives are essential. You’re not gonna run a
society without incentives. You’re not gonna abolish markets. So, we set up a little tension here between Titmuss’s insight and
Aristotle’s view of politics. Now, there’s one way out of this. Maybe we don’t have to worry about this. Now, economists are really of the view that we can do without Aristotle’s values. That’s the way we do our public economics. I started to trace where
this idea came from. And it really comes not from the meaning of an important body of work, but rather by a supposition
that has been adopted by great thinkers as a thought exercise. Think about this, this is Machiavelli. I’ll come back to the rest of
the quote in just a minute. But, the important part in red is, “All men are wicked, “hunger and poverty make them industrious “and laws make them good.” Does that sound familiar? That’s the idea that we
can organize a constitution on the basis of the incentives,
based on hunger in this case to induce people to do things which will add up to the social good. Now, it’s not that of course Machiavelli was not saying that
hunger makes people good. He says, hunger makes people
act as if they were good. And that’s good enough. Now, there are many
others who had this idea. A contemporary of Machiavelli, Marsiglio. But also, if you think
about the way Hobbes posed the problem of
order and limited freedom in what was then modern society. Mandeville, Hume, Smith, Bentham. Bernard Mandeville, famous in economics for a wonderful book that he
wrote, The Fable of the Bees. This is what he had to say
about the relationship between vice and governance. “Thus every part was full of vice. “Yet the whole mass of paradise.” He’s describing a hive of
bees were nasty animals. “Such were the blessings of that State, “their crimes conspired
to make them great. “The worst of all the multitude “did something for the common good.” So, this is a really big idea that we should distinguish
between motives and consequences. And this is Mandeville and
it’s of economics after that. He wrote it about bees because it would have been too scandalous at the beginning of the 18th century had he written it about humans. In fact, he got into a
lot of trouble as it was. What happened in the
hive was that the hive was this scandalous hive and everything work out pretty well. But then, they got religion and they all acted like good little bees, and the hive collapsed and so on. That was the story of the bees. Now, the subtitle of one of
the additions of his book was, “Human frailties may be
turned to the advantage “of civil society and made to supply “the place of moral virtue.” Now that is a very very interesting idea. That is, the ordinary motives
could substitute for virtues. He didn’t explain how that could be done. But, it would very soon be provided by the classical economists. The invisible hand is of course just a statement of that view. That ordinary motives
when organized properly by the proper social institutions can induce people to
act in the public good. So, here we have one of
the most famous quotes even rivaling one where
mentions the invisible hand, “It’s not from the
benevolence of the butcher “the brewer, or the baker
that we expect our dinner, “but from their regard
to their self interest.” Now, this view was taken
up by people at the time. Hume, of course, preceded Adam Smith by about half a generation. And, what Hume said about policy making and constitution making, really epitomizes the way modern economists have thought. “Political writers have
established it as a maxim “that in contriving any
system of government “every man ought to be
supposed to be a knave “and to have no other
end in all of his actions “than his private interest. “By this interest we must govern him “and by means of it make
him, notwithstanding “his insatiable avarice and ambition, “cooperate to public good.” Now by the way, doesn’t it sound like he must have been reading Machiavelli? Even the structure of
the sentences, right? Anybody who wants to form a republic should supposed that,
that’s the translation of Machiavelli’s Italian. Hume is saying the same thing. And, we get Bentham who
wrote the first book in what we would now
call public economics. How to design public policies. He announced what he called
his duty on interest principle. He was talking about
compensation of public officials. And he said, “We should
make it every man’s interest “to observe that conduct which
it is his duty to observe.” Now, in economics we just
call that aligning incentives. Or, an incentive compatible policy. That is, it’s a policy that induces people as a result of their self interest to do the thing that
the society as a whole would deem profitable
or good for the society. And once again, these two statements here are about not making people
care about their morality or the benefits they give to others, but rather given them
private incentives to do so by the clever design of public policy. And so, what happened during this period from Machiavelli through to Bentham, was that good laws replaced good citizens as the sine qua non of good government. We could displace Aristotle concern by the design of good principles. And that was by the way a very key idea in Machiavelli’s Discourses. Not, The Prince, but in The Discourses. That’s what he’s really saying. The thing that we have that we can do is we can design roles
which will induce people as he put it, of ordinary humors, we can induce people of ordinary humors to conduct themselves in way that contributes to the public good. And this is really a big
idea right up to the present. I think it’s familiar to you. But, this is a wonderful
editorial from 1988 from The New York Times. A previous financial crisis. Program, trading, index
arbitrage and so on. Could go on about this
but the key line is this, “Perhaps the most
important idea here is that “to distinguish between
motive and consequence. “Derivative securities attract the greedy “the way raw meat attracts piranhas. “But so what? “Private greed can lead to public good. “The sensible goal for
securities regulation “is to channel selfish
behavior, not to thwart it.” And I’m imagining that
that was written by some, that line was put in there
by some Yale graduate from economics who was
assisting the editorial board, had read Mandeville and so on. And thought that was a
clever thing to put in. It’s just straight Mandeville. Now, so now think about it. It may be repugnant to
you to think that way. But, should we worry really? Why not just harness greed? Well, economist say that a market economy or a capitalistic economy has the benefit of not relying on
morality to function well. Of course, a very famous
expositor of this view is Hayek. “The liberal market economy
is a system under which “bad men can do least harm. “It does not require out
finding good men for running it, “or that on all men becoming
better than they are now.” That’s just Machiavelli. Ordinary humors, that’s all we need. A little more explicitly Charles Schultze of the Brookings Institution. “Market-like arrangements
reduce the need for compassion, “patriotism, brotherly love
and cultural solidarity.” And finally, I think the
most astute one is Buchanan. Nobel laureate in economics. He’s shopping near his home in Virginia. “I do not know the fruit
salesman personally, “I have no particular
interest in his wellbeing. “he reciprocates this attitude. “I do not know, and have no need to know, “whether he is in the direst of poverty, extremely wealthy, or
somewhere in between. “Yet, the two of us are
able to transact exchanges “efficiently because both parties agree “on the property rights relevant to them.” Now that is a very bright statement. I mean, I don’t endorse his indifference towards the fruit salesman. But, he understands what
it is about the economics. Which, I’m happy to say,
we can now call former economic conventional economics. Which is no longer taught in grad school thank you very much. “Because we agree on the property
rights relevant to them.” That’s just another statement for saying the contract is complete. Everything that we care about
has been contracted for. So I don’t care about his morality. If he gives me a bag of bananas, and it’s not a bag of bananas, I get my money back. So that’s what he’s saying, complete contract is what
makes his indifference an appropriate stance. Well, but economist have had, you may wonder why I said it was ex. Did you wonder? It is ex. I’m coming to that. Why it is that we once thought that but we no longer think it? Why did economist think that we should be concerned with preferences? We could put them aside. Well, we once had a theory that showed that desirable social outcomes are possible with
unrestricted preferences. So, let me run through this argument. Unrestricted preferences mean
essentially, bring them on. We don’t care what the preferences
are, we can handle them. So, here I’ll lay out in a single slide what the argument is and then
I’ll tell you why it’s wrong and why economist have now rejected it. First, the market is
obviously decentralized it’s privacy preserving. It’s, when guided possibly by a good but not omniscient planner
or social designer, policy maker, it’s capable
of implementing outcomes by means of procedures. And the italicized parts
are the three things that matter as far as a
liberal commitment like that of, for example, Hayek. That is, it avoids coercion. It avoids paternalism
and it’s free of waste. Those three things. I’ll come back to them. It avoids waste. What we mean in economics by that is just the outcome is Pareto efficient. It’s not possible in the outcome for all parties to be made
better off by some change without anyone being made worse off. So that’s the rather
minimalist view of efficiency which is part of this liberal commitment. It avoids paternalism. It doesn’t say that people have to be of one type of preference or the other. It completely rejects Aristotle’s view that he constitution
should take a position on what the citizens should be like. So by unrestricted preferences it means, that you can any preferences you want. This is now, it’s called
preference neutrality among liberal philosophers. By the way, it’s a very new term. It’s not an ancient term. But it just means, if you’re a liberal you don’t make a position
about the nature of the good, or what people consider to
be the good life and so on. And finally, whatever the outcome is it should avoid coercion. If you participate in an
exchange it has to be voluntary. Now think about it. That’s not all you could
ask of a philosophy as the basis for economics. But you must agree, that’s pretty basic. Those are things that liberal people, I count myself among them,
liberal people are committed to. Now, some people think
that it’s been done. A great professor from
this great university certainly claimed that it had been done. “The superiority of liberalism has been mathematically
demonstrated,” by Gerard Debreu. This is in Figaro. Actually, Figaro misquoted
him in the headline. What he said actually,
was virtually identical, what he said is, “The superiority of the liberal
economy is incontestable “and can be demonstrated mathematically.” He was talking about the famous theorem, so called, invisible hand theorem, the he and Kenneth Arrow
proved 30 years earlier, which showed the conditions under which a competitive economy would support a Pareto efficient outcome. So, let’s think of this liberal trinity. Has it been demonstrated? Those are the three desiderata
that I mentioned before. Pareto efficiency, preference neutrality,
voluntary participation. Now, so this is what economist
thought as of the late 80s that we, I mean, or the early 80s, that we had actually shown. And, let me say why we thought that. That is, we had some theories under the heading of mechanism design which appeared to show that implement Pareto efficient outcomes
with unrestricted preferences and with voluntary participation. But, that hope turned out to be false. For decades of mechanism design, and a good number of Nobel
prices for these results showed, and I’m summarizing here, what the Swedish Nobel Committee said in awarding the prizes the first time, the really big mechanism
designer got prizes, “The implementation of
Pareto-efficient outcomes “in the absence of complete
contracts is generally “impossible for unrestricted preferences “if participation is voluntary “and there’s a limit on
the extent of penalties “that may be imposed,
excluding physical punishment “imprisonment for debt,” and so on. That’s the result of this body of work. Now, there are many parts of it. Getting people to truthfully tell what their preferences
are, or their capacity turns out to be not incentive compatible. That is, you can’t design
a way that does that if there are more than two options. That was shown in 75. Private voluntary exchange,
even when you have complete contracts does not
implement efficient outcomes. That was shown by Myerson
and Satterthwaite, and Chatterjee, and Samuelson
also in the late 80s. Now as result, the
mechanism design literature has for the most part abandoned the Pareto criterion entirely. And what it does, it talks
about something called incentive efficiency. Which means, the best you
can do given the preferences. Which obviously means that
then preferences are important. They’ve abandoned the idea, the strong idea of Pareto efficiency. And these are the guys
Hurwicz, Myerson and Maskin who one the price for
their contribution to this. Now, a number of people
have worked on this problem. And, I wanna say that this
is a trilemma, not a trinity. And, the idea is you can
have any two vertices but not all three. And, I’ll show some results on the edges about why that’s true. And what you lose if you do, for example, you can
have Pareto efficiency and voluntary participation, but you can’t have preference neutrality. So, if you have that one and that one what Hwang, that’s Hwang there, what Hwang and I showed
is you can have these two but only by violating
preference neutrality. If at least, by the way it’s not true that both of the agents have
to be honest or altruistic, just one, but they have
to be sufficiently so. So you have to violate the idea that, bring them on, when it
comes to preferences. You can have voluntary participation and preference neutrality, but this is what Chatterjee
and Samuelson showed, then there’ll be unrealized
gains from trade. And you can have Pareto efficiency
and preference neutrality but only by a very clever mechanism which requires people to
commit to making a trade before they find out what the deal is. In which some of them, once they find out what the deal is they won’t wanna be part of it. So, that violates voluntary participation. So, I conclude that that attempt failed and it failed, you know, a long time ago. Interestingly the paper
from Figaro in which Debreu was quoted was exactly the time that these papers were coming out. And he, Debreu, was extremely
on top of that literature to his wonderful credit. Why he said that to Figaro I can’t imagine because the house of cards was collapsing right in those years. And the date in Figaro was 84, and these papers were
all in the early 80s. Now, so virtue, to use
the old style expression, it is still essential. And this is especially the case where relevant information
is not verifiable. The non-verifiability of information is what gives rise to
incomplete contracts. If there’s some kind of information that either is lacking, so
called asymmetric information, or even if present can’t
be used in a court of law to enforce a contract, then you’ll have an incomplete contract and then all of these problems will arise and norms and other things
will become necessary. It’s also the case that imagine a state that had the capability
of implementing a system whereby contracts would be complete. That would be an extremely invasive state capable of collecting information from you which is, now it cannot be collected. In other words, trying to
make all the information about your life verifiable in a court is exactly what most liberal people on privacy grounds would resist. So, making the liberal economy that is the neoclassical model which was supposed to
be the economic basis of the liberal philosophy, making it work is a dystopic vision because it would require
contracts to be complete which would require a state that no liberal would ever accept. Now, other regarding preferences, ethical commitments become important. And here we have Arrow again once again getting it
right, 1971 he wrote this. “The process of exchanges requires “or at least is greatly facilitated “by the the presence of several virtues, “not only truth, but also trust, loyalty “and justice in future dealings.” Again, still Arrow, “In the absence of trust opportunities “for mutually beneficial cooperation “would have to be forgone. “Norms of social behavior
including ethical and moral codes “may be reactions of society to compensate “for market failures.” Once again, he’s got it right except it’s suggesting that
we had market failures before we had morals is
a little bit ahistorical because clearly human being had morals long before they had markets and therefore they couldn’t
of had market failures. But I’ll set aside for the
great and sadly departed economist Kenneth Arrow. Now, let’s think about
were economics went wrong. The classical writers assumed something that nobody’s really put their finger on. They did not assume that
people were selfish, far from it. They didn’t assume that
preferences were somehow outside of economics or exogenous. I mean think about,
Hume’s moral convention. Hume who said we should act
as if people were knaves the next sentence said it
may seem odd to you reader that something which is
a true axiom for politics should be false in fact. That’s what he said. We’re gonna assume this
and we know it’s not true. Or, think about Adam Smith,
Theory of Moral Sentiments, very aware of that. Let’s go back to Machiavelli. “It’s necessary to anyone
who would organize a republic “and it’s laws in the republic “to suppose that people are wicked.” He didn’t say people are wicked. He said, you should adapt this assumption if you’re gonna design a constitution. We want to, or as Hume put it, we want a knave proof constitution. We want a wicked proof constitution. And in fact, Machiavelli went on and on about how societies were well governed where they have high levels of morals. People misunderstand what
Machiavelli was all about. Read The Discourses, not The Prince. Now, so they were very aware
of the importance of norms. But, they did make the
following assumption, they assumed that what Smith
called moral sentiments and material interest could
be pursued independently. That is, they assumed that policies which were designed to shape behavior by appealing to the material interest in monetary incentive for example, wouldn’t interfere with
the moral sentiments. Which might also assist
in governing a society. And similarly, that appeal
to the moral sentiments would not interfere with the exercise of the material interests. So, the key idea here is that
incentives affect actions only by altering the cost and benefits of the targeted activities. So, there’s no effect on the preferences. Now, these proposition
as you will recognize now come into play in policies to get kids to stay in school, to not get pregnant, sentencing guidelines, not to mention more standard
aspects of economics. Let me lay out what I just said somewhat more analytically. We have here something called values. Which is here this,
sorry, social preferences. Suppose there’s an
incentive maker, a designer, social planner, call ’em. And, she wants to affect the action the pro-social action on the right. She has some incentive
that she can impose. A tax or subsidy or something. That would affect the material payoffs. And that will have a positive effect on the right hand term pro-social action. The problem is that people
have social preferences which might have led them to
take the pro-social action anyway in the first place. And, that’s not a problem. The problem is the arrow going downwards from incentive down to social preferences. If that arrow’s negative
so that the incentive has a negative impact
on social preferences then you have a problem. So, let me lay out the total effect is, the direct effect, that’s the top route going through the benefits and costs. The indirect effect is
the effect going from the incentive to the social preferences and to the pro-social action. Typically economics has
ignored the lower route. And in recent years we’ve found out that the lower route really matters. So, what I mean by separability is that the total is just the direct effect. There isn’t any indirect effect. Now, empirically there’s some bad news. The firemen in Boston in
2001 just before Christmas got a message from the fire commissioner who said that he’d noticed
that the people calling in sick tended to get sick on Mondays and Fridays and he found that very irritating. And so, until then they’d
had unlimited sick days. In fact, very few people
abused the sick days or at least very few people
abused them very much so they went up to 15. But the commissioner then said, as of now if you call in sick more
than 15 times a year your pay will be docked. So it’s a penalty. And, what happened on
Christmas and New Years was the call ins doubled. And what happened in the next year was over the whole year
the number of people calling in sick doubled. And the firemen who were interviewed said, sorry, I go to work when I’m injured, I go to work when I’m sick. I do that because I’m a public servant and so on and so on. They felt insulted. And, so they just retaliated. That’s what’s called strong crowding out. That’s when the incentive
not only blunts the effect but actually reverses it. Now Sandra Polania-Reyes and I, that’s Sandra by the way in Bogata. She’s from Columbia. She’s doing an experiment in the streets among market people in Bogata. She’s an fantastic experimental economist. We did a bunch of papers. In most of the experiments
of which we collected a large number, there was crowding out. So the incentive in economics
would be called a substitute for the morals. A substitute in economics
is the following, if an incentive and a moral
preference is a substitute then the higher the incentive the less is the effect
of social preferences. The larger one variable is the less is the derivative
of the outcome effect with the other one. So that’s what a substitute is. And that’s what we found out. We did find out that in some
cases there was crowding in. And obviously in is gold. That’s what the mechanism designer or social planner should be thinking of. Now, just to get a few words on the table. Wanna talk about the
nature of crowding out. It can be categorical. If there’s an incentive
for something you’ll say, it has an effect. Like, you know, he did it for the money. Well, how’d you know that? Well, there’s some tax incentive
I don’t know how big it is. That’s a categorical effect. So, I wouldn’t be as
likely to for example, give to the university if
there was some tax advantage because people might
discount my generosity. Now, the other is that there’s, sorry, there’s marginal crowding out, just means it depends on
how big the incentive is. And obviously you can
imagine psychologically both could be the case. And I’ll tell you in two slides that we observe in experiments that both indeed are the case. And entirely different
dimension is the causes. Of which I think there are two. One I has to do with framing. That is, the incentive makes it a different kind of situation. So it doesn’t change your preferences it just tells you, oh
this is like shopping and not like dealing with my family. So that’s framing. It’s called, situation
dependence in social psychology. Economist would call it state dependence. The states differ because in
one case there an incentive or an incentive of a particular size, and the other case there is no incentive. So those states differ and then we have state
dependent preferences. Finally, a consequence of
this crowding out phenomena is that the idea in economics is the way you implement and outcome. You have a some Nash equilibrium which is somehow not okay,
and you wanna change it. Well, what do you do? Well, you change the situation
so there’s Nash equilibrium which has the desirable features. That’s called, in mechanism design, implementation by Nash equilibrium. So the idea of the game is
to shift the equilibrium and it’s a very good idea ’cause when you’re shifting, if you wanna shift an outcome you better make sure that
the desirable outcome you’re trying to get is
actually a Nash equilibrium otherwise it will be
undone by private actions and the policy will fail. That’s not a bad idea. But, we have to make sure
that that new Nash equilibrium that were desiring actually
reproduces the preferences of which support the equilibrium. So, we have a rather unusual concept. Remember where you heard it
first, equilibrium preferences. Okay. What it means is what has to be stationary for a policy outcome to be the expectation that you get by implementing a policy is that given the preferences which will result from these incentives, the outcome that you want will actually be implemented by private action. So, and this is the analogy to the so called, Lucas critique. Now, let’s look at some data. This is an experiment, this is a state dependent
preferences subject both categorical and marginal. You’re just using the terms I just introduced in the last slide. It’s a wonderful experiment
with a public goods game. I won’t describe the details of the game but the public goods game is
in person prisoners dilemma in which the dominant
strategy is not to contribute. Self interested person
would not contribute everybody else should contribute. And so, no sorry, in this game the strategy of a purely selfish person the person’s own benefit
from the public good would motivate them contributing 25. So, there are, there is here there’s no incentive. Here there’s an incentive
of 12 and that’s 60. This is just, you get an incentive if you’re a hight contributor. So this is all played
anonymously with real money. Let’s look at the red dots here. That’s what a selfish
person would contribute with no incentive. If you add the incentive then
they would contribute more if they’re totally selfish. And then, if you have a big incentive they contribute a lot more. So that’s what a selfish person would do. Now let’s look at what people actually did in the experiment. With no incentive they
contributed a lot more than 25. They contributed 37. This distance here is a measure
of their social preferences or their ethical desire to
contribute to the public good. And when you add the incentive
sure enough it goes up. It goes up from 37 to 38. So if you just looked at that you’d say the incentive worked. But now look at this. If it goes up to 60, what do you got? There’s no effect at all
of the social preferences. Those two numbers out there
obviously, statistically and significantly different. So, these individuals with no incentives made a very major commitment
to the social good which they didn’t do at all
when there were incentives. And the difference is, as you
can see, were quite large. That’s crowding out. Now, is it marginal crowding out or categorical crowding out? Well, to do that what I did is well, I said, well, suppose
that there was a incentive of epsilon, a small number, and that would be somewhere right here, right near the vertical axis. How much would they have contributed? Well, I just projected this
line from that purple dot that’s what they did with
that incentive to that. And then back to here and said, that’s roughly what
they would’ve considered if you had a vanishingly small
incentive but it was there. And, that gives you 34. And, now notice this says that, this is a categorical crowding out. The fact that this line is flatter means that varying the
incentive has less affect. That’s marginal crowding out. So both were going on. And you know, both were quite substantial. And when Sandra and I did this in lots of different experiments, it turns out that almost
always you get both effects. It’s quite surprising. Okay, now let’s turn, this is the kind of information, you know, when people say,
okay how do you use this to design policy? Well, I think a combination of
looking at these experiments and also looking at what social
psychologist already know about why crowding out
occurs, will help us. This is from Mark Lepper, whose work I admire very much. That’s the social planner. Suggests how complicated his, I guess his in that case, task is. Lepper says this, “The
multiple social meanings “of the use of tangible rewards “are reflected in our
everyday distinctions between “bribes and bonuses,
incentives and salaries. “They carry different connotations
concerning, for example, “the likely conditions under
which the reward was offered, “the presumed motives of the person “administering the reward, “and the relationship between the agent “and the recipient of the reward.” Yes, that’s sound right. That sounds like something economists should pay attention to. So let’s look at some actual policies. We have rural Colombians and they’re playing a public goods game. And, these are real rural
people, not students. And the game was designed to look like how much stuff are you
taking out of the forest. ‘Cause they were deforesting a place. This was an experiment
by Juan Camilla Cardenas who intervened there in Columbia before he became a grad student. He only found out later that he could publish papers on this. He was trying to change
whether people could cooperate and not deforest the place. When he came to grad school he
got a couple of publications from stuff that he was doing primarily ’cause he was community organizer. Which is very nice. If you look here, or there, this is the first, this the game played and they, what the vertical axis is, how far did they deviate from what a selfish person would do? Now, the ideal for all of the society would be deviated by six. And, an entirely selfish person would’ve deviated not at all. And so they were kind of in between. So this says round after round they are kind of halfway between being the sinner and the saint. Then he stops the game here and he says, okay, the groups that’s black are gonna be subjected to a fined if they take out too much. They’ll be monitored and
if they’re discovered to have taken out too
much they’ll be fined. The group that’s red are gonna be allowed to communicate with each other verbally, and then after that the
game is played anonymously. So, you see what happened here at first the fine worked exactly. They exactly implemented
the social optimum which is to deviate six from
what a selfish person would do. And as time with on they
went right down to zero. The fine wasn’t big enough. So essentially, these people who had acted halfway between being selfish
and being completely generous ended up after eight rounds
being entirely selfish. Sounds a little like
the previous experiment. The ones who communicated
did a little better. These red dots here are a
little better than those. They did surprisingly not well to me. It was class divided society and these groups were of different classes and they didn’t communicate very well. There’s some great stories
I could tell you about that. But, I think the best
way of explaining this is once the fine was announced people engaged in what psychologist
call moral disengagement. They just thought, oh
it’s not a moral problem. They’re fining us so not playing the game in a publicly responsible way is a commodity which I can
buy despite paying the price. Here’s another experiment. This is a trust game. In the trust game there are two parties, the first party gets a sum of money which he or she then can
allocate to the second party. Before it gets to the second
party it’s triples in amount. And the person who gets the tripled amount then can send some back
to the first person. It’s like an investment. You invest in the second person and they give you some stuff back. But, there’s no way of enforcing it. Well, you don’t have to
be a genius at game theory to figure out that if you
thought the other person was entirely selfish
you should send nothing ’cause they won’t send it back anyway. So, that’s the way the
game should be played. That’s not the way the
game is played hardly ever. People send a lot and they
get a lot reciprocated. And if they send more
they get a lot more back. So, if we look at just the gray bars, the gray bar says that if
you send between two and four you get on average four back. If you send between five and seven you get a little over six back. So essentially the more you
send the more they send back. Though they don’t have
to send back anything. So people are reciprocal. They respond to that signal. But then the experimenters
did a very clever thing. They gave the sender, the first person, the option to impose a fine. So, I can send a message to you saying, I’m sending you five and
if you don’t send me back at least 10, remember
the thing is tripled, if you don’t send me back at least 10, then I’m gonna fine you. And so, when the fine was imposed here, the black bars, that’s what happens. Now look at the black bars. What do they tell you? Much less reciprocity. They’re not reciprocating. So imposing the fine should
improve the situation ’cause you’re improving the incentives that’s what economist
are always trying to do to get the thing closer
to a complete contract. But the closer you got,
the farther people came from the thing which would maximize the wellbeing of the two summed. But then, and even cleverer
move with the experiments gave the option to say, you can impose a fine
but you can publicly say I’m not imposing it. So here’s five. I can impose a fine but I’m
not gonna impose a fine. And then what happens? Look at the white bars. That’s what happens. Now, why did that change? And, what changed? The fact that fine was possible
but you didn’t impose it allowed you the first person to signal to the other
person, I trust you. It said, I’m not tryna
get the most out of you. So, it was, this tells us something about designing institutions. A little change like that
allowed a piece of information to transmitted in a truthful way. I’m gonna go passed this because I wanna get to, but it’s just a summary from a paper that Sandra
and I wrote about. How every thing works. After I published this paper in Science, I guess it was in 2008. Thomas Schelling,
unfortunately also departed, wrote me this note. “Dear Sam, “Your article in Science,” blah blah. “I worked in Washington,
in the White House “and Executive Office of the
President from November,” blah blah, “These were
exciting and stimulating times. “People worked long hours
and felt compensated “by the sense of accomplishment. “And I believe a sense
of personal importance. “Regularly a Friday
afternoon meeting would go on “until eight or nine, when
the chairman would suggest “resuming Saturday
morning, nobody demurred. “We all knew it was
important, we were important. “Some time in 52 I believe it was, “President Truman issued an order “that anyone who worked on Saturday “would receive overtime pay. “What happened? “Saturday meetings virtually disappeared.” Well, that’s crowding out. President Truman was just introduced to the crowding out phenomenon. Or the chairman of the committee. Now, other people who
have real responsibilities face this problem. Consider the tax collector
somewhere near Hyderabad. A number of people were not paying taxes. And so, it’s small to read. What he did was he hired
a bunch of drummers to go outside the houses of the people and just drum outside the houses. And he sent along a couple
of clerks with computers in case the people decided
to pay up their taxes. And, it turns out it was very effective. Now, why was that effective. It was effective because
actually people know they’re doing something wrong
when not paying the taxes. And they don’t wanna be seen
in that light by the neighbors. So, this drumming taxes out of
the recalcitrant tax payers. This by the way, I mean, I’m
sure they invited it himself. But look at this, this is a picture from the 14th century, early 14th century, what’s called a charivari. A charivari in Europe was a method by which communities enforced
moral standards on people by gathering outside the
homes of the miscreants. The baker who charged high for bread when there was a bread shortage. The person engaging in
sexual misconduct and so on. It was very often women, they almost always had musical instruments or some kind of sound making equipment and you still find charivaris in Europe mostly New Years Day now,
just at celebrations. But, so this thing about shaming people into compelling, into conforming
with social procedures is an old idea. Now, it’s been carried out also. This is seeing, I love the town of Bogota. This is a mayor of Bogota by the way. A former, a mathematician and philosopher, former rector of the University. When he became mayor he
had a very serious problem which is, tremendous traffic fatalities on these, they’re called zebras, zebras. These stripped things. And Bogota was really notorious for this and it was a very serious problem. And what did he do? He hired over 100 clowns to go and ridicule drivers. And there they are. You can see they’re, and they were very aggressive
and extremely funny. And then everybody talked about it. And then he also, he
appointed what he called the order of the zebra. The order of the zebra which was a bunch of taxi drivers, they were the worse offenders. The 100 taxi drivers who got compliments from the pedestrians and so on, then they had a little zebra they could carry around in the car. There was a lady of the zebra, one of the taxi drivers
was a female, and so on. So, what was going on? I mean, and he did a
lot of things like this in terms of water shortage and so on. I mean interestingly, he did not reduce the
enforcement by ordinary police. In fact, he upped it a little bit. And so, this was a combination
of making this a moral issue. How you drive. And then also for the real accosters making sure they didn’t get away with it. By the way, which is another part of that great fresco in Siena. Go and have a look. It’s not about the virtues only. It’s also about getting the cops and the virtues to work together. Well, I’m gonna close with what I think we may have learned about
some of these cases. This is an iconic experiment. I didn’t put it first
because you’d all say oh, we all know that. This is an experiment, it
wasn’t actually experiment, done in Haifa, Israel. People coming late to pick
up their kids at the daycare. I think any economist here
has already heard about this but if there’s anybody
in the room who hasn’t I’ll tell you a few of the details. A sign was posted saying, as of tomorrow anybody coming
more than 10 minutes late will be fine, actually
the fine happened to be 10 New Israeli shekels. And, they counted before the lateness and then they counted afterwards. The group for the fine are the dark line. And the groups without the
fine are the open squares. And as you can see, what happened is once
they imposed the fine people doubled the amount of coming late. And not only that, they aborted the
experiment here in week 17 not surprisingly because it
was inducing a lot of lateness. And what happened was, lateness continued. Now, there’s lots of ways
of interpreting this. But I think the simplest way, the most parsimonious way, and the way I think is true, the title of the paper
is, A fine is a Price. A Fine is a Price. A fine is a price means, a price is something if
you pay for it that’s it. Nobodies gonna arrest you
on the way out of a store if you paid for the good, right? Fine is a price, okay. So, fining people for coming late is, you turn lateness into a commodity. Step right up, if you wanna
pay 10 Israeli shekels fine. Now, if you wanna ask if it
would’ve been 100 or 1000 would they’ve come late? Of course they wouldn’t of come late. That’s not the question. The question, of course
there’s some incentive which will get people to come on time. But, that particular
incentive wasn’t enough to do the job. But, and that experiment
is talked about a lot. But think about this, think about another fine, looks identical. Ireland imposes a small tax
on plastic grocery bags. It was proceeded by a huge media campaign about don’t trash the Emerald Isle, and so on and so on. And, within two weeks
no one was using bags. I mean, it was an
extraordinary elimination of plastic bags. So, I mean, plastic bags were like wearing a fur coat in Berkeley, I
mean you just didn’t do it. And so, but it’s the same. You impose a fine. And in Ireland they essentially, it seems, I mean the fine was so small it’d be hard to think
that it got rubbed out just because of the fine. It’s not, you can’t
exclude that possibility, but it’s probably not just the price. It probably crowded in
social preferences so how. Now, there are lots of
differences we might draw upon. But I wanna come back to
Bentham who I chided before. ‘Cause this is in the
Morals and Legislations, a very wise thing that he says. “A punishment should be a moral lesson. “When by reason of the ignominy
it stamps upon the offense, “it’s calculated to inspire
in the public with sentiments “of aversion towards
those pernicious habits “and dispositions with which “the offense appears to be connected “and thereby to inculcate the
opposite beneficial habits “and dispositions.” So, a fine, a fine is a lesson. It’s not a payment. It’s teaching something. A punishment is supposed to be a teacher. Well who does that sound like? That’s Aristotle. That’s Aristotle saying, in doing this we’re trying to sustain
or create a population of citizens capable of good governance. And that’s what the
charivaris all about too. Now, I don’t want you to go away from this thinking that fines are wrong and the Irish case suggest
that that would be a mistake. Here is a case. This is a public goods game in which here’s the standard game, you can contribute or not. You can contribute 20. People start by contributing two and then it goes basically down to zero. So people just, basically
people lower their contribution because other people are not contributing. And the other way they have to punish them is by not contributing themselves. Then here at period 10, you change the rules and say, after each round you’ll see on your screen not the names of course but the numbers of all
the people in your group and how much they contributed. And you then have the
option of taking some money out of your own kitty,
out of your own pocket, and reducing the fining of somebody else. We never use the word
punishment of course. We just say, you can
pay to reduce the fining of somebody else. So, they start off a little
higher and it goes up. Now what happens in here,
those places there is, there were a lot of people
not contributing much and people were punishing. By the end of the game
everybody contributing a lot and nobody’s punishing. Now notice, that’s a very
small change in the rules. That had a huge impact. Here, there were a few selfish people who were driving this downwards because the ones who were, would’ve liked to contribute
were getting angry ’cause the other people
weren’t contributing. Over here, possibly a
small number of people who are civic minded and willing to actually punish the others, were driving the equilibrium. Now, there’s a wonderful
puzzle here by the way. This game here is a public goods game in which the dominant
strategy is to not contribute. That means, whatever anyone else does what you should do if you’re
maximizing yourself interest is don’t give. This game over here, the punishment game, it’s the same game. Punishment’s a public good. The dominant strategy about punishing is you shouldn’t punish. Let somebody else punish. So, in the second round
people should’ve been as selfish as the first. It’s a very interesting characteristic. And I think they’re good
evolutionary reasons why we have this. That people here were acting selfish but when it came to
ability to punish people who were breaking rules, people are very happy to participate. It would take us somewhat farer field to explain why that would
be true evolutionarily. If you compare these two games
with which you’re familiar the top one I just described. And this was the one
in which the incentives drove out reciprocity. So that’s a contrast, right? In once case fining people over here, fining people was leading
people to contribute more. They didn’t contribute
less when they got fined they contributed more. And in the lower one, the prospect of a fine made
people less reciprocal. So in one case it seemed to be building up social preferences, the top. And the other case not. Well, I was able to look into why this experiment
worked out the way it was. Remember, I can give you five and then I can say I want
seven and a half back then we’d split the total. Or, I could say I want 10 back then I’d get most the total, right? The ones who were greedy were the ones who were being negatively responded to. So, the negative response was
not a response to incentives. It a response to greed. The ones who were saying I’ll fine you if you don’t split it 50-50 with me were not negatively affected. So there’s a lesson there. That it’s not the incentive per se. I’m gonna run through
these are all thing that, I wanna go back to Aristotle. Okay, this was during Aristotle’s lifetime but I do not that he was involved. But, the dates right, right. So, there’s a mission to set up a colony in the Adriatic because
of the Etruscan pirates. And the ships had to be
recruited from private lives. The ships were owned and the crews, it’s a huge operation. There was like, 200 ships
and horses and soldiers, and sailors and so on. And, the people who were wealthy were appointed to deliver
a fully equipped ship to the port Piraeus. Fairness was assured. Now this is amazing. What the council said is, okay, these things are called
liturgies, I’m not sure why. Hundreds of them were
given out to wealthy people and said, you have to produce this ship you have to do that. Now here’s how fairness was ensured. Brilliant. The liturgy was allocated
in the following way. Suppose I got a liturgy. But, I happen to know that Micheal who didn’t get a liturgy
was wealthier than me. I go to Micheal and I say,
“Micheal take my liturgy.” And if he refuses then his alternative is we exchange our wealth. Got it? I’m a citizen. The citizen’s council
doesn’t how wealthy he is, they just thought I was wealthier. But I know, I’m his neighbor. I know how many cows he has, or whatever. So I go and I say, you take my liturgy or I take your cows. That’s mechanism design at its best. Because it’s using private information the fact that I know
he’s wealthier than me to essentially allocate
the burdens of this thing. So, this was a set of
incentives which were fair. The incentives were given as prices. They were not set as
incentives, for example, the herald of the council of 500 is to announce the crowns at
the contest, the festival, in the order that the competitive zeal of the trierachs, that is
the captains of these ships, towards the demos would
be evident, and so on. A clear public purpose was stated. Substantial fines for those
who didn’t do it were imposed. Now, think about if the Athenians instead of two economists had designed the Haifa daycare experiment. It was two economists who did it. And they do great work it’s
a wonderful experiment. So, the Athenians in their time machine they got to Haifa first. And, how would they have done it? Well, this was what was on the door of the daycare centers in Haifa. As you know, official
closing time, blah, blah. As of next Sunday, fine
of NIS 10 will, da, da. So that’s what the economists did. And, the Haifa people they
didn’t make it in time. But here’s what they had
planned to put on the door. It would of said, the council of parents wish to thank you for arriving on time to
pick up your children. Since this reduces the anxiety that the children sometimes feel. And allows our staff to
leave at a timely manner to be with out own families. We recognize that all parents who have a perfect record
of unblemished by lateness for the next three months
with an award of 500 NIS, to be given at the annual
parents and staff party, with the option to contribute your award to the school’s Teacher
of the Year celebration. Now, do you think if that
what they’d had on the door they would of had people coming later? I don’t think so. We haven’t run that experiment but if the Athenians had
just gotten there first, it all would of work out a lot better. Now, the economy and society
into which we’re now entering couldn’t be farther from
the world of James Buchanan dealing with his fruit seller. We’re not living in a
world in which we agree on the property rights being transacted. We’re not living in a world in which everything that matters,
that goes on between us, is covered by a costlessly
enforceable contract. Whether it’s secondhand
smoke, or climate change, or epidemic spread, or hiring a worker, or giving a loan, or a taking a loan. And so, think of the 18th, 19th century. The sinews that connected
the world was trade, and grain, and steel. That’s not what connects us today. We do that, but it’s also
sneezes and burning carbon. And all kind of other things. That will never be subject to contract. So, obviously, the
economist’s job until now is extremely valuable still. Perfecting incentives which will work even in the case of self interests. But, these will fail if they
compromise moral commitments that are necessary to
govern a modern society in which incomplete contracts is just a very dangerous kind of utopia. Now, securing a
sustainable and just future will require that we take
seriously, as Aristotle did, the kinds of moral development that we’re engaging in our society. I don’t underestimate
how troubling this is to any liberal, and I’ll say twice now, and I count myself among them, who sees this as also
a problem in society. A society which could be dominated by the commissar of culture and so on. Let me end with a hopeful thought. I had the word, CORE, next to my name. Curriculum Open-access
Resources for Economics. This a new introduction to economics based on modern economics not on what’s the text books today. Which is mostly something that you’d, came from the 1980s. We take for example incomplete contracts as the normal case, market
failure as a standard case and so on. It’s available on your telephone, you can get it right now if you want. I will count it as being impolite. There it is up there. It’s around the world. It’s already accepted
as the standard course at the Toulouse School of Economics thanks to Jean Tirole. And at the UCL, the top
economics department in the UK and one of the top in Europe, Humboldt University in Germany, and so on. And, it’s also available in a book form. Crazily enough a publisher
agreed to publish it even though it’s available
on everybody’s telephone. It’s a very new way of teaching
and learning economics. It’s highly interactive. I mean, we’re digital first. We didn’t do a book. We just did a platform. And, we also have a course called, Economy, Society and Public
Policy, for non majors, also being used at graduate
level public policy courses. And, we have a new course
also called, Doing Economics, which is a fairly sophisticated teaching of how to handle data on economics using a lot of the economic arguments and cases in these other books. But it’s basically handling in R. And it’s very popular amongst students. ‘Cause students understand now, that knowing R is really
an important thing to have on your CV. So, that’s it. Thanks to all of my collaborators and thank you for coming. (applause) – Thank you very much for an
extremely stimulating lecture. Couldn’t think of one that fit the Weinstock lectures better. We have time now for
questions and discussion. The only think that we would ask, I’ll let Professor Bowles
call on people himself. Ellen will provide a microphone. Just we would appreciate if
you could keep your comments or questions brief. So we can hear from
Professor Bowles as well. Thank you. Just put your hand up if you, – Could I ask, first question
to come from a student? And you can’t lie if you’re a student. Like, I know you’re not a student. – [Kelsey] Hi, my name
is Kelsey Alford-Jones. I’m a student here in the
energy and resources group. And I worked a lot with
endogenous communities who were facing development projects implemented by large
transnational companies. And, this is fascinating to me and I’m wondering if
any of the experiments that have been run include scenarios in which there’s a very
large power imbalance. It sounds like most of these games include people who are generally operating maybe with the same resources
or with the same incentives. And could you just speak more about how these games might be different or whether there’re
experiments that have been done under other scenarios of those types of large power imbalances. – There are. I mean there are two
kinds of power imbalances in the experiments. There are experimentally
induced power balances. That is, you give a
principal a lot of power, I can set bounds on what you do. That’s an experimentally given difference. But then, there are real
world differences in power. That is, the people actually, the experimental subjects
come from different location. I’ll give you two examples. I mentioned the great
that Juan Camilla Cardenas in Columbia does. And how, the communications didn’t actually improve things very much. Well, and I said the problem was that the groups were heterogeneous. And in one case and one
of the cases I represented these were groups of five and there was one group
in the public goods game, there were three women and two men. The older man, whose name
was Don Ricardo and his son, the were the two richest guys in town. The two rich guys in the group, obviously a huge imbalance, and they, the two rich guys, were trying to pursued
everybody in the group, oh look, don’t take
anything out of the forest. We’ll all do better. So, do the optimal thing,
you know, deviating six. And then, Juan Camilla noticed
the group hadn’t down well. And he asked one of the women,
well what was the problem? And she said, well you know, Don Ricardo was saying
we should all not take anything from the forest. And Juan Camilla said, well
why did you take so much? And she said, you know, well
I don’t trust him, you know. I could never look in his eyes. I didn’t really believe him. And so I asked Juan Camilla, well, what had Don Ricardo done? And he had taken the maximum. And his son had taking the maximum. And the women in the group
had taken some middle thing. So basically, and that
was a general result. That is, groups of mix
wealth in his experiments did extremely poorly. Also, homogeneous wealthy
groups did poorly. The groups that did best
were homogeneous poor people. And I don’t know if
there’s a lesson there. The other thing is that in some place there are a lot of, there’s a fantastic experimental economics community based in University of Cape Town. Justine Burns is a name to follow. And they do a lot of experiments across racial and class boundaries. And so you see about how
do white and black people, and how do people of
Indian origin and so on relate to each other in these games. So those are two things. But, I would ask Juan Camilla
Cardenas and Justine Burns and follow on. I hope you find something. Or, maybe think of a good
experiment to do yourself. – Hi, we’re a group of PhD students. How do you think we
could apply these ideas on your framework to nonexperimental kinda like empirical work? – I think, if by this framework you mean, the crowding out by incentives and so on. What you’re always looking
for is a natural experiment of some kind. Like changing the rules
for giving blood and so on. Those are quasi-experimental. But, if you mean the more
traditional econometric work, I don’t think it’s been done. And the problem is, when you have radically
different incentives so that you can actually see a difference, too much else is also changing. That is, you know I’ve been
just trying for a long time to say, well okay, a society which lives primarily by monetary incentives is a different kind of society culturally than the one that
basically deals with other, other kinds of ways of enforcing norms. But then, it’s very hard to
find sort of clean changes. You know, national boundaries
as you probably know in Switzerland, there’s
some very nice cases about two sides of the
German-French boundary because German speaking,
French speaking boundaries. But, it’s very hard to do. It would be very good
if you could, you know, what’s been done is there’ve
been a lot of studies of the validity of the experiment that is seeing whether or not fishermen who contribute
to the public goods game are also those who engage in environmentally
friendly fishing practices. And the answer to that is yes. But that’s, you know, so that’s showing there is a real world analog to it but it’s not the kind of
thing you’re asking for. – [Woman] So I wanted to ask is it, is it necessary that the
actions are visible to others. So, I’m thinking you can be an
immoral in an invisible way. Right, like if you, a company that is polluting or something, if they’re not accountable to
anyone they can still, I guess yeah they can still pollute. Another thing is, I
guess we also maybe need communities to which you are accountable. That’s another question I have. Do we need that, those two things? – Yes, I agree. And you probably know a least
as much about that as I do because of your research. But, the role of community is suggested by the fact that when you
have a peer punishing you in a public goods game
it has a big effect. And by the way that effect takes place even if we introduce what’s called the perfect stranger treatment, which means every round
the groups are shuffled. So, if we’re in a group together now, and I don’t contribute and you punish me, you couldn’t possibly be doing that in order to, that I would
shape up to your benefit. ‘Cause you know I’ll
be somewhere else next. And, the other thing which we notice is being punished by a peer who apparently has no
selfish reason for doing that has a big impact. That is, it’s not the punishment. For example, in these
games a verbal admonition is almost as effective
as a financial fine. What people care is, they care about their own
standing in the community. But when you said, how important is it that it’s observed. Distinguish please with me between the two following concepts. One is guilt and the other is shame. Guilt is something that
you feel privately. Even if nobody knows about it. Shame is what you feel as
if you’ve done something about which you feel guilty and it’s publicly recognized. Now, I think it’s useful
to have those distinctions because both are at work. And when I do something good,
I do something generous, most economist would say, well you probably did that
because you’re signaling to others your generosity
and that will improve the kind of trades that you
can engage in in the future. Which of course could be true. But, there’s a concept in psychology called the looking glass self. You’re looking in the looking glass. A lot of our signaling we do
to ourselves for ourselves. And here’s why. We’re never sure about
our goodness, our bravery, our kindness, or whatever it is. And we occasionally engage in activities to reassure ourselves to
daily reproduce ourselves. Reconstitute ourselves. So that kind of self signaling
is something which goes on even in the absence of
others observing you. Now, how important is one and
how important is the other surely depends on the context and so on. But, when people do things which are kind, brave and so on, entirely
with nobody looking it could have a part of
that looking glass self aspect of it. But, I think the last question is, your last question about
the role of the community, it’s absolutely essential. The difference between Ireland and Haifa was the explanation at
Haifa really deprived people of any opportunity to say, oh, this something we
should be doing together. Whereas for accidental reasons the deal by which the
law got passed in Ireland had as part of it a
massive publicity campaign which said, look we Irish people are all in this thing together. You know, garbage bags are
really anti-Irish and so on. So, it was a notion of an us. That was implementing them. – [Man] What you said
was very interesting. But, I would like to ask, one of the tenets in
Buddhism is right action independent of the results. And, I don’t, do you have any comments on how all you’ve been saying tonight might work in a Buddhist community? – I have thought about that. I spent a lot of time in
India when I was a youth. And I was very attracted to Buddhism. Unfortunately, I think
one of the leading experts in the world on Buddhist economics was just sitting behind you. Unfortunately, she left. So we should ask here. I think that, the idea of doing good, because inconsequentially that it’s not for consequential reasons but because it’s the right thing to do. I think that’s a lot of our morality. And, in economics the term other regarding preferences is used. It means I’m doing this action because I have concern for you. And so, the way that’s
done in mathematics is well I have some benefits of my action and I care about the benefits of yours. So I put some little extra
next to your benefits. Well, that’s a lot of what generosity and being a good citizen is. But, a lot of it is not
that I’m doing something like I’m transferring something to you. I’m doing something because
it’s the right thing to do. Deontologically, that
it’s not consequentially. It’s a fundamental aspect of Buddhism. And, I think a lot of, for example, a lot of the self signaling is actually reassure ourselves that we are good quite apart from who’s looking. And so, I think there’s
a missing set of terms in the way, at least in economics, we think about these things because we’re always, I mean, if get
away from Homo economicus then what the individual is is putting a weight on
someone else’s wellbeing. Instead of being a moral
being in it’s own right. And, both are important obviously. – [Woman] Kind of a,
maybe a little bit of a more bizarre question. But, I’m thinking of
you mentioned Buchanan. And you’re sort of, I wasn’t clear if you were sort of trying to create sort of like this comparison
between a past time when economics was simpler, it tapped into simpler
relationships, right. And now, particularly as someone who likes to do comparative studies that incorporates the past, couldn’t say Buchanan’s
relationship with the fruit vendor be problematic, say the fruit vendor spite of the fruit or
something like that, right? This idea that like
Buchanan tapped into this particular economic phenomenon that is as you mentioned related to the property and the belief that, anyways, so could you explore
that a little bit more. And could you actually tell
me if that’s what you mean or am I misinterpreting you? – No, I can say something about that. For most of the time when biologically modern
humans have existed, we did not live in Buchanan’s world. We lived in worlds in which we interacted with relatively small number of people. Not as small as most people think. I mean it could be
dozens or even hundreds. But, we interacted with a group of people in which there were no contracts, there was no state to enforce
the contracts if there were. There was expectations promises and so on. But, none of that was remotely like the perfect contracting rule. Nor were there rules of private property applied to virtually all things of value. A few things were. So, I’m talking about hunter-gather life up until 11000 years ago. And even the first three or
4000 years of the Neolithic there was very little of what
matters was private property. For example, almost certainly not land. But probably stores. So the idea that we were, as a species we evolved to
do very well in an economy in which there was a limited role for private property and contracts. Now, I think that the world
Buchanan was describing was really a very short period of time in which a lot of the stuff that mattered you can actually weigh and measure it and there for transact it in a contract. Maybe half a millennium or something like, some period of time. And, I think from what I said at the end, I think we’re now moving into an economy in which that will be
increasingly not the case. The most important stuff that’s gonna on in a modern economy you cannot
weigh, you can’t measure it, you can’t contract for it. That’s knowledge base, that’s affect, that’ caring for people. The knowledge and caring based economy is a lot more like the
hunter-gather economy than it was like the economy of Buchanan and his fruit stand. So, we may be able to
learn a lesson from that. Obviously, given the modern
communication abilities, given also modern states, the modern means of coercion and so on, it’s an entirely new world. I’m not suggesting we
can model our society on a sorta modern day Flintstone economy but we do have something to learn about our capacities to cooperate
are really extraordinary. And, if you look at human
institution that have been a big success, the cooperative and egalitarian hunter-gather
society is far and away the most successful. Enduring for 100 thousand years. Capitalism is just a few centuries old. And, I think we may be moving
into an economic situation in which, if can quote
Kenneth Arrow again, it wasn’t on the slide. Arrow said, “Information, knowledge, “is a fugitive resource. “It runs away.” Just like that animals who ran away from the hunters and gatherers. You cannot own it. He said we’re just beginning to understand the contradiction between
fundamental economics and property rights. So he was talking, and
this was three decades ago, Arrow was talking about
a fundamental problem about moving into an economy in which it’s not possible to own stuff. And when you try to own it with
intellectual property rights it’s actually dysfunctional for society. We’re moving into a society in
which those rules don’t work. And so, Arrow was saying,
three decades ago, we’re gonna have fundamental
institutional changes because the stuff the
economy is now made of doesn’t work anymore for
this private property and complete contracting regime. Now, I don’t think it means we’re gonna do away with private property. And I certainly don’t think we’re gonna do away with
contracts in markets. It means it’ll play a
much more limited role and we better find out some way to deal with the other stuff. Whether it’s intrinsic motivation, trust, morality, and other things. Arrow didn’t say what they might be. – [Man] Hi, do you have
a stance on whether we should use public policy
to foster social norms? For one point, it’s clear
that some norms are universal, say, trustness and being
generous and so on. But saying fostering egalitarian norms would be much more controversial. – I think, this is a
very difficult question. Having listened to my lecture it’s a question which
absolutely has to be asked. If you take the Aristotelian position you must also then say, what would it mean to be a good citizen? Now, there’s an easy way
to answer the question which is, States today are
engaged in inculcating norms. They do it in schools, they
do it through patriotism, they do it through political
leadership and so on. It goes on all the time. So, I could say at a minimum, what I would like us to do is have a public discussion
about which norms we would like to see brought to the fore. Now, if you have a
reliably democratic society in which sincere communication and debate following Habermas for example, as a philosophical principle, you can see that might be a frame work in which we can then have some confidence in the kinds of norms
that would inculcated. I don’t think we have any reason to think that that’s gonna solve the problem. And think there’s a lot to fear from it. For example, I think one of the things, I think human beings are
generous and also very given to us and them distinctions, both. We’re generous towards the us and we’re often indifferent
towards the them. I think we evolved that way genetically. I worked on that for a
long time in biology. I think there’s a very good
case that that’s who we are. If that’s true, that’s a problem. Because, we’d like to
inculcate the altruistic and common norms, and
we’d like in most cases, not all, but in many cases, to obliterate those repugnant
us and them distinctions which work to the
disadvantage of less well of and people of other groups. I don’t know how that can be done. I don’t think it can be avoided. And I think that the idea
that this is going on anyway without an open discussion
about the people we would like to be, and I mean globally, that’s certainly a problem. Whether or not bringing
that discussion to the fore would address the problem and
address all the possibilities of norms which would come to the fore in that discussion might
be racist, or homophobic, or other repugnant things. That, of course we can’t know. But thank you for your question. Are you from economics? – [Man] Yes. – Don’t write your
dissertation on that one. (crowd laughing) Unless you have a really good idea. No, by the way, a brilliant dissertation was written in Harvard in the mid-60s by Herbert Gintus on
endogenous preferences. And you might go and
find it it was a very, Amartya Sen was on his committee. But, have a look. Some people have gotten away
with writing dissertations about really big questions
like the one you asked me. But as I say, (chuckles) – [Rui] We’ll have one final question from one of the committee members. – [Woman] Thank you. Thank you very much. I’d like to ask a question not so much about the economy part. But, when you were
speaking about Aristotle and being a good citizen and
also the title of your book. I started thinking about hundreds of years later Michel Foucault. And, I’m wondering what you would consider the distinction is between I think a fundamentally liberal
notion of the good citizen. And maybe Foucault’s notion
of the governable citizen or the governable subject. Which has always struck
me as somehow at its core not very liberal. – This is a time in
which people are reticent to criticize liberalism. And for good reason ’cause
liberalism is in serious trouble. But, one of the reasons why
liberalism is in serious trouble is the very limited nature of the idea of the individual and the role society. Recognizing families and states basically. And, that seems to me to be a major flaw. So, and if you look at
the history of liberalism of course, I mean I
started working on a paper which was, if John Stuart
Mill had been Florentine, if he’d come from Florence, Italy, because there the idea of Librata, was a both individual
and a community idea. And that was a fundamental
philosophical commitment of those places. Machiavelli was by the way, Machiavelli of The
Discourses was a very good representative of that. Now, I think that’s, it’s the lack of the emphasis on community between family and nation that’s the flaw. I don’t know whether how that relates. Why don’t you say. What do you think the
relationship between that of the governablity, good governable individual of Foucault is? – [Woman] I mean, not his. I’m sure there are other people who know much more about
Foucault than I do. But, I always interpreted
Foucault as saying that laws and norms, and schooling which you referred to is to
make people sort of docile. Live harmoniously according
to the convenience of a stably functioning society. And that doesn’t carry the connotations of individual autonomy agency and liberty that the liberal vision
of the good citizen typically carries, all the
way from Athenian times. Which I thought you were more
hearkening to when you spoke. That’s all. – I think that, this
again is a long story. If you think of early liberalism it was a body of thought
that defended the weak against the strong. And advocated for tolerance. And for example, even the early
advocacy of property rights remember, it was advocating
private property rights against the States that
were run by the elite and run by the rich. The idea of private property rights was a defense against a State which was an autocratic State of the rich. And so, if you think about
a lot of early liberalism it had a definitely pro
less powerful, outsider. Then at a certain point, obviously, political liberalism
married economic liberalism. Laissez faire. And that was the beginning
of the current troubles of modern liberalism. That turns out to be a
very unstable marriage. Because, it went through,
as you surely know liberalism was not democratic. It became democratic
early in the last century when the working class
and women got to vote. And now, we have a situation of a politically empowered working class which is living under an economic model which is destroying their communities and essentially serving them very ill. Well, that’s a very dangerous,
dangerous situation. And that’s, I mean I
recently wrote a paper called, The End of Liberalism. By the way, it was not a prediction. The double entendre was intended. The end of liberalism used be defense of the weak against the strong. So, I meant people to
think maybe it’s over but maybe we should try
to re-wed liberalism to its original ends. Having don that I
wouldn’t say that is the, all that we could expect
from a normative position for the good society. But, we better defend
it now while we need to. – Alright with that,
thank you very very much. It’s been a pleasure. (applause) (mumbling) (upbeat music)


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    Walter Roberts

    This is an interesting topic but would have been better if Prof. Bowles had been more careful to set in layman's terms the technical handles common among his peers and to demonstrate the main ideas behind those terms and discoveries with real-world examples, as he did with the case of the firemen who resented being "incentivized" with respect to their sick-days. Of course, from high in the Ivory Tower it is very hard to keep one foot, much less one's awareness, on the ground, i.e., the discourse limits of the Everyman; but that is what academics must strive to do, if they wish in any degree to be 'public intellectuals' whose work actually disseminates to general consciousness, becoming fodder for general consumption. Nevertheless, this is a great presentation, full of information and food for thought for non-economists, provided they put forth the effort to concretize the abstractions.

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    Brent Shuffler

    I agree with you, Walter. The Professor spoke quickly and almost non-stop for more than an hour. Even for economists, it is challenging to digest the points and the graphics as the information vanished from the screen too quickly. I had to pause the video multiple times to make sure that I got enough time to read all the details. Some of it, I still did not entirely follow. More real-world examples and illustrations would be very welcome. We need to see both failed policies and programmes and why they failed, and successful ones and why/how they succeeded.

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    Scentisky Fortenine

    Voluntary trade is the only sustainable economic model. The notion of a sovereign currency is an outdated model of addressing people as subjects, as cattle. The time of military enforced Exclusive Economic Zones is an outdated polity that will end when people get sick and tired of being slaves to so-called sovereign states.


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