Iniquity, Irresponsibility, and/or Incentives? Art Carden

Crises breed witch hunts. Ongoing economic and political malaise has spawned a lot of different theories for how we got into this mess, and different groups have their preferred bad guys. Stories involving clear heroes and villains make for animated talk shows, but they provide poor descriptions of what is actually going on. Reality is more subtle.

 

 

 Perhaps unsurprisingly, the Occupy Wall Street movement is blaming Wall Street. The Occupiers are urging us to “stop Wall Street greed” and “stop corporate greed,” but as many commentators have pointed out, blaming “greed” misses the point. People generally pursue their own interests, however they choose to define it, and one of the virtues of free market institutions is that the generally channel that pursuit of self-interest toward socially beneficial ends. One of the blessings of the last few centuries has been that we have adopted economic, political, and social institutions that have channeled the pursuit of self-interest away from predation and toward production.


Broadly speaking, the way to accomplish your goals in a free market is to find ways to help others accomplish theirs. For too much of history, the way to accomplish your goals was to find ways to prevent others from accomplishing theirs (like taking their stuff). Even if we redistributed all the wealth today, the distribution would be unequal again tomorrow. Some would be successful entrepreneurs. Some would be unsuccessful. Some would be lucky. Some would be unlucky. Some would be responsible. Others wouldn’t. Perhaps we could redistribute wealth again, but this would eliminate incentives to produce anything to redistribute.
Some of the Occupiers are protesting because they and others are burdened by crushing debt from student loans. On one hand, this complaint is one of the hardest parts of the Occupation to take seriously. On the other hand, there is something important here. Just as people probably didn’t wake up unusually greedy one morning, others probably didn’t wake up unusually irresponsible one morning. People weren’t forced to borrow money to study subjects with limited market value, but they were given incentives to do so–as this helpful infographic a reader sent me explains. People weren’t forced to overpay for houses using money borrowed on questionable terms, but they were given incentives to do so. The financial crisis didn’t happen because people suddenly got greedy or suddenly became irresponsible. We had a financial crisis because the incentives were wrong.
This is an area where the Occupation makes an important point. There are a lot of people who played by the rules and paid dearly when it turned out the rules themselves were bad. Some of the Occupiers are claiming that they were lied to, but the misinformation came from distorted prices rather than deceptive people.
In his book The Undercover Economist, Tim Harford talks about how prices in competitive markets tell the truth about the costs and benefits of different courses of action. When the incentives are systematically distorted by interventionism and loose monetary policy, the prices are lying.
The effects go beyond short-run hardship. In the long run, this will erode the social capital that makes a free, commercial society work. The financial crisis, high unemployment, and other problems didn’t merely waste time, talent, and treasure. They are also eroding trust in the institutions that made modern economic growth possible. That, perhaps, is the real tragedy.