Posts tagged with: incentives

During a season such as Christmas, where hyper-consumerism and hyper-generosity converge in strange and mysterious ways, it’s a question worth asking: How much of our gift-giving is inefficient and wasteful?

For some, it’s a buzz-kill question worthy of Ebenezer Scrooge. For an economist, however, it’s a prod that pushes us to create more value and better align our hearts and hands with human needs.

In a new video at Marginal Revolution, economists Tyler Cowen and Alex Tabarrock explore this at length, asking how we might maximize the value of gift-giving:

For Cowen and Tabarrock, gift-giving typically suffers from knowledge and incentive problems. “When people buy something for themselves, value is created, because the buyer values the good more than it costs the seller to produce,” Tabarrock explains. “But when people give gifts that aren’t wanted, the recipient values the gifts at less than the cost. Gift-giving: it can be kind of a negative trade.” (more…)

The Affordable Care Act, more commonly known as “Obamacare”, is a strange law from the perspective of economic theories of insurance markets. Still, one can see where its designers were starting from. The individual mandate may be onerous from a liberty standpoint, but it makes sense if you understand that insurance markets are vulnerable to a phenomenon known as the “death spiral.”

The idea behind the death spiral is based on the recognition that insurance is a risk management scheme. Insurance companies, despite their best efforts, are less knowledgeable about its customers’ health than are their customers. As such, the prices an insurance company charges are based on the average risk that a customer will need care. (more…)

Courtesy Evangelical Outpost and the always-interesting 33 Things, here’s a video on the strangeness of the economics of incentives and punishments:



The lesson here is that people in real life, body and soul, are not simple rational economic actors who respond only to material realities.

We exist in the context of social webs and relationships. But we also have non-material faculties; consciences, free choice, creativity, speculative reason.

Homo economicus is useful as a partial model of human behavior, but it is not exhaustive, comprehensive, or reliably predictive. Why do economists try to universalize this model?

My theory is that it is in part a response to the post-Englightenment subversion of the unified field of learning. Theology was displaced, albeit briefly, as the queen of the sciences. Philosophy could not hold on, and was torn down by the clamoring crowd of other disciplines. Now each discipline seeks to place itself upon the throne, thus we get tyrannizing and universalizing claims from every academic discipline. Everyone tries to explain everything in the terms of their own discipline, and these explanations are therefore by necessity reductive.

For a bit more, see “Requiem for Homo Economicus,” from the Journal of Markets & Morality 10, no. 2 (Fall 2007): 321-38, in which Edward O’Boyle argues, “Burying homo economicus and substituting homo socioeconomicus brings the basic unit of economic analysis out of the individualism of the seventeenth and eighteenth centuries into the personalism of the twentieth century.”

To these models, we ought also add homo religiosus, all the while recognizing the each are models and therefore limited, partial, and provisional relative to the comprehensive picture of humanity in imago Dei.