Economics, Literature and Scepticism

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I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

Saturday, January 30, 2010

Regarding Harford

Posted by Simon Halliday | Saturday, January 30, 2010 | Category: , , |

redcross.jpg image by NitajkToday, in his column for the FT, Tim Harford describes some of the troubles with paying people to do things, they might have done through altruism anyway, the most famous example of which is Richard Titmuss's book about blood donation in the UK, with another example - the Haifa day care centre - brought to light in Freakonomics.  In these examples, paying people resulted in worse outcomes.  Though he doesn't annunciate it, Harford's talking about the crowding out hypothesis, i.e. that always motivating people with material outcomes crowds out social norms that might have supported other equilibria, some of which may be superior to the new equilibrium with material. He talks about this a bit, then goes on to describe new and contrary evidence that shows how paying people for blood donation has resulted in getting more blood and of at least the same quality as when blood was not paid for.  Harford goes on to describe where and how altruism 'fails' and why material incentives succeed.

http://www.utsc.utoronto.ca/~psyb10/images/altruism.jpgBut, looking at the same topic last year, Sam Bowles published a paper about material incentives in social policy and gave several examples of crowding out occurring emprically, and he showed that researchers are trying to derive a complete theory to explain why this occurs - a theory that relies strongly on the ideas of other-regarding preferences and social norms.  Both other-regarding preferences and social norms may predict acts that look like altruism, but also they may predict acts that look quite spiteful or mean. For example, using a theory of 'inequity aversion' (1, 2) proposed by Erst Fehr and Klaus Schmidt, I may care about what happens to people, but only to the extent that I am positioned relative to them in income levels or levels of material payoffs.  Sometimes, I may want to increase their income to bring theirs closer to my level; sometimes I may want to decrease their income to bring it down to my level; sometimes I won't care at all.  The point about all of this is that the argument many economists have made that preferences are entirely self-regarding (or self-interested) and unaffected by social norms might be wrong.  We don't just care whether we get our dinners, we care about whether our children, friends, and others clear across the world are eating too. 

Anyway, the point describing all this theory is to express my indignation at Harford for pooh-poohing altruism without going into details about its backstory, about the kinds of things that manifest behaviour looking like altruism.  Now, I think that Harford communicates economic ideas fantastically, I read his column religiously because I enjoy his wit and insight, but I feel in this instance that he's done an injustice by sweeping under the carpet a mountain's worth of evidence so that he can maintain the claim that incentives (are all that) matter.  The Titmuss insight remains: introducing material incentives may also have unintended consequences

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