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The Power of Incentives (Vol. 105)

Incentives are the key to productive action

Why do we do what we do?

This is a rhetorical question, but thinking about this is important. It is important because it gets us to understand what works and what doesn’t.. What is it that motivates us? How do stimuli, positive or negative, influence our decisions, or our actions?

What does all of this have to do with economics or economic systems?


Adam Smith in his classic book on economics published in 1776, The Nature and Causes of the Wealth of Nations, described the ‘Invisible Hand’. This is simply the notion that self-interest is what motivates people to produce. Produce more; produce better; produce cheaper; produce new; and all for the purpose of satisfying the consumer. But the motivation is not primarily to satisfy the consumer, but only by satisfying the consumer, can the producers sell their product and make an income for themselves.

In his less well-known book, The Theory of Moral Sentiments, Smith demonstrates an uncommon understanding of human nature. He seems to know what makes us tick. As he describes it:

“It is 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.”

In a free enterprise/market economy there is ‘private property’ and ‘rule of law’. This protects property rights and allows individuals to benefit from their efforts. We can keep the fruits of our labor. And so, we have the incentive and are motivated to work hard, work smart, create new products, because by doing so, we improve our condition. And as a byproduct, it improves the condition of society as we grow, and get new and better and cheaper products. And this economic system enabled the US to become wealthy, with the highest standard of living in the world.

A socialist economy that is controlled by the state, robs individuals of this incentive. In that economic system, the workers do not keep the fruits of their labor. The state controls everything. That is why socialism has never, and will never work for the benefit of the members of their society. We have seen failure over and over again. We have never seen success.

We grew to be the richest country in the world by having limited government and reliance on the individual. The Federal government was small, serving the functions set forth in our Constitution. The States performed other functions, and the rest was left to the individual. That worked, and worked well.

Sadly, we are moving away from what made us a rich, great country, and toward a society with more and more government, and reliance on government, instead of on ourselves. This is a form of socialism that takes capital from the productive sector and redistributes it to the non-productive sector. Ultimately, that impacts our growth and, if big government is financed by debt instead of taxes, that adds enormous amounts of debt that will burden us and future generations.

What is absolutely clear to all economists, growth benefits everyone, and growth comes from investment by the private, productive sector. The more we take from the private sector through taxation or borrowing, the more we slow growth and take away from the future.


If we continue down this path; if we rob individuals of their incentives; if we continue to grow government, robbing us of our freedoms; if we continue to pile up unsustainable debts; if we do all these things, WE will destroy this once great nation for our kids and grandkids.

Don't let that happen on OUR watch.


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