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Why Incentives Really Matter (Vol. 24)

Updated: Feb 7, 2023

analyticsbox | Nov 03, 2021


Incentives

If we get the incentives right, we will get the result we want!

History is packed with examples of how government policies with good intentions fail to deliver. Thanksgiving offers us time to reflect on some of our country’s experiments.


The Facts No Spin #10, explains the War on Poverty has failed to eliminate poverty and help people with low-income find the means to independent living. So, the poverty rate in the U.S. has not shown any of the promised improvements which were supposed to lead these people to self sufficiency. Instead, it has led to dependency on government and a sense of entitlement.

Policies and programs with one-size-fits-all people experiments have a long history in the U.S..


There is a little known part of history about the Pilgrims. When they started the colony in 1640, their initial approach was to operate as a communal farm, a socialist model. Everyone worked at a commonly owned farm, and shared equally in the output, no matter their contribution to the effort of farming.


And guess what? THEY STARVED! Half of the Pilgrims died in the first 2 years.

Governor Bradford realized the problem and changed from sharing the output equally, to sharing the land equally. Each Pilgrim got their own parcel and farmed it and kept the output for themselves, and freely traded their excess crops with others for things they needed. They were able to keep the fruit of their labor.


And THEY FLOURISHED! Why? Because they initially had the incentives wrong -- when people do not benefit from their efforts, they do not make the effort, and when they do, they work hard to succeed. This is just human nature at work - we do what is in our best interest. It’s been this way since the beginning of time.

So why do government programs often fail? It is hard to get the desired results when the incentives are wrong. And the government just cannot seem to get them right. It may be for political reasons or simply not understanding the goals and incentives needed. Either way, if the incentives are wrong, the end result is not achieved.


The Bottom Line


Human nature is wonderfully predictable, psychology will always lead us to do what we think is in our best interest. But what seems to be good is not always as it seems.When developing government policy, we need to consider proper incentives and design programs that will get the intended results, while considering all the ‘seen and unseen’ consequences that can be predicted.

Government approaches have not worked. Before the War on Poverty was implemented, the poverty rate was falling rapidly. It is time to try letting the market forces work, we will be surprised by the progress.

Understand Economics, then Vote Smart.

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