Naked Economics: Undressing the Dismal Science

Another main theme of the book is that incentives matter. This is actually the title of Chapter 2, which covers incentives extensively, but they factor into everything else Wheelan writes about. They stem from self-interest (which is not the same as selfishness) and seeking utility. Get the incentives right, Wheelan argues, and you can guide people’s behavior. The word “guide” is more accurate than “control” here because one size does not fill all. People in different countries react to different incentives based on culture and level of economic well-being. Even within the lifespan of the same person, evolving priorities may change which incentives they respond to. Likewise, incentives might not seem obvious. They’re not just about money, and human behavior is complicated (people sometimes act against their own self-interest). That last point is something economists have learned more recently. People don’t act as rationally as previously assumed. Understanding this and taking it into account when devising incentives is important to getting the desired outcomes.

Incentives are difficult to get right. Sometimes they even worsen the problem they are set up to solve. One example Wheelan gives is the initiative during the Clinton administration to require the use of car seats for infants traveling in airplanes. On the face of it, this seemed to make sense. Car seats were required for use in automobiles, and they offer a more secure location than their parents’ arms in the event of an accident. However, they also required that another seat be purchased, which Wheelan explains made air travel too expensive for some. If a number of families decided to drive to their destination rather than fly, that would defeat the original purpose of increasing safety, because flying is much safer than driving. The incentive backfired.

Incentives are not just relevant to economic matters; they can be used to deal with important social issues as well. As Wheelan writes, “Our best hope for improving the human condition is to understand why we act the way we do and then plan accordingly” (56). An example covered in Chapter 5 is gender discrimination in the workplace. Wheelan explains that businesses are at a disadvantage in hiring because they don’t know the plans of their prospective employees. Because women will need to take time off if they decide to have a baby and because mothers are still much more likely than fathers to quit working in order to care for children, employers find it wiser to choose men over women when hiring. A simple solution, according to Wheelan, is to change the incentives: make maternity packages refundable. If a woman returns to her job after having a baby, she keeps the benefits; if she resigns to raise a family, she returns the benefits to the company.