Student View: Incentives, Poverty and the Power of Expectations
By Dalani Paulsell, Northwhood University
Economic difficulties have been analyzed using facts and figures, as well as the formulation of policies and theories. However, it is sometimes difficult to see the real-life aspect of such problems. Hillbilly Elegy, written by J. D. Vance, provides a personal insight into the author’s life, describing the hardships he encountered due to the economic and social circumstances that existed around him. In contrast to this personal account, The Economics of Public Issues is focused on analyzing the impact of economic principles on individuals and their actions. If both books are read and analyzed simultaneously, it becomes evident that one of the most important aspects described in both books is that of incentives.
In Hillbilly Elegy, Vance talks about his upbringing in a poor Appalachian family that was always unstable and poor. One of the points he mentions is that many people in his area grew up with certain behaviors and mindsets that prevented their ascent from poverty. For instance, Vance mentions instances where people would blame themselves for being broke but would never work hard or even take up jobs offered to them. Although these behaviors might be seen as poor choices, Vance says they are shaped by people’s surroundings. This is because most of the time, there were fewer motivators for succeeding and more motivators for surviving.
This particular statement has direct implications for the concept discussed in The Economics of Public Issues by Daniel K. Benjamin, Roger LeRoy Miller, and Douglass C. North. According to the textbook, people act rationally and respond to incentives; hence, an individual makes his/her choice taking into account the costs and benefits associated with this choice. For example, when dealing with the topic of welfare or unemployment programs, the authors of the textbook argue that when an incentive system minimizes the financial benefit from going to work, then some individuals will not be eager to work. Of course, we talk about rational behavior and not laziness here. If the benefit from not working is approximately equal to or even higher than the benefit from working, then people will opt for the first one.
Vance’s experiences give a practical demonstration of how these theories work in the real world. In Vance’s neighborhood, welfare policies, broken families, and societal values were at times aligned in such a way that they produced perverse incentives, a term economists use to describe incentives that encourage unintended or undesirable behavior. If there is a chance of losing welfare support by engaging in low-paid employment, then the cost of working might be higher than the benefit, resulting in one not working. Moreover, the pressure in society can make one reluctant to strive for more.
Nevertheless, Vance’s narrative also highlights the fact that different incentives will result in drastically varied outcomes. One of the most important factors that changed his life came about due to the discipline that he learned from his grandmother, Mamaw. Mamaw provided an organized and disciplined setting where he had clearly defined standards and expectations that he had to meet to receive positive reinforcement, while at the same time, negative behaviors would be punished accordingly. Economically speaking, he had a new incentive system put into place. As a result, he began to think about his future goals and objectives.
The relation between the two texts is crucial to understanding what lessons one can learn from them concerning public policy and economics. One needs to understand the effect that laws and policies have on people’s behavior to avoid undesirable consequences when creating them. For instance, anti-poverty programs could have disastrous effects if they do not incentivize work and improvement. However, policies that reward education and employment can encourage social mobility and help people escape poverty.
Combining the lessons from both books, there is one fundamental truth when it comes to economic behavior: People act according to their incentives. In Vance’s book, we see how wrong incentives and unstable environments create obstacles to escaping poverty, whereas proper influences such as guidance and clear expectations result in more positive behavioral patterns. From the economic point of view of the other text, there is nothing coincidental about this. In order to create opportunities for people and shape a policy in a manner that will lead to positive results for all stakeholders involved, incentives play an absolutely crucial role.
About the Author
Dalani Paulsell, of Macomb, Michigan, authored this piece for the October edition of When Free to Choose, Northwood’s signature publication dedicated to exploring the importance of free enterprise and other tenets of The Northwood Idea. Click here to receive When Free to Choose in your inbox!