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Scarcity and Incentives

By Craig Wright | 16 Oct 2020 | Economics

When people query why elite athletes such as NBA basketball players are getting paid so much more than teachers, the argument is one of scarcity: it is not that basketballers get paid more; it is that the NBA selects an elite of basketball players. Such individuals are rare and hence scarce. The other side of the scissors is that such individuals are in demand. Whenever scarcity and demand meet, price increases, arising from the values attributed by the people seeking the good. The range of the teacher’s salary also varies. In part, the problem with public schools, in general, is that good teachers are not only paid the same as mediocre teachers, but they gain the same external incentives. The incentivisation to be the best teacher is frequently not monetary. Still, when we fail to reward and incentivise individuals, it may not merely be because we are doing so in monetary terms. The incentive to be a better teacher is not limited to one that is based on financial reward (Wisener & Eva, 2018).

When we compare the scenario of the teacher to the one of the NBA basketball player, we must next look at how many teachers there are, compared to how many elite athletes there are. It is also simple to argue that teachers spend many years at university. Elite athletes can train seven days a week, to an intensity that exceeds the completion of a doctoral degree multiple times over. The consequence is that we reward the elite few who can sacrifice to such an extent, and succeed. When people can compete and earn based purely on merit, the few individuals who are most skilled in their roles will generally receive more than others.

What people are not thinking about when they are making such comparisons is the incentive and value outside of a pure monetary reward. Many people become teachers because they wish to teach. The motive lies in bringing up and educating the next generation of society. For many teachers, the motivation to be a teacher is the reward. Balancing incentives is computationally demanding. The ability to find and report market prices accurately is the primary strength of the free market. Markets do not make judgements. They don’t have ethical values; markets are merely tools that reflect the principles of those who act in them. In taking the small, incremental changes and interactions that everyone completes daily, the invisible hand of the market (Smith, 1776) comes to form equilibrium prices, based on the standards of society, as they are reflected within the rules. The rules, of course, can skew how the market works. Legislating for maximum prices will impact the number of goods produced and lead to shortages. Even though many socialist nations have tried to plan their economies centrally, the sheer volume of interactions is beyond human calculation.

Cassar and Meier (2018) provide strong evidence that workers are influenced and incentivised by nonmonetary aspects of the job. Job satisfaction and productivity are not derived from the size of one’s pay cheque. Wisener and Eva (2018) focused their study on the incentivisation of medical teachers. Medical education requires valuable time from physicians and clinicians. Many medical educators volunteer their time or take significant pay cuts to be able to teach. On a purely monetary basis, doing so would seem irrational. The motivations of people who engage in such activities cover many diverse roles, and rather than receiving fiscal benefits, such individuals gain a sense of self-worth and feel valued. It is important to note that the introduction of monetary rewards can act to disincentivise good performance (Titmuss in Wilson, 1972; Upton, 1973).

The selection of incentives is as essential to businesses and individuals as it is to society. From an ethical standpoint, many people have started reacting to the focused shareholder approach promoted by Milton Friedman (Posner, 2020), which has resulted in an emphasis on short-term gains at the expense of long-term growth and the building of capital. One of the consequences of such failed incentive structures comes in the form of excessively large bonus cheques, paid to many CEOs. Many such cheques have been handed for strategies that are detrimental to the long-term viability of a business. Essential business activity such as research and development returns value to the company after long periods of time—that may exceed a decade. Such departments become easy targets in a drive to cut costs, allowing executives to increase the corporate bottom line in the short term and boost executive salaries.

There is no simple answer that covers all aspects of life. People have an ingrained sense of fairness, but it is very rarely attuned to an accurate focus on what is truly right and wrong. But the common-sense approach to how people interact works more often than not (Gwartney et al., 1985). Creating successful incentive structures is difficult, and one can rarely be legislated for from above. One of the hardest lessons may be that not everybody is motivated by money. Although it may otherwise make for more straightforward reporting on the news, the reality is that people seek meaning and fulfilment. In creating a system where people work and provide, whilst gaining a sense of dignity, it needs to be remembered that different people will end up with different outcomes. To merely hate and envy others who have more does little to improve our lot or to incentivise productive behaviour.

References

Cassar, L. Meier, S. (2018). Nonmonetary Incentives and the Implications of Work as a Source of Meaning. Journal of Economic Perspectives, 32(3), pp. 215–238. doi: 10.1257/jep.32.3.215.

Gwartney, J. Stroup, R. Clark, J. R. (1985). Essentials of Economics (2nd ed.). Academic Press.

Posner, E. (2020). Milton Friedman Was Wrong. [online] The Atlantic website, retrieved from: https://www.theatlantic.com/ideas/archive/2019/08/milton-friedman-shareholder-wrong/596545/, last accessed 2020/08/20.

Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. (1st ed.). W. Strahan and T. Cadell.

Upton W. E. (1973). Altruism, Attribution and Intrinsic Motivation in the Recruitment of Blood Donors [dissertation]. Ithica, NY: Cornell University.Top of Form

Wilson, R. N. (1972). The Gift Relationship: From Human Blood to Social Policy. By Richard M. Titmuss, New York: Pantheon Books (1971). 339 pp. In: Social Forces50(3), 411-412. https://doi.org/10.1093/sf/50.3.411.

Wisener, K. Eva, K. (2018). Incentivizing Medical Teachers. In: Academic Medicine, 93(11S), S52-S59. https://doi.org/10.1097/acm.0000000000002383.

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