Tuesday, February 17, 2009

Executive pay caps and 'incentives'

--Moments ago a personality on CNBC, who, judging by his statements, considers himself a faithful adherent to free-market economic theory, argued that recent executive pay packages had nothing to do with the crisis we are in. Right or wrong, this statement is remarkable as a blatant contradiction of free-market economic theory, which sets as one of its most important tenets that incentives matter.

If the enormous pay incentives weren't motivating behavior and leading to the growth of 2002-2007, how would economic theory explain their existence? This way: The pay either stimulated behavior, or was a significant inefficiency in the market. So the pay is culpable in the crisis, or, if it isn't, it needs to be changed anyway.

In sum, here was one of the faithful, god bless him, trying to argue in favor of the free-market, and it took undercutting one of the main pillars of free-market thinking to do so.

--The study of economics faces a moment of crisis. This moment is in stark contrast to the few smooth decades for economic theory that got us here. As this body of knowledge works itself out, we should remember that the goal should be to improve our understanding of incentives, not all of a sudden pretend they don't matter. Our current age includes a whole lot of money, and, at least theoretically, a whole lot of incentive as a result.

--It strikes me as a good research project to put together a picture of the social institutions that shape 'incentives.' What the hell are they? Where do they come from? How do they get us to do things? How do they change? A couple sociologists (at least one who studies politics economics, and another who is versed in stats and economic sociology) could sort out the question of incentives.

--Here are a few of the institutions that I'd begin with:

1. The Federal Reserve and Treasury

Actions: Print money and make debt, expand the money supply, in sum, make money exceptionally available, create an incentive?

2. The government

Actions: Use rhetoric like 'small government,' push for tax cuts and shape ideology, cut taxes and manipulate fiscal outcomes, create incentive?

3. Family, education, and media

Actions: house opinions and create the public sphere of ideas, entrench communicative habits and create knowledge, market truths, create an environment conducive to consumption, create an incentive?

4. Social-psychology

Actions: Individuals interpret environment and develop conception of self-interests, a broader socialized mind develops in concert with public sphere of ideas in which individuals participate, individuals in return internalize and/or reject the incentives that are communicated, a social mind of rough consensus and certain deviation emerge around the notion of money as an accepted stimulant of behavior

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