Book: The Moral Economy

## Summary

### Preface

Bowles mentions the *Norms and Preferences Research Network* as where many of the ideas in the book were first tried-out.

Bowles' initial interest was in people's noneconomic motivations (e.g. ethical, intrinsic), and how they might be affected by the incentives, legal constraints, and other public policy instruments. Yet, there was doubt among academics whether such motives were common enough to warrant serious study. A period of experiments appeared to show that people are more generous and civic-minded than economists or evolutionary biologists assumed, and neither natural selection or cultural evolution models provide a ready explanation for how this came about. Together with Herbert Gintis, their investigation of such models culminated in *A cooperative Species* (2011). Coming full circle in this book, Bowles returned to the implications of the new empirical knowledge on behavior for the design of policies and institutions that work well when people act both on self-interest and generosity, moral action and amorality.

### I. The Problem with Homo economicus

* 1-8: to design effective governance, we need to have a model for how people respond to laws, economic incentives, information, morals, etc. that make up a system of governance (a multi-faceted model). In practice, this model has only one mode: homo economicus. We all know this model is ‘wrong’, but Bowles highlights two ways in which it fails to lead to good policy predictions:
	1. Policies that follow from the HE model, namely those harnessing incentives, might make people more selfish:
	2. Hence they often don't work well: (they crowd out other things?)

* Provides two examples of crowing out: 1. Haifa fine for late picking up of kids, 2. starting to reward kids for prosocial behavior they were already doing diminishes this behavior.
* Labors on the point a bit to argue that: if incentives crowd out desirable prosocial inclinations or behavior (outcomes that the incentives are targeted to produce), optimal policy use of incentives will be lower. Instead of crowding-out, he also notes possible positive synergy between incentives/constraints and ethical/other-regarding motivations.

### II. A Constitution for Knaves

* 9-10: Can a constitution for knaves work, and if so would it be a good idea to govern according to one? Begin to address this by reconstructing the history of the constitution for knaves idea, and its transformation of market theories into moral-free zones.
* 11-16: Machiavelli's Republic: two moves? 1) selfishness as the model for analysis of governance (for prudence?), and 2) Mandeville/Smith suggesting selfishness actually produces socially beneficial outcomes
* 16-21: A constitution for knaves: classical economists argued for the HE/knaves model of individuals from a prudence and pragmatic point of view, not because of its empirical reality. Bowles notes its appeal stems from:
	1. Self-interest became to be seen less as deplorable and more as benign (Smith, Hobbes
	2. Virtue alone is insufficient as a basis for good governance at larger scales (national), the scale concern increased as nations and markets included increasingly many people.
* cont'd: when seeing the HE model as a way to analyze the effects of incentives-based policy on behavior without reference to other motives, it begs the question: are material interests and moral/prosocial motivations actually separable, or can they not be analyzed in isolation?
* 21-25: Separability of Moral Sentiments and Material Interests: economics has largely missed the possibility that prosocial behavior could be adversely or synergistically affected by policies that harness self-interest. (West Point intrinsic/instrumental motivation example)
* 25-29: Markets as Morality-Free Zones: optimal outcomes are achieved if people take into account how their behavior affects others. In morality, the ‘golden rule’, or in incentives/markets: prices! With (1) no missing markets, (2) prices reflect externalities, and (3) complete contracts, we get the FTWE: no need for virtue/markets are moral-free zones.
* 29-33: Economics for Knaves: In practice, the highly restrictive assumptions of the FTWE are usually violated. Bowles mentions ill-defined property rights, incomplete contracts, externalities, public goods, principle-agent problems. Some of these have 'solutions' like Pigouvian taxes; this makes that the role of the policy-maker becomes ordering the right laws to induce citizens to act *as if* they were good, instead of making them good as is Aristotle's legislator's job.
* 33-37: Machiavelli to Mechanism Design: while some ingenious systems of incentives can expand the domain in which 'self-interest' is a good policy (Pigouvian taxes, mechanism design), these have not replaced the role of other-regarding motives. Arrow: "Norms of social behavior may be reactions of society to compensate for market failures". While the idea of governance through incentives was valuable, economics has radicalized it as the only mode of governance, ignoring other modes and their interactions.
* In the pages that follow, we will put ourselves in the shoes of Aristotle's legislator, who knows that incentives and constraints, while essential to any social order, will never be sufficient and may be part of the cause of some problems.

### III. Moral Sentiments and Material Interests

* 39-41: starts with illustrative examples of how incentive governance can work, but also often doesn't. It depends on what the pre-intervention mix of modes of governance was---is there e.g. much other-regarding sentiment to crowd out?
* In this chapter show that: lab experiments suggest that moral and other non-economic motives are sometimes crowded out by explicit incentives.
* 41-46: Homo Socialis: in experiments, the minority of people (~30%) behave as purely maximizing their own material welfare. Most people have some 'social preferences: "different motives that induce people to help others more than is consistent with maximizing their own material payoff". Hence, there is heterogeneity in the population; there are different 'types'.
* 46-56: Crowding Out (and In): looking at the case of public goods: non-separability occurs when incentives affect the individual's 'experienced values' which I think is roughly the salience/weight of social preferences compared to incentives [SEE Q7]. Illustrated by figure 3.1 [INSERT PICTURE], we can distinguish 4 cases: (1) separability, (2) crowding-out, (3) crowding-in, and (4) strong crowding-out. These 4 different cases can be distinguished empirically by using the predicted HE response, and seeing if behavior deviates from the prediction. See Cardenas, et. al. (2000) example. [ADD CITATION] (feel like i oversimplified this slightly, what is the 'smart' thing in this study?)
* 56-60: Crowding Out: A Taxonomy for the Legislator: to know how to take interaction effects into account, we need to know how/why they work. First, we consider a taxonomy of the different crowding effects. Difference between: (1) 'categorical crowding in/out': when the presence of the incentive (rather than its extent) is what affects the person's individual values, and (2) 'marginal crowding in/out': when the extent of the incentive matters. Figure 3.3. illustrates how this works [INSERT FIGURE 3.3] (note specifically point s', better to not have incentives than too low a lvl of them). If the legislator knows what the figure looks like for their problem, they can make the optimal policy choice.
* 60-65: Measuring Categorical and Marginal Crowding Out: through the example of a public goods game with no, low, or high bonus for the highest contributor [INSERT CITE IRLENBUSCH & RUCHALA 2008], Bowles emphasizes that categorical and marginal crowding do occur in practice. In [INSERT CITATION BOWLES & POLANIA-REYES], they empirically distinguish categorical from marginal crowding by assuming a linear/constant marginal crowding effect and calibrating using the observed contributions at different bonus levels (see p.61 figure 3.4).
* Provides a second example [INSERT CITATION; CARDENAS 2004] where a fine *increased* public good contribution *by more than predicted by the monetary incentive*. Combined with the observation that increasing the fine did not have an effect, he notes this as an example of categorical crowding-in. Cardenas' interpretation: the presence of the fine increased the salience of the public nature of the action and carried a moral message.
* 65-69: A Surprise of the Legislator: since the legislator no longer takes preferences as given but takes into account the effect of incentives on preferences, when this total effect decreases the effectiveness of the incentive tool, the legislator might need to use more of it to reach the same goal *because* the tool is less effective. (I suppose the opposite goes for crowding-in).
* 69-75: The Lab and the Street: The experimental evidence for crowding out will be of little interest of lab results do not predict behaviors outside the lab. He gives a list of 4 external validity concerns and about a dozen examples/studies. Ends by noting that *there are no direct tests whether those who act as if they have separable preferences in the lab do the same outside the lab, because it is not clear how such a test would be conducted*. See Q11.
* 75-77: Moral and Material Synergies: hence, political economy has been taken in the wrong direction by excluding ethical and other-regarding motives (either assuming absence or separability). While this new understanding of crowding effects improves the legislator’s ability to design optimal policy, ideally they’d understand how to produce crowding-in! For this, we will need to understand the black box/causal origins/cognitive processes that explain how crowding in/out works.

### IV. Incentives as Information

* Intro: a constitution for knaves may *produce* knaves. If a legislator seeks policies under which incentives and social preferences are synergistic---or even with a more modest ambition of additive separability---they will have to learn why crowding in/out occurs.
* 80-84: Learning about Preferences from Experiments: Bowles collected 51 relevant experiments and will use the same revealed preferences method as above to infer how incentives affect social preferences. He notes this is tricky because in strategic situations, the payoffs of actions and therefore actions themselves depend also on beliefs about others' actions. Hence, we need to distinguish when actions change as the result of changing preferences or beliefs.
* 84-86: The Meaning of Incentives: incentives convey messages/information. We can distinguish between two causal mechanisms through which crowding works:
	+ (1) situation-dependence of preferences, where the salience of a preference depends on the environment which incentives are part of (short-run phenomenon). E.g. like our everyday distinction among bribes, bonuses, and salaries; incentives signal different messages/information that may affect one's social preferences.
	+ (2) 'endogenous preferences': incentives may alter the social learning/socialization by which people acquire preferences during childhood/adolescence/life (a long-run phenomenon).

* Three different mechanisms of how incentives can crowd out social preferences:
	1. 86-89: Bad News (about a principal) mechanism: by implementing an incentive, one reveals info about one's intentions/type and beliefs about the other(s). Fehr & Rockenbach (2003) example [INSERT CITAITON]: trust game plus option for investor to impose a fine trustee if transfer is below a chosen amount. Shows that for a given lvl of investment, choosing to impose the fine decreases reciprocity by the trustee, and choosing to not have a fine increases reciprocity compared to a no-fine-possible treatment.
	2. 89-97: Moral Disengagement: people look for cues for appropriate behavior, and incentives provide these: market-like incentives might trigger "moral-disengagement". Such *situational cues* may be at work even in nonstrategic settings. Examples of this follow. Falk & Szech (2013) [INSERT CITATION]: receive money to have mouse killed fetches much lower price than selling the mouse for someone else to kill it. Hoffman et al. (1994) [""]: changing names or actors in an ultimatum game decreases offers and offers accepted. Henrich et al (2010) [""]: adding a 3rd party who can fine (the incentive) in a dictator game more often *decreases* the allocation, contra to expectation.
	3. 97-103: Control: Incentives Compromise Autonomy: introducing incentives may 'overjustify' an activity, and make it become perceived as externally instead of intrinsically motivated (this may also apply to things different from material incentives like deadlines). E.g. example of rewarding children for painting makes them do so worse and less. The second half is about how when parties have bad beliefs about each other as in the bad news mechanism (1), equilibrium switching is another possible tool for the legislator. (these pages would feel more at home the mechanism 1 part)
* 103-110: Emotion, Deliberation, and Crowding Out:
* 110-112: A Puzzle:

## Questions

1. The two points in chapter one being the same? See footnote 1
2. What are the mechanics at play in these two example? See footnote 2.
3. Incentives and constraints in the same basket? See footnote 3
4. See footnote 4
5. p.40: "In these cases, the assumption of material self-interest provides a good basis for predicting the effect of varying incentives to increase the payoff of working harder. Their work effort was closely aligned with the extent to which their pay depended on it." Interesting way of thinking: before tampering with the structure of the modes of behavior, first examine what the mix of modes is currently. This allows one to consider how intervening in one mode of behavior might effect how other modes operate. E.g. For traders, who's work effort to a large extent is probably driven by bonus pay/promotion/salary increase, altering just the financial gain mode probably has a large effect while not affecting the other modes. In contrast, imposing fines for taking time off from work for firemen (like example in book) might ceteris paribus decrease their off-time, but the substitution of other motives outweighs the financial motive leading to overall more off-time (and probably less satisfaction/happy with the job?).
6. Overall, the point of non-separability is well-taken. What I am missing a bit is an inquiry into the different types of non-incentive motivations that might be affected. E.g. some mentioned are: (see footnote 6)
	* Morals (often, e.g. p.41), ethical commitments
	* Norms (often)
	* Sense of accomplishment (p.39)
	* Personal importance (p.39)
	* Patriotism (west point example)
	* Altruism
	* Reciprocity
	* Intrinsic pleasure in helping others
	* Aversion to inequity
7. How are 'social preferences' = "motives that induce people to help others more than is consistent with maximizing their own wealth or material payoff" (p.45) and 'experienced values' = "the motives that are salient will depend on how the contribution is framed, including whether an incentive is provided to those who contribute. I term these proximate motives to contribute the citizen's 'experienced values'" (p.47) different?
	* My guess is that the experienced values is the salience of the different social preferences/motives? So e.g. the weight of some altruism motive v. incentive motive. Then, the graph on p.49 doesn't fully make sense to me as then the weight of the incentive must increase as the weight of the altruism motive decreases?
	* "framing provided by the incentive may affect the salience of the individual's social preferences, resulting in a level of experienced values different form would have been the case in the absence of the incentive". So, experienced values are a level? That is kind of the same as their salience, no? So EV = salience of SP?
	* It is a bit restrictive to put this all on salience? E.g. for the firemen example, don't people feel unappreciated, or insulted instead, so that their motives change rather than their salience?
8. ~~p.58 is there a reason to not have both categorical and marginal crowding effects? E.g. in absence of incentives, the introduction may induce a shift in the categorical sense, after which there is still some marginal crowding happening depending on the level of the incentive. IS PRESENT IN 3.4 AND 3.5. PROBABLY JUST FOR SIMPLICITY.~~
9. p.65 clearly states that incentives will affect preferences, not just experienced values. Note that this is different than in figure 3.1 which was used to show the causal channel between these concepts. Yet, In this case, what is the difference between them really? Just the salience?
10. p.68 i don’t get the point Bowles is trying to make here: is there something more than just needing to use more of something to reach the same goal because it is less strong/effective?
11. p.75 end of ch: can we not think of some ways in which such things could be tested outside of a lab??
12. p.97: seems to me that mechanism 1 (bad new abt principal) is very much a strategic setting thing since one infers things about the other through their actions. Mechanism 2 (moral disengagement) was mentioned to be possible in non-strategic settings (intuitively it arises from nonstrategic considerations), while p.97 posits it more as occurring in non-strategic settings? Now, mechanism 3 (control/autonomy) is posited as primarily a nonstrategic feature. Yet, the very first sentence of the chapter feel more like a strategic inference to me. I would be inclined to think (1) is exclusively strategic, and (2) and (3) arise in both.

## Footnotes:

1. ↑ Are these two things not the same? When we try to realize prosocial behavior, incentives crowd out other motives for such behavior, exacerbating the severity of the misalignment between individual and societal interests. The reason they don't work well, is exactly because of this crowding out? So, both points say: incentives crowd out prosocial behavior, this means people behave more selfishly = incentives don't work well.
2. ↑ The first one I think is somewhat less interesting: how late one is picking up their children became commoditized by putting a price on it, hence people people don’t feel bad for being late because they are paying for it. Here, roughly the wants/desires seem unchanged, they are just enabled to be included in a difference choice mechanic. The second one is trickier. It seems there is actually a change of wants/desires? Feels unlikely that: the kids didn’t *want* to do the prosocial behavior but it was enforced by a expectation/norm/moral, and now the commoditization crowds out this mode hence they no longer perform the undesired prosocial behavior. Rather, feels like the desire shifted?

Idk, it feels harder to separate when kids act on desires or follow expectations.
3. ↑ Seems to put incentives and constraints into one basket, but they seem quite different to me? They might interact with prosocial tendencies quite differently? E.g. an incentive to not be late might 'commoditize' it and therefore crowd-out a norm, where a limit doesn't commoditize it as much (there's no price) but possibly convey that behavior below the limit is ~acceptable?
4. ↑ See notes in book: is HE model *and* complete contracts required? With just HE, we still have contracting and other transaction costs?
5. ↑ But kind of throws them on to a single pile, not clearly differentiating how they differ. The writing seems to suggest he sees of these as different forms of incomplete contracts?
6. ↑ Read into these examples what sort of other types of motives are affected; see Q6.
7. ↑ E.g. altruism, reciprocity, intrinsic pleasure in helping others, inequity aversion, ethical commitments, etc.
8. ↑ insofar as people can be analyzed as primarily using one of these modes rather than a continuous mix of modes
9. ↑ Bowles uses ‘preferences’ instead of EV or ‘prosocial behavior’ here.
10. ↑ Can imagine that if there’s some aversion to higher lvls of incentives, it might mean that the legislator uses the incentive tool less *often* than the naive legislator, since with strong crowding out the legislator prefers not to use the incentive tool at all.
11. ↑ Not entirely clear why this happens. May signal low trust in the other person. Alternatively, it may just be perceived by the trustee as a signal about the 'type'/motivations of the investor, and a desire by players in the trustee role to share with intrinsically motivated people, but not with payoff-maximizers/selfish players?