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Thomas Paine Quote

Freedom hath been hunted round the globe. Asia and Africa have long expelled her. Europe regards her like a stranger, and England hath given her warning to depart. O! receive the fugitive and prepare in time an asylum for mankind.

ideas > Incentives

While reading one of my favorite economic books, I came across the word incentive. An incentive is defined as something that induces action or motivates. What are the primary things that motivate people in general? I would have to say that money and the pursuit of happiness are two primary incentives that motivate people to do what they do in life. Why does money motivate people? It is because money represents freedom, the freedom to buy and do what you want. We work so we can pay our expenses and hopefully have a significant profit left over so that we can do the fun things we want to do or save for the expensive trip or house that we would like to buy later. The profit incentive is a main motivator of people in a free market system. In a free market system, everyone is competing for the same money. Generally the one who works the most efficiently will garner the most money. The beauty of this system is that it produces efficiency, which means that more goods and services can be produced. A more efficient economy is better than a less efficient economy because more people can enjoy the more good and services created. In a free market, money tends to flow towards the goods and services that people want.

Now letís turn to another group of people, politicians and bureaucrats. What are the primary incentives of politicians and bureaucrats? It certainly isnít money, at least money gained legally. These jobs tend to not pay as well as the private sector. The primary motivation of politicians is to get reelected and to enjoy the power that comes with political office. The primary incentive of bureaucrats is to sustain their office and grow their bureaucratic empire. It isnít profit. What happens in an economy that is run to a large extent by the government through direct spending and government regulation? If the primary incentive is not money, then decisions made and money spent wonít be allocated to the most efficient means of production nor to produce goods and services that the people want. The money will be allocated to secure the most votes. Is this good for the economy? Obviously not, because it means the economy runs less efficiently, which means that less goods and services are produced, and less people can enjoy in the wealth of the country.

Once one understands the incentives of people and the incentives that are created by certain kinds of spending, it is relatively easy to see what the results of certain actions will be. People that I talk to often assume that government is the answer to most of their woes. They say, ďThe prices of housing are too high. Letís cap them.Ē or ďIf itís between business running the show or government, I trust government. They should run the economy.Ē Governmental solutions are provided by politicians and bureaucrats who have different incentives than you or I. Their main incentive is to get reelected, which often means that money is wasted or spent unwisely. And money spent is money gone, never to be recouped. Money is like time. Once youíve used it, you never get it back. Not all spending is equal.
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