I had my first graduate microeconomics class today.
One thing the professor posited as a “guidepost” for economic thinking is that incentives matter. As an example, he used welfare. If the state guarantees a certain level of income in an effort to reduce poverty, some people will respond by quitting their job and free-riding off state welfare programs. In other words, and more generally, people respond to incentives. Policymakers can’t just pass a law and expect people to act exactly as they did before. Human beings choose and economize within constraints. When relevant constraints change, our choices often change, too.
But talk like this has always rubbed me the wrong way, and I wasn’t sure why until tonight.
That’s because just minutes after positing this “guidepost” for economic thinking, he posited value is subjective as another guidepost. Value is subjective to each individual person, of course. This is economics 101.
But if value is subjective, then how can we really know how people will respond to incentives? How do we even know what is and is not an incentive for other people? And can we really know what incentives they are responding to?
Yes, I realize it’s usually safe to say that lowering the monetary cost of something will increase quantity demanded for that something (in the case of college loan subsidies, for example, more people will seek college loans). But this isn’t something we can logically deduce. Our ability to predict how a policy will affect incentives depends on how well we guess at other people’s subjective values based on our past observations and experience. It’s really just a guessing game. It doesn’t seem to align with the axiomatic-deductive method espoused by the same economists who engage in this type of “incentive talk.”
Maybe I haven’t read enough about this, but I’ve at least put my finger on just what about “incentive talk” has always left me perplexed.