Economic Incentives, and Moral Ones, Too

The world is full of incentives, but we often fail to realize how incentives entice us to act. Some incentives are economic, but others are moral. Both are important, but as incentives become more perverse or unintelligible, so sometimes do our actions. Economic incentives can complete destroy moral ones.

Let's assume a scenario for a moment. Assume you take your kids to a daycare center each weekday. For these services you pay $360 per month. Suddenly the daycare providers enact a new policy--if you are more than ten minutes late to pick up your children, you will have to pay a penalty of $3. Would your behavior change? How?

According to the book Freakonomics, this exact scenario was tried at one daycare center, and the results were completely unexpected. The number of late parents went up dramatically. It's all because of incentives. Prior to the enactment of the $3 fine, parents were generally very embarrassed to be late to pick up their children, and it only occurred in extenuating circumstances. After the advent of the fine, parents no longer felt guilty at having violated their 'contract' with the daycare center.

Later, the daycare center rescinded the $3 fine. The number of late parents went down, right? Actually, no; it stayed about the same. The Parents had become conditioned by the fine not to feel guilty if they were late, and they still didn't feel guilty when the fine was gone.

Incentives are causes of effects that we must carefully weigh before we implement them. Economic incentives can destroy moral incentives very easily.

There are all kinds of incentives in society that we don't think about. Government provides all sorts of economic and moral incentives to society.


This is the easiest incentive to visualize. If a government entity offers a welfare check to the unemployed that equated to a wage of $10 per hour, nearly every unemployed person would not work at a productive job that paid $10 per hour or less (the ones with the highest morals probably would). Actually, due to what I call the "money value of time" they probably wouldn't work for a job that paid less than $12 or $15 per hour.

Minimum Wage

I have a theory here that needs to be developed, but it seems to me that government establishment of a minimum wage requirement has a perverse economic incentive. It gives some businesses a baseline for how little they can pay their employees. It is my (unsubstantiated?) belief that in the absence of minimum wage laws, people on the lower end of the earning scale would make more money.

Drug Legalization

Because drugs are illegal, they fetch a much higher price on the street than they otherwise would. The high price draws those into the drug-selling trade whose moral incentive not to sell is significantly below their economic incentive to do so. If drugs were legalized, these drug sellers would have to find new careers. But because there are corrupt and designing men in the world who would continue to supply people's drug addictions, let's look at another incentive...

Do you know anyone who would be more apt to try drugs if government suddenly legalized them? I do. And the result would be more addiction. The moral incentive to quit would be substantially erased by the addiction, but the removal by government of the previous moral stigma (illegality), coupled with the economic incentive of now low-cost drugs would make it highly improbable that anyone would ever escape their filthy habit.


In 1972, prior to the Supreme Court's decision known as Roe v. Wade, which legalized abortion in 1973, approximately 100,000 abortions were performed in the United States. In 1973, the number of abortions in the US skyrocketed. The trend continued upward, because a moral incentive not to abort was removed. More recently, however, a new moral incentive has appeared--technology. Because doctors can more clearly study the personality traits of each little person in the womb, and because they can use technology to correct even microscopic defects in the little guy or girl, more doctors are refusing to perform abortions.

Rules and Laws that Do Not Appeal to Our Ethical Nature

What did you do when your mom said, "If you don't stop doing that, I'll ground you for a month!!!" You kept doing it, because you knew it would be a gigantic pain for her to administer a one-month grounding sentence. In the same way, the more government establishes penalties and laws that are not commensurate with the crime or with common sense, our likelihood of violating those laws increases. If the United States congress passed a maximum speed limit on our freeways of 25 miles per hour, how many people would break the speed limit? Everyone except a few really old grandmas. And more perversely, the accident rate would increase dramatically.

Epilogue. I've discovered another thought as I've been writing. In the absence of moral incentives, economic incentives can take very vulgar forms. Like cutting off someone's head if they won't join your religion. This is why true religion, which can be measured by its morality, is critical to efficiently running economies. What is moral (or truly religious) can be measured by The Golden Rule, spoken by the Master who walked the earth two thousand years ago.


  1. Amazing post. The first example that came to mind before I started reading your list of examples, was the charitable contribution deduction on our income tax. A big reason a lot of people oppose a flat tax would be the loss of these targeted economic incentives.

  2. Thank you. And your example is a very poignant one as well. I like to think that my charitable contributions would be as much under a flat tax, but I'm not sure...

  3. Frank, this is a great post. I think your wise statement about laws that do not appeal to our ethical nature at the end undercuts your argument for the continuation of the drug war.

    The vast majority of those punished by our government for doing drugs have done nothing to harm anyone but themselves. Yet we, like the mother in your example, go to exceedingly great lengths to provide expensive punishments to try to curb the behavior of those who have done nothing to harm anyone else.

    Our nation realized the lack of wisdom of prohibition when 2/3rds of state conventions voted to repeal the foolish policy (interestingly Utah was the state which put the 21st amendment over the top).

    You may be right that an end of the drug war could mean we would have more people stuck with "that filthy habit." Is the cost in tax dollars and lost civil liberties worth the benefit we receive when these non-violent offenders are behind bars?

    I'd say definitely not.

  4. Jeremy,

    Thanks for your contribution to the debate. I am not completely convinced of my specific argument in the drug case either. But my general point I stand firmly by--government needs to think through the incentives that it creates by its policies, and we should not legalize drugs until we are very (reasonably?) sure that the perverse incentive I described will NOT happen.

  5. As for the war on drugs, I think the answer to Jeremy's issue is for the punishment to match the crime. If you're pushing or supplying, your punishment should be more severe than if you are a hapless user. Hapless users should be sentenced to rehab and then put on probation to make sure it sticks. That's both moral and charitable.


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