It’s All About Healthy Incentives

A common phrase I’ve heard associated with Tyler Cowen’s new book Discover Your Inner Economist is Mind Grenade, and less than 50 pages in, it becomes clear why. Although I have yet to come across an explicit and concise definition of Mind Grenade, this phrase has undoubtedly been used heavily when talking about this book because of Cowen’s uncanny ability to create “aha! moments” through expert story-telling using extremely well-considered, simple language.

Here’s Cowen on The Virtues Of Capitalsm and Why Fostering a Sense of Control Should be An Inherent Element in Any Economy:

One of the least-heralded virtues of capitalism is how it blends and melds different kinds and mixes of rewards and penalties. Capitalism is not just dollars, dollars, and more dollars. It is also the best system for mobilizing intrinsic motivations toward the greater good of mankind. And that includes allowing people a sense of control.

Capitalism is about knowing when to change incentives and about knowing when to stop thinking about money. The problem with Soviet communism was not just that healthy incentives were too weak, but also that bad incentives were too strong. For most people in the Soviet Union, the only way to have a decent life was to court the Communist Party. This pressure was always present and always overbearing. The choice was to be a total rebel — which usually led to a very bad end — or to court or at least tolerate power. Virtually every social and economic decision was influenced by this calculus.

Of course, this was an unhealthy incentive, but that was not the only problem. It is less commonly understood that the Soviet Union offered less scope for incentive-free behavior than does capitalism. A state-controlled economy led to less pay, most of all in the realm of creating and implementing new business ideas. Play was pretty much restricted to close friendships and family relations. The result was less creativity and less personal human investment in making our world a better place.

And that is a big reason why communism failed.

– Tyler Cowen