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“People respond to incentives.” That is a mantra, a shibboleth, a totem of economic thought that is various touted, invoked, and at the very least accepted by partisans of all sides and factions – it’s one of the core tenet’s of Mankiw’s textbook, for example. But getting beyond the fact that in some sense it’s a tautology, the statement strikes me, after some thought, as weirdly determinist.

One could, for example, create a model where “people respond to incentives” but what any given individual is incented by, or incented towards, is completely random – money could make some people vomit, while other people do ten jumping jacks every time they see a labradoodle. But that’s not what economists mean when they say “people respond to incentives.” What they mean is that there is some identifiable set of circumstances and stimuli that people will, in aggregate, respond to predictably.

Far be it from me to dispute this, at least directly – certainly you could imagine a world where the micro can seem random but the aggregate can seem largely predictable, but you could also imagine a world where forces outside that identifiable set of circumstances and stimuli have a sufficiently large and unpredictable effect on aggregate human behavior, and, further, interact with those circumstances and stimuli in volatile ways, thus at least partially rattling, if not undermining, the foundations of a system of thought based on those incentives.

What I really want to talk about is determinism. Because it is weird, at least a little, to me that some of the people who most vigorously and vociferously intone “people respond to incentives” as a devotional are the people who also most vociferously support “individual freedom” and voluntary action. It’s not so much that there is a contradiction per se as much as an odd combination of stress – why is it so important that as much of the human sphere as possible is structured to be voluntary if the effects of any given system are largely predictable?

What led me to this thought was Doug Henwood’s fascinating interview with Penny Lewis about the myth of the hard hat/hippie divide in which she refers to the post-Vietnam volunteer army as being the “economic draft.” Now this is, in some sense, self-evidently true – it is difficult to imagine a situation in which a volunteer army offering sufficient pay and benefits would fail to find recruits.  But it also seems that it would be important to people to feel as though joining the army was voluntary on an individual level, regardless of the aggregate fact that the army will invariably recruit around the number of people it wants to assuming it knows how to set pay and benefits accordingly. My question: is the “voluntariness” of the army important because it increases efficiency (ie, recruits are self-selected rather than compressed at random) or is it because it is somehow just? What if you could create a non-voluntary system that guaranteed a similar level of efficiency (not that hard, when you consider that a decent chunk of enlistees have, er, ulterior motives) – would that be equally just to a volunteer army? If not, why is the voluntariness of the moment of enlistment so crucial? Wouldn’t it be more just, in some sense, to compress and pay less and thus tax less? Taxes aren’t voluntary.

This rambling inversion of Nozick’s Wilt the Stilt thought experiment doesn’t really go anywhere, but it is also worth noting that I stumbled upon this little essay on why leftists are necessarily determinists by Benjamin Studebaker. Notably, it goes wrong logically at precisely the moment it goes wrong factually:

The right very strongly disagrees with the left on this. Remember “you didn’t build that“? The right was furious about Obama’s claim that businessmen were not personally responsible for the success of their enterprises. Obama tried to back-peddle on the comment, but he had no business doing so, because “you didn’t build that” is precisely what leftists believe. Leftists don’t think that the rich are to credit for their success or that the poor are to blame for their failures. Leftists think sociological and natural forces determine who succeeds and who fails. People who succeed benefit from genetic advantages, better parenting, better education, more opportunity, more help from the state, and so on. People who fail lack these advantages and often possess their inverse–genetic disadvantages, bad parenting, bad education, less opportunity, less help from the state. To the extent that you are genetically gifted and enjoy a good environment, you succeed. To the extent that you are genetically shafted and suffer from a poor environment, you don’t.

Sigh. I am loathe to engage with anyone who presents any interpretation of Obama’s “you didn’t build that” comments other than the correct one for fear of engaging with someone deliberately uninformed or un-invested in good faith, but it’s worth explaining one last time, I suppose, that Obama’s comments were focused on something indisputable and very, very important – the intergenerational compact of public investment. Here’s how it works.

I am alive in some present. In the present, society has the capacity to produce some sum of material resources and intellectual discovery. Certain kinds of production – such as the production of pointlessly-large exurban houses in the Sun Belt or flat-screen televisions – are largely present-oriented and disconnected from future prosperity, while other investments – like building and maintaining transportation and utility infrastructure or scientific research – are largely-future oriented and necessarily divulge the vast share of their benefits to future generations regardless of how fast they convey present investment into future benefit. The Interstate Highway System, for example, certainly provided some benefit to those who were born during the Eisenhower administration, but assuming they are well-maintained could theoretically produce benefits to future generations ad infinitum.

Now, those benefits, while increasing net prosperity in myriad ways measurable and otherwise, do flow in lumpy ways. For example, if you founded a large trucking enterprise in the 1960s when the Interstate Highway System was just being built, you are likely really, really rich today. And if you, say, founded an internet shopping website when the internet was just getting started you, too, are likely really really rich today because of both public investment in making the internet possible and the highways that actually bring goods from fulfillment centers to homes at almost the speed of click.

This gets back to the argument Obama was making. Obama wasn’t making some puzzling point about entrepreneurs being winners of an arbitrary genetic and environmental lottery to justify their expropriation; he was making the very obvious point that many, if not all, of the people who are rich today are rich because past generations made sacrifices to invest in the infrastructure that made their success possible and therefore they should hold up their end of the intergenerational compact and help fund the public infrastructure of today that will create tomorrow’s broad-based prosperity and billionaire entrepreneurs alike. Nothing about this requires a belief ether way about determinism or free will, just the practical observation that quality public investment breeds prosperity which makes entrepreneurs possible (remember Woody Allen’s point about being a savannah tribesman) and the argument that those who benefited from past investment the most should probably pay a larger share of the costs of current investment for reasons of both fairness and ability. Therefore Studebaker’s conclusion that:

If we deny that the universe is determinist, there is no ground for objecting to the right’s argument that some people will themselves to success through virtue and others to failure through vice. If there is any other element, if there is any independent will, then some people really are fundamentally better people than others, are more deserving than others, and should be rewarded on that basis alone.

Is both incorrect and misses the point that that causes of why, say, Bill Gates or Steve Jobs got really rich is separate from the point that public investment in universities and computer technology and the internet and patent protection made someone getting really rich pushing forward the boundaries on computing all-but-inevitable and therefore whoever that someone is should help fund high-speed rail or whatever.

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Responsible prudent savers. Totally ants.

Scott Sumner, lingua in bucca, swapped Formica for granite countertops and writes:

PPPPS. Yes, granite is very durable, which makes it investment . . .

. . . and of course saving too!

This, of course, goes to one of my hobbyhorse points – the exceptionally fuzzy line between "consuming" and "saving." The better way to view the world, IMHO, is one in which, beginning at some arbitrary point, we apply our time and existing stuff, through the media of institutions, to make more stuff, and that stuff varies in function, quality, durability, etc.

This also reminds me of a tangential point – young people, on average, probably do not travel anywhere near the optimal level. Travel can be expensive, but when you are young there are two factors that mitigate strongly in favor of travel. Firstly, you are most able to enjoy it. Let me tell you right now that future 50-year-old me would have had a way tougher time enjoying Mehrangarh than the present 26-year-old me. Secondly, travel is a perpetuity, and while most of their utitlity is illiquid, that’s as much an advantage as disadvantage – nobody can expropriate, steal, damage, or tax it.

This is much the same as education, which is why education debt is a bad idea, but while a college degree can be so expensive most people simply cannot fund it out of current consumption, an unforgettable month-long jaunt through India for two can cost less than $5000 including airfare, adequate lodging, and all consumption. Which is a lot, but if you have a young cohabitating pair with no kids making at least a combined $70-80k, as long as their rent isn’t too expensive and neither is drowning in debt it’s perfectly possible to save adequately for such an adventure over less than a year. And you could make a very strong argument that traveling while young is just as much "investment" (in something that produces a lifetime-long flow of happy memories and increased knowledge and wisdom, as well as fun stories to share with others) as "consumption."

Humans like categories. And for good reason – they make the world computable. Unfortunately, they can have the side effect of predigesting the world for us, so especially when it comes to concepts that are wholly or mostly abstract, we should be doubly on our guard against firm deliniations against what is “x” and what is “not x.”

More often, “x” is better used as an adjective and not a noun, not a class of thing but property that a thing can have more or less of or be more or less consonant with. JP Koning is a terrific advocate for this approach, as he explains why is blog is called “Moneyness:”

The second way to classify the world is to take everything out of these bins and ask the following sorts of questions: in what way are all of these things moneylike? How does the element of moneyness inhere in every valuable object? To what degree is some item more liquid than another? This second approach involves figuring out what set of rules determine an item’s moneyness and what set determines the rest of that item’s value (its non-moneyness).

Here’s an even easier way to think about the two methods. The first sort of monetary analysis uses nouns, the second uses adjectives. Money vs moneyness. When you use noun-based monetary analysis, you’re dealing in absolutes, either/or, and stern lines between items. When you use adjective-based monetary analysis, you’re establishing ranges, dealing in shades of gray, scales, and degrees.

Not only do I wholeheartedly endorse this approach re: understanding money, I think the methodology should be expanded to all kinds of other things. For example – a feature of much libertarian thought is trying to decide whether or not something is “coercive.” I’m not a libertarian, but I am emphatically not trying to concern troll when I suggest a better avenue to pursue is trying to weigh whether different things are more “coerce-y” than other things.

This brings us back to “savings” vs. “consumption,” or “investment,” or “consumer goods” vs. “capital.” I really don’t like these distinctions, because as useful as they have often been in the past in the present they can often sow more confusion than anything else. I suggest we instead look at different goods having different levels of “saveyness” or “capitalness” – some goods last longer, some have more uses, some increase future productivity more than others. This applies to both the consumer side as well as the good side – ie, is a certain consumer decision “saving” or “consuming,” as well as is a certain good “consumption” or “capital?”

Think of a Twinkie. Twinkies are an odd product; on the one hand, they are a cheap, delicious, unhealthy snack; on the other hand, they are (at least according to legend) practically immortal. So is buying a Twinkie consumption or saving? Does it depend when you eat it? And for those who will say “but Twinkies aren’t an investment, they bear no interest, they just sit there” – so does money under the mattress, and nobody thinks that isn’t saving. More interestingly, from the perspective of the economy, for the most part it doesn’t matter what you do with the Twinkie. Obviously in the aggregate, if people buy lots of Twinkies for “saving” purposes as opposed to “consumption” purposes there might be fewer loanable funds, but if you were deciding whether to buy a Twinkie, stuff it in the pantry, and eat it in a year, or simply stuff a dollar bill in the pantry to buy a Twinkie a year from now, you’d still be saving the same amount…right?

Or think about what goods are “consumption” and which are “capital.” Got it? OK – is roasted coffee a consumption good or capital? Fine, that’s probably an easy one – since it only has a single use, it probably gets counted as consumption even though it is manufactured and increases productivity. What about a Keurig machine? What about my beloved ekobrew that allows me to turn fancy whole bean roasted coffee into a Keruig-produced cup of hot java? Are these “consumption” or “capital” goods? Does it matter if I’m a worker at a firm or a sole proprietor? If Google had a giant coffee roasting and producing operation at the Googleplex as a perk for their employees we’d probably call the equipment they used to make the coffee “capital” – so is it merely a question of scale? If I buy it on Amazon, is it automatically “consumption?”

I think these conceptual questions are inevitable if we continue to rely on heuristical categories that don’t tell us much about modern life. Instead, any time we discuss a social production decision, we should instead ask ourselves questions – what does the good do? What inputs does it require to do what it does? How long does it last? How much does it increase productivity and happiness? How much maintenance does it require? What is it replacing or displacing, if anything? Asking these kinds of questions will tell us things about the nature of what we, as a society, are producing that are much more valuable than traditional delineations. For example, I think the United States, as a society, should be building more high-speed rail. High-speed rail is very “capital-y” – it lasts a long time and greatly increases productivity. I would be willing to trade substantial amounts of “consume-y” goods – candy bars, video games, new T-shirts – in favor of building more high-speed rail. Of course, the GDP calculation will show that as “G” and not “S/I” assuming it is built by the state – but it represents a social decision to produce more long-lasting, productivity enhancing, future-oriented stuff than it was before at the expense of more quickly-depleted, pleasure enhancing, present-oriented stuff. In the aggregate, that’s what “saving” is. It’s not a question of “more” or “less” but “what?” and “why?”
See also this book.

Matt Yglesias and Tim Fernholz have both written great stuff about how US government borrowing is supporting US household deleveraging, a process Fernholz calls the “invisible bailout.” And they’re right, and for important reasons – as Yglesias says:

But when the household sector tries to reduce its indebtedness it needs to do something to make that happen. Stacking up huge piles of money in the closet is not a very sound method. As an individual, you don’t really need to think about this. You save by either lending money to your bank or else by purchasing a financial asset (stock, ETF, mutual fund, bond) from someone else. But that just puts the money in the bank fault or in someone else’s closet. Ultimately the money saved has to go to something.

What’s really interesting about that, though, is that it’s also true on a global level and not just a national one. One of Fernholz’s charts shows that the US has net-delevered even relative to pre-crisis 2007 levels. This should not only give a lot of pause to American austerity pushers, but austerity pushers everywhere. For if the US is net-saving, somebody else is net-borrowing. Europe? Maybe. But as austerity gets pushed harder there then that means either somebody else is saving less or some other party is borrowing more or both. Just like we can’t all be net exporters, we can’t all be net savers. In some sense, all saving is simply being the counterparty to someone’s borrowing (since saving is an attempt to push current consumption into the future and borrowing is the opposite) and therefore if you’re not affecting net global indebtedness you’re just squeezing the balloon. But net global indebtedness should be driven by the desire to save, not the desire to borrow – as long as the world is accumulating capital and is looking for some kind of store of value or investment return then they’ll find something, but in the absence of that you’re not going to magically find money to borrow. So the real question we should all be answering is “given the current global demand for savings how can we allocate that capital?” not “how can we reduce the federal government’s borrowing?”

I think this is all getting a little confused by the Euro crisis. Not being able to run experiments like this is what makes macroeconomics such a headache, but I’d bet dollars to donuts that on Earth-beta where there was never a European monetary union there is no debt crisis in Europe and most developed country would be currently borrowing at super-low rates, which is in fact what we see elsewhere.

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