Monday, December 18, 2006

Incentives in economics and love

OK, ladies and gentlemen, we're going to take a break from the typical "Here's what's going on in Dan's life" post, to talk a little bit about economics. Specifically, incentives. This has come up recently in a few different ways for me (once through traditional business analysis, once relating to relationships), and it's something that I feel needs to be understood by the world at large.

The fundamental theory of economics is that everyone will do what's in their own best interest, financially. Economic theory then states that this will lead to greater efficiencies. For example, if two airlines are competing and one of them finds a way to reduce the fuel they use, they will do it. Not because it's the right thing to do on any abstract, intrinsic, moral level (e.g. environmentalism). But because it will save them money, and thus add to their bottom line. This results in greater efficiences, because companies will strive to reduce cost in any way they can. Therefore, El-Cheapo airlines will evaluate their options (direct vs. layover flights, multiple stops on one flight vs. multiple flights with one stop). They'll look at which method customers prefer, and how much fuel is consumed by each method. They'll figure out which one gets them the most passengers per litre of fuel used and go with that one. The end result is that each airline goes for the most efficient plan they can devise, based on customer preference and fuel use. They use less fuel, and customers get what they want-everybody wins. The company that is less efficient gets fewer customers or uses more fuel (or both) and thus makes less money and eventually collapses.

Another major effect that has an impact on economics is external costs (also called negative externalities). This came up in a debate I was in last weekend, related to airlines costs (which is why I mention it now). The basic premise is this: the cost of your airline ticket is really only a portion of the true, full cost. The true cost is the total sum of the internal and external costs. The internal costs are what the company has to pay-buying the airplanes, buying the fuel, paying staff, etc. The price of your airline ticket reflects these internal costs (plus a markup of course, to generate profit).

But there's another cost: external costs. External costs are things like the environment. Because private companies don't have to pay to clean up the environment. If it's cheaper to pollute like crazy, companies will do it. Because if they don't, their competitor will; this will make their competitor's product cheaper, everyone will buy that product, and the environmental company goes under. This is where the government has to step in.

I believe in the power of the free market, but I am also well aware of its failings; one of those failings is attention to the environment and the health and welfare of people in general, and it is here that (light-handed) government regulation is necessary for the market to operate efficiently, without destroying us and the planet. And the best way to do this is to internalise those external costs. Because if a company has to pay for all costs, it will bring the efficiency-boosting power of the markets to bear on environmental and social concerns. There are two examples of this, I wish to illustrate: computer recycling and carbon credits.

Computer recycling laws have begun to be examined in various places (such as the WEEE Directive). The basic premise is that computer manufacturers should have to contribute some money to the government to cover the cost of disposing of the waste that computers eventually become (this is especially pertinent to computers given the short life-cycle of these devices and the hazardous and expensive-to-recycle components they use). Without such laws, the companies have no incentive to pay extra to recycle their products. Let's say that the computer market consists solely of CompX and CompY. If CompX tacks on an additional $100 to the price of their computers, to cover the cost of recycling, and CompY doesn't, CompY's product suddenly become $100 cheaper. Way more people buy a CompY, CompX goes out of business and now the only manufacturer is the one who didn't (and still doesn't) recycle. Therefore, there is no incentive for one company to do such a costly, albeit moral, move. So, the government steps in, mandates that all companies must pay for the actual cost of recycling their product. Therefore, not only does it not give one company an advantage (and thus, a reason not to do it), but it also gives them an incentive to make their products more recyclable, so they have to pay less to the government.

Carbon Credits work to internalise the cost of air pollution. Companies can buy, sell and trade the right to pollute a certain amount. Therefore, if a company wishes to use a process that results in a lot of air pollution, it costs them a lot of money. Furthermore, if many companies wish to do so, it costs even more, since the high demand for these credits will cause the price to skyrocket. Carbon credits therefore, make the companies look for ways to reduce their greenhouse-gas emissions. Not because it's good for the environment per se, but because it will save them money, by not needing to buy carbon credits. The carbon credits simply provide an incentive for the companies to care about the external cost.

What's the common theme here, and how does it relate to relationships, as I mentioned in the opening paragraph of this tirade? Well, the common theme is incentives. In an ideal world, companies would do the right thing, and consumers would buy only from comapnies that did the right thing. Neither of these are true, and to posit otherwise is folly. Ultimately, the overwhelming majority of people will do what's in their best interests (read: cheaper, easier and more successful). If you wish to affect change, you have to provide incentives, not moralising and wishing things would be better. Economics is (as is science, though that's another rant for another day) fundamentally amoral. Note that this is different from being immoral. Immoral means that you make decisions counter to morality; amoral means you make decisions regardless of morality. In the context of economics, economic theory does not make value judgements vis-a-vis what is intrincially "right" or "wrong". Rather, it observes human nature and says that most people will generally make decisions that are the best for them and that it is therefore personal incentives that are the most effective agents of change.

So... relationships. The second thing that triggered this rant was the following little note, posted to a female friend's facebook blog:
Find a guy, who calls you beautiful instead of hot.
Who calls you back when you hang up on him.
Who will stay awake just to watch you sleep.
Wait for the guy who kisses your forehead.
Who wants to show you off to the world when you are in your sweats.
Who holds your hand in front of his friends.
Wait for the one who is constantly reminding you of how much he cares about you and how lucky he is to have you.
Wait for the one who turns to his friends and says, "...that's her."

yes yes...i know...impossible but maybe...just maybe....awww...who day....maybe...
I've heard this refrain, or others shockingly similar, many many times. And it infuriates me. Because, aside from being slightly whiny, it completely misconstrues the way the world works, and lays blame in entirely the wrong place. Because it's not the male gender's fault that so many guys are jerks, and treat women badly; I blame women for this. Because you have failed, time and again to provide incentives. Because the guy described above, that wonderful, ethereal, impossible-to-find guy? He exists. He exists in greater numbers than you realise, and he's generally single. Because every girl who says she wants what's described above dates jerks. Not because they're jerks, but because they're confident, strong, exciting and charismatic. All excellent qualities, but all too often paired with boorishness, misogyny and manipulativeness. Now, I understand that in many cases, such guys hide it well. But in as many, or more, cases, it's painfully obvious. And yet these guys still get girls. Over and over, far outstripping the success of the guys described in the wistful passage above. So, the shitty guys proliferate.

And why shouldn't they? They've been given the keys to the castle, the ultimate incentive. Whether they merely want sex or whether they want actual dating, the guys I describe as "jerks" (and I understand the archetypical nice guy/jerk dichotomy is oversimplified) get what they want. And women are baffed. It's not even limited to complete jerks-I've seen intelligent, clear-thinking, attractive, sane women go out with guys with whom they have nothing in common, with whom they cannot even carry on the simplest of conversations, and guys whom they do not trust. These same women are them baffled as to why they are so unsuccessful with men, and tend to conclude, banally, that "all men are jerks". WRONG. Many many are jerks. And you've just rewarded them for being so. You have provided every incentive for them to continue being jerks, because it brings them unprecedented success. You have completely failed to internalise the cost of being a jerk, and have inexplicably expected them to change their ways independent of any push to do so. It. Won't. Happen.

The solution is simple: if you just want sex, fine. Hook up with the jerks, leave them when you get bored, and move on. But if you want more, if you want what my quoted passage describes, don't settle. Don't settle for the guy who treats you like crap; ignore the guy who never calls or won't introduce you to his friends. Because all you're doing is encouraging the development and broader spreading of those exact characteristics you abhor. If you dig deep and truly do want a decent guy, then think about the guys you've overlooked. Because somewhere in that mix is a guy who will actually treat you well; chances are you passed over him years ago for an oafish lout who (shockingly) never turned into the wonderful guy you dream of.

No comments: