Economists Are So Cute (but so are badgers )

Economists would be so cute in their naiveté if they weren't so destructive. The other day I was reading an article (oddly, on umpires and the strike zone) and I ran across this quote "As economist Edward Lazear has shown, organizations become more productive when a job well done is rewarded with extra money and dumb mistakes are punished." The referenced article is "Incentive Contracts" http://www.nber.org/papers/w1917. The paper is from 1986. Normally I would not bother with something so old, but it did get a reference from the recent article.

Actually, Lazear does not show much of anything, but he does survey various incentive schemes. There are a variety of equations, including a partial differential equation based on nonsense, that are not used for anything other than to give the article a patina of respectability.

Here is my summary. Workers are lazy and in order to get them to do anything we have to provide proper incentives. The goal of the incentives is to increase worker effort. We can base incentives on effort or on productivity. Oftentimes it is difficult to get information on effort and productivity, so we may have to adjust labor contracts for the best available information. Oh, by the way, we also have to think about quality.

The general notion of incentive is quickly replaced by money and the article only discusses wages. The reduction of "incentive" to "money" is a common simplification in economics. Money has the nice quality that it is easily counted and fits nicely in equations. Most people work to support themselves and their family, but over two thirds of workers also work to "Feel useful/productive". http://www.pewsocialtrends.org/2009/09/03/iii-attitudes-toward-work/

The main payment schemes discussed are for sharecroppers, piece rate workers, and hourly wage workers. There is also mention of the value of pitting workers against each other so the most productive workers are disproportionally rewarded.

It is demonstrably true that compensation and incentives are important in the work place. The notions in the article are worth thinking about, but not within the framework presented. The intellectual framework for the pretended quantitative notions in the article is based on demonstrably false premises. The article include such gems as:

"Incentive contracts arise because individual (sic) love leisure. In order to
induce them to forgo some leisure, or put alternatively, to put forth efort,
some form of compensation must be ofered (sic)" 

This statement is true only when the work or the workplace involved is dehumanizing. Habitat for Humanity and other non-profit groups that rely on volunteers are simple counterexamples. Perhaps we should forgive the academic who thinks about work in terms of factory piece work and sharecroppers for simplifying the human condition to a form of slavery where monetary carrots and sticks are the only way to motivate.

Another quote gives the rosy view that the workers inevitably get the rewards of increased  output.

"Thus, (2) merely says that output, Q, must be paid entirely to the worker otherwise another firm could steal the worker away by paying more." 

Beware of arguments based on this type of logical sounding statement that bears no resemblance to reality. Simple evidence is the stagnation of wages over the past couple decades despite large increases in productivity. I did a couple blog posts on productivity. The most relevant one for this context is http://colin-quodlibet.blogspot.com/2010/09/if-we-are-to-believe-productivity.html.

The sad thing is that employers often believe this nonsense and instead of providing a more pleasant and humane workplace, they turn it into an unpleasant, metrics driven, competitive hell-hole.