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toddle over to the hot stove and touch it, you burn a finger. But if you bring home straight A’s
from school, you get a new bike. If you are spotted picking your nose in class, you get ridiculed.
But if you make the basketball team, you move up the social ladder. If you break curfew, you
get grounded. But if you ace your SAT’s, you get to go to a good college. If you flunk out of law
school, you have to go to work at your father’s insurance company. But if you perform so well
that a rival company comes calling, you become a vice president and no longer have to work for
your father. If you become so excited about your new vice president job that you drive home
at eighty mph, you get pulled over by the police and fined $100. But if you hit your sales
projections and collect a year-end bonus, you not only aren’t worried about the $100 ticket but
can also afford to buy that Viking range you’ve always wanted – and on which your toddler can
now burn her own finger.
An incentive is simply a means of urging people to do more of a good thing and less of a bad
thing. But most incentives don’t come about organically. Someone- an economist or a
politician or a parent-has to invent them. Your three-year-old eats all her vegetables for a
week? She wins a trip to the toy store. A big steelmaker belches too much smoke into the air?
The company is fined for each metric ton of pollutants over the legal limit. Too many
Americans aren’t paying their share of income tax? It was the economist Milton Friedman who
helped come up with a solution to this one: automatic tax withholding from employees’
paychecks (16-17).
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