The trap of judging political parties using standard incentive frameworks

TL;DR: Standard incentive frameworks optimize for contexts of mediocrity. Anything worth achieving isn't achievable with a low threshold for negative incentives that can deter individual's actions.

Adam Smith once famously said 
"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."
The conventional wisdom is also that people do things they do as per the incentives structured around what they do. This principle is applied to explain people's behaviour and to design systems. If you want a person to get out and sell more books, pay the person per every book that he sells. If you want someone not to do certain task, make sure that the incentives are structured in a way such that the benefits of not doing the task are greater than the benefits of doing it.

We are thus accustomed to fitting everything into this standard framework of incentives. There are two distinctive features of this form of world view.

One, the incentives are perceived as instruments, external to the person, which can be used to carefully mend the actions of person of a person towards a desired direction. These instruments are considered to be sole factors driving individual's action. It doesn't consider the inherent desires and motivation of the person, which are independent of the external instruments of incentives. It doesn't expect people to use their motivation to overcome the constraints.

Two, strength of external instruments is placed above responsibility in case of non-action. If people in a system don't perform duties, the lack of incentives is cited as the constraint thereby placing emphasis over the external instruments. The individual isn't expected The external instruments are used as justification for non-action. Strength of external instruments triumph over responsibility in root cause analysis.

Understandably these presumptions are useful in most of the everyday cases. The typical case of an employee in a company, working only for a salary and is least bothered about his actions or in actions, as long as they don't threaten his employment. Thus, such standard incentive frameworks optimize for situations of mediocrity where individuals put their self interest over the effects of their action or inaction. Standard incentive frameworks thus try to align both self-interest and desired outcome using a range of external instruments called incentives.

Now, think about this. When was anything worth achieving made possible with individuals or organizations which function as per such standard incentive frameworks? For instance, consider Elon Musk. If standard incentive frameworks were to be applied, considering the seemingly insurmountable challenges that he faces, he should have not taken up ambitious tasks that he is working on. Consider Mahatma Gandhi. What incentives did he have to bear the pain to lead a struggle for decades to get independence to India? 

The stories behind achieving such challenging tasks go against the two basic premises of  the standard incentive frameworks discussed above. One, the action is not propelled by external instruments of incentives but due to a strong will and internal desire, independent of external instruments.  Two, responsibility lies with the person and external instruments aren't acceptable reasons for non-performance.

Thus, it is to be noted that great deeds are achieved by applying standard incentive frameworks.

Where do governments' functions fit in?

One may note that 'difficulty of the task' and 'relationship of person performing the task' indicate the usefulness of applying standard incentive framework. Not so challenging tasks that are to be performed by people who aren't supposed to be responsible can be optimized using standard incentive framework. Challenging tasks, on the other hand, require inherent desire to perform the task and ownership.

Coming to the governments, their functions stand amongst the most challenging. At the same time, governments aren't regular employees in a company who can shrug off responsibility. This puts  the critical governments' functions in the latter category that requires inherent desire to propel the actions and not external instruments and demonstrating responsibility without using external instruments as justifications. However, unfortunately, the government's actions and inaction are incorrectly categorized into the former category and standard incentive frameworks are used to analyze its action and inaction. The political economy theories outlining the constraints involved in decision making are used to justify government's inaction.

As one can see, this is obviously problematic. The external instruments are a matter of perception. One can use standard incentive framework to justify any inaction by suitably listing endless constraints involved. We forget that it doesn't absolve the government of the responsibility to overcome those. Governments aren't supposed to be driven by these constraints but by inherent desire to overcome these and march in the desired direction.

Dani Rodrik outlines good examples on similar lines in his paper "When ideas trump interests".
"During the 1970s, China was a centrally‐planned economy in which administered prices were a mechanism of generating rents and transfers to groups favored by the Communist regime. Price liberalization and the removal of obligatory grain deliveries to the state would generate significant efficiency gains in the countryside, where the bulk of the population lived. But it would come at the expense of depriving the state of its tax base, and urban workers of their cheap rations of food. By the standards of basic political economy models, these strong redistributive consequences provide an adequate explanation of why efficiency‐enhancing reforms were resisted by the Chinese leadership. 
But the Chinese government was able to devise a short‐cut..................
The point being  constraints are always present and at the same time, the solutions exist too. If ever we want to force governments to look for such solutions, we shouldn't let them settle in a comfortable equilibrium where we justify their inaction by subjecting them to standard incentive framework.

It is also important to note that addressing issues like enhancing the quality of education don't have clear-cut checklist of solutions. The nature of the problem is not as that where huge gains can be achieved by just pushing the governments once for a brief moment to do certain tasks, the way one could imagine about the 91 reforms, where a government with its few decisions for brief moment yielded drastic change. One must realize that it's not the case with issues like education. There are no pre-defined solutions. Solutions have to be evolved with constant iteration with a singleminded focus on the goal. It involves addressing many foreseen and unforeseen challenges in the journey. It can't be achieved with the mindset of standard incentive framework, where the expectation is that governments will only work till there is an incentive. If that's the case, even if there is an incentive in terms of public pressure, governments will either do something for showcase while not addressing the roots of the problem or governments can give up midway as new challenges emerge and the pressure diffuses. It isn't practically feasible to hold the government accountable on every single day to prevent that from happening.

In this context, political economy models outlining constraints for government's action often do more harm than good by giving governments armour to justify their inaction thereby making them settle in a comfortable yet unproductive equilibrium.

The next time, when someone argues that governments don't have incentive to improve education because of lack of incentives (it isn't an electoral issue etc.), please do remember the above. If governments behave like individuals without responsibility, deriving motivation only from external instruments, they better not be in government. After all, leadership is about leading people; it's not about moving ahead and standing in front of a group of people thereby claiming leadership. Of course, then complaining he (leader) isn't moving because people aren't moving.

2 comments:

  1. I consider government in a democracy to be similar to any other market albeit with some differences - each "customer" purchases the service once every five years and the party with the maximum market share wins and provides services for the duration of 5 years. There are political entrepreneurs who are visionary (similar to Mahatma Gandhi and Elon Musk) and have the passion to disrupt the market. But the vast majority as not visionary (similar to most markets), or at least not as visionary.
    With the "first past the post system" of democracy in India, we have high barriers to entry for new entrepreneurs to emerge in politics. This is one reason by even ineffective and inefficient parties remain around for decades after they have lost all passion and run out of ideas. Maybe the debate can be around allowing new, disruptive political entrepreneurs to emerge more regularly by lowering entry barriers in electoral politics.

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  2. Disagree. The point of this post was precisely against analogies to market where political parties are "expected" to behave as per voters' demands.

    Politics is not an easy task. Entry barriers *will* be high regardless. The problem is more about whether these entry barriers are fair. Even after assuming that *unfair* entry barriers are removed, the remaining barriers will still be *high*. This is no excuse for not being pro-active.

    Thinking that change is the job of disruptors is absolving the existing parties of their responsibility and giving them a convenient bail out. We should change our narrative to working on *education*, *health* etc. as absolute metrics that are to be expected from every party, regardless of demands from people.

    How many of those decisions that governments take are being actively demanded by people? For instance, bankruptcy law etc? None. Were all the reforms by governments done so because of demands from people? No. Governments feel responsible at the end of the day for their job, chalk out vision of what's needed and act accordingly without waiting for everything to be first demanded by people. If that's the expectation that we are setting to governments, it's hard to progress.

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