How Good and Gain Can Meet
A FEW weeks ago, Brian Shaw signed a contract to play basketball in Italy for a million dollars a year. The news was a jolt in Boston, where Shaw was a promising - though not exceptional - young player for the hometown Celtics. The implications, though, were much broader.
Whether the move was in Shaw's best interests, is open to question. That his agent made a killing is beyond dispute: $100,000 off the top and a nice percentage of the rest, the Boston press reported.
Acquisitive sports agents are not the most pressing problem that besets the land. But they point to one that is rising on the list: the way people can reap enormous rewards for doing things that are wasteful, if not downright destructive.
The corporate takeover wars, for example, that are bringing turmoil and disruption to American industry. The driving force behind these is often an investment banker who stands to get a percentage of the deal.
Likewise, the ridiculous awards in ``palimony'' suits and other exotic new legal maneuvers. These have less to do with actual harms suffered by plaintiffs, than with the way their lawyers get a percentage.
Messed-up incentives are even a problem in advertising. Tony Schwartz, the maverick adman, wrote last year that the ``advertising business generally rewards failure and punishes success.''
``Since the ad agencies are paid a percentage of their media billing, there is no incentive to produce more efficient advertising that might reduce costs.''
The list goes on and on. If the challenge facing socialist countries is to provide incentives to produce, market-driven countries like the United States face a more advanced dilemma: how to channel economic energies in socially useful directions.
Even the Wall Street Journal, that bastion of free-market fundamentalism, has acknowledged this somewhat. In England, Margaret Thatcher has proposed ``deregulating'' lawyers by letting them charge contingency fees, like US lawyers. A Journal editorial writer observed that the way to promote prosperity is not to set profit-maximizing lawyers loose upon the land.
A large ship turns a little at a time, and so with economic incentives. There have been changes in recent years that point to much larger possibilities.
In the business realm, some corporations are now paying ad agencies in part according to results at the cash register. Efficient advertising is not always to be desired - cigarette and alcohol ads, for example. But the principle of pay-for-performance should obtain more broadly. Stockbrokers, for example, get commissions simply for making trades. Shouldn't their pay be based, at least in part, on how those trades pan out?
The bigger challenge is to encourage behavior that goes beyond economics. In college sports, Mississippi State and other schools have started paying their coaches bonuses based on the number of athletes that graduate. Why not apply this principle more widely? If the nation paid a bonus of, say, $10,000 to every impoverished teenager who graduated from high school and stayed off drugs, the effect in the ghettos would be electric. We could dispense with legions of social workers and other costs as well.
Some politicians cling to office so they can qualify for a pension. Sam Smith, editor of the Progressive Review, suggests ``reverse vesting.'' Let them qualify after one term, with benefits diminishing after a certain tenure.
The tax laws are full of wrong-headed incentives. Accelerated depreciation of real estate encourages owners to sell buildings once the write-offs are used up. Instead, we should reward owners for investing over the long haul. If mortgages were paid off once in a while, then rents actually could go down.
Virtue will not always be convenient and probably shouldn't be. When economists imagine a free-market utopia with economic incentives for every right action, they are indulging in fantasy.
Yet the broad stream of human behavior does flow, at present, down the channel of self-interest. So we need to think of ways to make this channel more benign.