'Incentives Matter': 6 Valuable Lessons From Economics About Work and Retirement
While critics complain that economists are always at odds with one another, there are plenty of areas of agreement that contain valuable lessons for our working lives and beyond.
George Bernard Shaw is credited with saying that if all economists were laid end to end, they wouldn't reach a conclusion. And President Truman said, "Give me a one-handed economist. All my economists say 'on the one hand…' then 'but on the other hand.'"
If you read the business news, it often seems that Shaw and Truman were right. Some economists seem to always favor one viewpoint, while others favor another. Often, it seems that their opinions line up with their politics.
And yet, there are many areas where there is common thought among economists. One way to find them is to read basic economics textbooks. When professors write these books for students, they want to cover the basic principles that are needed to understand the field.
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While there are many areas of agreement, these are the six that I think are most important.
1. Incentives matter
When it comes to incentives, what can we do to encourage people to take one action over another? How can we attract people to one career over another?
Most of us know it takes years of study and high tuition to become a doctor, lawyer or engineer. But people who go into these fields can look forward to financial and social rewards.
And even if they don't reach the pinnacle of income in their fields, they can benefit from the psychological rewards of their professions. Can there be any greater reward than for a doctor to save a patient's life?
Other people may choose to work in fields that aren't as difficult to enter but can provide an attractive set of workplace benefits.
Look at how employers who are competing for qualified workers bid up salaries, offer health insurance and retirement plans with matching contributions, or provide vacation pay, tuition reimbursement and paid time off.
2. Scarcity is real
Is there scarcity in the world? Can there be any doubt of this? What is one of the scarcest things we have? Time.
None of us has enough time to do all the things we would like. As a result, we have to make trade-offs. Which would we rather do — watch our child's ball game or go fishing? Would we rather take a family vacation to Florida or save money for our children's college education?
And of course, would we rather spend all of our earnings today or save some for retirement? As Mick Jagger, a former student of the London School of Economics, sang, "You can't always get what you want."
3. Division of labor creates efficiency we can all benefit from
In 1776, Adam Smith wrote about the benefits of trade and economies of scale. A worker who specializes can be far more efficient in producing goods and services for himself and others than a worker who tries to do everything himself.
A great example of the division of labor is Smith's description of a pin factory, where he wrote that a single man working alone "could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty.
"But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades …
"I have seen a small manufactory … where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day."
4. Choices involve opportunity costs
- Making a choice to do one thing means not doing another
- Eating at a fine restaurant means not going to a Broadway show that night
- Buying a Ford F-150 now means not taking a weekend getaway later in the year
- Do you like an expensive latte every morning, or will you make a home-brewed cup of coffee?
There is no right choice. Each of us must choose what's important to us.
5. Trade makes us better off
The benefits of trade generally outweigh the costs. No matter what you do, there are things that others can do better and/or cheaper. Or they might not be better than you, but you may be better served by doing something else that gives you a comparative advantage.
If you spend all your time growing corn, you might be able to afford a home, a car or trip. But you can't be a farmer and also build your own home, build your own car or build an airplane.
It makes more sense to do what you do well and let others do what they do well. And this is true whether you trade with your neighbors, people in other cities and states, or other countries.
America is a great supplier of food to the world, even though a small part of our population works in agriculture. Workers in other countries are more efficient in other areas and can build computers and smartphones at a substantially lower cost than we can.
When we trade corn and soybeans for computers and phones, everyone does better.
6. Money has a time value
Would you rather have $10,000 today or in a year? In this case, take the money now. A year from now, what the money buys may and probably will be less.
What if the choice is to take $10,000 today or be paid $12,000 in a year? In this case, the future dollars will be 20% higher. As long as inflation is less than 20%, the value of the future dollars will be greater than the value of the dollars today.
But here we come back to the opportunity cost. Taking the money today may make it possible to buy something that you can enjoy and benefit from now. Would you rather have a new home today or in a year? It depends:
- What kind of home?
- Where?
- How close to friends, relatives and work will it be?
All of these factors come into play.
Because each of us has our own values, economists can't say what a better choice is. They can tell us what some of the trade-offs are.
And that, in the end, is why economists don't always reach conclusions. However, they will tell us that the best answers depend on which hand we consider.
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