Friday, March 28, 2008


Incentives are at the heart of my economic theories. And so I was delighted to see at Marginal Revolution that far more successful businessmen than I have been extolling the same point.

Marc Andreessen is (I think) the guy who founded Mosaic and Netscape, the original web browsers. He quotes from Charlie Munger, business partner of Warren Buffett and vice-chairman of Berkshire Hathaway. And he starts his "magnum opus" with the "Reward and Punishment Superresponse Tendency"

I place this tendency first in my discussion because almost everyone thinks he fully recognizes how important incentives and disincentives are in changing cognition and behavior. But this is not often so.

Marc tends to concentrate on the application of these ideas to Silicon Valley microeconomics - the allocation of employee stock options to promising startups. I agree with Munger and suggest they have much wider relevance. From my crazy ideas for judging employee benefits to national taxation strategy, I believe that adjusting market price is the most appropriate tool for controlling demand, but it does not rule out more egalitarian distribution.

For example, the government could increase the marginal cost of driving to reduce congestion and pollution; obviously driving demand is inelastic, so revenue would increase, and there is nothing to say that this additional revenue could not be used to help those most hurt by the higher cost of driving. It's social engineering. I'm not sure that Marginal Revolution would agree with that.

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