Sowell Continued: Incentives Versus Dispositions

Continuing my previous commentary on A Conflict of Visions, the author Thomas Sowell explains that one of the key differentiators between the “constrained” and the “unconstrained” view of politics is that the former relies on “seeking the good through incentives” whereas the latter does so “by changing the dispositions of human beings.”

The constrained vision accepts that self-interest is at work to some degree in all our choices—we achieve the collective good primarily on the basis of rewards (or punishments). A classic example of this is the profit motive. Goods and services that require more time, skill or resources to produce will consequently cost more, and accrue more profit to the provider. It is the difference between achieving “desired results” through deliberate social planning (unconstrained method) and striving for them in ways that are “conducive” to the desired results (constrained method) but without the expectation of always achieving them, since we live in a highly imperfect universe.

Essential to understanding social relationships in the constrained vision is the idea of “process costs.” This means that every project we undertake involves not only some effort, but that our decisions will reduce the amount of effort that can be expended on other projects or may even impact them adversely. In the unconstrained vision, there is a complete denial of these trade-offs and the need for prudential decision making.

One obvious area of unconstrained economic planning is income distribution and the expropriating of funds from the private sector to finance the public sector. For example, there is the case of a major U.S. pharmaceutical firm buying out a U.K. company in order to restructure and thereby take advantage of Britain’s lower corporate tax rate. In retaliation, the U.S. government is looking to “crack down” on companies that reincorporate overseas. This begs the question as to why we have such high corporate tax rates in the first place.

For the unconstrained thinker, corporations and executives should simply hand over more of their money without question and without passing increased costs on to the consumer. For the constrained individual, it is natural that most people will seek to retain as much wealth as they can. Knowing this, it is arguably better to lower tax rates since these will result in a lower cost of living (and thus a higher standard of living) even for those of us who are not rich business executives. On the other hand, the unconstrained model, while deliberately aiming at economic “equality” or “fairness,” actually results in less wealth for everyone. It is classic Adam Smith example of “unintended consequences.”

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