Posted tagged ‘Self Interest’

Incentives Matter

May 29, 2014

File:VA hospital waco 2009.jpg

The recent revelations about VA hospitals shouldn’t surprise anyone. This problem isn’t peculiar to the VA, it’s systemic in all bureaucracies. The track record of central planning is less than stellar, whether It’s government intervention in a  free market economy like the U.S., or central planning in a communist economy like the former Soviet Union. Both systems create bureaucracies that have their own incentives under which the individuals inside these bureaucracies make decisions. We can’t look at bureaucracies from the stand point of how a business operates in the free market, because the incentive structure is totally different. We might think that these bureaucrats are not acting the way we would act, if we were in their position Don’t be too quick to judge, these bureaucrats are acting exactly how they should act if you consider the incentives they operate under. In a free market, prices ration scarce goods and services, and also pass knowledge to individuals and businesses. The incentives and constraints transmitted through the market, are totally different from the incentives and constraints transmitted to bureaucracies by politicians and administrators. In the market the incentive is to provide what the consumer wants which means you first must give before you receive. A bureaucracy is a monopoly on a particular service, which means the person using the service is an annoyance rather than someone who has to be pleased. In a free market the consumer can go somewhere else if he is not satisfied. At the DMV the consumer has no other place to go to get the service. In the case of the U.S. Postal Service, consumers are choosing better options for communicating and shipping packages, and the U.S. Post Office doesn’t care because it’s getting propped up by yours and my tax dollars.


Firing Eric Shinseki and replacing him with a better “angel” won’t solve the problem, {if the problem is making sure the veterans are being taken care of}, because the incentive structure will remain the same. If the problem is trying to find political cover, than firing him will help in solve the “political” problem, at the expense of veterans lives. Watch and see if the administration fires Shinseki and then claims the problem is being take care of. Remember Guantanamo Bay detention center in Cuba is still open today even though the President said during and after the campaign in 08, that he was going to close it, so we know political talk and actions are responses to political incentives.


Here are a few examples of Governments creating incentives that individuals respond to.

I will quote from Thomas Sowell’s book Basic Ecomomics. “During the Stalin era in the Soviet Union, there was a severe shortage of mining equipment, but the manager of an enterprise producing such machines kept them in storage after they were produced, rather than sending them out to the mines. The reason was that the official orders called for these machines to be painted with red, oil-resistant paint and the producer had on hand only green, oil-resistant paint and red varnish that was not oil-resistant. Disobeying official orders in any respect was a serious offense and “I don’t want to get eight years,” the manager said. When the manager appealed to a higher official to use the green, oil-resistant paint, this official’s reaction was “Well, I don’t want to get eight years either.” ….None of these people were behaving irrationally. They were responding quite rationally to the incentives and constraints of the system in which they worked. “

Remember the Deepwater Horizen oil drilling rig that exploded and spilled oil into the Gulf of Mexico in 2010. Well here is what you need to know about the incentives that government created to push oil drilling farther out in the gulf. I will quote from this article Bashing BP at “In 1995, President Bill Clinton signed into law the Deepwater Royalty Relief Act (DWRRA), which was “intended to encourage natural-gas and oil development in the Gulf of Mexico in waters at least 200 meters (656 feet) deep by offering royalty relief on qualifying natural gas and oil lease sales.” This act has since expired, but there remain continued incentives for drilling in deep water.”

“In other words, the government specifically passed laws that gave the oil companies incentives to drill far offshore — that is, in deeper water where risk is presumably higher. In addition to the higher risk of accidents, the cost of solving any problems are necessarily greater in five thousand feet of water than in, say, 250 feet of water…..Who could blame a company for trying to achieve a minimum relief volume, which would guarantee billions of dollars in royalty-free sales of petroleum and natural gas?”

“Additionally, a liability cap of $75 million for the oil companies was put in place by law. This is an incredible use of the control of the political means to make favorable dealings for oneself in the economy.[1] In fact, it is the very definition of corporatism: First, individuals within a company work to get laws passed to reward companies for taking risks previously deemed unworthy of the time, energy, and capital expenditures. Then, those same individuals within the company work to get other laws passed to limit liability when things go wrong.”


The VA is a totally Government run healthcare system. Considering it treats veterans, it is relatively small compared to the amount of people Obamacare will affect. Since Government can’t manage the VA’s small sample size; how is it going to handle the amount of people in Obamacare? The short answer is, it can’t, and here are the two main reasons why.

The first is you can’t legislate abundance into existence. The first rule of economics is scarcity. We live in a world governed by scarcity and health care is not immune from this rule, no matter how much politicians want to legislate it out of existence. Scarcity means that healthcare has to be rationed in one of three ways, by prices in a free market, by fighting each other for the scarce good in a lawless society, or by an administrator or a board in a government-run system. If healthcare existed in abundance, it would not be an economic good and therefore would not have to be economised.

This reality of scarcity leads to very different incentives and constraints being created in a free market, a hampered market, or in a centrally planned socialist economy. People are self-interested individuals and will respond to the incentives and constraints created by each economic system. The consumer is sovereign in a free market system, and bureaucrats and their rules are sovereign in a centrally planned system. Think of the 2500 pages of rules in the Obamacare bill, and the 300 plus million individual citizens it is supposed to cover and ask yourself; will it work? If the end sought is to provide quality healthcare the answer is no. If the end sought is to prop up and grow government. The answer is yes. Always look for the incentives and ask; how will a self interested person respond?

Related ArticleCentral Planners Don’t See The Consequences Of Their Actions. Or Do They? at

Related ArticleHuman Action Reveals The Reality About Political Decisions, by










Why Socialism Won’t Work? Human Nature.

March 28, 2013
From each according to his ability, to each ac...

From each according to his ability, to each according to his need (Photo credit: Wikipedia)

Socialism is defined as Government control of the means of production, instead of private ownership, (property rights). Socialism goes against human nature as you can read about in this article, “Does Socialism Work? A Classroom Experiment”, by Dan Mitchell at Human beings are self-interested and will work harder for their own benefit than they’ll work for the benefit of others. The human nature of a child born in today’s world hasn’t changed, it is the same as a child born in prehistoric times. A child has to be taught to share, selfishness is natural to him, and even when he becomes a civilized member of society, self-interest is still his default position. In the article mentioned above, (more…)