Incentivizing an Ethical Economics

Yves here. Believe it or not, incentivizing the well-off works.

By Simon Szreter, professor of history and public policy at Cambridge University, fellow of St John’s College and co-founder and editor of www.historyandpolicy.org., Hilary Cooper, an economic consultant, researcher. former government economist and senior policymaker, and Ben Szreter, hief executive of a community-based charity. Together they are joint winners of the IPPR Economics Prize. Originally published at openDemocracy

An ethical economic system – where everyone has a stake in future well-being – is essential to address the problems facing the economy and society. To achieve this, policy makers should look to Britain’s history for inspiration.

There are two clear periods in our past when everyone in society contributed to the population’s basic social security, education and health needs because everybody could see the strong and tangible benefits that resulted from it.

Most obviously, this happened in the postwar decades of the new welfare state as hitherto unseen levels of investment in the population’s health and education fired up productivity growth so that it reached a historic peak of 2.4% per annum from 1950-1973, three times higher than the entire period 1871-1937.

Far less well-known, this also happened throughout the two centuries which led to the industrial revolution. From 1601 onwards England had the world’s first ever universal social security system in the form of Elizabeth I’s Poor Laws. This transformed the choices available to ordinary people, providing a safety net in times of unemployment and guaranteeing support for orphans, widows, the sick and the elderly. People could take risks, such as moving to towns for work, knowing that they would be supported if this didn’t work out and that they were no longer tied to staying put to support their parents.

All of this was good for the economy: it led to the elimination of famine in England over 150 years before the rest of Europe combined with much higher rates of labour mobility and urbanisation.

The simultaneous 1601 Charitable Uses Act was a masterstroke of statecraft. The wealthy were now mandated to support the poor, incentivizing them to choose to do so instead by gaining kudos for their good works: a flow of charitable almshouses, schools, apprenticeships and even hospitals ensued. The wealthy could clearly see that such initiatives, if effective, could reduce their future liabilities to support the destitute.

The success of these past periods of growth demonstrates ‘incentivized altruism’ – encouraging the prosperous to provide the resources for all to participate in economic growth because they can see they will also gain from it. If we were to apply this idea to contemporary Britain, what would it look like? If it was a growth promoter in the past, how could we design it to be a growth promoter now?

Our winning submission to the IPPR Economics Prize proposed creating two altruistic contracts, one which focuses on investment for future growth and one which focuses on providing resources to support an ageing population. They are altruistic because they require businesses and the people with the most wealth to contribute most. They are incentivized – and this is the key innovation – because the people who contribute the funding are given clear rewards that are set out from the start.

The first contract raises the level of corporation tax to fund a transformational programme of investment in greening the economy and reversing the education, skills and health inequalities that blight so many communities. Businesses then win back reductions in corporation tax every two years provided new national targets on growth, productivity, decarbonisation, skills and inequality are met. The harder businesses work to deliver on this, the greater the reward.

Alongside this, there should be a higher rate of income tax at the point at which people earn more than ten times the average salary – with the money raised used to alleviate poverty. As the pay gap between high earners and the rest of the population is reduced fewer people will pay the higher tax.

The second contract is an intergenerational one that offers free care in old age, based on need, with long-term funding guaranteed through a ring-fenced citizens’ wealth fund. New taxes on wealth and inheritance will be needed to support the fund, but the payback – incentive – is that this liberates the older generation from the lottery of losing everything to pay for care. It also frees younger generations from unsustainable future care and tax burdens so that they can contribute productively to our economic growth.

Ethical economics, in which welfare is reconceptualised as a growth promoter, is not only important to restore our economic health. It is also fundamental to a genuine democracy – one in which everyone shares in economic success because they acquire the skills and support to do so. It may sound too good to be true, but the good news is that we’ve already achieved this mix twice in Britain’s history, each time with remarkably positive economic outcomes.

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12 comments

  1. Chauncey Gardiner

    Thank you for this post. According to the US Bureau of Labor Statistics, US Labor Productivity growth increased at an annualized 3.40% rate for the first quarter of 2019, compared to 1.30% in Q4-2018 and 0.70% last year. This was higher than the long term average of 2.18%.

    Year-on-year, productivity rose 2.4 percent, which was the most since the third quarter of 2010, reflecting a 3.9 percent increase in output and a 1.5 percent increase in hours worked.

    Through a variety of means, the wealthiest segment of our society have been capturing most of the productivity gains for themselves for years. So let’s hope these suggested incentives lead to policy changes that bear fruit for all Americans.

    Reply
  2. inode_buddha

    It’s a pity that those who most need to read this, in the USA, probably will never hear of it. They certainly don’t learn from history, or the last 40 years of economic warfare would never have happened. I’m old enough to remember when color TV’s were made in USA by people who could afford to live decently on their wage. You would think, (carrot-and-stick), that not having a bloody revolution would be incentive enough.

    Reply
  3. James E Keenan

    From 1601 onwards England had the world’s first ever universal social security system in the form of Elizabeth I’s Poor Laws. This transformed the choices available to ordinary people, providing a safety net in times of unemployment and guaranteeing support for orphans, widows, the sick and the elderly.

    Well, to say the least, that’s startlingly different from my recollection of what the Poor Laws were about.

    Reply
    1. Synoia

      Your comment is also true for me. I need to go and do some more reading.

      Didn’t the enclosures Acts feature during this period, as well as the English Civil War?

      Reply
      1. readerOfTeaLeaves

        This was also a period when Europeans (esp. Brits, Scots) began to colonize all around the globe, but particularly N America, which let some of the population steam out of the European kettle.

        Reply
  4. JEHR

    This proposal presupposes that the wealthy have empathy for others who do not have the same means as they do. In my opinion, it would be harder to teach the wealthy billionaires how to feel empathy towards those who are less well off than to thread a camel through the eye of a needle. (Sorry about the mis-quotation.)

    Reply
    1. Dick Swenson

      The issue of ethics is a major one. I also think of the ethics of automation, the ethics of programmers such as those wo helped VW build a cheating mechanism, the ethics of those who build mechanisms for Facebook, Google, etc. to help advertisers, and so on. I think that we are a lost civilization.

      Reply
  5. TheCatSaid

    While I can appreciate to some extent the value of providing “health care” to the elderly, if it were me I’d want it to be health care on my terms–not health insurance (as it often turns out to be), and not limited to “consensus medically approved” approaches to healthcare. While some prefer conventional medical approaches–pharmaceuticals, western medical approach to “diagnosis” and “treatment”, etc.–others do not.

    We should be allowed to choose for ourselves and vote with our feet. I’ve too much experience with numerous alternative approaches to want to limit myself to conventional offerings in most situations other than a serious accident. The conventional medical tool chest is far too limited from my perspective, and often does more harm than good.

    This fundamental aspect of healthcare choice gets scant discussion time and no serious consideration when it comes to policy deliberations of policy. The MDs rule the game.

    Reply
    1. Dick Swenson

      I am confused by this post. First, why don’t we use the phrase “medical care?” Nobody except my physical therapis provides me with anything resembling “health” care.

      Second what has this to do with economic ethics?

      Thirdly, insurance is simply a payment mechanism for medical care. Nothing prevents anyone from seeking that care in whatever form wanted. However, most forms of insurance may object if you claim that a visit to Esalen to drop acid as medical care.

      Reply
      1. TheCatSaid

        Medical care vs health care – I’ve heard both terms used interchangeably. In either case, is what is delivered always “care”?

        Having a vast system into which we are expected or required to pay, to provide services that in many cases cause harm is indeed related to economic ethics. Look up “iatrogenic” and statistics for the disease, condition or pharmaceutical of your choice. There have been many articles on NC about issues with health care and the insurance industry. Many US bankruptcies are due to medical bills. This is economic ethics.

        Insurance is more than “simply a payment mechanism for medical care”. As numerous articles on NC have detailed, insurance is a mechanism for delaying or denying care (because profits!), in addition to acting as a gatekeeper for what qualifies as “care”.

        Strawman = suggesting I might personally consider “a visit to Esalen to drop acid” among my personal medical care choices.

        Reply
  6. nihil obstet

    Put in a tax that is reduced when certain goals are met and the level is reviewed every two years? Sounds like a tax lawyer/auditor full employment program. I don’t know that I’ve ever seen the enforcement of conditions in programs dependent on incentives. Economic development incentives are virtually never enforced when the company fails to meet the hiring or wage or benefit levels on which the incentive was based.

    The arguments for better national health care, higher wages, and good education are already there. I’m not sure what this article is about.

    Reply
  7. Jack Parsons

    So, for example, abolishing private criminal practice and forcing everyone to use a Public Defender would incentivize the rich to fund Public Defenders?

    Reply

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