Sunday, August 12, 2007

Sunday dollars+sense: You want to pay me for that? How money changes things.

You are doing your job well, your boss starts paying a performance bonus and you do it even better.

A job that was unpaid suddenly becomes paid. You’re keener to do it.

A service that used to free becomes expensive. You are less keen to use it.

Every successful economics student knows these statements to be true, and every successful economics student is wrong.

Economists believe these things to be true because they know we are motivated by money. We prefer more of it to less. But it isn’t always true that we prefer money to none at all...

Professor Bruno Frey is a specialist in non-market economics at the University of Zurich. He gave staff from Australia’s Productivity Commission a lesson in reality at a seminar in Melbourne this week.

He asked them to imagine “being invited to your friend’s home for dinner, and she has prepared a wonderful meal. Before you leave, you take out your purse and give your friend an appropriate sum of money”.

He added that virtually nobody in his or her right mind would behave like that, because they would know that paying would end the friendship. Economists were apparent exceptions.

What about a boy on good terms with his parents who willingly mows the lawn? Then his father offers to pay him for cutting it.

Frey observed that the boy might still cut the lawn, but in future he would do it for money rather than for its intrinsic worth. And he would probably no longer be prepared to do any type of housework for free.

He calls this change “crowding out”. One form of motivation (financial) replaces another (intrinsic).

Economists have always recognised intrinsic motivations, but in the past they have thought that financial motivations added to rather than replaced them.

Childcare centres are loath to impose fines on parents who pick up their children late. They know what will happen if they do. A study in Israel a few years back found that introducing a big fine for late collection substantially increased rather than decreased the number of parents arriving late.

As Frey put it: the fine transformed the relationship between parents and the childcare workers from a mostly personal to a more monetary one. Being late no made them guilty.

Frey isn’t saying that money doesn’t matter. He knows it does. But its arrival can change things. It can replace rather than add to some of what’s best about humanity.

Bruno Frey, Motivation Crowding Theory: A New Approach to Behaviour, Productivity Commission Roundtable on Behavioural Economics and Public Policy, Melbourne August 8-9, 2007.

HT: Productivity Commission