One thing we've learned in Macroeconomics is that incentives matter and our economy is contingent on the relationship between demand and supply. The concept of incentives playing a role in economics was fleshed out by the economist Adam Smith by using the analogy of the baker and the butcher, saying that the reason they make their services available to the buyer isn't out of their goodwill; rather, it's for their self-interest in accumulating wealth for themselves. The customer needs the bread or the meat from them in order to have food for their survival and the producer needs their money so that they can purchase food or other goods and services they need. In sum, when interests are properly aligned, they yield a desired result for both parties. Additionally, incentives act as a guide in determining our actions. One such example is why people vote. Even though voter turnout is at an all-time low, the incentives to vote are based on principle, such as a feeling of fulfillment in being able to express your opinion or even an incentive as small as earning the small blue sticker that says "I Voted!".
top of page
bottom of page
Kiersten,
Incentives are indeed pivotal to the core of an economy. This concept applies not only to Adam Smith's vision of a free market economy, but to command economies as well. In such systems, people possess no individual profit motive and are instead incentivized to be lazy and get by on the work of others, because only the government has a say in how resources and wealth are distributed. The result? Inefficiency and no competition to counteract these conditions. Boiled down, incentives matter, regardless of the economic system.