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♪ [music] ♪
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- [Tyler] Now let's say you could
only teach two words to everyone.
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What would the two words be?
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My candidate would be
"incentives matter."
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If there could only be one lesson
from an economics class,
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a single takeaway --
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I can't boil it down to one word.
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Even in German there's not one word
for "incentives matter."
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I hope they coin one.
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[audience laughter]
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But to train or teach students
throughout life, in all areas,
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to keep on seeing whether
our economic knowledge in those areas
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is certain or uncertain --
incentives are playing a role.
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So just very simple examples.
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In a number of cities,
there are proposals
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to ban tipping
of waiters and waitresses.
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There have since then
been studies that show
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that if tipping is banned,
the quality of service goes down.
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Of course this is,
to us, common sense.
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It has more or less
been verified empirically.
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If the waiter or waitress
does not get more
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by bringing you your plate
when you need it
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because you leave a larger tip,
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they're not going to be
as keen to do it.
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It doesn't mean that
all people care about is money.
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It does mean that incentives matter.
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You look at these
Silicon Valley companies.
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That's my trip after this.
I'm going out there.
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Like Google and Facebook --
they've all gone public now,
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the famous ones.
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It was really striking.
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Right after they go public,
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there is a spike in the divorce rate
for their employees.
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[audience chuckles]
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Now why is that?
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Is it that being
in a publically run company
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is more stressful?
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Or somehow causes people
to spend more time away from home?
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I don't know.
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But there's a pretty simple
economic reason --
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that once it's
a publicly traded company
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people can sell
their shares of stock, right?
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And if there's a divorce settlement,
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the partner who has more money
can pay off the other,
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and they can reach an arrangement,
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whereas if you're holding
relatively illiquid shares,
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or you're not allowed
to sell them so rapidly,
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and you have to reach
a divorce settlement,
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it's much harder to do.
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Maybe you have to borrow to do it.
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People are reluctant to do that,
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so they don't get divorced
until the company goes public.
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You would think,
"My goodness! That's cruel
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or cold-hearted, or calculating,
or Machiavellian!"
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Morally, you may approve
or not approve,
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but the point still remains --
incentives matter.
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In the United States right now,
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one big problem
we have with incentives
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is that when people
at lower income groups
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climb the income ladder
they lose a lot of their benefits.
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That is like
an implicit tax rate on them.
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So, in some estimates --
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again, it depends
on your circumstance --
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but if you go from being poor
to being, say, middle class,
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your marginal tax rate might be,
say, 50 to 70% in some cases.
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It's probably at least 40%.
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So if you ask who are
the people in this country
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who face the highest tax rates?
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It's not generally the rich people.
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It's not even
Warren Buffett's secretary.
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Very often, when you understand
incentives properly,
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it is the poor people.
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When I was in Montreal,
one thing that struck me
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is there's
relatively little gentrification.
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Rents are quite low,
by most American standards,
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for a city that large.
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And when you walk around
it was striking to me
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how many restaurants
are closed for lunch.
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So think of Montreal.
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The city still has a feel
a bit like in the '70s.
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It's not poor,
but it hasn't grown very rapidly.
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It doesn't have a tech sector.
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Investment has been afraid
to go there,
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because of all the talk
of secession.
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So it has a retro feel.
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Rents are much lower.
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So you have a restaurant,
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you don't necessarily
have to open it for lunch
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to stay in business.
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And if you open it for lunch
you work your staff more hours,
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you bump up
against labor regulations.
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Again, incentives matter,
incentives matter,
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incentives matter.
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It's true in the non-profit sector.
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It is true in government.
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It is true in every country
of the world.
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Of course incentives mattering
does not have to be a good thing.
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It does help us get
many good things done, right?
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We have property rights.
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Property rights help people
who create value
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to internalize value.
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That's another incentive.
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So I don't really
teach property rights
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as a separate category.
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To me they're an example
of incentives.
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They're part of the carrot.
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They're how you get
to eat the carrot.
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There's one story I read recently --
it's kind of scary, actually.
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There was a fellow,
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and he bought
an old tooth of John Lennon.
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Yes, John Lennon the Beatle.
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He bought the tooth at auction.
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And now he's putting ads
all around the internet saying,
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"Do you think you might be
an unrecognized descendant
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of John Lennon?
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I have his DNA.
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Contact me.
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We will test you,
and we can bring a lawsuit."
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In my opinion --
It's now a personal opinion.
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I'm not speaking as an economist --
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but that's a negative incentive.
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So a lot of the troubles
we have in the world
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also spring from incentives.
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♪ [music] ♪
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- [Narrator] Click here
to watch the next episode
-
of "Tyler Cowen's
9 Big Ideas of Economics."
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