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