Does Money Ruin Everything?

Imagine someone said:

The problem with paying people to make shoes is that then they get all focused on the money instead of the shoes. People who make shoes just because they honestly love making shoes, and who aren’t paid anything at all, make better shoes. Once money gets involved people lie about how good their shoes are, and about which shoes they like how much. But without money involved, everyone is nice and honest and efficient. That’s the problem with capitalism; money ruins everything.

Pretty sad argument, right? Now read Tyler Cowen on betting:

This episode is a good example of what is wrong with betting on ideas. Betting tends to lock people into positions, gets them rooting for one outcome over another, it makes the denouement of the bet about the relative status of the people in question, and it produces a celebratory mindset in the victor. That lowers the quality of dialogue and also introspection, just as political campaigns lower the quality of various ideas — too much emphasis on the candidates and the competition. Bryan, in his post, reaffirms his core intuition that labor markets usually return to normal pretty quickly, at least in the United States. But if you scrutinize the above diagram, as well as the lackluster wage data, that is exactly the premise he should be questioning. (more)

Sure, relative to ideal people who only discuss and think about topics with a full focus on and respect for the truth and their disputants, what could be the advantage of bets? Money will only distract them from studying truth, right?

But just because people don’t bet doesn’t mean they don’t have plenty of other non-truth-oriented incentives and interests. They are often rooting for positions, and celebrating some truths over others, due to these other interests. Bet incentives are at least roughly oriented toward speaking truth; the other incentives, not so much. Don’t let the fictional best be the enemy of the feasible-now good. For real people with all their warts, bets promote truth. But for saints, yeah, maybe not so much.

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  • Robert Koslover

    Regarding your hypothetical shoe philosopher, I fear that a very substantial fraction of the voting public would: (1) conclude that the argument makes perfect sense, and (2) would be clueless as to why you consider it a “pretty sad argument.”

    • Anthony Cooling

      Our original poster, and Tyler, are making the situation dichotomous, when it’s not. Either someone does it for the love of the sport, or their in it for the money? People do all sorts of wonderful things for their intrinsic benefits without pay, but if you pay them, the pay will attract those who do it for the money and who don’t care to give the attention to detail, right up until the point where you pay someone a lot to do it really well. Imagine if we paid people for making model airplanes. Some people do it now for free and they painstakingly work on making them look great. Pay a modest fee, and lots of people will do a haphazard job, and do it for the money. Pay me like I’m a surgeon for the model airplane, and that f*cker will be perfect. I think most people intuitively understand that. How many bands have been ruined once they got the big record deal?

      • Tyler said “tends to”, but such qualifiers *tend to* get lost in the argument.

        ” Pay me like I’m a surgeon for the model airplane, and that f*cker will be perfect. ”

        Only if the payment is tied to quality in some way. The market is supposed to achieve that, but quality often is not actually the criterion for reward.

      • Anthony Cooling

        Good points qualifying the qualifiers.

      • HsBnfa

        It might be that paying people to make model airplanes would cause the average quality to go down. But that’s only because if you paid people to make them, many more would start doing so than do currently. Your argument seems to want to imply that the people who currently make model airplanes for their own enjoyment would lower the quality of their output if they were paid for it – but why would that be at all likely?

        Actually, I know how it could be – if paying these people to make their model airplanes entails them making them for sale, having some minimum number to crank out per day, having this be their primary source of income so they’d better make enough of them to sell so as to not lose their job. But that’s a totally different situation than before. Now we’re making model airplanes for other people who either can’t make them or don’t want to. The alternative solution for this problem – people who like making model airplanes making them for free – is totally untenable. Nobody enjoys making model airplanes enough to want to make them for free in the kind of quantity that someone working in a model airplane factory would be expected to output.

  • Lord

    People learn more from losing than winning but still prefer the latter.

  • Viliam

    That reminds me of discussions about teachers’ salaries. “We shouldn’t pay them more, because that would attract people who care about making money, instead of people who desire to teach children well.”

    Seems like some jobs are *too sacred* to deserve a good pay. The shoe-maker is low-status, so we have to pay him to do the job. The truth-teller is high-status, so we shouldn’t pay him.

    However, there are a few high-status jobs, such as lawyers, who get paid, and no one seems to object against that. So is the curve something like “low status gets paid as a compensation for work, high status gets paid as a sign of respect, but middle status should do it for free”?

    • Anthony Cooling

      I realize I just said essentially the same thing as you, responding to R. Koslover below.

    • The “throwing money at education isn’t the answer” line seems to be particular to the U.S.

      • Anthony Cooling

        When you already spend more money on education than any other nation on earth for average results, yea, it is a common refrain.

      • Erroneous and dishonest answer. The U.S. has relatively low teacher pay and high classroom size among other developed nations, and spends 13% of the budget on education, which is nowhere near the top.

      • Anthony Cooling

        Note how you changed what we are talking about in your answer from amount spent on education to teacher pay and % of budget. The U.S. spends over $15k per pupil (though it varies by state). The Swiss are next closest, at about $14k per pupil. Relative to GDP, we don’t spend nearly as much yes, but more than other industrialized nation. You’re the dishonest one.

    • free_agent

      Adam Smith noted that if more prestige is given to an occupation, then its pay tends to be lower.

      In regard to lawyers, the situation is complex, because what lawyers do — i.e., fight to get clients what they want — isn’t particularly respected. Lawyers who have high incomes and a lot of influence are respected, but low-ranking lawyers re not. (Whereas even a mediocre middle-school teacher will get respect out of proportion to their pay.) Jane Jacobs pointed out in “Systems of Survival” that what laywers do doesn’t fit well within either of the two major ethical roles that our society defines, so their position is intrinsically disadvantaged for prestige.

      In regard to teachers in the US, the situation is a mess. Teachers per se aren’t paid particularly well relative to their education, but not too badly, either. But the public education system has a lot of administrators and other workers. Part of this is to deal with the complexity of the three levels of government that hand money out to schools, and partly because schools are used as the vehicle for what is really social services (that in other countries are part of other bureaucracies). E.g., in my metro area (Boston), the central city schools spend more per-pupil than any other school district, but there’s no reason to believe that the spending on teaching delivered to a median student is better than in the wealthier suburban school districts.

  • Anthony Cooling

    There are hobbies that I have seen destroyed by a market approach. For example, I have been at a martial arts school that was corrupted by the instructor’s motivation for money. It began with his divorce (and subsequent alimony). He began to promote belt ranks based on attendance rather than the skill required to achieve a belt, whereas before he made a reasonable living but taught for the love of the art. After a couple years I left and went somewhere else. While I think the problem with academia and government in general is its lack of accountability for usually not doing what said institutions say they will, and that “skin in the game” helps with accountability, money does indeed sometimes have a corrupting influence.

    • Cowboydroid

      Money does not have a corrupting influence. Money is an inert object that is incapable of exerting influence.

      What you mean to say is that people’s own vices are corrupting, including the vice of greed. Nobody disputes this reality.

      Economists are quick to point out that the market punishes greed rather effectively. Devoting your efforts to short term consumption at the expense of long term considerations renders you poor in the long term. As you indicated, your instructor lost a paying student when you left. No doubt, as the quality of instruction suffered, more paying students left, and fewer signed up.

      • Anthony Cooling

        Don’t be droll. The way a martial art school works, one can make far more money with lots of students pushed through rather than developing the ones who stick out hard workouts in order to develop quality. He lost me and a few other senior students, but he made far more pushing the suckers through. Moreover, since the mechanism for “skin in the game” in martial arts is not profit and loss, but how you do in actual confrontation, which is so remote for the average person, the suckers have no idea that they weren’t learning to defend themselves. One could not pull what he did in a ghetto school. In the long run, he still comes out ahead and the poor fool who has a meaningless belt loses in the rare event of an actual fight, and there is very little opportunity for reputation feedback in a typical surburban McDojo that mom takes little Johnny for his karate lessons. So what caused the change? His NEED of money due to a shrew of a wife, not greed or vices.

  • Alexander

    Everyone’s firing shots at Tyler!!! The lunch table must be getting tense at this rate.

  • The idea that publicly committing yourself to a position fosters dogmatism was (I understand) espoused by Socrates, who believed this about presenting ideas in written form.

    • Dave Lindbergh

      That’s one of the nicer things about betting.

      Unlike publishing a paper or most of the other ways intellectuals express their opinion, people can and usually do bet anonymously.

      Which *reduces* their social commitment to keeping the same opinion over time.

    • citizen15

      In many betting markets, one can trade in and out of positions. Even in the private betting market between Caplan and Cowen, Cowen could have in principle found an offsetting bet with someone else, if his view had changed.

      When one participates in betting markets, one is incentivized to continuously re-evaluate one’s views right up until the moment the bet is settled. Rigidly adhering to a mistaken view in the face of new evidence just deprives oneself of the opportunity to cut one’s losses by betting with someone else that also refuses to acknowledge the new evidence. The effect is the opposite of dogmatism.

      Participants in betting and financial markets exert much effort to continuously evaluate whether to increase, decrease, close out, reverse, or hold their existing positions.

      • Nobody has suggested that the two profs tried to renegotiate their terms after the initial bet.

        Maybe that would change in a prediction market, where changing one’s position is facilitated, but I tend to doubt it. Intellectuals who bet are a distinct group in that they are trying to establish a track record on being right (not on estimating probabilities).

        Maybe that itself would change. I would consider it unfortunate.

  • Sure, relative to ideal people who only discuss and think about topics with a full focus on and respect for the truth and their disputants, what could be the advantage of bets? Money will only distract them from studying truth, right?

    Then you admit that, relative to the ideal intellectuals aspire to, betting is wrong.

    There’s the difference with shoe production, which does not – and should not – try to conform with an ideal of excellence.

  • free_agent

    Initially, I thought you were going to segue into food and farming, and note how people (people I know, anyway) disparage the concept that food could be an ordinary item of commerce.

    But in regard to betting, I think the effect you are discussing depends on the context. If someone is betting in a context where *all* that is involved is whether they win or lose money, their betting will be biased toward the truth as they perceive it. But there are situations where that doesn’t apply. One is when the bet is public, and so their bet is seen as an act of allegiance to an idea, group, or whatever. Another is when the bet is large relative to the betting pool and others are watching the pool to determine what action to take. In that case, a “strategic” bet might cause the watchers to take an action that is advantageous to the bettor in some way other than through winning the bet.

    The summary is that betting pools formed of a large number of small, anonymous bets are likely to be better sources of information.

  • Michael Vassar

    Robin, your paper “he who would pay the piper…” appears to me to be the most compelling argument that I have seen that yes, money ruins everything with information content. Now shoes don’t have much information content, so it doesn’t ruin them that badly, and money is really useful for scaling things, and scaling some things improves them, so the issue becomes a balance between money ruining information content and scaling making things better. The traditional subject matter of academia is things where scaling is done easily without money, so adding money ruins things there. In medicine, scaling is incredibly useful, but based on your own arguments it seems fair to say that everything is ruined anyway, and almost everyone who looks would say that money is the prime culprit.

  • Ely Spears

    Incidentally, the short passage you wrote in the “Imagine someone said …” portion is pretty much exactly the pitch made to convince people to work as non-founder or non-executive employees in start-ups. Even the language used to flatter above average employees these days, such as “ninja” or “rockstar” or “guru” all imply a sort of self-denial when it comes to compensation, an ascetic willingness to emit talent but without some kind of “impure greed” to require competitive compensation for doing so. “Rockstar” may be the closest to a figure that is permitted to demand a wage, but even in that case it’s implied that fame and social status are more important to you than compensation. And all of them create an impression of status or progress that doesn’t fit into the traditional organizational notions of advancement, meaning that, linguistically anyway, before you’re even hired, you’re treated as if whatever advancement means for you, it is not allowed to be the same kind of thing that advancement means for the executive.

    People really do say this stuff and it seems to work pretty well to hoodwink candidates. “We want someone passionate about what we do here” really means “we want someone above average in job-related areas but below average in evaluating the value of their own labor” or “we want someone cheap whose mistake rate won’t be a problem, but we want to advertise as if we go out of our way to hire the very best.”

    • Oh sure if you can find a way to convince employees they are being paid in status, you can pay them less cash. But in most industries, eg shoes, that just won’t work much.

      • Unanimous

        It works about half the time.

  • You need to deny not that money corrupts everything but that it corrupts anything.

    Extrinsic rewards decrease intrinsic motivation when that motivation is high; but not when it is low. This is a well-confirmed result in attribution theory. If highly motivated intellectuals take to prediction markets, it would be a corrupting influence.

    What direction would this corruption of inherent intellectual motivation take? Intellectual progress takes place by developing theories that raise interesting problems. Prediction markets reward theorists who propose issues that promise definitive resolution.

    • I say that intellectuals usually have low motivation toward truth.

      • 1 Are you among the majority with low truth motivation? (It’s only fair to say.) If not, then you should agree that betting is bad in your case if not others.

        2. Dreams of fame probably count as intrinsic motivation.

      • Relative to the motivation that bets provide, yes I have low intrinsic motivation toward truth. Dreams of fame are in general motivations toward truth.

      • Michael Vassar

        In so far as we don’t care about truth, why even have the conversation?
        Where do you think truth comes from? Does it come from anywhere?

      • In fairness, he didn’t say we care nothing for truth.

      • Dreams of fame are in general motivations not very well targeted toward truth.

        Regardless, they have been the actual source of intellectual progress for millenia. You apparently agree that a betting culture would undermine it.

      • But the kind of bets economists tend to make are relatively small in scale to their overall earnings or worth and are probably more motivated by considerations of pride or smugness than by real financial concern.

        If you made a substantial fraction of your money making bets it would be a different matter.

      • brendan_r

        If you read Tetlock – or ever bet much yourself – you’d know that a gentlemen’s bet where no money is on the line but the question is made concrete, and it’s known we’re gonna check back in the future to see whose right, improves accuracy dramatically.

  • brendan_r

    This is by far the dumbest thing Tyler has ever said publically. Sounds like he’s taking his loss strangely personally. Maybe if he bet more often he’d get thicker skin – you win some you lose some.

  • I think you are being unfair to Cowen here. Whether or not a particular way of offering compensation is a good one depends on the kind of result you want.

    Suppose you own an international shoe selling company (like Nike) and hire 30 of the best shoe designers in the world to come work for you in your development lab. Initially you pay them all a flat salary and things went great then you start offering rewards to whoever submits the best idea and paying bonuses based on the fraction of company sales shoes you designed accounted for. One could easily imagine such a reward structure disincentivizing collaboration and reducing overall productivity.

    I take Cowen’s point to be that academic Economics is a very similar situation. One already has strong incentives to be good at one’s job and come up with interesting ideas. Indeed, one even still has very strong incentives to be associated with influential predictions and theories.

    However, one could well imagine that a norm of ready and easy betting would discourage suggesting off the wall or new ideas. Most new ideas are ill-formed and even if they eventually lead to a better model they often neglect important features at the start. If spitballing an idea might cause someone to say, “I think your full of shit. If you really believe that make a bet.” it discourages voicing the idea since turning down the bet loses you status.

    Worse, betting has an unfortunate biasing property as very few people bet with substantial fractions of their net worth. After all losing a bet where you back the status quo losses you little status (everyone thinks…well I thought the same way he just had the balls to bet) while losing a bet where you dispute it costs substantial status as it makes it seem like you were confident about your incorrect idea.

    Maybe it’s not true but you should at least admit the possibility that a norm of encouraging casual betting might disrupt the ability to generate new ideas and could enable the maintainers of the status quo to more easily suppress novel competitors.

    • Very important point, and a surprising error for an economist: failing to look at he problem from a marginalist standpoint.

      Note that Robin’s justification for “leaning libertarian” is infirm for similar reasons.The only rational justification for “leaning libertarian” would be some claim that a social bias causes excessive statism.

      As with “leaning libertarian,” Robin evaluates betting with an argument that avoids a marginal analysis.

      • brendan_r

        Your schtick is playing Devil’s Advocate as pedantically as possible, huh?

    • brendan_r

      The people in government who liked Tetlock’s ideas are young studs.

      The establishment didn’t.

      Honestly, all you Tyler sympathizers are building these elaborate theories for phenomenon that don’t exist.

  • Some scientific confirmation of Cowen’s insights into the effects of winning a bet:

    “Winning a competition predicts dishonest behavior” –

    • brendan_r

      A winning or losing streak in most anything affects you psychologically. Poker players call it tilt.

      Playing lots of poker makes you better at recognizing and adjusting for tilt – or it doesn’t in which you case you lose and stop playing poker.

      Would be good to generalize that kind of learning and selection – if you suck then get out – to as many fields as possible.

      We know who the world’s top poker players are.

      Wouldn’t it be nice to know same about, say, WAR.

  • Unanimous

    Your pretty sad argument isn’t all that sad. I agree that money results in the world having far more and better shoes, but it proceduralises the shoe industry (makes it mindnumingly boring for most of those in it) and introduces trickery.

    Money has benefits and negatives, and you need to weigh up both in each situation. In the case of the shoe industry I agree money wins out for me and most people. But this doesn’t necessarily mean money wins out for betting on ideas, health, education, or any other area. It’s case by case. I’d say give it a go and find out.

  • Bet incentives are at least roughly oriented toward speaking truth; the other incentives, not so much.

    Those who have made intellectual contributions have generally not been individually motivated by the desire to speak truth. In reading Randall Collins’s The Sociology of Philosophies, I’m struck that those who fail to be creative are inhibited by just this mistake about motivation. Or more exactly, the mistake about intellectual motivation rationalizes their own intellectual inhibitions.

  • free_agent

    Reports are that prediction markets failed badly on the Brexit vote. If that’s really true, it’s worth investigating.

    • They also failed badly on the NBA championship.

      But seriously – I notice that events you would expect to strongly affect the market don’t in the U.S. presidential race. Trump’s odds stay the same regardless of what he does.