Econtalk host Russ Roberts interviews author Daniel Pink on the topic Drive, Motivation and Incentives in last week’s podcast. Pink’s message is that a substantial body of empirical evidence shows that people are only motivated to a limited extent by money to increase their production in a work situation. Once employees are paid “enough”, other motivators take over, such as “autonomy, mastery and a sense of purpose.”
Some thoughts I had while listening to this.
As I understood Pink’s synthesis of the research, a given individual may not increase their work production by the incentive of more money beyond a level they are satisfied with. What I think that this shows is that offering the same set of employees marginally more money may not improve output. However, the way I suspect that the labor market works is that different individuals who produce a higher level of output find their wages bid up as they move around the labor market.
Around 19:00, Pink raises the question of whether a large bonus for producing a new idea that succeeds in the market would produce more and better products. Roberts points out “Dan, that is the way our economy actually works”. Roberts points out that this is how entrepreneurial competition works. The market rewards entrepreneurs who produce a great new product with a large “bonus”, known as “profit”. The prospect of this reward stimulates many entrepreneurs to try new ideas, some of which fail. Thank you Russ Roberts for not letting that point get by.
However, the point Roberts makes is slightly different than what I think the research shows. For a company, holding the set of employees constant, the research questions whether offering a bonus to those employees will result in more innovation. It might or might not; maybe the employees of that company are not very entrepreneurial or are highly risk-averse. But what the market for new products and new firms does is to select those individuals — employed or otherwise — who are motivated by the possibility of earning profits.
Pink is not convinced, citing the example of people who have accumulated a large amount of wealth from profits on one company who start another company because the marginal value of the additional money is insignificant to that person. He interprets this to mean that entrepreneurs are not primarily motivated by money. I believe that Pink is correct, that we are all motivated by many things including, but not limited to money. But I don’t think that his example proves the point: successful entrepreneurs may still be motivated by earning money.
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You mean the law of marginal utility? Each additional unit of money adds less utility than the last, and eventually money becomes less important than other things. Hope he didn’t spend too much money on that “empirical evidence.”
does the law of marginal utility apply to money?
“Pink is not convinced, citing the example of people who have accumulated a large amount of wealth from profits on one company who start another company because the marginal value of the additional money is insignificant to that person. He interprets this to mean that entrepreneurs are not primarily motivated by money. I believe that Pink is correct, that we are all motivated by many things including, but not limited to money. But I don’t think that his example proves the point: successful entrepreneurs may still be motivated by earning money.”
A significant conclusion one could draw from this argument is the importance of respecting property despite an inequality in wealth. If entrepreneurs tend to only start a new business when they have a large surplus of money, then the growth of the economy is dependent on the relatively wealthy being allowed to keep their money and use it as they please. If you think they “have enough” and can survive with only half or less of their income, then they will indeed have enough to satisfy their consumption but not enough to motivate further investment.
Most employees nowadays are, I suspect, socialists at heart. In their minds, the job’s main function is to pay the mortgage or the rent, to buy some decent clothes and food, and to fund a few vacations. And then there’s medical insurance. And the kids.
The idea that the employee ought to be focussing on adding value to the shareholders is often a foreign one. Bonuses don’t work, I suspect, because central planners within the company decide the basis for granting the bonus. Most companies follow hierarchical, militaristic structures. Rarely does an employee actually own a piece of what he produces. At most, he might own some shares in the company as a whole.
ABR’s comment about bonuses at most companies is true. My company has bonuses, but its based not on individual performance (in fact, there are few ways that bosses CAN reward individual employees, which I think is part of your point also). The performance is based on the company as a while, and then your particular part. If the company overall doesn’t met its goal, no bonuses period. If the company DOES met its goal, then you need to deal with the goal of your part of the company kicks in. This means that if you are a member of one part of a company, you may get a different bonus. Then your paygrade will determine your fine bonus (lower pay grade, lower bonus). For most rank&file employees, its really hard to understand how THEIR work goes to achieve the overall goals, really.
But then I think that these things (like the original talk being debated) are too often done up by people who aren’t working the real world and have to deal with things like bonuses and such.
Pure entrepreneurship is the same thing as pure artistic creation — potential money-making outcomes are irrelevant, such people do what they do simply because they must (i.e. it is a calling). Many people, of course, do dream of making heaps of money from their business ideas, which makes them something other than entrepreneurs (i.e. something more like businessmen/businesswomen). Likewise, whenever an artist takes to painting a mural on commission or releasing a cover tune or writing something based on what they believe “people want to read,” they begin straying away from being artists and toward being artisans.
There is, of course, room in a civilized society for all of the above. Just don’t confuse terms and don’t lie about there being “degrees” of either entrepreneurship or art — there is no “third way,” either someone is an artist/entrepreneur or they are not. The key is for capitalists to recognize the veracity of the legitimate entrepreneurs they encounter, and for consumers to distinguish works of a legitimate artistic process from other catallactic goods.
In other words: trying to turn artists or entrepreneurs into business people is a guaranteed recipe for destroying civilized society. Let them do what they must, do not interfere, do not offer advice, do nothing but appreciate what comes out the other end of their process (whether that means appreciating it all the way to the bank or all the way to the trash bin).
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