The Economics of Incentives, an Introductory Account

From its infancy in the 18th century, the framework of economic analysis has had three major ingredients. First, it takes as axiomatic that economic agents act on their own behalf, with or without sympathy for others. It does not judge self-interested action to be immoral or unworthy of serious study. Quite the contrary, it suggests that the pursuit of one’s own interest describes well economic behavior and asks us to develop its consequences. Second, the framework takes social equilibrium to be the concern of economic analysis. Economics is a branch of social science, and as such it requires at least two potent actors. The laws of physics and the chemistry exist in the absence of mankind. For psychology it may be enough that there is a single human being. However, for sociology, political science, and economics, you need at least two people. Finally, the framework of economic analysis takes the goals of individual economic agents to be in conflict; it views it as the business of economics social science to determine the extent to which this conflict does or does not result in the efficient use of resources, promote the social good, and so on.