Incentive

An advantage for English speakers trying to speak another language is that so many of our words find their way into other languages.  Russian is no different.  But I can imagine that the creep of anglicisms into Russian is as galling for Russian speakers, as it is for speakers of other languages.

One word that hasn’t entered Russian is incentive (“a thing that motivates or encourages someone to do something; a payment or concession to stimulate greater output or investment” – Oxford Dictionaries).  I think this is a pity.  I wish the words инсентив (incentive) and инсентивизировать (to incentivise) existed in Russian (perhaps they soon will!), because they are important for the understanding of economics.

Economics is a discipline that owes much to the ideas of British thinkers.  Adam Smith in the second half of the 18^th century described the “gains from trade”.  In the late 19^th century, Alfred Marshall wrote Principles of Economics, which set out the main features of a market economy.  In the early 20^th century, John Maynard Keynes was the most influential economist who wrote about the lessons of the great economic depression of the 1930s.  And Karl Marx spent the last part of his life in London, where he wrote Das Kapital, his critique of capitalism.

We’ve just recovered from a very difficult economic time in Britain, the most serious since the 1930s.  One of the main problems was the large public deficit that emerged as the economy went into recession.  The high deficit could not be sustained over the long term, and the government needed to bring the budget back into balance.

To do so, it decided to undertake a series of cuts in public spending, including the Foreign Office.  I’m not happy about them, but I know that they are necessary to correct the imbalance.  I also know that my livelihood depends on the long term success of the economy.  I think many other Britons have sufficient understanding of economics, and would reluctantly agree with me.

I recently teased an audience of Belarusian students of economics, by saying that I agreed with the view of Thomas Carlyle, a 19^th century British philosopher, that “economics is the dismal science”.

I explained that economics is not a pure science, where you can prove or disprove a hypothesis by experiment.  Economics is a social science:  it relates to the behaviour of human beings.  People are not always rational, nor do they react in one place the same way as they react in another.

While diplomats need to understand many facets of the country they are working in, understanding the economy is particularly important.  We are sometimes asked to advise businesses on the economic prospects of the countries we work in.

I say that there is great potential in Belarus.  However, the Belarusian economy is dominated state enterprises which aren’t efficient or profitable.  Their management appears focussed on production, rather than on tailoring their products to demand in the market.

Economics is about the aggregation of the decisions of different people on the production and consumption of commodities and services – anything that can be bought, sold, exchanged or traded.  Price is usually a major factor in this decision making.  But not always.

On their own, the theories and models that economists construct about the distribution and use of resources – from the basic laws of supply and demand, to models for whole economies – can only explain so much.

Some differences are related to the structure of each economy.  These can include total workforce, availability of local resources, capital and other “factors of production”.  Then there are more human factors such as levels of welfare available, propensity to pay taxes and other preferences and choices that particular groups of people may make.  These are more rooted in culture and society.

The same economic policies can work differently in different circumstances.  I gave the Belarusian students the example of how an increase in interest rates in the 1990s would have a different effect in Britain compared to Italy, where I was then living.  This was largely because many Italians held their savings in government bonds.  So an increase in interest rates actually increased their income in the short term, before the effect of the increased cost of borrowing had effect in the wider economy.

I suggested that economists needed to understand the history, sociology, and psychology of the people in a particular economy.  Those subjects may explain better how people would behave in certain circumstances.

The Russian translation for incentive tends to be стимул as in stimulus, or побуждение as in motivation.  Neither quite captures the essence of “incentive” which is about something extra that motivates an individual to take a particular action.

A stimulus is an external change to the environment.  Economists talk about giving a stimulus to the economy to encourage people to save, or companies to invest – a “macro-economic” term.  But as the history of economics has shown, governments need to understand how individuals or smaller groups react.  This is micro-economics – what incentivises people, or how incentives can be tailored to work best.

This may be the problem with Belarus.  I think the state enterprises aren’t efficient and profitable because the right incentives aren’t in place.  So I hope that инсентив and инсентивизировать can enter the Russian language.  They won’t change things by themselves, nor make economic reform any less painful.  But economic policy has to be grounded on human nature.

I took the idea of incentive being at the heart of economics from an article on the Guardian website.