Incentives Matter: Children's Edition

“So, think of human action like traffic. There are roads, signs, and rules that help drivers avoid crashing into one another or damaging property. People can move freely toward whatever destination they choose, as long as they don't hurt other people or break the basic rules. But too often, government interferes, so human action is forced in another direction. The system gets distorted. People follow paths they normally wouldn't take, and maybe make bad choices about which way to go. Getting to their destination becomes harder.”– The Tuttle Twins and the Messed Up Market

At the University of Northern Colorado (UNC), college planners decided to wait a year before adding sidewalks to their campus to see where students naturally traveled.  This strategy enabled human action to determine the proper pathways by observing how students would behave if left to act on their own.

In Connor Boyack’s 2020 book, “The Tuttle Twins and the Messed Up Markets”, Boyack gives children a lesson on money, incentives, and entrepreneurship.  In this edition’s story, the Tuttle Twins each earn $3,000 from the sale of the Family Theater.  Wondering how best to use their new windfall, the twins decide to open a Children’s Entrepreneur Market and help small-time entrepreneurs grow their businesses with microloans.  Suitable for children aged 8 to 12, the Tuttle Twins tale is based on Austrian economist Ludwig von Mises’s book, “Human Action”, a treatise on how individual decision-making shapes the best economic system, one that is rooted in human choices. 

In his book, “Human Action”, Mises first introduces praxeology into the field of economics by asking why people act as they do and determining how incentives and tradeoffs affect decision-making.  Since purposeful human action aids individuals in achieving their personal goals, human behavior cannot be excluded from the economic equation. 

The children's first act was in deciding whether to keep the theater by making it more profitable or to sell it and use the money elsewhere, understanding that once one choice is made, the other option is no longer available.  This is the opportunity cost of making a decision.  When their money from the sale was received, their next action tested their time preference.  Should they spend their money now on short-term desires, or save it for a later good? 

Since banks use customers' savings to loan out to others, the saver is paid interest for the use of their money.  This gave the twins the idea to use their money to lend to children who were making money as a side hustle to their schooling.  A simple contract for a loan repayment with a 10 percent rate of return was offered to several young entrepreneurs to improve equipment or increase their supplies.  Since incentives matter, finding children who were motivated to work hard would ensure a repayment of both the loan and the interest.  Determining whether the child wished to buy a special gift for themselves or to help an ailing parent helped the twins find good prospects. 

Along the way, the twins encounter vendors with little incentive to repay loans, often due to outside interests or subsidies provided by their parents.  When the twins found sellers like this, they came to realize how unfair competition in the marketplace distorted outcomes.  Selling subsidized products for prices too low to make a profit, because there was no need to repay start-up capital, severely hurt their competition. 

Likewise, in today's economy, subsidies are messing up the energy market, where green energy cannot compete without vast amounts of money from the government.  For example, rebate money for electric car purchases hurts gas car sales.  When banks themselves received bailouts from the central banks to cover unpaid loans, this only made loans riskier since the lack of repayment was never a problem for the banks. 

In every case of government intervention, interference ultimately altered human action, as consumers adjust to changing conditions. 

Human action is the foundation of free market economics because it allows consumers to act based on their own needs.  Whether trudging their way around a college campus or choosing automobiles, individual actions should always be at the heart of the economy.