With the recent developments in the economy there could have not been a better time to pick up this book and read it. I work for a financial institution which had received a good amount of TARP funds. This was followed by media on the company’s allocation of resources for what appears to be a recreational purchase equaling almost the amount of TARP funding. In turn to find out company “x” had decided that employees will not be receiving a compensation increase this year. After just the first couple of pages I already knew I wanted to dive in to the first part of the book discussing the “Ten Key Elements of Economics.” This immediately shifted my interest to the first two key elements that: “Incentives matter” and “There is no such thing as a free lunch.” There are many thoughts that came to mind while reading along.
The incentive for employees was the annual compensation increase. The problem we are facing now is that the labor and productivity supplied are expected to be maintained, while people need to do more with less. As the book explains, it takes time to adjust. However one may argue that the incentive has changed. Now as the economy has shifted and the company has to make budget and staff cuts; the individual incentive has shifted to “maintaining employment.” Thus there is no longer an increasing financial incentive, with the exception of the existing financial compensation. We must remember that incentives matter, but also that at the same time they can shift based on the factors providing the incentive. The book examines the increase and decrease in gasoline prices. Consumers responded by changing their behavior, consequently shifting incentives.
The cutbacks of company “x” leads right into the element that “There is no Such Thing as a Free Lunch.” The compensation for the service we provide now is allocated elsewhere. By deciding to stay employed with company “x” we have employment. Then again if we chose not to remain employed; it will cost us the potential income that could have been earned, so no free lunch. This also makes me consider key element number seven “People Earn Income by Helping Others.” Nonetheless what happens to the incentive of providing others with valuable goods and services now? With the lack of understanding the shift in incentive I feel the employees will only care about their personal desires. Their interest to improve can result in lower productivity standards, or the search for a new employer. Considering the company standpoint inefficient workers will find other more personally beneficial opportunities. Cited as one of the reasons for reduced productivity of labor. The employees will provide less valuable service as the company profit will continue to decline.
By changing the ways of how the company operates and the rate of compensation it forces employees to focus even more on their self-interest. Now when presented with work, they will find the most efficient way of service. This in turn goes along with economic progress; along with the correct amount of government intervention as discussed in the later part of the book. This can potentially create areas for new employment opportunities, and advancement of the nation as a whole. Any company can bring their numbers back into the black with the correct allocation of the resources and capital. But also with new innovative ways to provide services and goods.
With the responsible people in the right positions and the people with a understanding of economic interactions self-interest will lead to a flourishing nation. In conclusion all the above tie into each other as well as the remainder of the book. Unfortunately self-interest with greed and lack of knowledge leads many of us to make imprudent decisions. I knew that incentives matter, but I also understand now that incentives can shift. With the shift in incentives and the self-interest we can grow prosperous. Yet we must understand the interaction and effects of economics as a whole for the small as well as the big picture. The book should be required reading for all that want the privilege of voting. I will be thinking not only of the one side of the economic hand but the other as well, and so should everyone else.
Courtney from Study Moose
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