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The Economics of Edwin Chadwick: Incentives Matter.

THE ECONOMICS OF EDWIN CHADWICK: INCENTIVES MATTER

ROBERT B. EKELUND, JR. AND EDWARD O. PRICE III

NORTHAMPTON, MASS.: EDWARD ELGAR, 2012, 246 PP.

This book is the first full-length study of the economic writings of Edwin Chadwick, the 19th-century utilitarian social reformer. Although not an economist in the strict sense of the term, Chadwick wrote a voluminous amount on all manner of economic subjects, especially with regard to the problems of public goods and the promotion of the general welfare. To those ends, Chadwick used innovative economic ideas and empirical methods to explain and improve conditions in 19th-century England.

In terms of his practical approach to economic reform, Chadwick distinguished himself through his pioneering use of statistics in economic analysis. Chadwick's work was simply unparalleled in terms of his ability to gather data on economic conditions: his "web of medical and other contacts throughout England were constantly pressed for data on disease, mortality statistics, and information on practically every subject imaginable" (p. 43). He did not merely assemble this data, however, but consistently deployed it in an effort to promote economic reform. And although Chadwick's empirical methods were not modern, his noteworthy efforts to incorporate statistics into policy analysis are obvious in practically all the topics discussed in this book. Incorporating empirical evidence did not, however, always result in sound economic analysis, and Chadwick does seem to have made some hasty generalizations based on data that were biased, either through accident or deliberate massaging (p. 44).

Another central theme in this book is that Chadwick's peculiar approach to reform led him to view undesirable economic conditions--and the policies necessary to improve them--as matters of effective remuneration; in other words, as incentive problems. Chadwick did not use the term "incentives" to describe his ideas, but he nevertheless viewed the problems of industrial-era economic reform as fundamentally intertwined with remuneration and punishment.

Chadwick's thorough-going appreciation for the complex and ubiquitous nature of incentives might seem unremarkable by today's standards, but in the mid-nineteenth century economists had not yet begun to think in the now-conventional language of incentives, and certainly had not begun to advance the mantra "incentives matter" (which is also the subtitle of this book). This fact makes Chadwick's attention to incentives that much more interesting for historians of economic thought.

Despite displaying great originality of thought in considering economic policy, Chadwick was not alone in his focus on incentive-based social reform. As Ekelund and Price explain, the role played by incentives was an important theme in the British utilitarian tradition, especially in the work of Bentham, whose social reforms often emphasized the proper arrangement of incentives. Bentham recognized the existence of what we would today call "externalities," and his social reforms were intended to ensure that proper incentives would bring about a harmony of personal and public interest (pp. 27-29).

The notion of incentives can be seen, for example, in the structure of the panopticon, where prisoners' behavior is molded by the authorities through (seemingly) constant monitoring. The panopticon is simply a version of the conventional moral hazard problem in which agents alter their output when unobserved. Much of the literature on moral hazard revolves around the problem of the cost of monitoring agents, which can be prohibitively high, thus effectively allowing or encouraging undesired behavior. Bentham's panopticon, however, actually provides a novel and entrepreneurial solution to this problem: in the panopticon, prisoners do not actually know when they are being observed; but at any given time, they might be. Because the prisoners cannot be sure, and so long as they are at least sometimes punished for any offenses, they must take care to act as if they always are being observed. Thus the actual cost of monitoring may be reduced without sacrificing good behavior.

However, Bentham's incentive-oriented panopticon worked at the administrative level as well, and this aspect is the focus of Ekelund and Price's analysis. Bentham was primarily concerned with protecting prisoners from abuse and discouraging administrative waste. His suggestion was to provide incentives for the prison administrators to promote the well-being of prisoners. Specifically, Bentham advocated a system of contract management, whereby entrepreneurs would pay for the right to use a convict's labor, providing a monetary impetus to care for the prisoner and thus ensure a sufficient quantity and quality of labor to justify their "investment" (pp. 56-57).

In any case, the notion of self-interest and proper incentives were fundamental for Bentham, and the same type of reasoning about the problems of agency and moral hazard appears in Chadwick's writings as well. In fact, it might even be said that Chadwick's "entire career may be characterized as the application of Bentham's principles to economic and social phenomena" (pp. 34-35).

As a social reformer, Chadwick dealt with many of the uglier aspects of industrial life, including public sanitation and the criminal justice system, which, in terms of quality, were often enough metaphors for each other. Each of these receives its own chapter, through which the authors argue convincingly that Chadwick anticipated many insights of contemporary economics. One of the most intriguing of Chadwick's studies involved the economics of the insurance and funeral industries, which provided the fodder for some of the more morbid incentive problems Chadwick faced (Chapter 5). Although the practice of insurance dates back several centuries prior to the industrial revolution, in the mid-19th century insurance began to develop its own distinct markets, and with them, its own distinct policy questions.

One of these early markets involved "Burial Societies," a common resource pool intended to raise funds for funeral expenses. Members paid dues to the society, which acted as a sort of insurance premium, and funds were then paid out for interment services. Because of the way the pools were organized, however, they fell prey to conventional moral hazard problems--especially the pools organized for child burial. Two major difficulties arose: first, the amount paid out for the burial of children was considerably higher than the actual cost of a funeral. Second, it was possible to register children in multiple pools. Both of these facts created significant monetary incentives to neglect or even cause outright harm to insured children. And both possibilities appear to have actually occurred (pp. 108-109). The observant Chadwick point out that the problem lay in the fact that the insurance arrangement removed the responsibility for the children's care from the parents, and established rewards for mistreatment.

As a reformer, Chadwick considered it a vital task to construct solutions to these kinds of incentive problems. One answer to the insurance hazard proposed by Chadwick was to find ways to lower the cost of interment services, thus eliminating the need for insurance, and along with it the moral hazard involved. He also suggested (in common with many insurance providers of the day), that if insurance is necessary it should not exceed the value of the insured interest. A third practice that was becoming more prevalent in the insurance industry at the time, and which Chadwick endorsed, was that insurance suppliers should be able to refuse payment if the insured party was found to have obtained insurance from multiple sources (p. 109).

Funeral markets are only one case where Chadwick's analysis predated later developments in economics. Ekelund and Price show that his views often anticipated the work of 20th century economists, and another merit of this book is the way it weaves together historical discussions with the work of contemporary economists like Gary Becker, Ronald Coase, Harold Demsetz, and George Stigler. Further, because of the wide range of Chadwick's interests, and well as those of his intellectual influences, a review of his contributions leads Ekelund and Price to survey many important events from this most revolutionary time in economic history. Both of these will capture the curiosity of readers interested in more than the relatively narrow subject of Chadwick himself. Other topics covered in the book include "Railways: the National Franchising Alternative" (Chapter 4), "Labor, Education, and the Business Cycle" (Chapter 6), and "Criminal Justice Institutions, Police, and the Common Pool" (Chapter 7), in addition to detailed accounts of Chadwick's life and intellectual milieu. Strongly influenced by Bentham and Mill, Chadwick approached each of these areas from a utilitarian perspective, seeking always to advance the general interest.

In short, Ekelund and Price have produced an engrossing and informative study of the economic life and times of Edwin Chadwick. Scholars interested in economic policy and reform, the history of industrialization, and the history of economic thought will find much of interest here. For researchers with other interests, the book is still highly readable, and even those with only a passing interest in these issues are sure to find something useful in this volume.

Robert B. Ekelund, Jr. and Edward O. Price III Northampton, Mass.: Edward Elgar, 2012, 246 pp.

Matthew McCaffrey (mcm0016@gmail.com) is a postdoctoral fellow in the Department of Liberal Studies at the University of Illinois, Springfield.
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Author:McCaffrey, Matthew
Publication:The Quarterly Journal of Austrian Economics
Date:Jun 22, 2013
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