THE MORAL ECONOMY: WHY GOOD INCENTIVES ARE NO SUBSTITUTE FOR GOOD CITIZENS Samuel Bowles, Santa Fe Institute & CORE It is widely held today that in designing public policy and legal systems, we should assume that people - whether citizens, employees, business partners, or potential criminals - are entirely self-interested and amoral. Given this assumption’s currency in legal, economic, and policy-making circles, it may seem odd that nobody really believes that people really are like that. Instead, the assumption of amoral self-interest has been advanced on grounds of prudence, not realism. But it is anything but prudent to let Homo economicus be the behavioral that underpins public policy. There are two reasons. First, the policies that follow from this paradigm sometimes make the assumption of universal amoral selfishness more nearly true than it might otherwise be: People sometimes act in more self-interested ways in the presence of incentives than in their absence. The reason, however, may not be incentives per se but instead the pursuit of economic aggrandizement and control with which they are frequently associated. Second, fines, rewards, and other material inducements often do not work very well. No matter how cleverly designed, incentives cannot alone provide the foundations of good governance. An erosion of the ethical and other social motivations essential to good government could be an unintended cultural consequence of policies that economists have favored, including more extensive and better-defined private property rights, enhanced market competition, and the greater use of monetary incentives to guide individual behavior. I show that these and other policies advocated as necessary to the functioning of a market economy may also promote self-interest and undermine the means by which a society sustains a robust civic culture of cooperative and generous citizens and may even compromise the social norms essential to the workings of markets themselves. Even more than in the past, high-performance knowledge-based economies today require the cultural underpinnings of social norms. Among these is the assurance that a handshake is indeed a handshake; where one doubts this, mutual gains from exchange may be limited by distrust.