Thursday, September 21, 2023

OPINION AND ANALYSIS | 28-08-2023 07:30

Incentives and the near future

It is possible for Argentina to emerge from the difficult situation in which the country finds itself, but a comprehensive economic programme with centralised coordination and the broadest political support possible is necessary.

A couple of weeks before the PASO primaries, an event was held with the excuse of commemorating 40 years of democracy; but it was evident to all attendees that the main interest and central focus was undoubtedly to try to decode the near future of Argentina’s economy. 

In attendance were Pablo Gerchunoff (economic historian), Domingo Cavallo, Alfonso Prat-Gay, and Jorge Remes Lenicov (three important former economy ministers), as well as prominent colleagues such as Ricardo Arriazu, Daniel Artana and Carlos Melconian. At the same time, the audience was a strange fusion of businessmen, economists, journalists, former politicians and aspiring politicians.

The organisers have published the content of these presentations, but in general, it was agreed that it would be possible to emerge from the difficult situation in which the country finds itself, as well as the need to propose a comprehensive economic programme with centralised coordination and the broadest political support possible; this is the only way to regenerate the non-existent social trust in the currency, the institutions, the authorities and the independence of the Central Bank.

The obvious serious problems to face: the non-existence of reserves, inflation, debt, deficit and the calamitous social situation, as well as the problem of “acquired rights" for different actors. Without the issue being clarified at the event, we can imagine thousands of politicians, trade unionists, officials and new employees of the three public powers (executive, legislative and judicial) of national, provincial, municipal and public companies strata, as well as businessmen holders of small or large perks and of course also privileged retirees.

The conflict between the need or not to explain the measures that should inexorably be taken and the need to obtain votes (the usual one... if I say what I am going to do, nobody will vote for me...) was also pointed out. 


Transdisciplinary explanation

Melconian emphatically stated the need to set out the guidelines for an economic programme, hoping that politicians will adopt it and trusting that society will surely support it.

Most agree with most of the ideas put forward, however we do not share an evident self-corseted vision; the world, all reality and therefore the sciences that seek to study and modify it, cannot be the object of limited disciplinary visions. In this case there is also a need for a transdisciplinary vision that differs totally from the unidisciplinary, the interdisciplinary and also the multidisciplinary.

Epistemologically, we emphatically support the need to understand the present world on the basis of the categorical imperative of the unity of knowledge.

Planning and proposing a future economic programme with the neoclassical assumptions of perfect information and full rationality would not only be a disciplinary problem – knowing all we have learned thanks to Daniel Kahneman and theories of behavioural economics it would be completely foolish.

For this reason, we must reformulate many things based on two famous sayings attributed to Albert Einstein: “Insanity is doing the same thing over and over and expecting different results” – i.e. if we want different results, we must try different approaches; and perhaps the most sensitive quote, “the mind is like a parachute… It only works if we keep it open.”

In the first place, we must first better understand why everything that has been tried economically since 1930 has always ended badly, not only because of the sufficiently studied "Argentine macroeconomic stop and go" approach but also the reasons that have motivated it. Essentially, due to our autochthonous fictional interpretation of reality, generating so many frustrated and frustrating reforms and counter-reforms, as well as the pathological externalisation of our responsibilities and guilt.


The incentive problem

None other than Adam Smith already told us about this in his work: “If we’re dissatisfied with a particular activity or outcome, or want to modify some behaviour, seeing the underlying incentives and finding a way to change them can often produce a more desirable result.”

Some authors have misinterpreted this idea referring only to economic incentives when in reality, the central question is about all kinds of positive or negative incentives (social, cultural, political, legislative, economic, etc.) that end up shaping and defining the social and economic behaviours evidenced in the aggregate.

As a mere example, let's briefly analyse inflation, its associated incentives and who may or may not be interested in eliminating it:

In general, politicians have no incentive to eliminate inflation: being able to spend more than real income is a constant ambition, together with the use of monetary supply to finance most of these expenses and as a powerful tool to reduce them in real terms (to the extent that expenses and salaries are indexed later).

Unionists enjoy the broad power that inflation gives them to renegotiate labour agreements and generally receive direct funds as the result of that renegotiation.

Companies and businesses often manage to anticipate prices (next in first out) and delay salary indexing, although everything has historically been complicated by the autochthonous stop & go and the recurring correlation of non-existence of reserves to import inputs.

The big losers  of the most regressive of taxes have always been the low-income sectors and retirees, since with higher disposable income it is possible to moderate the impacts of these pathological behaviours.


Professional duty

Unlike the aforementioned idea, our main professional obligation is not to convince politicians to change these and other policies, but also to explain to the entire society the need to change these patterns of conduct.

The winner of the PASO primaries, Javier Milei, well understood this; he spoke directly to angry voters and not to intellectuals or leaders. He proposed oversimplified or incorrect conclusions as well as illogical and inapplicable solutions, but it doesn’t matter: his libertarian populist brand is well “seasoned” and “spiced” with a histrionic and aggressive diatribe.

Considering the results of the primaries, we cannot be certain about the future. The fact that forms of populism, disguised as either right and left, finished in first and third place is not a favourable indicator. We therefore modestly propose to continue analysing and talking about incentives in different areas that directly or indirectly have had a very negative impact on our social and economic structures as it resembles now.


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Martín A. Morgenstern

Martín A. Morgenstern

Dr. UBA Economía. Profesor e Investigador en Economía de la Salud.


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