INTRODUCTION All of us act as if the concept of effort has meaning and is useful. We believe that the amount of effort exerted differs among people and depends upon the circumstances. In common speech and in popular writing we use effort to help explain the outcome in many activities such as sports, school, and work. We feel our own exertions of effort in our minds and in our bodies, both while exerting the effort and afterwards. Yet variations in effort have heretofore not been taken account of by economists in analyses of economic phenomena. This short book postulates that the amount of effort which a person will exert depends upon two factors: a) the opportunity that the person perceives to earn additional income, and b) the person's `need' for additional income as measured by the person's wealth. Of course the effort also depends upon a host of other factors stemming from nature, nurture, and the current environment. But those other factors are considered extraneous here. My aim is not to `explain' the effort exerted by individuals, but rather to understand the effect of economic variables. To that end, the book focuses upon only wealth, opportunity, and the relationship between them, except for a few forays outside of economic behavior to see how far the analysis can be extended fruitfully. More particularly, this book postulates that the amount of effort (drive) is a function of the arithmetic difference between wealth with and without the opportunity in question, considered relative to the person's current wealth. This central concept of Drive-Effort has close links to the psychologist's concept of the Just Noticeable Difference (JND) and to the economist's concept of diminishing marginal utility. This Drive-Effort formulation can serve as a precise definition of the concept of incentive. The concept of wealth refers to what one can purchase with one's present assets. The concept of opportunity refers to the additional assets one can obtain conditional upon accepting the alternative under discussion. Various types of evidence are offered in support of this postulation. None by itself is strong enough, or sufficiently direct, to constitute full confirmation. But I hope that the totality of the evidence makes a solidcase that the Drive-Effort formulation is supported by available observations so that it seems reasonable as well as useful. Effort is manifested both in the amount of time that a person works, and in the intensity with which a person exerts him/herself during the time devoted to work. The two aspects of effort are linked in being substitute methods of achieving the same end; one may work harder, or longer, or both, to finish the job. Intensity is the more interesting and perhaps the more important aspect of effort. Regrettably, however, length of time worked is easier to discuss because there are more extant relevant data, and also because economic theory has given it more attention. I hope that these circumstances do not influence the reader to think less about the intensity of work effort than about its extent, however. After setting forth the intellectual underpinning of the effort concept and a formal statement of it, the book proceeds to apply the central idea to a variety of situations. One purpose of the applications is to demonstrate the power and versatility of this analytic tool. A second purpose is to offer substantive hypotheses about a variety of economic circumstances that are interesting in themselves, ranging from an explanation of why competition may lead to greater vigor in firms' activity than does monopoly (Chapter 6), to a suggested explanation for the decline of empires (Chapter 8). The analysis of behavior in monopoly compared to that in duopoly, which should generalize to the question of how the presence of competitors affects the vigor of competition among firms, is the analytic centerpiece of the book because it demonstrates in detail the use of the method. Economists have heretofore taken for granted that the presence of competitors induces firms to compete more vigorously, but the matter has gone unexplained in systematic and formal fashion; the outcome turns out to be more complex and less clearcut than expected. The analysis of monopolistic versus duopolistic behavior hinges on an objective specification of incentive, a concept central to economic thinking which, upon inspection, is seen to be ambiguous and commonly used in conflicting fashions. The concept of Drive-Effort is the other side of the coin from the concept of incentive, and is offered as an operational and objective definition of it. Economic analysis usually assumes that all the decision units are identical. Among the few exceptions to this rule are differences in natural resource endowment, differences in consumer tastes that lead to exchange, differences in risk preference, and Engel-curve-type consumption systems. This assumption of homogeneity of economic agents is very convenient theoretically. By discussing the behavior of the "representative" firm or consumer as it interacts with similar firms or consumers, the standard analysis can arrive at an equilibrium without the complications which would arise if the interacting units were assumed to differ on such dimensions as size, assets, knowledge, and market share. For some purposes, however, the assumption of homogeneity does not serve us well. The external disequilibria that induce profit-seeking economic activity, and the internal conditions that lead firms and individuals to respond to these disequilibria, often depend upon differences in abilities of the competing firms and individuals caused by prior experiences, as well as by such characteristics as size. Austrian economists, especially Hayek, have emphasized that these differences have an important effect upon the nature of competition. Arrow's analysis of organizations and their behavior takes a similar point of view (l974). Industrial-organization theorizing about such phenomena as price leadership and price umbrellas also exemplifies analysis that necessarily deals head- on with such differences among firms. Recently, such concepts as implicit contract, specific human capital, and firm-specific effects have arisen to deal with differences among business units. These concepts point in the same general direction as does this book. But such departures from the assumption of uniformity are still only a small part of economic thinking. One of the most important internal conditions in which firms and individuals differ is the information that they possess about markets and the business environment. This is Hayek's central point; he emphasizes its far-reaching consequences for business behavior and for the development of an orderly economic structure. Different states of information about economic opportunities necessarily lead to differences in Drive-Effort, though the point will not be developed here. One would like to know (a) the extent to which such differences in information states relate to actual effort expended, an interesting empirical question; and (b) how wealth, and the Drive-Effort Measure that will be defined later, affect people's search for information about disequilibria and economic opportunities. Both of these latter questions must mostly be left for the future, however. Please understand that the differences among firms and individuals are not being analyzed here because they are interesting in their own right. Rather, these differences in internal conditions are employed to systematically explain differences in economic behavior and economic outcomes as, for example, why one nation waxes richer while another wanes poorer, and why firms exert different amounts of effort when there is competition than when there is monopoly. Better understanding of the influence of one's economic circumstances upon one's economic behavior may help us understand a variety of interesting and important questions such as: (a) Why do some nations and groups of people work longer hours than others? The answers "Because they are poorer" and "Because they have a value for hard work" are inadequate; Though such statements may be suggestive, they are not easily rendered precise in terms of economic theory. (b) Why have the once-richest nations been surpassed in wealth by other nations that were formerly less rich? Answers citing wars and political personalities may be strengthened by consideration of economic conditions if properly understood. (c) Why has economic development tended to take place in temperate climes? The answer "Because there is enough but not too much challenge," may have much truth in it, but cannot easily be coordinated with other economic propositions. (d) How does one sensibly think about a situation such as that of the Crow Indians who own "huge coal reserves" and also have "an unemployment rate approaching 70%" (Wall Street Journal, Jan. 31, 1984)? Talk about "lack of jobs" obviously is an incomplete explanation at best; before the white men came, there were no "jobs" at all in the modern sense, and no one worried about a high unemployment rate or idleness. A pressing practical question upon which these chapters bear is whether, in the context of the U.S. at present, changes in the opportunity structure of taxes, regulations, and economic institutions will "get this country going again."1 Does, or does not, some combination of the *** wealth level, the educational system, and our values and aspirations influence people's work propensities in such fashion that no conceivable changes in the opportunity structure could elicit the kind of enterprise and hard work and ingenuity that Americans exhibited in the past? Another pressing question, always with us, concerns the tradeoff between giving welfare and providing incentive to work. The viewpoint of this book may be contrasted with Schultz's view of the related topic of entrepreneurship (1980), wherein the key element is an dimension of human capital of the same order as education and physical strength, and with Kirzner's view of entrepeneurship (1985) wherein the activity with which he is concerned is "costless". And my viewpoint contrasts particularly sharply with Becker's view of effort, to be discussed in Chapter 3, wherein the hours-worked aspect of effort is an allocation decision at the expense of leisure, taken from a total fixed quantity of available time, and wherein the intensity aspect of effort is thought of in a similar fashion. -------------- INSERT I-6A Unlike Schultz and Becker, my interest here is in the aspects of human capital which are unlike physical capital. A person who has been trained to shovel dirt efficiently has much in common with a post hole digger, and a person who has been trained to draw maps reliably has much in common with a computer that does a similar task. But a machine does not vary its output of dirt or maps or new ideas in response to worries about losing its job because of working too slowly, or to hopes that a new enterprise will succeed and put the children through college. It is motivation, imagination, ethical decisions, altruism, character, courage, perception, and the like that are the subject of this book, dimensions of persons and groups which depend upon circumstances that do not affect a machine, but which do affect the course of civilization, that are the subject of interest here. ---------------- (Though the feeling aspect of effort at the heart of the mechanism, the subject matter is completely economic. Both the determinants of effort, and the consequences of it that are discussed here, are wholly material, economic in magnitude. This also is in contrast with Becker's approach, a main objective of which is an improvement in our understanding of the individual, that is, an advance in psychology.) The subject of risk is perhaps the closest analogy in the current domain of economics. Though we talk about a taste for riskbearing, it is really the feeling of fear that influences person to choose a portfolio with a smaller amount of risk and a lower expected value than a riskier portfolio with a higher expected value. And as with my treatment of effort, no fixed endowment is postulated within which the feeling toward risk is traded off against another element. The order of the topics is as follows: The essays begin with a discussion in Chapters 2 and 3 of the economic literature on optimization with respect to various inputs for production and consumption -- purchased inputs, one's own time a la Becker, and effort. An objective definition of Drive-Effort as a function of wealth and economic opportunity -- which also provides a definition of "incentive" -- is put forth in Chapter 4. That discussion shows, I believe that the analysis of expended effort usefully supplements the analysis of time allocation and of profit maximization in understanding important economic behavior and outcomes. Chapter 5 reviews data relevant to the hypothesis, and describes some tests that could falsify it. Next follows Chapter 6 with the formal analysis of monopoly versus duopoly. Chapter 7 discusses a variety of situations which the concept of Drive-Effort may help explain. These situations are not analysed at length or in depth, unlike the analysis of monopoly-duopoly in Chapter 6; rather, the brief discussion of each situation in Chapter 7 is intended only to be suggestive, and the basis of possible future analysis. Chapter 8 discusses various policy implications of Drive-Effort analysis. A brief summary, Chapter 9, ends the book. A PERSONAL NOTE Perhaps some words about the author's feelings toward this book are more appropriate in this case than in most economics writing, because this book treats people as beings with feeling, and considers the economic implications of feeling, rather than dealing with the more mechanical aspect of humans as economic aspects. Effort -- speaking now in an idiom different from the formal analysis that is the heart of this book -- depends upon what we call the human will. And the human will flows from what many of us would call the human spirit. This human spirit, we are willing to say when we are not talking economics, is the well-spring of the creative impulse and the creative capacity, which in turn are the source of advance in civilization, contributions to our treasury of art as well as progress in technical knowledge and gains in the standard of living. The first impulse for this book, well before I even began to grope for the central analytical idea, arose after looking at the work of a friend who makes great sculpture, and talking with him about the life force and the thought that goes into his work. The role of inventors and artists and of entrepreneurs is obvious. But what contribution can economics and economists make toward this advance in civilization? It seems to me that economists (along with political scientists and sociologists) can contribute by learning about the structure of economy and society which will promote the process of progress so that lawmakers and government servants can bring about these conditions. This includes providing the freedom from unnecessary constraints within which creative individuals and organizations will dream bold dreams of awesome projects, and the incentives that will bring forth their greatest effort to realize the dreams, while not choking or misdirecting their creative efforts by confiscating their gains or preventing their freewheeling operations in the name of preventing negative externalities; consider Hong Kong and Tanzania. It includes allowing for sufficient competition among private organizations, and also among public organizations such as municipalities and states, to test a variety of innovations and winnow out the best among them; such pluralism in Europe, the historians have recently told us, is one likely cause of the surge in progress that took place there but not in China or India. And it also includes organizing and coordinating the large social projects such as space exploration which may not be done early by individuals without the encouragement of government, while not wasting the resources of society in vast vain boondoggles. In all this work historians have much to teach us about the experiences of the past, materials on which economists can apply the tools of systematic evaluation which can help sort out the conditions of progress from the conditions of stagnation. I hope that this book is a drop in that bucket. D/136,#1 1-12-86 effort1 FOOTNOTES 1This was first written in 1983, when that question seemed especially pressing.