Starmer must remember humans respond to incentives, not rules
Rules are important to any civilised society, but Starmer has forgotten that humans respond far better to incentives, writes Paul Ormerod
As the Prime Minister, Keir Starmer, often reminds us, his father was a toolmaker. He himself is a lawyer.
The two professions have a lot in common. Both require the following of well-established rules and processes. Whether it is the manufacturing of a precision instrument or the application of precedents from case law, there is a clear structure to be followed.
Rules and regulations are obviously an important part of any civilised society. But they fail to take into account the fact that social and economic policymaking involves human beings.
If there’s a loophole, humans will use it
Humans are creative and do not necessarily follow rigid sets of behaviour. If it is to their advantage to get round a regulation or exploit an unintended loophole, they will do so.
A recent example is the rental market in Berlin. As the Guardian newspaper – no doubt essential reading for the PM – recently noted, Berlin is often seen as a beacon of “progressive” housing policies. Renting there is associated with secure, unlimited, rent-controlled tenancies.
But the same piece went on to point out that, in reality, Berlin now has one of the most overheated property markets in the world. In 2023, the last full year for which data is available, in this notionally highly controlled market, asking rents for apartments rose by 21 per cent.
The reason is a simple loophole in German federal law: if apartments are rented out as “temporary” and “furnished”, owners can evade tenancy regulations and charge considerably higher rents. From a very low level, the incentive structure has altered landlord behaviour so that this type of renting now makes up over 50 per cent of the market in Berlin and other German cities.
Around the world, whenever rent controls have been introduced without such loopholes, the supply of properties for rent falls and the quality of both the accommodation and the maintenance falls. The incentive for landlords to supply good properties is reduced by the controls.
Case studies in Europe
La Gaîté Lyrique, a left-wing cultural centre in Paris, staged a free conference on “reinventing the refugee welcome in France”. More than 200 migrants, who had been living on the street, turned up. Not surprisingly, the incentive to stay in a warm building rather than sleep rough was strong. They refused to leave, and the centre is on the verge of bankruptcy through being unable to stage performances.
In 2023, 157,000 asylum seekers and economic migrants crossed the Mediterranean into Italy. In 2024, the number collapsed to just 66,000. Prime Minister Meloni did not, as Starmer has done, try to tackle the problem by re-defining people smuggling gangs as terrorists.
Instead, she used monetary incentives. Meloni has paid the Tunisian and Libyan governments to co-operate in preventing the would-be migrants leaving their shores. In addition, she has introduced substantial fines for so-called humanitarian rescue vessels which exceed their quotas of how many people they can land in Italy.
These are but a handful of examples of the simple but profound truth that changes in incentives can alter the ways in which humans behave.
A lesson for Starmer
The British government appears to struggle with this concept. For example, making labour more expensive by increasing employer National Insurance means that companies have less of an incentive to employ people, a stark fact illustrated by the current collapse in the employment figures.
Rachel Reeves seems to have grasped that regulation can be a powerful barrier to growth. But the crucial next step for her to take is to understand the key role which incentives have in creating a dynamic, successful economy.
Paul Ormerod is an honorary professor at the Alliance Business School at the University of Manchester and an economist at Volterra Partners LLP