It is surprising to find that Schumpeter (1954) does not mention the word “incentives’ in his monumental history of economic thought.Today, for many economists, economics is to a large extent a matter of incentives: incentives to work hard, to produce good quality products, to study, to invest, to save, etc. How to design institutions that provide good incentives for economic agents has become a central question of economics.
Maybe Schumpeter’s omission arose because, when he was writing, economics was mostly concerned with understanding the theory of value in large economies. For that purpose, neoclassical economics in particular postulates rational individual behavior in the market.In a perfectly competitive market, this assumption translates into profit maximization for firms’ owners, which implies cost minimization.In other words, the pressure of competitive markets solves the problem of incentives for cost minimization. Similarly, consumers faced with exogenous prices have the proper incentives for maximizing their utility levels.The major project of understanding how prices are formed in competitive markets can proceed without worrying about incentives.