Practical wisdom and organizations

When institutions are not working as they should, their leaders and policy makers typically reach for two tools with which to improve them—detailed rules and “smart” incentives. This paper argues that neither rules, no matter how detailed, nor incentives, no matter how smart, can do the job in any situation that involves human interaction. What is needed is character, and most especially the character trait that Aristotle called practical wisdom. People with practical wisdom have the moral will to do the right thing and the moral skill to figure out what the right thing is in any particular situation. The paper further argues that although they may be well intentioned, rules and incentives actually erode wisdom. Excessive reliance on rules deprives people of the opportunity to develop moral skill, and excessive reliance on incentives undermines moral will. Rules and incentives demoralize activities and the people who engage in them. Finally, the downward spiral of diminished practical wisdom created by increasing reliance on rules and incentives is taken as an example of “ideology”—a false conception of human nature that comes increasingly to look true as institutional conditions force people to behave in ways that confirm it.