Saturday, June 13, 2009

Why the Regulatory State always produces a worse result than the market

Why do so many unarguably bright people produce such unarguably bad results? Even the Swedes couldn't make socialism work. How come?

Incentives.

The incentive structure in the Regulatory State bureaucracy lead to adoption of less and less useful regulations, as new generations of bureaucrats try to make their careers and climb the ladder up from GS-7. David Friedman has an outstanding example:
Suppose you are the first city planner in the history of the world. If you are very clever you come up with Cartesian coordinates, making it easy to find any address without a map, let alone a GPS—useful since neither GPS devices nor maps have been invented yet.

Suppose you are the second city planner. Cartesian coordinates have already been done, so you can't make your reputation by doing them again. With luck, you come up with some alternative, perhaps polar coordinates, that works almost as well.

Suppose you are the two hundred and ninetieth city planner in the history of the world. All the good ideas have been used, all the so-so ideas have been used, and you need something new to make your reputation.
There's a reason that some things have been tried first, and why the greatest gains are always to be had early in the process.

The difference between the Regulatory State and a private firm, of course, is that a private firm cannot command labor and capital, and so is forced to prioritize earlier, and more.

1 comment:

DirtCrashr said...

Private firms seldom have an army behind them and the police in front...