Why policymakers keep getting it so wrong
Four months ago I started a think tank. As part of the process I looked into the history of policymaking. There is plenty there, both on the disasters side and the successes side.
But there was this surprising commonality across almost every single policy I looked at. It didn’t matter whether it was large, small, left-wing or right-wing, or even the country.
With almost every policy, the knock-on effects far exceeded the intended consequences.
In other words 90% of the consequences of a policy are unintended.
That really does change everything. Because that means that ostensibly good policies can become bad policies and bad policies good policies.
Perhaps the best analogy is from Chaos Theory. Everyone knows about the butterfly who flaps its wings and causes a hurricane on the other side of the world. Yet the butterfly’s decision-making is really confined to, “Shall I jump over to that flower over there?”
Examples abound. In fact almost every policy is an example. Take the Poll Tax. The Poll Tax contributed to the end of Margaret Thatcher’s career, and poisoned relations with Scotland - propelling the SNP and the current independence debate thirty years on.
Ultra-low interest rates were there to help our economy avoid a depression. A decade later they have caused the largest financial bubbles in history, the greatest equality gap in history and all the political baggage that goes with it. They have led to the greatest post-war expansion of the state and enormous misallocation of capital (too much cheap money). They have slown down economic growth, bankrupted corporate pension schemes, turbo-charged green energy and the development of the internet, while triggering a boom and bust in US shale oil drilling. And they have created moral hazard; where central bankers reward economically incompetent governments with cheaper money and more QE.
Perhaps one of the most pleasing examples of this paradox is from development economist Albert O. Hirschman – one of the most under-appreciated and creative economists of the 20th century. Hirschman travelled all over the world surveying economic development projects. What he noticed was that, in the long-term the most successful projects were also the most troublesome. When projects did not go as planned, good things happened. People developed creative solutions. They reached out for help by forging new relationships and involving more of society. Crucially the results were also more resilient and long-lasting. He called this ‘the hiding hand.’
Creativity always comes as a surprise to us; therefore we can never count on it and we dare not believe in it until it has happened. In other words, we would not consciously engage upon tasks whose success clearly requires that creativity be forthcoming. Hence, the only way in which we can bring our creative resources fully into play is by misjudging the nature of the task, by presenting it to ourselves as more routine, simple, undemanding of genuine creativity than it will turn out to be.
...Instead of asking: what benefits [has] this project yielded, it would almost be more pertinent to ask: how many conflicts has it brought in its wake? How many crises has it occasioned and passed through? And these conflicts and crises should appear both on the benefit and the cost side, or sometimes on one—sometimes on the other, depending on the outcome (which cannot be known with precision for a long time, if ever).
So, here is the big idea...
If 90% of the consequences of new policies are unintended, don’t we need to rethink policy making and presentation?
Currently, 90% of the focus is on the intended outcome and its core principles – e.g. we raise tax and give the money to the poor, reducing inequality.
What we need to do is invert it. i.e. 90% of our focus and presentation should be on all the possible knock-on effects, with just 10% on the intended outcome.
Of course, not all consequences can be foreseen. But should we not at least try to focus more on understanding the unintended consequences as well as the plan and the principles?
Like a wise ship’s captain, we need more iceberg thinking. We need to completely reframe our analyses and presentations.
We need to list our externalities and debate them more thoroughly.
And, we need to pursue those policies with the best externalities; sometimes regardless of the core outcome.
This is counterintuitive. However the rewards could be enormous.
Crucially, this could lead to huge savings and better public services. Just as carrying a Swiss Army knife is more efficient than lugging the entire kitchen drawer, policies that achieve myriad positive outcomes can deliver more for less.
That may be a hard. It is highly counterintuitive. It is harder to sell. But doing more of this somewhere along the line will lead us to way better results compared to what we have been experiencing.