If you want to get something done, it helps to have specific goals. Shooting a target is tough if you don’t know what that target is.
Properly calibrating the target is imperative. Chasing the wrong goals can engineer counterproductive incentives. It sounds like the goal should be obvious, but it can be subtle. We want to attack a problem directly, not the symptoms.
Creating complex rules to tackle a bevy of symptoms can, in fact, exacerbate the problem. For example, complex banking regulation has drastically raised costs of compliance which has in turn caused consolidation. Some have even theorized that the shrinking number of small local banks has been a primary factor in the slowness of the recovery from the financial crisis in small business funding.
There are times where consolidation may be a healthy market development, but we should recognize how regulation impacts the market and its participants (i.e. all of us). Rent control discourages investment in property improvements. Raising minimum wages and thus labor costs in low-skilled occupations can accelerate automation by encouraging capital investment. Restricting development increases housing costs for everyone by reducing supply. The point is not that regulation is bad; sometimes the benefits outweigh the costs and other times the side effects are in fact positives. The point is that sometimes our good intentions are perverted into worse outcomes. Even the housing crisis a decade ago began with the noble desire for higher home ownership rates among American citizens. The multitude of public and private mechanisms are too complex to tackle here (I recommend Adam Tooze’s Crashed for a thorough treatise), but the added up to reckless abandon and irresponsible lending.
Back to the crux of the matter: how do we avoid paving the road to hell with our thousand good intentions? We must not latch onto the first problem we see. Before we can go about solving anything, we must first understand the underlying causes and mechanisms of the issue down to the depths of their basic elements. This is easier said than done, but that is precisely why we must not rush anything and starting small is almost always preferable to large-scale interventions.
Perhaps the most visceral example is that of the so-called “war on drugs.” It started with Nixon and every time it became clear that drugs were still being consumed en masse, we threw more money and resources into enforcement. In the process, we have lost sight of what we were trying to accomplish: a reduction in consumption. By trying to prevent supply from reaching consumers, we may have caused temporary disruptions in supply or increases in price, but with demand standing strong the long-term effect was sinister. Illegal organizations popped up everywhere and the most violent ones gobbled up the smaller ones. Now we are left with international criminal cartels whose violence can only be described as astonishing. Their power rivals that of the state in some countries. The worst part is that we already had a fantastic example of what happens when you criminalize consumption in the shape of the prohibition of alcohol in the 1920s.
Why did we fail so spectacularly? We approached the problem as if the world was as we wished it to be rather than how it actually exists. How, then, can we go about truly understanding problems and their mechanisms?
It turns out humanity has developed a fantastic system for displaying what we collectively value. It’s been around for millennia and you use it every day. It’s called a market. We need to use it as a reference not only for understanding what is happening, but as a tool for experimenting with solutions and magnifying policy implementations. By simply playing with incentives, we can put private money to work at the things we wish to achieve. Work with human nature rather than attempt to stymie it.
Private interests will flock to new industries if it is clear they can make money doing it. Competition will sprout solutions no individual could have dreamed about. The key here is to engage all the stakeholders and understand that true sustainability must include profits.