notes on efficiency

I've been watching the Wire and thinking about bureaucracy.

In a small company/drug gang/ police department, people dare, and they make mistakes. They're trying to get the job done just to survive.

This success grows them something worth owning. And more people join. And to succeed, players must no longer just survive as a team, but look good as individuals. So it becomes less about success than about covering your ass.

The thing is, if you're covering your ass, you don't have two hands for your job. You don't dare. And you don't succeed so daringly. You succeed with your crushing momentum.

In other words, the incentive is false. It encourages quiet mediocrity over risk-taking success.

The trick to economics, really, is finding ways to peg tangible incentives on the what actually matters, not what indicates what matters.

Baseball provides a fine example. The Oakland As (as so excellently chronicled in Moneyball, by Michael Lewis) figured out that prized baseball statistics do not actually translate to better players or wins. Despite emphasis on batting averages, on base percentage indicated winning potential more clearly. Errors often indicated that at least someone had hustled to the action. And walks indicated a batter with a small strike zone.

So, the A's got rookies on the cheap that everyone else ignored. Jason Giambi, Miguel Tejada and David Justice all began as low-paid As until they hit free agency.

The better you get at pegging incentives to desired results, the more efficient your markets are. For example, if private prisons made money by reducing recidivism, rather than by having more inmates, the government would spend less, instead of more, on prisons each year. More efficiency.

I am very much in favor of small government. Some people who try to make smaller government, however, end up making it more expensive and less effective. Privatization is a system in which the incentives do not encourage the goal. Private power systems (Enron, anyone?) led to massive blackouts, because natural monopolies like power grids do lend themselves to competitive pricing. Privatized electricity, however, at least makes sense if market players can compete.

Child services has no way to peg performance to dollar incentives. Neither do prisons, yet we privatized them. Prison guard unions and incarceration corporations now buy our congressmen and demand more arrests and longer mandatory sentences. Their incentive pays them for more Americans locked up, not fewer crimes committed.

The inmate population has more than quadrupled since privatized corrections began in the 1980s. It is two million people and counting.

Now, democracy, in an economic sense, is an attempt to peg the happiness of the people to the performance of government. It runs into many inefficiencies in this process. People know little about the government's performance. Advertisements and editorialists change what people demand from government. (Happiness/the right to pursue happiness is too vague to demand.) 

Campaigns need money to win elections these days, (the days of T.V. advertising) but for a campaign donor to earn money does not require an egalitarian government. That inefficiency just complicates the process.

Make democracy more efficient. Pay attention to the facts. Write your congressmen. I suggest starting with Mukasey's refusal to prosecute attorney generals.