In this episode, we explore how good intentions and good outcomes are so easily destroyed by the same bad decision…
What’s the purpose of a prison? In an ideal world, it shouldn’t exist at all - but we don’t live in an ideal world. So at best it’s perhaps an unfortunate social-necessity, a place to isolate people who’ve become unable to act appropriately within the agreed rules of the society. To use the US term, a ‘penitentiary’, where people can repent for their misdeeds and return to society as good citizens. Fluffy abstract descriptions of that kind, anyway, that gloss over so much of the sheer messiness of the real-world.
Whichever way we frame it, the overall aim would be that there would be less crime and violence sloshing around in the social context. If that’s the case, then low rates of crime plus low numbers in prison would be a good metric to aim for. And there’s a social incentive there, too: crime is costly, in every sense, so we want to keep it down.
But yeah, it’s unlikely that crime will ever vanish entirely, so yeah, we’ll probably still need a prison of some kind, perhaps run by the state on behalf of society as a whole, and under the authority not just of the state, but of society as a whole.
Yet prisons are expensive to build and expensive to run - so surely it’d be cheaper, and easier, if we hand the whole mess over to some company or other, to run the whole thing on behalf of the state as a commercial operation?
Not a good idea.
Really not a good idea…
Why not?
It’s because if we do that, we’ve just introduced perverse-incentives - incentives that are directly opposite to those of the initial intent. We started out aiming to reduce crime - to keep crime to the absolute minimum that we can. But in this insane ‘economics’, that company is going to need to make a profit: and if the state only pays them per prisoner, they’ll only make a profit if the prison is full. Which means that they now have a strong incentive that make sure that perceived-crime will increase. Judges get issued with quotas: no matter how minor that infraction may be, just make sure that that defendant goes to prison. Police get issued with quotas, to make sure more people go to court, to make sure they go to prison. And look! - the crime rate has gone up! - which proves we need yet another privatised prison! And another… and another… and another…
The outcome is evil, sure - disastrously so, from a social perspective. Yet it isn’t intentionally evil as such - or we’d hope not, anyway. It’s just that that’s what happens whenever we forget the initial intent, and allow perverse-incentives to take over.
And it isn’t just prisons, of course: in a money-based ‘economics’, we’ll see the same perverse-incentives at work just about everywhere around us.
Take healthcare, for example. The overall intent is that, as much as possible, people should stay well, and if they do get ill, that they should get better as quickly as possible. The cheapest and most effective way to do this, with the best healthcare outcomes overall, is if the healthcare system is managed by the state, on behalf of the people as a whole. By comparison, the more the system is privatised, the more the costs go up, fragmentation goes up, and healthcare-outcomes overall go down. (Globally, the hard-data have long been absolutely emphatic on that point, though it’s interesting to note how much the data are becoming suppressed in favour of relentless sales-pitches for privatised healthcare…).
Yet why is that? The answer is that as soon as we privatise the system, the incentives are changed. The state has a strong incentive to keep healthcare costs low, but also to ensure good healthcare outcomes for all (because otherwise epidemics become unmanageable, for example). By contrast, privatised ‘healthcare’ has a strong incentive to ensure that people become ill - because then that there’ll be a market for the organisation’s services. And it also needs those people to only partially recover - to become well-enough to earn to pay, but not well enough to be safely healthy - so that the organisation can continue to sell its services to those people. Gotta sell those tablets, sell those tablets, sell those tablets - so we need people to be unwell enough to need them…
It’s not just in healthcare, of course - it’s everywhere. A surprising number of industries actually depend on things going wrong: car-repairers pray for rain, otherwise they won’t get paid because there’s no crash-repair work to do. Same for just about any kind of repair-work, really. Definitely perverse-incentives sitting right there.
And then we have really stupid mistakes such as Public-Private Initiatives (PPI), which are pretty much built upon perverse-incentives. Let’s take real example of a city that wants a new road. The intent for the road is that traffic will flow more smoothly, and supports everyone - business, commute, freight, personal-travel, everything that the people who live in the city would want. The city wants all of this right now - but the catch is that it can’t afford it right now. Ouch.
So it sets up a PPI deal with some big road-construction company. They reach a deal, in which the city agrees that this new road will be privately owned and operated by the construction-company, as a toll-road. A ‘nice little earner’ as we used to say. And all of their incentives collide horribly with the original intent for the road. Oops…
What actually happened in this real case was that the company required the city to change all of the roads in the entire city to feed as much traffic as possible onto the toll-road. Which promptly locked up, because until they finally got round to setting up an automated system, all of that traffic had to go through toll-booths, very, very slowly. And only people who could afford pay the tolls could use the road - which meant that anyone on a lower income how to find some way to bypass the whole miserable mess. Freight fees and bus-fares rocketed, because everything had to go through the toll. Oh, and every other toll-road in the region had its own system for managing automated tolls, none of which were compatible with of the others, cluttering up every driver’s windscreen with a forest of erratic, misbehaving, often double-billing toll-dongles. Lots and lots and lots of other problems, legal, financial, heaven-knows-what-else. Ouch. Lots of ‘ouch’…
The real outcome was that driving in the city was far worse than it had been before, and cost far more, too. The only ones who benefited from this bleak farce were the owners of the toll-road, who made a very fine profit, with fees contractually guaranteed to increase by several percent each, despite providing no new services at all. Perverse-incentives indeed.
Again, though, we don’t need to use pejorative language such as ‘evil’ here. All I’m saying is that that’s what perverse-incentives do - and hence no-one should be surprised if those incentives are acted on, no matter how perverse they might be.
Sigh…
What can we do about it? Short-answer: whatever we’re working on, be clear what the real intent and incentives are: and take care to never allow any perverse-incentives to intrude into the real story.
You Have Been Warned, perhaps?
Perverse indeed, many such scenarios exist Today which mirror your examples. Banks are always a prime example of such incentives, first time home-buyers are almost criminally allowed to apply for loans which stretch their finances to the limit. When interest rates inevitably climb the homeowners cannot afford to maintain instalments, and thus put up their house up for sale to settle the original debt. The house of course has re-entered the market place for the next potential buyer ensuring that the perverse incentive forms a continuous loop at ever increasing interest rates.