Catching the bounty

Adam Smith wrote:

 “The bounty to the white-herring fishery is a tonnage bounty; and is proportioned to the burden of the ship, not to her diligence or success in the fishery; and it has, I am afraid, been too common for vessels to fit out for the sole purpose of catching, not the fish, but the bounty.”

The purpose of the subsidy was to capture the profitable white-herring trade from the Dutch. It made it profitable to build larger vessels, though not to catch more fish.

There are many cases in which similar results have occurred. When the UK offered a shilling (5 pence) for each grey squirrel tail to cut their numbers, it was alleged that some unscrupulous farmers were breeding grey squirrels to collect the bounty on their tails. This was not what the subsidy intended.

Goodhart's Law tells us that "When a measure becomes a target, it ceases to be a good measure." This means that if a specific metric is used as a target for performance, people will optimize their actions to maximize that metric, potentially at the expense of the overall goal the metric was meant to represent.

There was a famous apochryphal story circulated in the time of the Soviet Union about a nail factory whose output was to be measured in length of nails produced. The factory switched to producing long thin nails to achieve the quota. To thwart this, the quota was switched to width of nails, whereupon the factory’s response was to produce short, fat nails to reach the set target. The quota was reset to be measured in total weight of nails produced. For a month the factory labored in secrecy and at the end wheeled out one giant twenty-foot long and very heavy nail.

The point is that subsidies and quotas are no substitute for markets. The market wanted nails people could use, not extremely thin ones, or very fat ones, or twenty-foot ones. The markets, rather than the Commissars, could have told them what types of nail were wanted.

When courses in cake decoration are counted as equivalent to four GCSEs, technical schools will add such courses to boost their measured academic status and prestige.

People, being people, will try to maximize reward for minimum of input, and if the set target is easier to attain than the goal it is designed to achieve, It will be the target, not the achievement that is pursued. Markets, rather than targets, lead people to produce what other people want.

Madsen Pirie