Unintended consequences:: who’s kidding who?
Thursday, 3 January, 2013 Leave a comment
A parable from the 19th Century that the insurance industry would do well to remember as it (directly and indirectly) presides over a ‘system’ whose man-made complexity – created to strip value from its customers/suppliers in order to sustain its own, spiralling and unregulated, greed – is the biggest single threat to its survival own.
PLEASE follow the links (below) in relation to opportunity costs and …unintended consequences for further explanation. Both are economically significant, yet, apparently, too readily overlooked by acolytes of Irresponsible Capitalism. Yet another entry for the bulging category of inconvenient truths to be swept under the proverbial Corporate carpet!
Opportunity costs: refers to efficient use of resources (does the term ‘peak oil’ mean anything to you!?)
“Anyone who believes in indefinite growth on a physically finite planet is either mad, or an economist.”
Law of unintended consequences: is particularly relevant to those of us with an ‘interest’ in complex systems, risk, complexity and resilience. For, although recognised in the days of Adam Smith and the Scottish Enlightenment, it is too readily overlooked. Now that’s bad enough BUT, when you recognise what we now know about dynamic, non-linear, business [digital] systems, IT IS CRIMINAL! As is the ongoing practise of teaching economic theory that is known to be flawed!!!
…the consequences of policies will depend critically on the nature of the interdependences
Never in our history have we been confronted by such high levels of complexity but, courtesy of the “genius of Dr Jacek Marczyk” and Ontonix, we NOW have the tools to measure systemic, OTHERWISE UNSEEN (see below), interactions. The first step to, if not avoiding, minimising the financial impact of unintended consequences.
Counterintuitive, moreso than common sense, applies when dealing with complex systems…
…”common sense” isn’t much use if you are dealing with a system so complex that you CANNOT understand its complexity, track causality or anticipate the “unintended outcomes”! Where the smallest decisions can have enormous consequences and the smartest decisions can be counter-intuitive, how can they be validated when the crowd advocate “common sense”???
Isn’t it strange then that an industry, in whose interest it is to minimise the costs associated with the negative outcomes of unintended consequences, are, in the Digital Age (apparently), STILL intent upon ignoring these tools in favour of persisting with techniques that hark back to the (now past) Industrial Era? Unless, of course, their stated goals are different to their [unseen or hidden] actual agenda!?
Because, when you think about it, it isn’t the insurance industry that pays the price of their failures and the regulatory regimes created to protect their customer: it is policyholders and society who pay. Ultimately, WE pay for their losses, whether legitimate or not. They are quick to tell us about fraud, perpetrated against them but a greater concern should be the cost of endemic financial mismanagement. It is so prevalent that it is, almost certainly, a bigger case of institutional fraud than the mis-selling of PPI.
Of course the implications of ignoring such inconvenient truths have much wider implications than just the insurance industry…aren’t we all still living with the ‘unintended’ consequences of financial sector greed, politicians agreeing to bail out their financial masters AND ongoing manipulation of markets?
I would be interested to hear some thoughts on this and the following.
The parable of the broken window was introduced by Frédéric Bastiat in his 1850 essay Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Unseen) to illustrate why destruction, and the money spent to recover from destruction, is actually not a net-benefit to society. The parable, also known as the broken window fallacy or glazier’s fallacy, demonstrates how opportunity costs, as well as the law of unintended consequences, affect economic activity in ways that are “unseen” or ignored.
Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son has happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—”It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.