UNCOMMON ECONOMIC THEORIES

Hey everyone, let’s chat about economic theories, but not the usual stuff they throw at us in lectures. I mean the obscure ones that don’t get much attention. There are quite a few economic theories that aren’t widely discussed, or maybe you’ve heard of them but most people haven’t. I’ll kick things off. Ever come across Goodhart's Law? It’s a concept in Management and Economics. Basically, it says that a measure loses its effectiveness as a measure the moment it becomes a target. So, when you take a tool meant to observe and turn it into a goal for rewards or consequences, people start gaming the system instead of actually making real improvements. Like when a company decides to judge itself based on customer reviews, but then employees just start bugging customers for 5-star ratings. That’s a classic example of Goodhart's Law. You see this a lot in the crypto space too, where projects are too focused on price rather than on the product itself. Once a token’s price becomes the primary focus, developers often ignore its utility. You end up with fake partnerships, paid influencers hyping things up, and all that might pump the price temporarily, but then it crashes when people see nothing of real value was built. The takeaway from Goodhart's Theory is clear: don’t mix up the scoreboard with the actual game. When you only chase the numbers, the real value gets lost.

THE COBRA EFFECT Stems from an incentive scheme that went wrong. The name came from a story during the days of British Raj where they offered bounty for every dead cobra in order to reduce cobra population. The population of Delhi saw this as an opportunity so they bred cobras and killed them after raising them thus making money. Eventually, the authorities caught on and stopped paying for dead cobras. The breeders then released all their cobras making the cobra situation worse than ever. This can be observed in economics or particularly in crypto wherein no one really actually uses a project because they are only after the incentives and once there’s no longer incentive available, the “users” leave.

Well, you can't really stop the measure (measure of good quality) from becoming target for reward. People can be told that this is what they need to do to be successful & earn good rewards, otherwise they wouldn't very much know the right thing to do to earn the rewards. But ofcourse, there will be competitions to meet the target (measure of good quality) and earn reward hence the likelihood to cheat. You can simply stop or minimize this by reviewing every work to ensure that people are providing good quality services or producing good fruits. If they get underseved good rewards, that become debts that will need to be paid back in one way or another, or you outrightly deduct the rewards from their accumulated rewards, if they can't pay the debts, or deduction is not possible they work for free until they repay the debt, were sold as slaves(in the past) to work and repay their debts, or they get sent to prison. The work review should be fraud-proof otherwise they cheat or game it also. The recommended approach is to open up the review system to the public, and let them find issues in works and reviews of other people. If you open it up to the public, it becomes very likely that the best reviewers will be part of it to prevent bad work or bad reviews of other people from scaling through. But I recommend that the reviewers be anonymous (possibly hidden ID within the review system) and there should be accumulation of reputations from past reviews By the way, I think the Goodhart idea should be considered a theory rather than law. A theory becomes law once it's established to be correct.

Yes, the Cobra Effect. Very interesting and sneaky theory. It shows how the solution to a problem might end up making the problem even worse, because of human ways and behaviour which would always find the fastest paths to reward. We can clearly see it in different sectors of our times, only the reward for doing something is optimized. The original goal, forgotten. Thank you for this wonderful insight.

A “good” example of this law is the “planned economy” of the USSR. And this example shows how this law works in reality. I was born in the USSR, and I know the history of the USSR “firsthand.” So, the planned targets that were set were achieved, but the quality indicators were extremely low. At the same time, the targets themselves were far removed from the real needs of the population, and the results of their implementation were of very low quality. But... the top leadership and “local authorities” received bonuses for numerical indicators of dubious KPIs. Everyone knows the result - the collapse of the “second pole of the world” regardless of the size of the territory, the population, military power, and “40% of the world's mineral reserves.”