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The Cobra Effect” unfortunately does not refer to G.I. Joe, though the spectacular ways in which Cobra Commander’s schemes inevitably backfire could have easily inspired the concept. It actually refers to a story from when India was colonized by the British. The British felt that there were to many cobras, and issued a bounty. Rather than creating an incentive to hunt and kill cobras, people simply started raising them. When the British realized their mistake and stopped paying bounties, the Indians released the cobras, which made the population problem much worse. This is an example of a “perverse incentive”.

Perverse incentives are incentive structures that produce counterproductive actions, often the opposite of the intended effect. They exist in free markets, but are rare, often localized to a single industry or sector, and are usually quickly recognized and corrected. Employees paid by the hour, for example, have an incentive to waste time, but an employee who wastes too much time will be fired. These same problems are an epidemic in any government program, and are often never corrected.

In a free market, the incentive within any industry is to reduce costs and prices. By using resources more effectively and undercutting the competition, a company increases their market share and can make more money. Even in a monopolized industry, as long as no barriers to entry prevent competition from entering the market, a firm will be forced to maintain low prices to keep competitors out. Low prices benefit consumers by allowing them to direct resources toward other products and services. The overall effect on an economy is to increase the wealth of everyone, even the most impoverished.

Planned economies, at their core, are based on looting other people. The incentive is to loot as much as possible before someone else does. This occurs at every level of a socialized program. Producers of a socialized good constantly demand more money and resources. If they have a surplus, they may squander it intentionally rather than admitting it to the oversight of the central planners, and suffering a budget cut in the future.

You will almost never see a government institution return a surplus to the public they have looted. Likewise, a socialized good provided for free to the public will be claimed by those who don’t have an actual need. If the soviet planners have delivered three crates of size 11 shoes, but you wear a size 10, you will still grab as many of the shoes as you can. Someone with size 11 feet may have something you need in the future. Capitalism is still how people get what they need in a planned economy, but it is conducted through barter and bribery on the black market.

Planned economies suffer from a lack of oversight, which would mitigate the effects of perverse incentives. In a free market, a business owner or manager spots problems in the incentive structure of their small organization rather quickly. This is an advantage that small businesses have over big business in a free market. It is very difficult to manage more than about a half dozen people. Eventually, multiple managers are required to run a business. They will eventually require managers, and their managers will require managers.

This creates a bureaucracy of middle management which has the potential to become grossly inefficient and costly. Socialism is the ultimate big business monopoly, where the State runs everything. In a socialized industry, maintaining low costs is not necessary. The public can simply be looted for more resources. Poor results can always be blamed on the budget (spoiler alert: no budget will ever be big enough). Because a State run monopoly exists through force and coercion, there is no threat of being undercut by a competitor entering the market.

The only character traits incentivized in a Socialist bureaucracy are the ability to lie, cheat, and steal. I won’t pretend that psychopathic behavior doesn’t exist within big business bureaucracies (it certainly does), but working hard, making good choices, and maintaining a reputation for decency and efficiency are the most attractive traits. Nobody wants to do business with an ass. When working in the private sector, the most power hungry and ill-informed person in the room is almost always a government regulator.

Regulations are particularly prone to perverse incentive structures. The endangers species act, for instance, created an incentive to kill endangered species. This is the inverse of the perverse incentive structure I described at the beginning of this article. When a land owner discovers a population of rare insects living on their property, they must either immediately eradicate them, or accept that they will never be able to develop the land, even if they currently have no intention of doing so. The value of their property will also go down, and selling it will become more difficult in the future.

No economic system is perfect, but incentive structures can’t be ignored. Centralization of economic and political power means that mistakes made at the top have catastrophic consequences. Often times, Socialists will argue that what they want is bottom up, rather than top down economic and power structures. However, the policies they argue for never produce that effect. Government control of resources does not create good incentives or efficient use of resources. Contrary to what “Democratic” Socialists might say, voting does not fix any of these problems. A competitive market is the only model which has a proven record of streamlining production, creating incentives to preserve resources, and producing greater abundance for the benefit of all.

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This is the second installment in my ongoing rebuttal of everything Socialist. Click here to read my first piece, addressing the problems with making economic calculations in a Socialist system.