Cui bono one more time

Yet one more illustration of the limitations of our institutional knowledge frontier as highlighted in this article, Profits on Carbon Credits Drive Output of a Harmful Gas by Elisabeth Rosenthal and Andrew W. Lehren.

If economics is the study of scarcity, then its singular most enduring insight is that if you want more of something, then you have to make it easier, cheaper, or more rewarding and if you want less of something, then you should make it harder, more expensive, and less rewarding. Pretty simple and straightforward. Whenever you make a change, it should always be second nature to ask "What are we rewarding and what are we punishing?" because that tells you what you will get more of or less of.

Real world experience, as illustrated in this article, seems to indicate that policy makers rarely ask this pivotal question. Or if they ask it, they clearly aren't very good at answering it.

This central central question is captured in a different form by that ancient Latin maxim "Cui bono?"

This is one of those ancient pieces of wisdom which has stood the test of some 2,000 years and yet which we are able to attribute to an actual individual. Cicero, in one of his speeches, references:

L. Cassius ille quem populus Romanus verissimum et sapientissimum iudicem putabat identidem in causis quaerere solebat 'cui bono' fuisset.

The famous Lucius Cassius, whom the Roman people used to regard as a very honest and wise judge, was in the habit of asking, time and again, 'To whose benefit?'

As indicated by Cicero, the original maxim really was more focused on the moral issue - you need to understand who benefits from an action in order to assess the morality of their action. But in order to answer cui bono, you have to understand what is being made cheaper, easier, or more rewarding. Before determining the who, you have to answer the how; Quomodo prodesse, how do you benefit? How does your action make it easier, cheaper, more rewarding and who benefits from that change?

This goes to the heart of the radical American experiment in liberty and the Constitution crafted to maximize the dispersal of power. Centralized power and decision-making is strategically inefficient and ineffective as well as corrupting.

Any system that centralizes decision-making meets the very real limits of Hayek's Problem of Knowledge. One manifestation of that limit of knowledge is the incapacity to answer the question "cui bono". It is why significant legislation almost invariably has major, long-lasting and consequential unintended consequences. Sometimes those unintended consequences are good and beneficial and we pretend that the whole effort worked as we intended. This is known as confirmation bias. Oftentimes, the unintended consequences are almost entirely negative, as in this case of gas emission control, and then we act surprised and treat this as an unpredictable aberration.

What is predictable is that the more complex a system, the more likely our actions will have unintended consequences and whether those consequences are beneficial or harmful (and to whom) is essentially random.

What is also predictable is that we will interpret successes as a tribute to good planning and the failures to bad luck.

The only way to address this systemic issue, as perceived by the founding fathers and by Hayek, is to disaggregate decision-making in to as small units as possible. While there will be many bad decisions, with agency, transparency, good data and good feedback mechanisms, the bad decisions will self-correct. When the stakes are made smaller, there is less opportunity for systemic corruption because it isn't worth it.

When power is aggregated centrally with centralized decision-making, there is always the risk of corruption and there is always risk of bad decisions having greater impact because the bad decision is no longer a small decision but a large one affecting multitudes.

In this one article, we have illustrations of multiple issues. There is the question of the wisdom of centralizing decision-making (establishing carbon trading exchanges and a market in gases) versus distributed decision-making. There is the philosophical/governance issue of power aggregators vs. libertarians. There is corruption (see the European carbon exchange history) and hubris (we think we know enough to surgically intervene in complex systems with predictable outcomes). There is the problem of knowledge (a hurdle for the power aggregators) versus the fear of inefficient dispersed decision-making.

How can we be seen to being doing something if all we do is leave it up to individuals? This is the radicalism of the American experiement in liberty - assume individual agency and responsibility, disperse decision-making, build a system of checks-and-balances to forestall power aggregation and ultimately stake one's faith in a government of laws and not of men. It was a blind leap of faith with little precedent and low expectations of success on the part of outside observers.

Ironically though, the more successful it was and is, the greater the temptation there is to go back and make the process just a little more efficient by aggregating just a little more power. Articles like Profits on Carbon Credits Drive Output of a Harmful Gas remind us to be skeptical of the siren call of centralized decision-making and the claims of efficiency and integrity.