Roger Kerr - Public Policy Riddles

7 September 2007

Two Bedouins are riding their camels through the desert. One of them starts complaining about how slow their camel is. The other responds that theirs is slower. They finally bet on the issue. The oasis is three miles off and they agree that the person whose camel gets to the oasis last wins the bet.

You can see what happens. One of the Bedouins goes slowly, the other goes more slowly so as not to lose the bet, the first one goes more slowly still. An hour later the two Bedouins are sitting on their camels, stock still in the middle of the desert.

At this point, a wise man comes by and asks them why they are sitting in the hot sun when the oasis is only two miles off. They explain the situation. The wise man whispers two words and the Bedouins leap back on the camels and race for the oasis. The riddle is: what are the two words?

This is one of many riddles used by Santa Clara University Law Professor David Friedman in Private and Political Markets Both Fail: A Cautionary Tale About Government Intervention, published by the Business Roundtable in 2004. Friedman was illustrating a problem of so-called ‘market failure’. This is a situation where individual rationality does not lead to group rationality, in other words where, if each person calculates and acts according to their own interests, everybody will be worse off than if they had acted in a different way.

The answer to the riddle is, of course, ‘switch camels’. The bet was which camel got there last, so if each of the Bedouins is riding the other’s camel, they want it to go as fast as possible instead of as slowly as possible.

The example shows how, by changing the rules of the game, and therefore the incentives people face, the problem of market failure can sometimes be solved without having to resort to government intervention and regulation.

In any society, getting the ‘rules of the game’ right goes to the heart of what enables people to flourish and what, in turn, enables a country to prosper. By the rules of the game we mean public policy, that is, the framework of institutions, laws and programmes laid down by the arms of government (parliament, the executive and the judiciary) that regulate the economy and wider social interactions.

Public policy matters because it has a profound impact on the living standards of all New Zealanders and the attractiveness of the country as a place to live, work and do business. Individuals and businesses large and small will only flourish in the long run in a healthy, competitive economy and a strong, cohesive society.

This theme is the focus of Public Policy: An Introduction, a new publication released by the Business Roundtable (available at www.nzbr.org.nz) to help policy makers, business people, the media and others understand that it is not population, location or the level of natural resources that mostly determine a country’s long-run economic fortunes. Rather, it is the quality of its institutions and policies that are the key ingredients for economic success.

The study makes the point that understanding the power of incentives in human behaviour is all-important. In other words, structuring rules and institutions in carefully designed ways – the real-world equivalent of switching camels – helps align the interests of individuals with those of the wider community.

Another story illustrating the same point, also from Professor Friedman, concerns a typical household with two cooks. He poses the question: If one cooks the dinner, who cleans up?

It might seem, on the basis of justice and how tired someone is after cooking dinner, as though if they cook, the other person should clean up.

That is probably the wrong answer, Friedman suggests. The reason, which will be obvious to people who actually cook dinners, is that the amount of cleaning up that has to be done is not predetermined. It depends in large part on decisions made when cooking dinner.

Do you use the same pan for three things, or do you say, ‘I’m not going to clean up, let’s get a fresh pan’? Do you take advantage of the two minutes while the water is coming to the boil to clean up from the previous stage by wiping gunk off the stove before it gets burned on? Because you have choices to make about how you cook the dinner that affect the amount of cleaning up, there is much to be said for the rule: ‘Whoever cooks cleans up the resulting mess’. That is fair, too: we just take turns on who does both. That way, whoever does the cooking has the proper incentive to minimise the mess.

The fact that rules have consequences is an important lesson of public policy.

Roger Kerr is the executive director of the New Zealand Business Roundtable.

ENDS

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