Do you ever find yourself thinking “Well, this process is just wasteful? What if we made a rule, so that X. Surely, it would be better“? So did the economical planners of the USSR.
Soviet economics had really 2 goals:
- Give everybody employment
- Feed 293 million people and finance the entire endeavour
To some extent, we can even call the experiment a moderate success – the unemployment was definitely defeated. That is a metric that market economies still struggle with, especially now – after covid-related employment shifts.
It’s the economic viability that was not very successful. The USSR was not only much less effective than the western counterpart – it just wasn’t working and could not continue much longer than in 1990.
But why was it so problematic? In Optimizing Things in the USSR Chris Said explores the optimization problems of the Soviet Union. Since the Soviet economy was planned top-down, the rules introduced a lot of unforeseen perverse incentives. For example, there was a permanent shortage of thin metal tubes:
Administrators would often track the total tonnage of a few broad classes of steel tubes in the models, rather than using a more detailed classification scheme. While their models successfully balanced the tonnage of tubes for the broad categories (the output in tons of tube-producing factories matched the input requirements in tons of tube-consuming factories), there were constant surpluses of some specific types of tubes, and shortages of other specific types of tubes. In particular, since tonnage was used as a metric, tube-producing factories were overly incentivized to make easy-to-produce thick tubes. As a result, thin tubes were always in short supply.
At every turn, there were incentives for wastefulness in the name of meeting the goals. Operators acting in good faith had to overcompensate by lying which introduced even more miscalibration to the planning process, thus creating even a bigger problem.
Even worse, in order to obtain more resources, factory managers in the USSR routinely lied to the central planners about their production capabilities
The situation became so bad that, according to one of the deep state secrets of the USSR, central planners preferred to use the CIA’s analyses of certain Russian commodities rather than reports from local Party bosses!
Perverse Incentives
Setting top-down incentives in the complex system can sometimes hilariously backfire. A fantastic Reddit Thread “What’s a rule that was implemented somewhere, that massively backfired?” lists some:
Can you beat the highscore?
My city has issues with loud bikes/vehicles. So as a deterrant, the city put up decibel meters that displayed how loud your engine is(…) people would pull up to these signs and rev the heck out of their engines to see who could get the highest decibel count.
Missing the “30 minutes or less” Pizza delivery?
When Domino’s said all pizzas would be delivered in 30min. or less or your pizza was FREE. All the delivery drivers kept getting in car accidents to get your pizza to you on time, so it wouldn’t come out of their paycheck
Something to think about if you are organizing a wedding:
A hotel I used to work for decided they were having an alcohol-free holiday party. This didn’t sit well with the people who’d been working there for years and were accustomed to a full bar at the party. The staff parking lot ended up being full of people drinking in their cars trying to get a good buzz to carry them through the party and most people ended up getting way drunker than they would have so the party was a shit show.
You cannot have an alcohol-free wedding (in Poland at least). It’s better if you supply the alcohol – at least you have some control over the quality.
The Cobra Effect
Any good list of perverse incentives cannot omit the “Cobra Effect” (Wikipedia):
The British government was concerned about the number of venomous cobras in Delhi. The government therefore offered a bounty for every dead cobra. Initially this was a successful strategy as large numbers of snakes were killed for the reward. Eventually, however, enterprising people began to breed cobras for the income. When the government became aware of this, the reward program was scrapped, causing the cobra breeders to set the worthless snakes free; the wild cobra population further increased.
“Cobra Effect” is a consequence of the solution that’s worse than a problem it aimed to alleviate.
Deutche Bank and Remote Work
Some people have lucked out during the COVID pandemic and I count myself among them. When I was moving my career towards remote employment 6 years ago, my head was full of remote beaches and waterfalls. However, I found myself very well prepared (comparatively of course) for the challenges of 2020, even with the beach & waterfall shortage in my life. I do realize, that not everybody has had the same fortune, and am very sympathetic towards supporting other workers and actively contribute.
Also, the brilliant minds at Deutsche Bank have decided to optimize this, very much like the Soviet planners. I will let myself copy the key points from CNBC:
- Deutsche Bank survey found more than half of workers wanted to continue working from home for the 2-3 days a week after the pandemic.
- According to the Deutsche Bank Research report, a 5% tax rate on those days on the average salary of a remote worker could raise $48 billion a year in the U.S., £6.9 billion in the U.K., and 15.9 billion euros in Germany.
- This would cover the costs of grants for people who can’t work from home and are on lower incomes.
How can this go wrong? I will leave it out as an exercise for you! Can you find the most perverse incentive this creates? Send me an email!