All problems can be traced to the feedbacks

At least that’s my theory.

Problems in feedbacks in human behavior can also be called incentive distortions.  What looks to many people like a “free market” failure, is usually an incentive feedback loop that has been distorted by government intervention.

Sowell hits on this in his column today:

Obama says he wants “federal housing agencies” to “help more people refinance their mortgages.” What does that amount to in practice, except having the taxpayers be forced to bail out people who bought homes they could not afford?

No doubt that is good politics, but it is lousy economics. When people pay the price of their own mistakes, that is when there is the greatest pressure to correct those mistakes. But when taxpayers who had nothing to do with those mistakes are forced to pay the costs, that is when those and other mistakes can continue to flourish — and to mess up the economy.

People paying the price of their own mistakes is an important feedback loop in a free market. It encourages more prudent decision-making in the future.

Pushing the cost of those mistakes to taxpayers who had nothing to do with those mistakes, distorts that feedback and loop, and causes mistakes to “continue to flourish.”

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3 thoughts on “All problems can be traced to the feedbacks

  1. “People paying the price of their own mistakes” begs the question of whether a person’s impending foreclosure is the result of their greed (buying a house that they couldn’t afford) or the result of something unexpected and beyond their control (losing a job because the recession forced their employer into bankruptcy).

    • Mark – Thx for the comment. But, I disagree.

      Buying something you can afford means considering potential changes in your life that may be beyond your control, like losing a job. For example, my wife and I decided to purchase a smaller home than our friends with similar incomes because we didn’t want to risk foreclosure if one of us should lose a job.

      Not considering such events would be my own mistake. I would not be too sympathetic to our friends with larger homes if they ran into trouble.

  2. Pingback: Why Does Power Corrupt? Update | Our Dinner Table

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