Thinking about Aaron Inc

Aaron Schiff has an excellent post up on his blog, discussing why the NZ Inc idea can be a bit dangerous.  I agree with him, and he has made a neat way of explaining it more clearly than I could have:

Think about it from a personal perspective. Imagine I was offered a high paying job in a new city. From an “Aaron Inc” perspective I might choose to take the job if it pays well. But what about the effects on my family, my quality of life, etc? “Aaron Inc” would lead to bad decisions overall, and I doubt anyone makes personal decisions solely on that basis, so why should a country?

The idea here is if we were just willing to focus on our income when making decisions, we end up missing out on all the other things we value – and ignoring that there are often trade-offs involved, such as between working harder/longer and enjoying more personal leisure time!

After giving it some thought, I would stretch the Aaron analogy a bit further though.

If Aaron was the one choosing, we already know that he knows what he values, what he cares about, and the trade-offs he’d like to make.  As a result, I would hope he takes these into account when making the decision.

However, when a government is making a decision for society as a whole these things don’t quite line up.

Instead imagine that Aaron isn’t the one making the choice about what to do with his life – instead there are a committee of people doing it.  Furthermore, he can’t accurately represent his preferences over things to people, and as a result the committee is having to guess at them.  Given this, the committee really needs to figure out what trade-offs exist and think about what Aaron’s preferences over all these things will be – and then put that in motion.  They will want to “maximise Aaron’s satisfaction” in some sense of the word.

Now if the committee decided “screw this we just need to do stuff”, and started following heuristics like “maximise income”, they would be acting like the NZ Inc idea for Aaron.  This would not maximise his satisfaction given trade-offs, and he would end up worse off than in the case when he could make the choices himself.

This is why markets are useful, they use prices to help reveal preference and allocate scarce resources.  They aid the democratic process which can’t fully rank preferences over society and choices (Arrow’s Impossibility Theorem).  These markets are akin to letting Aaron make choices himself in our example, instead of having a committee do it.

Government has an essential role in all of this.  It helps to co-ordinate activity when prices/markets fail for some reason.  It helps to introduce property rights and the rule of law.  And it helps to correct for injustices that may occur in a broad society.

However, just like in the case of the committee running Aaron’s life – a government that focuses on a naive heuristic such as “maximise this output” or “minimise this cost” or “fiddle with all the things to some degree”, rather than concentrating on allowing co-ordination to help maximise this unobservable value of people’s lives, will miss the point.  They will ignore trade-offs and inadvertently hurt people they couldn’t be bothered thinking about because “something must be done”.

It is this reason why many economists get nervous around the rallying cry of NZ Inc.

  • Shamubeel Eaqub

    It lines up with the disparity between income (slipping relative to OECD) versus quality of life/happiness (pretty high, #5 I think) indicators for NZ. Robert MacCallouch at UoA raised this with me over coffee several times. We make choices based on a number of variables, many unobservable by the government. Well maybe not after GCSB stuff 😉

    It is also relevant for the discussion around Fonterra and export diversity. There is a rally cry that NZ Inc must diversify. But if you create regulation that creates an entity like Fonterra and there is high global demand and prices for dairy, where do you expect resources to be allocated?

    Matt, can you please do a post on my anecdotal observation that whenever something goes wrong, the reaction is “what will the government do about it?”

    Isn’t there a role for using broad frameworks that already exist and using personal responsibility. Perhaps the reaction should be to wind back complicated policies rather than adding more?

    • “Matt, can you please do a post on my anecdotal observation that whenever
      something goes wrong, the reaction is “what will the government do
      about it?””

      You have an account – you can do a post 🙂

  • Aaron Schiff

    Great extra points guys – thanks. As James said on Twitter, it’d be handy to have a catchy phrase to replace NZ Inc. Something around happiness might be good, then the govt could have a Happiness Growth Agenda 🙂

    • They’d try to build a happiness machine, spitting out units of happiness.

      I call it a brewery, but people may have other ideas …

    • I prefer to replace ‘NZ Inc perspective’ with ‘growth perspective’. My experience is that NZ Inc implicitly refers to some measure of national income and calling it ‘growth’ indicates that you’re explicitly excluding everything else.

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