Sunday, September 4, 2016

Chris Dillow on incompetence

Chris Dillow points out that incompetence is something that should be part of economic models, but isn't:

Chris Dillow - on incompetence. Quote:

Should ineliminable incompetence play a bigger role in economic and political thinking?

My trigger for asking is a piece in the Times by Oliver Kay on the appalling mismanagement of football clubs such as Blackburn Rovers, Charlton, Leeds and Blackpool. But of course, incompetence is much wider than that. Trains are late and overcrowded; building projects run over time and budget; utilities, banks and broadband providers often have poor quality service that can’t wholly be explained by profit-maximizing; and you all have examples of bad management in your own workplace.

Which brings me to a paradox. Whereas our own eyes tell us that incompetence is ubiquitous, standard economic theory regards it as merely a temporary deviation. It thinks that agents are incentivized to optimize; that badly managed assets will be bought cheaply by people better equipped to run them; and that competition will drive incompetent firms out of business.

But here's where he sums up the problem in one sentence:

I have an incentive to become a Premier League footballer or Nobel laureate, but you’d be ill-advised to bet on me becoming either.

It's not really a case of "incompetence", but rather one of unequal endowment of human capital. Unfortunately, recognizing that would mean using human capital as an input to every model, and it would also mean learning how to quantify human capital in some way if you want numbers to come out the other end.

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