The key to effective public policy is to understand incentives. Incentives are not particularly well understood. That explains why most public policy is bad policy.

I will hone this post into a particular aspect of public policy, government licensing, shortly. Remind me to get on with it if I get distracted.

To set the scene, let me remind you of the difference between the Left political mind and the Right political mind. No, it’s not that billionaires should pay their fair share of tax. It is that the Left do not understand consequences. They don’t understand consequences because they don’t understand incentives. Therefore, they don’t think through their policy ideas.

They see a problem, such as house rents are too high and unaffordable for many. Their goal is to make house rents more affordable. So, they legislate to stop landlords increasing house rents. Does anyone think that will work? Even after hundreds of years of experience watching why price caps don’t work? Well the Left mind still thinks it will work, that is why they continue to impose price caps when they can. They have no ability to think through what will happen when they have a single policy idea designed to fix a single problem.

The right political mindset does not think that way. To the right, the world is full of people going about their own business trying to get ahead, looking out for themselves and family. Those people know that the best way to get ahead is to do something that other people value and will pay for. The right knows that every new policy restriction will have ramifications, many and varied.

To get back to licensing, the example at hand in an earlier post was a call to license superannuation funds to offer certain products to the market. Unlicensed funds would be prohibited and would presumably suffer criminal penalties if they breached the license rules. This is typical government behaviour. It is everywhere. Your doctor must be licensed. Your dentist. Your financial advisor. Your actuary. Your publican that serves you a beer. What is it about government licensing that makes outcomes worse not better? It is about incentives. The government that imposes a licensing requirement displays a total lack of understanding about incentives.

Take the doctor example. If there was no obligation to be licensed, what would make doctors want to provide the best possible health care for their patients? It would be their personal concern for the patient and their desire for the patient to return to the doctor whenever their health needed attention. The incentive for the patient and the incentive for doctor would align. They would be mutually beneficial. No other competing interests would exist. The better doctors would attract the patients and the bad doctors would find themselves unable to earn a living. Bring in Government licensing and the incentive structure changes. The license firstly restricts supply of doctors. Secondly it shifts the doctor’s incentive to be that of maintaining their license. They know that as long as they are licensed they can earn a living because supply is deliberately restricted. Patient care now has a competing interest.

Once the incentive structure changes, the consequences change. The Leftist mind stops just before getting to that point. They have a goal – make sure doctors are competent – and they decide to make that decision on behalf of everyone else by determining who can be and who cannot be a doctor. What makes a government bureaucrat better at judging the competent from incompetent doctor than an actual patient? Nothing! After messing up medical care, the busy Leftist moves on to stuff up something else in public policy. If it seems to you that the Left stuffs up everything they touch, now you know why.

Understanding incentives is hard. We are dealing with people after all. But it is not as if any of this is new. Adam Smith, the Scottish philosopher, wrote about this stuff in his famous book the Wealth of Nations, published around the time of Captain Cook’s discovery of the eastern coast of Australia. Smith wrote “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.”

The classical economists knew all this material. The typical economic treatise of 100 years ago would begin by analysing the fundamental aspects of human nature that drive all actions at the individual level.