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Risky Thinking
On Risk Management, Business Continuity, and Security
19 October, 2017
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Political Risk and Economics

Politics mostly consists of making policy decisions which benefit one group of people at the expense of another. How do you keep a check on policies which will affect you without spending too much time and effort on the process?

There's a rather sad small plaque in Nova Scotia's Cabot Trail provincial park near Cheticamp commemorating the site of a fishing village which was relocated to make way for the park. Apart from the plaque, a broken concrete jetty pointing out to sea from an empty beach is all that remains of the small village.

I wonder whether the inhabitants of this village were that happy with the political decision to form the park. I wonder if they even realized what was happening until it was too late.

One of the realities of politics is that it costs money to monitor what is happening. Economics, as they say, is about people responding to incentives. When a policy may have a major impact on you it's clearly worth monitoring. When the financial impact is less than the cost of monitoring, then the monitoring effort is wasted.

For example, suppose someone comes up with a policy which will see my business profit by $100,000 if it is introduced. It's clearly worth up to $100,000 in lobbying and campaign contributions if I can ensure that the policy will be adopted. Suppose that same policy will cost everybody else $1 if it is introduced. It's probably not worth their time to find out much about the policy, let alone to put together a reasoned argument and write to their political representative to oppose it. This, it is argued, is the reason why governments introduce so many policies which benefit small groups at the expense of the majority.

But there is another type of policy that governments particularly like. The type of policy which will cost me $100,000, and benefit a large number of voters by $1. What happens now? Rationally I should be prepared to spend up to $100,000 lobbying if I can prevent this policy being adopted. How much I should spend will depend upon how likely I am to succeed, but psychological studies suggest that I will put a lot more effort into preventing a loss than realizing a gain.

So far, so good. I'm rational. If a policy will cost or benefit me more than (say), $10, I stay up late lobbying my political representatives. Otherwise I roll over and go to sleep.

But the problem here is that the government does not introduce just one policy, it introduces many. It doesn't state clearly who benefits and who loses for most policies, only who benefits. Most of those are going to be the +$1 or -$1 type policies - policies I could safely ignore. If a policy is of the +$100,000 good news sort then somebody might ring me up to draw it to my attention and ask for a campaign contribution. But if a policy is of the -$100,000 kind then its unlikely anybody will ring me up and tell me — certainly not the government. In fact, it's probably not in their best interest for them to do so.

Remember also that journalists and editors are in the business to sell newspapers or TV advertising to the multitude, not to cater to the needs of a minority.

So how rationally do I monitor political developments to for policies to my advantage or disadvantage? The only practical way I know of is by joining together with others with similar interests who may be affected in a similar way by government policy and to share the cost. That way the $1000 cost of determining whether a policy is to your advantage or disadvantage becomes a $1 cost, and even the -$1 policies may be identified and cost-effectively opposed.

In Douglas Adam's Hitch-hiker's Guide to the Galaxy, the hero's house is demolished because he never checked up on local government policies. (A similar fate for similar reasons befalls the Earth). Don't let that happen to your business. Join an association or lobby group to make sure that your political interests are not neglected, whether at the local, regional, or national level.

Michael Z. Bell
October, 2004

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