Someone (almost) always suffers when a new policy improves the lot of others.

Listener: 27 August, 2005.

Keywords: Distributional Economics; History of Ideas, Methodology & Philosophy;

Matthew Rabin is a wonderfully eccentric economist. His University of California at Berkeley website is littered with jokes. But his research on how we behave economically is some of the most interesting being done today, promising the 42-year-old a deserved economics prize in honour of Alfred Nobel.

A few years ago, economic behaviour was in the strait-jacket of “rational economic man”, a characterisation of how we function in economic situations. Its assumption that we carefully calculate to maximise our well-defined objectives is obviously not true. Following a close study of the evidence from psychological experiments, Rabin is a leading developer of a theory that offers a more realistic account of how we behave.

Yet, in the long run, despite the enormous significance of this innovation, he may be best remembered for “Rabin’s Law”. Like a number of other “laws” useful in the social sciences, it is not a rigorous scientific law, but a rule of thumb alerting that something peculiar is happening when it appears to be broken. Among the others I use frequently are: there is no such thing as a free lunch. (This is sometimes said to be the fundamental law of economics.) If a statistic looks interesting, it’s probably wrong (Moser’s Law). The way you score the game shapes the way it is played. (I learnt this from accountancy academic Don Gilling.)

To which can be added: any policy change usually makes someone worse off.

I may have been at the birth of Rabin’s Law. He was giving a seminar at Harvard University. (I was attending as a Fulbright New Zealand Distinguished Visiting Fellow.) Superficially, the topic was potato chips. The concern was why we lack self-restraint, doing things in the short run that in the long run we regret – like eating too many chips (or drinking to the remorse of a hangover). The phenomenon is a challenge to the notion of a “rational economic man” who should never regret what he does, unless the circumstances change.

Responding to one interjection, Rabin remarked that the existing policy is always “Pareto optimal” (that is, someone would always be worse off if the policy was changed). Avoiding the economic jargon, it becomes “any policy change usually makes someone worse off”.

Notice, I have slipped in a “usually” that, Rabin would no doubt have added, had his formulation been less spontaneous. All the “laws” stated above have a “usually” concept implicitly in them. Sometimes there is a free lunch, but such occasions are very rare. Circumstances change, and it may be that briefly there will be the opportunity for a benefit to all.

Rabin’s Law is a particular example of this proposition. Just as the fundamental law says all opportunities for everybody being better off are quickly seized upon, the political process quickly adopts policies that do not hurt anyone. Further policy changes improve some people’s situation and worsen others.

The law is one of the most fundamental ideas in government policy. It reminds us that almost certainly any policy change will make someone worse off. The law does not say that a new policy should never be introduced. Rather, it asks who will suffer from its introduction. That might suggest seeking to soften the impact, or it might demonstrate that the policy is faulty.

It is a particularly useful rule during an election campaign, when politicians promise policy changes, perhaps because they believe in them. But their presentation of new policies will emphasise the benefits to those they are trying to persuade to vote for them (or those who provide money and resources for the campaign – an increasingly important phenomenon). Advocates are most unlikely to tell the public who will be worse off, except when they are trying to make political pariahs of the sufferers. Typically, the pariahs are only some of those who will suffer.

Very often, the policy advocate, un-aware of Rabin’s Law, will not have thought through whose interests they are damaging. Help them by innocently asking any politician expounding a new policy: “You have told us who is going to benefit from your policy, but who is going to be worse off?” Rabin’s Law says that if they cannot answer, they probably have not understood the policy.