Government interventions and the Cobra effect

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by Claudio Grass via Claudiograss.ch

Almost two decades ago, German economist Horst Siebert coined the term the “Cobra effect” to describe the real-world consequences of “well-intentioned” government interventions that go awry and produce the exact opposite results from what they aim for. The term was inspired by an incident that took place in India during the British rule, when the authorities tried to reduce the number of deadly cobras in Delhi by offering a cash reward to citizens for every dead snake. As one might expect, it didn’t take too long for entrepreneurial Indians to start breeding cobras to increase their income. And when the authorities realized the folly of their scheme and put an end to it, the now-worthless reptiles were released, causing the number of cobras to skyrocket to levels much higher than when the plan was first implemented.

This incident itself might be almost a century old, but the mechanism behind it is basically timeless. It always comes down to the hubris of central planners, who believe they can tame, micro-manage and control the economy, a living organism, with countless participants, forces and moving parts. Instead of allowing the free market to function as it naturally does, they naively try to tinker with it, restrict it and manipulate it, and the results are always the same: Either their efforts produce no results, usually at a great cost, or more often, they simply backfire and make the problem they were supposed to solve much worse. Or as Mark Twain aptly put it, “The best way to increase wolves in America, rabbits in Australia, and snakes in India, is to pay a bounty on their scalps.”

We’ve seen this play out time and time again, throughout history and in all kinds of different countries, periods and circumstances. Back in the 1860s, as the US was trying to complete its first transcontinental railway system financed by both state and US government subsidy bonds, Congress thought it would be a good idea to pay the contractors for each mile of track they delivered. Consequently, Union Pacific Railroad went on to lay tracks in the shape of a bow to maximize their profit.

A much less amusing example can be found a little later in Canada. In the middle of the last century, the government conceived of an inspired social welfare scheme to help the weakest and most vulnerable members in any society: orphans and mentally ill people. It paid institutions 70 cents per day per orphan and $2.25 per patient per day. An estimated 20,000 orphans were purposefully misdiagnosed and falsely certified as mentally ill and forcefully confined in state facilities until they reached adulthood and were rendered unprofitable.

Much more recently, we find similar results stemming from the “Endangered Species Act of 1973” in the US, a statute that still stands. Signed by President Nixon, the law imposed severe building and development restrictions upon landowners that find endangered species on their property. Clearly meant to preserve and protect those species and their habitats, the law had the exact opposite effect: The fear of losing the right to develop and use their property incentivized many landowners to preemptively destroy areas that might be able to serve as an attractive home to such species, while it even caused some to deliberately eradicate endangered animals found on their land.

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It is clear to any sane reader that behaviors like that, being entirely unnatural, irrational and senseless, could never have come about without the interventions of central planners. There are no such incentives presented in a truly free market and if anyone witnessed their neighbor engaging in similar activities, without knowing the full context and the artificial economic forces invented and laid down by state actors, they would surely think them lunatic or psychopathic.

And while it is obvious that creating such perverse incentives can directly cause real and often irreversible harm to large groups of people, to the natural environment and to entire economic sectors, the ripple effects of these policies should also not be underestimated. Although less clearly identifiable, at least at first sight, there are long-term and far-reaching consequences that stem from the vanity of a few men who believe they know what is best for millions of others.

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In the upcoming second part, we look at contemporary examples of the cobra effect, the consequences of which we’re still having to deal with today and for the foreseeable future. 

Claudio Grass, Hünenberg See, Switzerland

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