Economia

Goodhart’s Law - the sociological analogue of Heisenberg’s uncertainty principle in quantum mechanics - originally arose in economics, and can be defined rather succintly as: Controlling an indicator results in the distortion of its use as an indicator (1). But I think it should be easier to understand Professor Marilyn Strathern’s version of the Law: When a measure becomes a target, it ceases to be a good measure.

John Sloman’s Economics (5th Ed.) comes with a few interesting examples. Let me quote just one:

If bank advances are a good indicator of aggregate demand, the government may choose to control bank lending. But as soon as it does, bank lending will become a poor indicator. If people’s demand for loans is still high and bank loans are becoming difficult to obtain, people will simply go elsewhere to borrow money. If you regulate part of the financial system, you are likely to end up merely diverting business to other parts which are unregulated.

Note: Bolded emphasis is my own.

I found Goodhart’s Law (and its applications) rather interesting (though seemingly obvious), but that’s primarily because I wasn’t taught this in A-Level Economics. But more interesting perhaps, is the possibility of a Reverse Goodhart’s Law:

It has been waggishly asserted that the stability of the economic recovery that took place in the United Kingdom under John Major’s government from late 1992 onwards was a result of Reverse Goodhart’s Law: that, if a government’s economic credibility is sufficiently damaged, then its targets are seen as irrelevant and the economic indicators regain their reliability as a guide to policy.

Now, if you were to ask me how useful this tidbit of information is going to be later, well…

(1) John Sloman. Economics (5th Edition).