Goodhart's Law

"Once a social or economic indicator is made a target for the purpose of conducting social or economic policy, then it will lose the information content that would qualify it to play such a role.  When a measure becomes a target, it ceases to be a good measure."
-- Charles Goodhart, 1975



Humans naturally optimize what is being measured and identified as important.  This is the result of humanity’s highly refined skill in assessing risk and return. The problem with choosing what to measure is that the selection can generate counterproductive or even destructive incentives.  The process of selecting which data is measured and recorded carries implicit assumptions with far-reaching consequences. 

If we accept that growth as measured by gross domestic product (GDP) is the measure of prosperity, politicians will pursue the goal of GDP expansion.  If rising consumption is the key component of GDP, we will be encouraged to go buy a new truck when the economy weakens, whether we need a new truck or not.  If profits are identified as the key driver of managers’ bonuses, managers will endeavor to increase net profits by whatever means are available.

There is a growing dissatisfaction in the economics field with the current measures of economic activity: GDP, unemployment, and so on. This dissatisfaction reflects a growing awareness that these legacy metrics do a poor job of capturing what is actually important in fostering sustainable, broad-based prosperity, what many call well-being.  If we choose counterproductive metrics, we build perverse incentives into the system, incentives that guide the goals, strategies and behaviors of participants.

Rather than measure consumption and metrics that incentivize debt, what if we measure well-being and opportunities offered in our communities? What if we measured doing more with less rather than consuming more? What if our primary measure of economic well-being was the reduction of inputs (resources, labor, capital, etc.) that resulted in higher output (increased well-being)?  Systemic success or failure arises from our choices of what to measure and what thresholds we set as meaningful.

-- Charles Hugh Smith (The Daily Reckoning)