Bounties, Grants, and Market-Making Entrepreneurship.

• Author: Lucas, David S.
• Position: Report

In an anecdote originating during British rule of India, colonial leadership sought to reduce the number of cobras--highly venomous snakes--in Delhi by offering a bounty for cobra tails to reduce their supply. Initially, wild cobras were hunted, and all appeared well. When a suspiciously large stream of tails was redeemed for payment, however, the government discovered that local entrepreneurs were breeding cobras for profit and so immediately disbanded the reward system. In response, the breeders released their cobras, increasing Delhi's serpent population dramatically. The incident is the presumptive basis for the term the cobra effect, instances where government efforts to solve a problem exacerbate it. (1)

Although this story's historical validity is unclear, economists and laymen alike have used it to illustrate the unintended consequences generated by perverse incentives. (2) Although many interventions fail, the cobra effect is arguably the most striking instance of government failure: the state encourages what it attempts to counter. A cursory understanding of the cobra effect focuses on antithetical outcomes generated by perverse incentives; however, the process by which these perverse outcomes emerge has received scant attention. We suggest that this story illustrates a specific dynamic of intervention, beginning with the state's commodification of previously nonpriced goods. This commodification gives rise to opportunities for creative individuals--that is, entrepreneurs--to discover ways to supply the resource, even leading to the emergence of new markets in the commodified good. As entrepreneurs supply the new commodity, the intervention is undermined.

We analyze instances of intervention where the state sets a positive price on a resource for which a market did not previously exist. Our argument explores how entrepreneurs respond when interventions transform resources that were not previously traded into economic goods. In the cobra story, for instance, wild cobras previously existed, but they were not traded until the intervention. The state itself transformed cobras into a positively priced resource; in response, cobra breeders exercised entrepreneurship to supply that resource.

Our analysis contributes to two strands of literature. The first is the literature on the "dynamics of interventionism," which integrates the traditions of public choice and Austrian economics to provide insights into the consequences of government intervention (Rothbard 1970; Mises [1929] 1977; Kirzner 1985; Ikeda 2002, 2005). This literature explores the dynamic characteristics of intervention into the market process. In contrast to a comparative statics approach that illuminates only snapshots of an intervention at given points in time, the dynamic view highlights the sequence of adjustments that diverse individuals undertake in response to an intervention. This work emphasizes that myriad individual adjustments to intervention can be both unintended and undesirable from the standpoint of the intervener.

Scholars in the Austrian tradition have applied these theoretical insights to a host of situations. For instance, Peter Boettke, Christopher Coyne, and Peter Leeson (2008) and Coyne (2008, 2013) analyze top-down reconstruction and development efforts. Coyne and Abigail Hall (2014) discuss how foreign interventions can "boomerang" back to erode domestic freedoms. Audrey Redford and Benjamin Powell (2016) explore how state antidrug policies spurred a series of unintended consequences in the nineteenth century, marking the beginning of the U.S. "war on drugs." Other work from one of us (Fuller 2017) applies Israel Kirzner's (1985) framework to analyze how digital privacy regulation impedes and redirects the entrepreneurial discovery process.

Sanford Ikeda (2005) emphasizes that an important aspect of the dynamics of interventionism is the effect of regulation on the entrepreneurial process. One category of unintended entrepreneurial consequences of intervention is the "wholly superfluous discovery process," first introduced by Kirzner. In this superfluous discovery process, "the imposition of regulatory constraints and requirements tends to create entirely new, and not necessarily desirable opportunities for entrepreneurial discovery" (Kirzner 1985, 144). This paper contributes to the literature on the dynamics of interventionism by focusing on one expression of the superfluous discovery process: entrepreneurs responding to the state's transformation of noneconomic goods into economic goods and thus its unintentional creation of a market for those goods.

Our paper also contributes to the literature exploring how institutions direct entrepreneurial activity into undesirable avenues. William Baumol (1990) writes that the nature of entrepreneurial activity depends on the relative payoffs to productive, unproductive, and destructive entrepreneurship. In his trichotomy, both unproductive and destructive entrepreneurship involve reallocation via transfers. Boettke and Coyne (2003) and Coyne and Leeson (2004) emphasize how institutions fundamentally determine these payoffs. Building on this insight, Coyne, Russell Sobel, and John Dove (2010) argue that "non-productive" entrepreneurship--involving the transfer rather than the creation of wealth--is the driver of economic stagnation and decline. These authors detail an undesirable dynamic where nonproductive opportunities arise from previous nonproductive opportunities; for example, nonproductive entrepreneurship can generate "new non-productive niches for profit" (338). They illustrate a process where lobbying for redistribution to and protections for entrenched interests generates new opportunities for lobbying by additional interest groups. We address a process where government intervention spurs an entrepreneurial response that can even lead to new opportunities in private exchange, suggesting the broader applicability of their insights.

Our analysis is important for several reasons. First, although the unintended consequences of the cobra effect have been discussed in a static context, little has been said about the dynamic adjustments underlying this tendency. We do not claim that the mechanism described here applies to every case of unintended consequences, yet our analysis is the first, to our knowledge, to specifically emphasize the entrepreneur as a driver of cobra-effect outcomes. Second, governments have intervened to transform un traded resources into economic goods throughout much of history and continue to do so. To the extent that market-making entrepreneurship contributes to government failure of this type, focusing on the phenomenon is worthwhile. Third, relatedly, market-making entrepreneurship is an expression of superfluous discovery that we believe to be relevant to a wide range of interventions. To illustrate this variety, we apply our theoretical analysis to five diverse cases of state intervention: rats in Vietnam; feral pigs in Fort Benning, Georgia; tuberculosis in South Africa; homelessness in the United States; and soldier remains in Southeast Asia.

We selected these cases for two reasons. First, they illustrate the robust nature of our theory. These cases are spatially diverse in that they relate to many different governments and populations. They also vary temporally, suggesting relevance in contexts with differing tastes, norms, and technologies. In addition, the cases deal with surprisingly dissimilar goods (from rat tails to human bones) and unique policy ends (from controlling a pest population to providing shelter for the homeless population). Second, each case involves novelty on some margin (e.g., by the reinterpretation of an existing case using the dynamics of interventionism framework or by the introduction of a case to the scholarly literature). The rat case in Vietnam has been noted by a single historian but has not been discussed in the economics literature. (3) The feral-pigs instance has been identified in popular discourse but has not, to our knowledge, been discussed in the scholarly literature. Although economists have explored the perverse incentives facing the homeless (see, for instance, Troutman, Jackson, and Ekelund 1999) and rent seeking in the homelessness industry (Lucas 2017a), no one, to our knowledge, has explored the market-making entrepreneurship associated with homelessness interventions. Neither the human-spit trade in South Africa nor the market for soldier remains in Southeast Asia has received scholarly treatment to date.

In the next section, we present a theoretical lens for understanding market-making entrepreneurship in the context of the dynamics of intervention. This analysis is followed by discussion of the five cases illustrating our theoretical framework and their implications.

Market Making, Superfluous Discovery, and the Dynamics of Interventionism

Little more than neoclassical theory is required to account for the price-theoretic insight that subsidization increases output. However, neoclassical insights provide no mechanism by which a new market comes about. (4) To explain this process, a theory of entrepreneurship is required. Our account explicitly highlights the relationship between intervention and market-making entrepreneurship. To do this, we bring a range of insights from Austrian economics to bear, including the theory of the market process, entrepreneurship, and the dynamics of interventionism.

Many theories of entrepreneurship involve "market making" as a key feature. Joseph Schumpeter ([1911] 1982) includes the opening of new markets as one of five types of innovation that characterize the entrepreneurial act. As Mark Casson states, "[O]ne of the most important forms of entrepreneurial activity is to identify changes in patterns of demand and to create new markets to meet those demands" (2005, 335). The market-process view of entrepreneurship, expounded by Israel Kirzner...