Published on September 19, 2024 4:37 PM GMT
Many people believe that when something good happens, positive outcomes naturally follow — but I'm here to explain why that's often not the case. In complex systems, improvements or advancements frequently set off a chain of reactions that can undermine the original benefits. This creates a paradox where progress in one domain often doesn’t lead to better results.
Consider the case of restaurants awarded Michelin stars. Surely this must be good for the restaurant, right? However, a recent academic paper showed that when restaurants receive Michelin stars, ostensibly a good thing, they paradoxically become more likely to go out of business than similar restaurants without the star. Staff seek higher salaries, leveraging their elevated status for better opportunities. Property owners and suppliers feel justified in demanding more money. Customer expectations rise, as does the composition of the restaurant’s clientele. Ultimately, despite the substantial benefits the Michelin star brings, the ripple effects throughout the value chain often make it difficult for restaurants to capture the value. The star, intended as a blessing, instead triggers a destructive spiral.
Let’s consider another example. Israel currently has the most advanced missile defence system in the world, capable of intercepting and neutralizing over 99% of incoming rockets. In the past year alone, Hezbollah has launched more than 8,000 missiles at Israel, resulting in numerous deaths, significant property damage, and the displacement of an estimated 100,000 people. Now, imagine how much worse the devastation would be without such a defence system.
Yet, paradoxically, the prevailing view in Israel is that the situation wouldn't necessarily be worse without it. When Israel first developed this missile defence system, it fundamentally changed the strategic calculus for both Israel and Hezbollah. Before, Hezbollah could inflict substantial harm with only a few rockets, carefully managing the damage to avoid provoking an overwhelming Israeli response. Now, with the defence system in place, Israel can absorb a much higher volume of rockets, so Hezbollah simply fires more missiles. Individually, each missile has a reduced impact, but collectively, they sustain the same overall level of destruction — just enough to stay below the threshold that would trigger a larger Israeli retaliation. The equilibrium remains the same, despite the development of the world’s best missile defence system.
Living in Toronto, Canada, I worry about a similar dynamic here. Canada, as a large, neoliberal, English-speaking country, is well-positioned for future growth. As the nation's economic hub, Toronto effectively extracts a portion of all economic activity across the country while attracting the best new talent and capital. The conditions are so favourable for Toronto that it is almost destined to thrive, regardless of any decision or action by the city. But this success presents its own problem. If Toronto flourishes no matter what, without the need for disciplined or thoughtful governance, it erodes the feedback mechanisms that typically drive better policy and accountability.
When one thinks of dysfunctional cities like New York and San Francisco, it’s precisely because they are blessed with so much fortune that they can afford to be so mismanaged. This situation in these cities exemplifies a broader phenomenon we might call the "success trap." When a system (be it a city, a company, or even an individual) reaches a certain level of success, it can paradoxically become more complacent and less likely to experience further improvement. The surplus value generated by things like agglomeration effects, winner-take-all markets or even natural beauty/great climate gets absorbed by the growing complacency that those benefits bring.
The broader point is that positive developments rarely happen in isolation. There’s no ceteris paribus when it comes to good news. Each new advancement reshapes the surrounding environment, setting off a chain reaction of adaptations that may capture all of the newly created surplus value. This idea is well-known in some areas, such as risk management, where it is referred to as the Peltzman Effect. This concept observes behaviours like drivers becoming more reckless because they feel safer when they wear seatbelts. In development economics, the resource curse describes how countries rich in natural resources often fare worse than those without, due to the impact on the development of their institutions.
To ensure that good things actually lead to good outcomes, it’s important to strategically act in anticipation of the updated environment. This requires an understanding of how any improvement will impact the broader system and planning for second- and third-order effects. It's not enough to simply implement improvements and hope good things follow; we must also consider how those improvements will alter the incentives, behaviours, and dynamics of the entire system.
In the case of Israel and missile defence, they likely should have committed to responding to a single intercepted missile in the same way as if the defence system didn't exist. Otherwise, all the gains will be eaten up by increased missile frequency. This strategy of "acting as if the improvement didn’t exist" could be a powerful tool in other contexts as well, helping to preserve the benefits of advancements rather than seeing them have their surplus value captured. In some situations, it may be found that creating a seemingly good new thing is not worth it at all, as there is no way to prevent the surplus value from being extracted by others or to avoid a homeostatic equilibrium. Interestingly, this could suggest a case for a kind of nihilism: since much of the surplus generated by positive outcomes is either absorbed by others or constrained by a homeostatic equilibrium, something that simply exists might end up in the same position as something that works hard to produce a positive result.
I’ve been reflecting on this lately because I serve on the board of a large YIMBY organization in Toronto. At a recent meeting, we discussed the inefficiency of a policy called angular planes. This is where buildings in Toronto are constructed with an inward slant, creating an accordion-like shape to minimize shadows — though at significant cost and loss of potential density. The argument in favour of angular planes is that without them, these additional floors wouldn’t be built at all, resulting in shorter, smaller buildings that house less people. Less cost-effective, but additional density is surely better than no additional density, right?
However, based on the above, I’m starting to see it differently. I believe these buildings may have a natural height equilibrium that the city can tolerate and will eventually reach. By embracing inefficient angular planes, the city prematurely settles for a suboptimal version of that equilibrium. In the long run, without the pressure to enforce angular planes, Toronto would likely end up with the same height levels for buildings, just executed more efficiently. Of course, the ideal solution would be to allow for greater density outright, but Toronto's ability to produce good policy — undermined by the very cycle of success I mentioned earlier — is too lacking for that.
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