Academic journal article Independent Review

Bounties, Grants, and Market-Making Entrepreneurship

Academic journal article Independent Review

Bounties, Grants, and Market-Making Entrepreneurship

Article excerpt

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. …

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