To illustrate the idea, economists use the example of a factory, which imposes costs on others through pollution. But Thomas Schelling, a Nobel Prize winner, extended it to the social domain 40 years ago in his paper Hockey Helmets, Concealed Weapons and Daylight Saving Time: Binary Choice with Externalities. The idea is that the impact of a social choice can be magnified. Behaviour, whether good or bad, may be copied and generates social externalities.
In this vein, two Italian economists, Claudio Lucifora and Marco Tonello, have just published a study on cheating in exams. They found that the more people do it, the more likely it is that yet more will follow the example. A snowball can turn into an avalanche.
The authors trace the origins of a wave of plagiarism back to the classroom, to things which by themselves seem innocuous, like teachers tolerating minor homework copying. It’s the same thing as the “broken window” effect on petty crime. Most crime takes place in poor neighbourhoods, which tend to be a run down. But rigorous enforcement of standards, like mending broken windows quickly, can help reduce much more serious levels of crime.
Another example is the executive pay boom that began in the 1980s. One notable case was Cedric Brown, chief executive of the newly-privatised British Gas, who increased his pay to the then outrageous level of £400,000 a year. Despite public opprobrium, he got away with it and other executives saw that he had. Politicians may now demand companies be more socially responsible. But we are now a very long way down the track. Virtually the only focus of corporations is to maximise shareholder value and executive rewards.
Once the genie is out of the bottle, it is difficult to put back in. As such, the instinct of government to do more and to regulate more is wrong. We don’t need more government. We need smarter government, using the waves of information on the web and modern tools of analysis to identify potentially harmful trends at an early stage. Fixing the broken window does not need armies of bureaucrats. It just needs to be done early enough.
Paul Ormerod is an economist at Volterra Partners, a director of Synthesis and author of Positive Linking: How Networks Can Revolutionise the World.