Businesses run from high costs like gazelle from a lion

Businesses will run from increased costs like gazelle run when they smell a lion. It’s amazing how quickly they change their behavior.

That was Andrew McAfee on the EconTalk podcast discussing his new book, “More from Less.” McAfee said that in reference to taxing or putting caps on carbon pollution, indicating that firms will seek alternative means of production — such as innovation — to avoid higher costs and therefore capture higher relative profits in the market. I think the government’s procurement process is a high cost that businesses seek to avoid in different ways.

First, there is the non-traditional businesses that will stay away from the government buyer because the costs are too imposing to break in, or will damage their competitive advantage in commercial markets.

Second, there is the small and medium size contractors who seek to avoid the costs by staying a subcontractor to primes or dealing with small business programs, in either case keeping the firms rather marginalized. (There are other classes of small/medium size firms not discussed here to be sure.)

Third, there are the large primes whose compliance with the high cost of doing business is their greatest asset and advantage. But they too make an art out of shifting costs around or doing other wizardry which complies with the process but not the intent of regulations. The data collected in the government come too late, too aggregated, and too context-less for it to be of much use in the decision-making process.

This all gets back to the seen vs. the unseen. Yes, government regulations will affect business behavior, but because businesses are full of smart and enterprising individuals with incentives, they will seek ways around the higher costs using methods not foreseen by the policy makers. The result can be an arms race between regulations and innovating ways around them.