Sunk Cost

Matthew Yglesias writting in response to Fareed Zakaria says:

This idea that if a project wasn’t worth doing it is worth abandonning halfway through certainly isn’t true as a general proposition. Say the government allocated a few million dollars to build a wasteful bridge, and now it’s almost done but before it can be opened they need $50 more in order to paint the lines on the road. It would be pretty silly not to support the additional money at that point, since not opening the bridge isn’t going to get you your money back.

The topic at hand is what reasonable people’s position ought to be regarding our commitment to Iraq – Do we stay, do we go?

This is a discussion that ought to be had, more carefully, more calmly. This comming year is going to be a lousy time for calm analysis though.

I like the bridge metaphore, in part because I use to help think about exchange standards. Exchange standards lower the transaction costs for two parties to move back and forth betwix each other. They create network effects the players on both sides of the bridge get locked into the habits of using the standard; i.e. the players climb the experiance curve. Complementary products and services pile on to make areas around the bridge more valuable. Thus London grows to complement to London Bridge.


LonBrtop.jpg

London Bridge – tourist attraction in Arizona

Of course it’s silly to even paint the lines on the bridge if the bridge doesn’t go anywhere.

So one part of the challenge in thinking about the cost of finishing the project in Iraq is figuring out what the upside is. Those that lead the charge into theis enterprise hoped it would create the hub around which the entire gulf and the middle east could be reframed. That’s a delightful, if hegemonic, goal. But does anyone believe that anymore? Few I think.

Lacking that clear benefit we seem reduced to more prosaic benefits. An unthreating, reasonably peaceful, and prosperous Iraq that provides a good example for others in the region – for example.

The problem with bridge building, standards creation, and other organized public goods is that it’s extremely hard. Many voices have to be convinced to sing the same song. That can only happen if you have reasonably strong leadership that people respect and follow and you can demonstrate clear benefits to all parties so they expend the effort to get there.

We seem to lack all these. In particular we pissed off whatever chance we had of grabing the reins of leadership going into the project thru our arrogant behavior. Of course if you can demonstrate sufficent cost/benefit people will follow even arrogant leaders. The tough nut is that nobody in this debate is currently providing a credible story that generates substantail cost/benefit. Mostly all we get are benefits that require far too much faith coupled with a general undercurrent of denial about the costs.

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