There is an economic principle called ‘diminishing returns’. This says, in effect, that your first hamburger is great, the second OK, but by the time you are on to your third and fourth, the returns in terms of enjoyment and allaying hunger are greatly diminished. Continue and the returns will eventually become negative. Of course, long before you become physically ill, the benefit:cost ratio will itself have become negative. This does not only apply to hamburgers. It applies to everything, including our policy settings. For a while the benefit of the new policy outweighs the disadvantages – until it doesn’t. We often fail to see the change because we are always looking backwards – justifying our current actions by the gains we have already made, and asssuming that these gains will continue.
Consider that over the last several decades we have made great efficiency gains in infrastructure services such as electricity production and distribution by increasing the size of our production units and integrating our networks. There was a period (up to about the late 1980s) when it was always more efficient to build a new plant rather than renew an ageing one because technological improvements were increasing boiler size resulting in vastly reduced capital costs and considerable savings in labour.
Eventually two things happened. The technological gains slowed down. And risks increased. For one thing, if you can satisfy demand with 6 units of a given size, should one fail you have lost 1/6th of your total output. But when the size of units increases to the stage where total demand can be satisfied by just 3 units, then failure of just one unit reduces your capacity to serve by 33%. Gains slow down, risk costs rise. We can see a similar pattern in the integration of networks. Initially the gains are great, and obvious. We do more integration and we get further gains. But the more individual networks that are connected the greater the risk that an accident in, or mismanagement of, any link in the chain will have flow on effects to the others.
And so we get events such as the 2003 major blackout of the NorthEast of America which extended into Canada and, closer to home, the 2016 widespread power outage in South Australia that occurred as a result of storm damage to electricity transmission infrastructure. The cascading failure of the electricity transmission network resulted in almost the entire state losing its electricity supply. To add to our worries are recent accounts of Russian hacking into US nuclear power plants.
So big is not necessarily beautiful. But what’s the alternative?
On hamburgers, there was a movie produced by Morgan Spurlock called Super Size Me. In the movie, he experimented with only eating MacDonald’s for 30 days. After the initial ‘declining returns’ and illness he then found his body started craving the food. There were numerous other negative impacts so the craving did not result in any benefits apart from possibly to the business. The craving was conjectured to be due to changes in gut bacteria. Regardless of the biology, in the context of this article, there is the possible reaction to change whereby people can come to ‘crave’ the effect of the change and become dependent on it, even though in the long term the effects are worse.
Interestingly, I can’t think of an asset related analogy for this, which may suggest that I am too bloated on the ‘hamburgers’ and blinded to my cravings. The lesson may be ‘Don’t make change taste like a hamburger’?
On the electricity systems – as for many networks these are designed with a level of redundancy or ‘spares’. I am not familiar with the details of the blackouts mentioned, but in terms of one of our four top words the ‘Uncertainty’ of the total failure of the whole system was probably so great (i.e. couldn’t be conceived of or costed) that the decision would have been made to ignore it. This is a valid Risk treatment option. Any of the networks in your area could fail if there are sufficient impacts to the network that exceed design and redundancy levels.
Thanks Doug. An interesting idea about cravings. I think it is true that we are developing a craving for (i.e. becoming dependent on) infrastructure expenditure and I would be interested to know how others think about this.