Goodhart's law

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Although Goodhart's law has been expressed in a variety of formulations, the essence of the law is that once a social or economic indicator or other surrogate measure is made a target for the purpose of conducting social or economic policy, then it will lose the information content that would qualify it to play such a role. The law was named for its developer, Charles Goodhart (a chief economic advisor to the Bank of England).

The law was first stated in a 1975 paper by Goodhart and gained popularity in the context of the attempt by the United Kingdom government of Margaret Thatcher to conduct monetary policy on the basis of targets for broad and narrow money, but the idea is considerably older. It is implicit in the economic idea of rational expectations. While it originated in the context of market responses the Law has profound implications for the selection of high-level targets in organisations.

It has been asserted that the stability of the economic recovery that took place in the United Kingdom under John Major's government from late 1992 onwards was a result of Reverse Goodhart's Law: that, if a government's economic credibility is sufficiently damaged, then its targets are seen as irrelevant and the economic indicators regain their reliability as a guide to policy.

Alternate Expressions

• A risk model breaks down when used for regulatory purposes. (Daníelsson, 2002)

(Daníelsson formally labels this a corollary of Goodhart's Law.)

• Goodhart's law is a generalized social science expression of the more well-known and economic-specific Lucas critique.

External links

• Goodhart, C.A.E. Monetary Relationships: A View from Threadneedle Street in Papers in Monetary Economics Volume I, Reserve Bank of Australia, 1975
• K. Alec Chrystal and Paul D. Mizen, 2001, Goodhart's Law: Its Origins, Meaning and Implications for Monetary Policy
• Daníelsson, Jón. "The Emperor Has No Clothes: Limits to Risk Modelling." Journal of Banking and Finance, 2002, 26, pp. 1273-96.