Many economic models assume that firms or other economic actors behave rationally, in particular, that they utilise all potential profitable opportunities available to them. This assumption is often pithily expressed as ‘there are no dollar bills left unclaimed on the sidewalk’. One of the most troubling episodes in contemporary economic history for this view is that brought about by the combination of the oil shock and rising environmental concerns which led in the 1970s to a dramatic increase in pollution regulation in most industrialised economies. Most companies, especially those directly affected, vociferously opposed the increased regulation claiming that the reductions in pollution and improvements in efficiency required would be very costly.
In fact, in many cases compliance proved far cheaper than expected with many firms saving money as well as saving the environment. To give just one example, consider the case of Japan as detailed by J.R. McNeill in Something New Under the Sun: An Environmental History of the Twentieth-Century World p. 98:
Japan even achieved quick control over car emissions. Tokyo’s car fleet quadrupled to 2 million from 1960 to 1970. … Tokyo brewed world-class smog and lived in a “permanent dusk”. MITI, the all-powerful Ministry of International Trade and Industry, reacted to public outrage by creating emission standards for the auto industry, following those the United States implemented in 1970. In both countries the car companies claimed the standards could not be met. The American companies sued the EPA. Japanese companies complained loudly but worked vigorously to meet the MITI and EPA standards. Some companies met both, years before the law required it, which helped them surge into the American car market in the 1970s. By 1978 new Japanese cars emitted only about 10 percent as much pollution as had new 1968 models. The Japanese aversion to old and used cars helped modernize the fleet rapidly and drastically reduced tailpipe emissions.
This very success begs the question of why firms had not engaged in these measures earlier. One answer is that they only became profitable once energy costs had risen or the regulations were in place but this can only be part of the answer. Another answer is that while people were wrong on this occasion this doesn’t mean they are wrong on average — in economic jargon their expectations while wrong could still be rational (that is, not systematically wrong but rather right on average not every time). Again, while perhaps partially correct it seems hard to accept when there was such systematic error committed by such a large group. Thus, we are left with the conclusion that it is possible for economic actors to make systematic errors, to, as it were, ‘leave unclaimed bills on the sidewalk’, particularly in relation when the opportunity under consideration is a novel one.
