Written by: Jason Lawit | Northern Trust
Economics is the study of wealth and resources and, perhaps - depending upon your politics - scarcity. Economics provides us with rules and theories to better understand individuals and households (microeconomics) and nations and regions (macroeconomics). Ideally, these rules help us make better and more informed decisions through time and add a dimension to our understanding of the world.
An economic concept I sometimes consider in an attempt to get a better understanding of an issue is Agency Cost. Agency Cost is the cost associated with non perfect alignment of goals between an agent and principal.
The idea of principal and agent and associated costs can be orthodox. The most traditional example is the cost associated with conflicting incentives between a company's shareholders and its management. Agency costs can also be direct or indirect. For executive management (an agent), a direct Agency Cost would be the cost of creating and monitoring a performance structure which aligns company executives to manage the company for maximized long term growth. An indirect cost might be the cost to shareholders where an executive was more concerned with his legacy (backward looking), as a steward of a company, than - forward looking - maximizing shareholder value.
Agency Costs can also be thought of more broadly.
Consider a municipal police agency whose aim is to protect and serve the people. The broad population can be considered the principals and police officers agents. Additional rules, procedures and oversight necessary to provide confidence that police officers represent the people consistently and fairly could be considered Agency Costs.
A very learned friend of mine once suggested the history of the world could be understood through agency costs. While I don't know if I would go that far, Game of Thrones (the TV series) provides a contained world which can benefit from an Agency Cost perspective. Think of the following relationships (to name a few) in Game of Thrones and how they might be understood from an Agency Cost perspective:
Think of Daenerys recently engaging Tyrion as an advisor.
Daenerys seems to have a clear set of objectives - take the Iron Throne and rule the Seven Kingdoms (and be a good mother to her dragons). Tyrion seems to have a less straightforward series of goals: revenge, prove his Father wrong and, perhaps - just rule for the people. The goals have some overlap, but Tyrion's goals are not perfectly aligned with Daenerys. What is the cost of such agency? Does the value of the advice of Tyrion outweigh such cost? How might Daenerys better provide incentive to Tyrion to give advice best aligned with her goals?
Perhaps Danerys' exercise of capital punishment (by dragon) several episodes ago can be viewed as a means to manage such Agency Costs.