Goodhart's law

Indian Economy glossary

Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT

Meaning

Goodhart's law says that once a number used to track something becomes an official target, people start working to hit the number rather than the real goal, so the number stops telling the truth. In short: "When a measure becomes a target, it ceases to be a good measure."

It matters because governments, regulators and banks run on targets and rankings. If those numbers can be gamed, policy is steered by false signals.

Explanation

Origin: Bank of England, 1975

  • Charles Goodhart was an economist who advised the Bank of England. He stated this idea in 1975.
  • Money supply (the total money in the economy) was watched closely because it seemed to move closely with inflation (the general rise in prices).
  • Then the Bank of England made money-supply numbers official targets:
  • Banks and borrowers changed how they held and moved money.
  • The official money numbers started behaving differently.

  • The old, steady link between money supply and inflation broke down.

  • Lesson: a pattern that holds while you only watch a number can fail once you start targeting it.

How it works: measure vs goal

  • A measure is a clue that points to a real goal. For example, exam marks point to learning, and a low NPA figure points to healthy bank loans.
  • When the measure becomes a target, rewards and penalties are tied to it:
  • People find the cheapest way to move the number.
  • That way often does nothing for the real goal, or even harms it.

  • The number looks good, but it no longer tells you what is really happening.

  • Core reason: people change their behaviour to hit the number, not to reach the real goal behind it.

Common forms of gaming

  • Window-dressing: making a number look better without any real change (e.g. hiding bad loans).
  • Selective reporting: recording only what helps the number (e.g. not registering crime cases).
  • Chasing the ranking: officials fix only the parameters (the specific items a ranking scores) instead of the wider system.
  • Data manipulation: changing the figures themselves, as in the Doing Business case below.

What makes it stronger or weaker

  • Stronger when:
  • one single number decides rewards, funds or careers
  • the people being measured also report the data

  • there is no independent check

  • Weaker when:

  • many indicators are used together
  • data is audited by independent bodies
  • outcomes (real results) are measured, not just outputs (activities done)

In India

  • NPA targets and evergreening (banking):
  • An NPA (non-performing asset) is a loan whose interest or principal has been unpaid for more than 90 days.

  • If banks are judged mainly on keeping NPAs low:

    • They may give a fresh loan to a weak borrower so the borrower can repay the old loan. This is evergreening.
    • The old loan never crosses 90 days unpaid, so it is not counted as an NPA.
    • Reported NPAs look low, but the hidden bad debt keeps growing.

  • World Bank Doing Business report (global ranking that India chased hard):

  • Data irregularities were first reported inside the World Bank in June 2020. The report was paused and investigated.
  • It was discontinued in September 2021 [1].
  • It was replaced by Business Ready (B-READY), first released in 2024 [1].
  • B-READY rates economies on three pillars: Regulatory Framework, Public Services and Operational Efficiency [2].

  • Lesson: when rankings are targeted this hard, the ranking itself gets corrupted.

  • GDP and state rankings: states or officials may push up the measured indicator without real improvement on the ground.

  • Governance angle: India uses many dashboards, indices and state rankings. Goodhart's law is the warning that comes with each one.

Don't confuse with

  • Campbell's law (Donald Campbell, 1976): the same idea, but from social science and education ("teaching to the test"). Goodhart's law (1975) comes from monetary economics (Bank of England money targets).
  • Gresham's law: "bad money drives good money out of circulation". It is about currency, not about targets being gamed. Both names start with "G", which makes this a common trap.
  • Parkinson's law (1955): work expands to fill the time available. It is about bureaucratic growth, not about gaming a measure.
  • Jevons paradox (1865): efficiency gains raise total resource use. It is about the rebound effect, not about measurement.

Prelims Hooks

  • Goodhart's law (1975): "When a measure becomes a target, it ceases to be a good measure." It came from Bank of England money-supply targeting.
  • Campbell's law (1976) is the social-science version (e.g. "teaching to the test"). Goodhart is the monetary-economics version.
  • Doing Business was discontinued in September 2021 after data irregularities (first reported in June 2020). It was replaced by B-READY, first released in 2024 [1].
  • B-READY's three pillars: Regulatory Framework, Public Services, Operational Efficiency [2].
  • Evergreening (giving a fresh loan so a weak borrower can repay an old one) is a classic example of Goodhart's law in NPA targets. An NPA is a loan unpaid for more than 90 days.
  • Trap: Goodhart's law is not Gresham's law (bad money drives out good money).

Mains Points

  • Targets vs outcomes in governance (GS-II/III):
  • Goodhart's law explains gamed rankings (Doing Business, discontinued 2021 [1]), NPA evergreening and inflated state-level indicators.

  • Remedies: use many indicators, have them audited by independent bodies, and measure outcomes rather than outputs.

  • Banking regulation (GS-III):

  • When NPA numbers are the main test of a bank, evergreening hides stress. Bad debt builds up quietly and shows up later as a bigger shock.

  • Regulators should look at the real quality of loans, not only the reported NPA figure.

  • Ranking-chasing in reforms (GS-II/III):

  • Reforms planned only to climb a ranking may fix the scored items and leave real problems untouched.
  • B-READY's wider pillars (Regulatory Framework, Public Services, Operational Efficiency) [2] are a chance to aim at real improvement in the business environment, not just a better score.

Related concepts

Read more

Sources

  1. 1Business Ready: More about us (FAQ), World Bankworldbank.org · tier 2
  2. 2Business Ready (B-READY), World Bankworldbank.org · tier 2