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Saturday, 01
June 2019 / 06.15PM / By Rob Norton / Header
Image Credit: sourcingalliance.org
The law of unintended
consequences, often cited but rarely defined, is that actions of people—and
especially of government—always have effects that are unanticipated or
unintended. Economists and other social scientists have heeded its power for
centuries; for just as long, politicians and popular opinion have largely
ignored it.
The concept of unintended consequences
is one of the building blocks of economics. Adam Smith’s “invisible hand,” the most famous metaphor in social science, is an
example of a positive unintended consequence. Smith maintained that each
individual, seeking only his own gain, “is led by an invisible hand to promote
an end which was no part of his intention,” that end being the public interest.
“It is not from the benevolence of the butcher, or the baker, that we expect
our dinner,” Smith wrote, “but from regard to their own self interest.”
Most often, however, the law of
unintended consequences illuminates the perverse unanticipated effects of
legislation and regulation.
In 1692 the English philosopher John Locke, a
forerunner of modern economists, urged the defeat of a parliamentary bill
designed to cut the maximum permissible rate of interest from 6 percent to 4
percent. Locke argued that instead of benefiting borrowers, as intended, it
would hurt them. People would find ways to circumvent the law, with the costs
of circumvention borne by borrowers. To the extent the law was obeyed, Locke
concluded, the chief results would be less available credit and a redistribution of
income away from “widows, orphans and all those who have their estates in
money.”
In the first half of the nineteenth
century, the famous French economic journalist Frédéric Bastiat often
distinguished in his writing between the “seen” and the “unseen.” The seen were
the obvious visible consequences of an action or policy. The unseen were the
less obvious, and often unintended, consequences. In his famous essay “What Is Seen and What Is Not
Seen,”
Bastiat wrote:
There is only one
difference between a bad economist and a good one: the bad economist confines
himself to the visible effect; the good economist takes into
account both the effect that can be seen and those effects that must be foreseen.1
Bastiat applied his analysis to a wide
range of issues, including trade barriers, taxes, and government spending.
The first and most complete analysis of
the concept of unintended consequences was done in 1936 by the American
sociologist Robert K. Merton. In an influential article titled “The
Unanticipated Consequences of Purposive Social Action,” Merton identified five
sources of unanticipated consequences. The first two—and the most
pervasive—were “ignorance” and “error.”
Merton labeled the third source the
“imperious immediacy of interest.” By that he was referring to instances in
which someone wants the intended consequence of an action so much that he
purposefully chooses to ignore any unintended effects. (That type of willful
ignorance is very different from true ignorance.) The Food and Drug
Administration, for example, creates enormously destructive unintended
consequences with its regulation of pharmaceutical drugs. By requiring that
drugs be not only safe but efficacious for a particular use, as it has done
since 1962, the FDA has slowed down by years the introduction of each drug. An
unintended consequence is that many people die or suffer who would have been
able to live or thrive. This consequence, however, has been so well documented
that the regulators and legislators now foresee it but accept it.
“Basic values” was Merton’s fourth
source of unintended consequences. The Protestant ethic of hard work and
asceticism, he wrote, “paradoxically leads to its own decline through the
accumulation of wealth and possessions.” His final case was the “self-defeating
prediction.” Here he was referring to the instances when the public prediction
of a social development proves false precisely because the prediction changes
the course of history.
For example, the warnings earlier in this century that population growth
would lead to mass starvation helped spur scientific breakthroughs in
agricultural productivity that
have since made it unlikely that the gloomy prophecy will come true. Merton
later developed the flip side of this idea, coining the phrase “the
self-fulfilling prophecy.” In a footnote to the 1936 article, he vowed to write
a book devoted to the history and analysis of unanticipated consequences.
Although Merton worked on the book over the next sixty years, it remained
uncompleted when he died in 2003 at age ninety-two.
The law of unintended consequences
provides the basis for many criticisms of government programs. As the critics
see it, unintended consequences can add so much to the costs of some programs
that they make the programs unwise even if they achieve their stated goals. For
instance, the U.S. government has imposed quotas on imports of steel in order
to protect steel companies and steelworkers from lower-priced competition.
The quotas do help steel companies. But they also make less of the cheap steel
available to U.S. automakers. As a result, the automakers have to pay more for
steel than their foreign competitors do. So a policy that protects one industry
from foreign competition makes it harder for another industry to compete with
imports.
Similarly, Social Security has
helped alleviate poverty among senior citizens. Many economists argue, however,
that it has carried a cost that goes beyond the payroll taxes levied on workers
and employers. Martin Feldstein and others maintain that today’s workers save
less for their old age because they know they will receive Social Security
checks when they retire. If Feldstein and the others are correct, it means that
less savings are available, less investment takes
place, and the economy and wages grow more slowly than they would without
Social Security.
The law of unintended consequences is at
work always and everywhere. People outraged about high prices of plywood in
areas devastated by hurricanes, for example, may advocate price controls to
keep the prices closer to usual levels. An unintended consequence is that
suppliers of plywood from outside the region, who would have been willing
to supply plywood
quickly at the higher market price, are less willing to do so at the
government-controlled price. Thus results a shortage of a good where it is
badly needed. Government licensing of electricians, to take another example,
keeps the supply of electricians below what it would otherwise be, and thus
keeps the price of electricians’ services higher than otherwise. One unintended
consequence is that people sometimes do their own electrical work, and, occasionally,
one of these amateurs is electrocuted.
One final sobering example is the case
of the Exxon Valdez oil spill in 1989. Afterward, many coastal
states enacted laws placing unlimited liability on
tanker operators. As a result, the Royal Dutch/Shell group, one of the world’s
biggest oil companies, began hiring independent ships to deliver oil to the
United States instead of using its own forty-six-tanker fleet.
Oil specialists fretted that other reputable shippers would flee as well
rather than face such unquantifiable risk, leaving the field to fly-by-night
tanker operators with leaky ships and iffy insurance.
Thus, the probability of spills probably increased and the likelihood of
collecting damages probably decreased as a consequence of the new laws.
About The Author
Rob Norton is an author and consultant and was
previously the economics editor of Fortune magazine.
Further Reading / footnotes
1.
Bastiat,
Frédéric. “What Is Seen and What Is Not Seen.” Online at: http://www.econlib.org/library/Bastiat/basEss1.html.
2.
Hayek,
Friedrich A. New Studies in Philosophy, Politics, Economics and the
History of Ideas. Chicago: University of Chicago Press, 1978.
3.
Merton,
Robert K. Sociological Ambivalence and Other Essays. New York:
Free Press, 1976.
4.
1. Online at: http://www.econlib.org/library/Bastiat/basEss1.html.
Credits
The article Unintended
Consequences first appeared in Featured
ENCYCLOPEDIA ENTRY on Wednesday, Oct 29, 2003.
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