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Institutional Economics
The law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple, it operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences.
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READER COMMENTS
manuelg
Jan 24 2008 at 1:24pm
I agree, this is a good analysis.
But I hate the phrase “law of unintended consequences”.
It is a vacuous description.
…Some consequences are unintended. Ay, yup.
…Some automobiles are blue. Ay, yup.
“The Law of Unintended Consequences” has the same descriptive content as “The Law of Blue Cars”.
I would rather talk about “Simple, Politically Safe Solutions to Complex Problems”. They often have exactly the opposite of the purported effect, and this is tolerated because the whole thing is an exercise in grandstanding.
For example, Ethanol from corn is a convoluted way to burn more Saudi sweet crude. It is tolerated exactly to the degree that “Seriousness about Global Warming” is just grandstanding.
Gary Rogers
Jan 25 2008 at 12:23am
I always liked the term unintended consequences, but that is just terminology and can be left up to individual preference. What is important is that our complex system is not going to go away so we better come up with some way to manage it. If a company tried to run its business the way the government manages its affairs it would be out of business in a month. The place to start is making government as small as possible but past experience tells me that the most optimistic prediction would involve only minor downsizing. The Federal Government is just never going to be small.
Since government is destined to remain large, it seems like we could still come up with some simple measures at key control points that would help everyone understand what is going on and help manage operations. With these controls we might be able to avoid at least some of the unintended consequences of past legislation. Although I admit that I have not thought this through completely, here are some of the things I am thinking about:
* The more the government subsidizes something, the more will be produced but at a higher price. Think health care, education, housing, sugar, etc. Excesses, waste and high prices all follow subsidized goods. The control would be to measure and monitor all subsidies with some education on the results.
* Whatever we tax we will get less of. There should be some thought put into what we are taxing, why we want to reduce it and what the consequences might be if it was reduced.
* Controls lead to shortages. This is pretty well known, so price controls are not often used anymore; but we do have suggestions like freezing foreclosures which fall into this category. By categorizing legislation of this type, we should be able to better predict some of the consequences.
* Jobs come from businesses. If jobs are really a priority, as the polls keep telling us, we should avoid doing anything that hurts companies or capital formation. In fact, if we really believed in job growth we would not tax businesses at all and just tax profits when they are distributed to owners.
* Government spending may provide benefits, but they are always offset by a penalty of the same magnitude. If the money comes from taxes, there is a corresponding penalty where the taxes are levied. If it comes from printed money there will be an inflation penalty and higher interest rates that go with the inflation. If it comes from domestic borrowing, private spending not take place for the amount that is borrowed. If it comes from foreign borrowing, it will replace an equal amount of our exports that would have been purchased. Borrowing also means that we have to pay interest on the debt, which adds an additional penalty.
* Paying back previous borrowing puts the money back into circulation for domestic spending or purchasing our exports, depending on whether we are paying a domestic or foreign lender. This is offset by taking away the amount the government has to spend.
OK, maybe this is not feasible, but there must be a better way to run the government.
Troy Camplin
Jan 25 2008 at 9:16am
The”law of unintended consequences” as an idea is necessary because too many believe that “good intentions are good enough.” Their good intentions result in unintended consequences — hat is, they never made an effort to match their goals and their means, and so their means resulted in different outcomes than they intended. I notice that it’s primarily those on the Left who have to deal with unintended consequences.
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