Saturday, February 11, 2012

Unintended Consequences by Rob Norton

Unintended Consequences

by Rob Norton

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.