In order to discourage the negative health effects of alcohol abuse, the Swedish government has long enforced high taxes on all forms of beer, wine and hard liquor. Arguably, there have been a greater number of deaths and illnesses resulting from this high tax policy than if there had been no tax at all. The reason for this is that the artificially high prices on alcohol encourage the Swedes to find other, less expensive ways of procuring liquor, like distilling their own spirits from grains and potatoes. Due to the lack of expertise and quality control in private stills, every year a number of Swedes suffer from acute alcohol poisoning and develop addictions to extremely strong forms of spirit. This is a perfect example of an unintended consequence of a government policy.
Typically an “unintended consequence” is thought of as an unforeseen negative result of some action (such as a law, policy or new practice). Sometimes this negative result is precisely the opposite of the intended outcome (as with the Swedish alcohol example above) and sometimes it is simply a result that is somewhat negative or negative in another way. An example of this might be the regulations concerning smoke-stacks in coal-fired electric generating stations. Local communities complained about the air pollution created by smoke-stacks in Ohio and the result was government regulated increases in the height of smoke-stacks. The unintended consequence of taller smoke-stacks was to send the sulfur dioxide into the jet-stream, contributing to increased acid rain and the lower pH levels of lakes in northern Canada which in turn threatened certain kinds of wildlife. The unintended consequence was not directly opposite to the original problem, but another unforeseen problem that required different kinds of solutions.
There can also be unintended consequences that are neutral or even positive. For example, a friend of mine who does occasional work for an institute in Montana ultimately benefits the overall trout population. How? Well, in Montana she enjoys fly-fishing, and in order to do so, she purchases licenses and equipment, which bring resources to the angling community in Montana, which has an interest in maintaining healthy trout populations. Free markets produce all sorts of positive unintended consequences because they reward innovation and allow for creative dynamic responses to changing opportunities. When a new innovation emerges, it produces millions of positive, negative and neutral responses that were not intended or foreseen. However, the positive unforeseen consequences overwhelm all others seeing as they vastly improve prosperity, life-expectancy and the range of choices that flow from freer markets.
Perhaps the best early articulation of unintended consequences is by the nineteenth-century French economist, Frederic Bastiat. In his famous essay, “What is Seen and What is Unseen”, Bastiat points out that we cannot gamble with unseen consequences, for the difference between the intended and unintended consequences is not a trifling matter, but often “tremendous”:
“for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa.Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil”.
What Bastiat means by a “small present evil” is, for example, the apparent unemployment that follows from the drastic changes in certain industries. Typewriters, typists, and various stakeholders in typing guilds have all been challenged and largely put out of work by the personal computer and word processing software. The “small present evil” is the unfortunate unemployment of those in the traditional typing industry. But if excessively tough penalties had been imposed on the innovation of new writing technology, we would all still be beholden to traditional typing methods, and that would have stifled innovation, prevented the decentralization of typing work, slowed our ability to share Word documents across the Internet and so on. All of these things are what Bastiat meant by the “great evil to come”.
When our governments bow to the various protectionist demands for certain industries (such as tariffs on steel, sugar, dairy products, lumber and so on) it is possible that “what is seen” is that people who work in those industries are protected and keep their jobs. “What is unseen” is that all citizens must pay higher prices for those products. Furthermore, others who can provide those goods more efficiently are prevented from competing, innovation in production is stifled, there is less overall wealth, and fewer resources are available for reinvestment and job creation. And so Bastiat’s “small present evil” is avoided but these greater evils are created down the road.
The institutional arrangements and the various assumptions that lead government to meddle in the economy are many and complex. One important fact to acknowledge, however, is that government (or any one mind or organization) can never have adequate knowledge of the economy to pick winners and foresee all of the possible consequences that will flow from various forms of regulation and taxation. Furthermore, when a large state actor (like the government) imposes a regulation, it is often extremely difficult to reverse the action in order to prevent or correct the negative unintended consequences. A simple tax or tariff intended to protect one industry, for example, might consume more resources and generate more social costs than if the industry was allowed to survive or die on the basis of its relative strengths.
Those who endorse a free market acknowledge that there will always be unforeseen actions and consequences that follow from the uncoerced actions of millions of producers and consumers. Most of these consequences, free-traders believe, are positive. But to those consequences that are negative, the free market responds more quickly than any government, with individual actors pursuing private incentives to create positive outcomes as efficiently and productively as possible.
For the link to the Bastiat article, see here:
Vanessa Schneider email -
Welcome everyone to the live discussion of "Unintended Consequences." We are joined by Jonathan Fortier, who will be online for the next hour to answer your questions and respond to your comments.
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Greg Krewski email -
How is it possible for price controls on a good or service to create shortages of it?
Jonathan Fortier says: Price controls limit the possible profits that people can realize on the sale of goods and services and so undermines the incentives to produce more. This is how rent controls usually result in creating less housing for the poor.
Baron Stearns email -
Very interesting article Jonathan. I am curious to know how you would respond to those who argue that freer markets have led to a 'race to the bottom' in terms of lowered labour and environmental standards.
If global trade is to be encouraged, should there be preconditions that take into account the protection of human rights and environmental standards? If so, should these protections be valued above money?
Jonathan Fortier says: Dear Baron,
Thanks for your article. I suppose that in response I would point skeptics of free markets to some great works on the subject that you raise. One example is Deepak Lal's work, "Reviving the Invisible Hand" which persuasively argues that globalization has vastly improved the living standards of people around the world. Inevitably there are people and businesses that abuse (or attempt to abuse) others both in free markets and in controlled economies. Most classical liberals support free markets as long as certain standards (about labour conditions and so forth) are protected. Others, such as libertarians and anarcho-capitalists, argue that a free market will ultimately produce the best overall labour conditions because it will create conditions where employees will be able to "shop" for the best environments. The issues are particularly thorny when children are involved.
Skeptical email -
Can't we support the government subsidization of certain industries if the unintended consequences of a free market would produce even worse results in that particular case?
Jonathan Fortier says; Great question! There are all sorts of examples where certain industries are protected for just this reason. Let's say, for example, that US steel workers simply cannot produce their product competitively compared to Indian and Chinese steel workers. If the price of steel imports is not kept artificially inflated through import duties, then thousands upon thousands of steel workers in the US would go out of work. Looks like a pretty bad scenario. So bad, in fact, that the average person might think that it is justified to impose tariffs in order to prevent the really bad consequence of lots of unemployed people. But, as you can imagine, the unintended consequences of these tariffs are many and I would argue, even worse than short term unemployment. With the higher tariffs, all Americans now must pay more for everything that uses steel -- the costs of car production and housing and transportation and so on all increase. The ripple effects can result in higher costs for tourism and recreation and farming and so on. All of these higher costs mean less money for reinvestment elsewhere, which ultimately means fewer new opportunities for the American people -- even steel workers. No one is arguing with the fact that it is very hard to lose one's job. But ultimately it is even harder to live in an economy that is stagnant and not producing new opportunities. The other thing to note is that higher tariffs do not simply protect American steel workers, they also impede the steel workers in India and China from developing more prosperous lives for themselves.
Thanks for the question!
Pork Chop Boy email -
Economics is often called the science of unintended consequences as so much of what the discipline deals with is explaining why we get results not anticipated. Given the dominance of this phenomenon in economics, why do you think so many people are ignorant of it?
Jonathan Fortier says: That's a great question Pork Chop. Bastiat lamented this as well, saying that people dismiss him as stating the obvious, then go ahead and vote as though they hadn't heard his message in the first place. I think that one reason for ignorance of economics is that people try to transpose their own economic experience in the world onto extended economic systems. For example, the average person thinks that you can address a certain problem by spending money on the problem. If your roof is leaking you spend money on a roofer and the leaking stops. I give someone three dollars, and they give me a sandwich. It all makes perfect sense as we have daily experience of solving these problems or getting what we want by spending money appropriately. When we attempt to transpose this experience onto the world, however, we get weird results -- I see a failing sugar industry in the US, so I impose import duties on sugar to the US to protect sugar growers. Seems simple enough, I have now solved the problem of a failing American sugar industry. This is how the average person thinks about economics I believe, and that is a serious problem (the funny thing about the American sugar duties is that they result in enormously high production of corn in the US in order to produce a less expensive sweetener -- corn syrup!).
What do you think Pork Chop?
Thanks for your question!
Baron Stearns email -
You said that: "Most classical liberals support free markets as long as certain standards (about labour conditions and so forth) are protected."
What do you think is the best way to enforce these standards?
Jonathan Fortier says: Baron,
Well, the minimum standards accepted by most would be limited negative rights -- that is, individuals are treated as autonomous individuals and cannot be coerced into working for certain employers or forced to accept certain conditions unless they have explicitly consented to them. Beyond that, we get into a complex array of questions. Some argue that government can force employers to create safe working conditions. That is a fairly regulatory approach, and many classical liberals would argue that it is not the business of government to intrude in this way. Others who favour less intrusion would argue for transparency or openness of information. For example, they would support laws that obligated companies to make publicly available any information about the hazardous substances (like asbestos or certain glues and paint thinners) in the work place. Employees would then be free to choose between some companies and others based on environmental factors and so forth. Still others who favour even less intrusive policies would argue that transparency and certain kinds of certification can be maintained more ethically, efficiently and effectively through private regulatory bodies -- such as Underwriter's Laboratory, that certifies electronic equipment.
Coso email -
Knowledge is key. While many institutional arrangements and assumptions lead to government intervention, skeptics, in my view, will only begin to resist that intervention rather than actively support and justify it when they realize (and when market supporters begin to stress) that politicians and bureaucrats act in the shadow of their limited knowledge - not out of malice or pure self-interest, as anarchos and rational choice theorists claim.
Poor Painter email -
There are some people, like artists and writers and so on, that have a hard time making ends meet with their work. Isn't it justifiable that the government subsidizes those small groups of people through redistribution or by buying their art and displaying it in our museums for everyone to enjoy? This sort of subsidization is really a small expense when spread out over the entire population, and I can't see where the really negative "unintended consequences" would arise.
Poor Painter
Jonathan Fortier says: Dear Poor Painter,
I am a fan of the arts, or some of the arts, so I appreciate your question. It is possible that the unintended consequences of taking very small amounts of money from people might not be that terrible. There is a moral argument to be made here about whether taking any money from someone for purposes they don't support is justified,
but we will leave that aside and try to focus on the theme of unintended consequences. Cumulatively, almost everyone can find a cause they want to support, so if we are funding artists, then why not lumberjacks and miners and fishermen? You can see that the unintended consequence of that is that people have a lot less money to invest where they think best. But let's look at it from the different perspective of artists and the kinds of art that would emerge in your proposed system of government grants. Who would determine which artists get the money? Would there be committees of government officials that would evaluate the art? Would they be elected or appointed? If so, why do we approve the choices made by the committee, and not by private actors in a market? How would fair prices for the particular pieces of art be determined? How would supply be regulated? If there were many grants available, would many more people become artists in order to benefit? Would artists then be something like government employees? There are plenty of artists in free markets that support themselves by selling their music and writing novels and so on. Perhaps one difference betwe
Jonathan Fortier email -
(Dear Poor Painter continued)
Perhaps one difference between them and the poor artists is that they have found a way to reach a public, and are producing things that people want to buy. In the government grant model, we have no idea whether artists are producing things that people want (at least, people beyond the committee that approves the grants). The market also allows us to understand how prices and supply and so on would work in the arts.
Vanessa Schneider email -
Thanks very much Jonathan for this provocative discussion. See you next month to talk about 'the Fatal Conceit.'
